The Greenbrier Companies, Inc.

Hello and welcome to the Greenbrier Company's third quarter of fiscal year 2020 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 Company, 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, Christy. Good morning, everyone, and welcome to our third quarter of fiscal 2020 conference call. On today's call, I am joined by Greenbrier's Chairman and CEO, Bill Furman, Lori Ticorius, President and COO, and Adrienne Downs, Senior Vice President and CFO. Today they will provide an update on Greenbrier's fiscal third quarter, as well as our near-term priorities during the pandemic and continued economic fallout. Following our introductory remarks, we will open up the call for questions. In addition to the press release issued this morning, additional financial information and key 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 Security Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2020 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. And with that, I'll turn it over to Bill.

Thank you, Justin. Good morning, everyone. As we begin this morning, let me express my continued gratitude to our workforce who have been working very hard and succeeding under extremely difficult circumstances. Our thanks extend to employees in every factory, office, and many now working at home, as well as to our customers, our valued business partners, and our shareholders. Recent times certainly have been extraordinary. Greenbrier and its people are responding to the challenge, and we've adapted very quickly. The rail industry and shipper traffic already have been weakened by trade issues prior to the pandemic, and then came the oil shock and the pandemic. More recently, we've all been saddened by the social and racial injustice, and perhaps the time spent by so many in social distancing and isolation have given us the gift of reflection. Since co-founding Greenbrier almost 40 years ago with my partner, Alan James, the late Mr. James, our success has exceeded all of our expectations at the time. It began with an investment of $5,000 each out of my basement and 50-50 handshake deal through partnership based on either of us being able to pledge our entire net worth in a business transaction. Today, we are among the largest freight rail car transportation equipment service providers in the world. From a 300-car fleet, Out of hunting in West Virginia, Greenbrier, being named after the Greenbrier Resort by its express permission, has grown to one of the most valuable franchises in the rail service area of the world. It's been a fantastic journey with many adventures and contributions from so many participants along the way. Far too many to name. This is not the first... time or the worst time throughout our career that our industry has gone through difficult situations. The playbook is well known. Respect for capital, liquidity, quick reaction, the sizing of platforms, and then recovery. And our industry is quite versatile and quite capable. of recovering very rapidly as we have seen in past recessions. Greenbrier, in the face of the dual challenges of the pandemic and the economy, has taken swift, decisive, and difficult actions. Undoubtedly, more will be demanded of us in the months ahead. Yet I am confident that Greenbrier's management team is up to the test. Again, I want to thank all of our employees, customers, shareholders who believe in us, and we will not let you down. I'm honored and humbled to lead Greenbrier at this moment in time. As we begin, allow me to briefly share my reflections on recent social events, societal events that have occurred within the short time since we last held a call together. These events have once again reminded us of social inequities that existed in our country long before COVID-19 pandemic reached our shores. We can draw hope from the recent despair and participate in positive and necessary changes. At Greenbrier, we will pursue change by living our core values. For over 40 years, respect for people has been woven into Greenbrier's DNA. We respect people because of the uniqueness they bring to us and the diversity of thought and experience embedded in our culture. In addition, we strive to do what is right. It's just the right thing to do. And it's a productive thing to do. Dozens of studies on productivity over the last hundred years have demonstrated attention to the workforce, whether it's through the Toyota production system, or other production systems such as Greenbrier's pays off. Greenbrier recognizes that a diverse workforce allows us to better reach our business objectives. Bringing together employees with a range of background and experience helps solve business challenges more effectively and allows us to better serve our customers. While we know all this to be true, we also know that corporations, And we need to do more. Greenbrier is establishing an eternal framework for the ingrained efforts to combine, to combat social inequities, and these will go deeper into our core strategy. As a company, we are doing our part to address inequality and to be part of the solution on environment, diversity, and inclusion. We will be metrically driven in our efforts. and we expect to be held accountable as we seek continuous improvement. Part of Greenbrier's service to society, however, is maintaining a successful business, a successful business enterprise. Today, we are focused on the priorities I detailed in our last earnings call, which are providing for the safety and security of our workforce and ensuring the economic well-being of our business. Good progress has been made as we've moved through a phased and measured response, a balanced response, appropriate to the conditions we face. We have focused on liquidity, cost reduction, capital preservation, respect for capital, and all of this is beginning to show in the numbers, but in the quarters ahead, depending on how circumstances go, certainly if Current circumstances continue, and there's no major improvement in our sector or the economy. You will see those metrics improve and improve. We continue to monitor the health and well-being of our more than 13,000 employees worldwide. As you will hear from Lori, we have protocols in place for any potential COVID-19 exposure. These are reported immediately and immediately addressed. Our protocols are being enforced by our management with a high degree of discipline. Greenbrier's experience rate with active cases has remained very low as a percentage of our entire workforce. Our recovery rate is outstanding. We extend our wishes for a full recovery to each affected employee and their families. With this low spread of the virus, each of our manufacturing plants as either meeting or exceeding CDC recommendations as we safeguard our employees while maintaining operations. And also, as Lori will address later, despite high levels of reported virus spread in Mexico and Brazil, and now, concerningly, and more recently in the U.S., our safety protocols and our swift response to identified cases have limited our exposure to plants wide outbreaks. We have swiftly acted to prevent clusters and to contain any outbreak so we have not had the instances that have occurred at other businesses in the United States and around the world. Financially, we have met or exceeded our near-term goals. Our consolidated cash balances have increased by over half a billion dollars since the start of the quarter. We've decreased our net debt by almost 200 million. Our efforts to rapidly reduce selling and administrative expenses also contributed to our financial performance in the third quarter, despite closing of some manufacturing lines, which have blurred the real effect of our initiatives in that area. Even then, S&A expenses have decreased by almost 10% sequentially, and we expect further reductions into the fourth quarter and into 2021. The benefits of our expense reduction initiatives and our capital preservation and drive for liquidity while we're operating our essential businesses around the world will provide lift for the business additional cash flow as the economy moves through this difficult time and into recovery. And the pandemic has the effect for all businesses to consider a leaner business model with less overhead, capitalizing on some of the benefits we have learned through remote operation and at-home work. Our manufacturing model is built on flexibility Remember that before the outset of the pandemic, we already had begun to reduce the size of our manufacturing footprint in Brazil, in the United States, in Mexico, due to anticipated lower levels of railcar demand and reduced aftermarket activity. Adjustments to production and staffing levels that began in September of last year continued into the third quarter of this year as we idled capacity in North American facilities as well as at Greenbrier rail services locations. Since we began that particular initiative, we've adjusted North American operations through workforce reductions equal to approximately 40% of Greenbrier's North American workforce. Prior to the third quarter, the majority of these separations occurred at two of Greenbrier's three Mexican operations. It is always a tough experience and emotional experience to separate from our colleagues and from so many of our friends who possess so many talents and good qualities. This time around is no different. In the third quarter, we took the necessary but difficult action to suspend our rail car manufacturing and operations lines at Gundersen, our longtime flagship facility in Portland, Oregon. The third quarter also saw Greenbrier eliminate the wide range of administrative positions in all our business units in corporate departments. These actions resulted in a reduction of 1,600 North American employees in the third fiscal quarter, on top of the almost 4,000 positions which earlier were removed since the beginning of our fiscal year in quarters one and two. All impacted employees received severance benefits tied to their length of service, fully now reflected in the financials that you have seen for the quarter and designed to bridge them into government programs. This is part of our philosophy of respect for our workers, respect for our workforce. The severance benefits bridge was needed because public programs have too often been unacceptably delayed in delivering earned public benefits to our working citizens who become, through no fault of their own, out of work. It was especially hard to part with workers at Gundersen who had persevered with us through many down cycles and national emergencies over the course of our 35-year ownership of that operation, dating back to the FMC Marine and Rail Division and dating back to the Gundersen brothers' business begun on the waterfront in 1918. Green Barge Jones Act compliant marine business continues at Gundersen. Backlog there extends well into calendar 2021 with a strong pipeline for new vessel orders. So we will continue to operate Gundersen on a much smaller scale. As I said at the start, we've seen a great deal happen in a short time. Fortunately, we have a well earned, experienced team, and this is not our first rodeo. No matter what comes next, Greenbrier is tough and Greenbrier is ready. If necessary, we are prepared to manage through the worst of times. Believe me, this is not the worst of times. We've had worse recessions in our industry, times in the 70s when only 5,000 cars per year were built. That was when we acquired Gundersen, seeing opportunity. I'm quoting the great Carl Icahn. It's when things are tough, you want to look for good opportunities. Greenbrier is an excellent opportunity for investment. Greenbrier has built an incredible franchise in rail car engineering, manufacturing, lease originations, leasing, and management services. We have loyal customers all over the world. We have a strong position in the North American marketplace. Based on efficient and flexible plants, we manage one quarter of the North American rail car fleet. In one way or another, we touch that fleet. Greenbrier, in the quarters to come, will preserve its financial stability, build a large pool of liquidity to deploy sensibly in capital opportunities in the future, prudently. And if we will focus on our core businesses, we'll work to shrink our footprint and increase shareholder value as we progress ahead. Now, over to Lori.

Thank you, Bill. And good morning, everyone. Our fiscal third quarter was quite strong in the midst of the pandemic and resulting economic downturn. As Bill said, I'm very pleased with Greenberg's ability to respond quickly and decisively to the world-altering events over the last several months. I'll spend a few minutes on the quarter and then provide an update on our COVID response. We delivered 5,900 rail cars in this quarter, including the syndication of 1,600 units. As we've stated previously, the timing of syndications can be lumpy, and a higher number this quarter indicates offsets the lower numbers that you saw in the first and second quarter of our fiscal year. This quarter, we received orders for 800 rail cards valued at about $65 million. Orders originating from international sources accounted for over 50% of the activity of the quarter, and this mix did impact the average sales price of order activity. Our backlog remained strong at 26,700 units valued at $2.7 billion. Our multi-year manufacturing backlog continues to be the source of stability in difficult times and provides us with the resilience and a bridge to when industry dynamics and economic conditions improve. We don't expect demand to recover overnight, and the number of cars in storage represents the highest level of rail car stores on record. But we're nonetheless encouraged by the activities of our commercial teams and conversations we have going on with several of our customers. And while orders in the quarter were clearly low by any standard, we have maintained momentum, and there's a reasonable amount of current activity that's subject to documentation and final confirmation that's not reflected in the current backlog. Our North American manufacturing group performed resiliently in a uniquely challenging quarter. In addition to building several thousand high-quality rail cars efficiently, the management team enacted the various protocols needed to ensure employee safety, including daily temperature checks for thousands of employees, redesigning workflows and stations to allow for social distancing, and introducing heightened cleaning activity across the network. These actions have allowed our facilities to remain open while providing a safe working environment. I'm further pleased to report that the operating performance of our ARI manufacturing facilities continue to prove this quarter, reflecting the benefits of remedial actions taken in our first quarter. Performance in Europe and Brazil was in line with expectations. And as I already stated, the order activity internationally and specifically in Europe improved throughout the quarter and accounted for about half of this quarter's orders. Europe's economy is slowly reopening, although it will take several months before it's back to pre-COVID levels. Brazil's economy continues to struggle through the pandemic, and we're working closely with our local management team to ensure the safety of all of our employees. Our wheels repair and parts operation revenue was impacted by lower rail traffic and fleet while continuing operating efficiency improvements in our repair business drove improved growth margins in the quarter. The management team did an excellent job enacting our response plan to COVID across the entire network, allowing employees to work safely while providing essential services for the North American freight rail network. Our leasing and services group performed well in the quarter, even with traffic and commodity-driven headwinds. The earnings of the group was negatively impacted by a $4.3 million charge related to a few financially distressed fan companies. A portion of the charge was driven by the new lease accounting standard. God bless all the accountants. These charges were more one-time in nature and are not expected to repeat going forward. Our lease syndication capital markets team had a robust quarter, as I already said, with 1,600 units syndicated, generating proceeds over $180 million. This is a very significant accomplishment given the volatile nature of the financial markets over the last several months. And now turning to our COVID response. Our incident response team continues to coordinate our efforts related to the pandemic. We're operating under a dual mandate of maintaining business continuity alongside ensuring employee health and safety. We've kept our factories and shops continuously operating through the pandemic. Whenever we have a positive case appear at one of our locations, strict adherence to our coronavirus guidelines have ensured the health and well-being of Greenbrier employees while allowing our essential operations to continue. We've undertaken several hard decisions over the last several months in response to the crisis. And as part of our plan to increase liquidity, we've reduced capital expenditures by $50 million, We've reduced annual overhead expenses at our facilities by $65 million, and we've reduced annualized selling and administrative expense by $30 million. This activity has caused us to part from some of our longtime colleagues and, in many cases, friends. But these actions, along with the necessary rationalizing of production capacity in North America, will create a stronger Greenbrier in the long term. Our business remains healthy. despite the current commercial environment, and our leadership position in our core markets in North America, Europe, and Brazil is unchanged. This requires hard work and continuous focus, but it's not our first challenge or our first rodeo, and it won't be our last. No matter how our fourth quarter or the remainder of 2020 plays out, we know our role in the transportation industry remains vital. The safe and efficient movement of goods is integral to economies around the world. It factors into any recovery, both near-term and longer-term, once a greater degree of stability and predictability has resumed. And I'll turn it over to Adrian.

Thank you, Laurie, and good morning, everyone. As a reminder, quarterly financial information is available in the press release and supplemental slides on our website. As you've heard from Bill and Laurie, We delivered strong results in the third quarter despite a challenging environment. Highlights include revenue of $763 million and deliveries of 5,900 units, which includes 500 units delivered in Brazil and 1,600 syndicated units. I predict gross margin of 14.1%. Selling an administrative expense of $49.5 million is almost a 10% reduction sequentially. The effective tax rate in the quarter increased to 41%, driven largely by a foreign currency-related discrete tax item at our Mexican subsidiaries. This brought our year-to-date tax rate to 33%. As background, for U.S. GAAP purposes, we keep the books for these entities in U.S. dollars. For Mexican tax purposes, the books are kept in pesos. Normally, these results are similar. However, during third quarter, there was a significant devaluation of the peso, which resulted in a disproportionate amount of peso taxable earnings and peso tax expense when compared to our U.S. dollar earnings for the quarter. The impact of this item on our third quarter Mexican taxes is treated as a discrete tax item rather than many tax items which are measured over the course of the year reducing volatility. Based on current foreign exchange rates, we expect a lower effective tax rate in the fourth quarter. Net earnings attributable to Greenbrier of $27.8 million, or $0.83 per share, excluding approximately $7.3 million net of tax, or $0.22 per share of integration-related and severance expenses, adjusted net earnings attributable to Greenbrier or $35.1 million, or $1.05 per share. Adjusted EBITDA in the quarter was $99.9 million, or 13.1% of revenue. One of the questions we've received regularly is to try to quantify the impact on the business from the pandemic. The longer-term impact is hard to know at this point, but we are able to quantify approximately $3.9 million of identifiable costs related to COVID-19 in the third quarter. These costs included items like personal protective equipment, additional labor expense, cleaning services, and additional interest expense from our precautionary revolver drawdowns. We view these items as vital to ensure that our employees are protected and facilities remain open. Turning to synergies, We successfully achieved 5.6 million of pre-tax cost synergies related to the ARI acquisition in the quarter and 12.7 million year-to-date. We are pleased with the progress the integration team has achieved and continue to be optimistic about the long-term benefits from the acquisition. In the quarter, Greenbar generated over 220 million of operating cash flow, reflecting robust syndication activity and reductions in working capital. As production rates moderate, working capital reverses and Greenbrier generates substantial cash. At May 31st, Greenbrier had cash balances of $735 million and additional borrowing capacity of $137 million. In combination with the spending reductions outlined by Laurie, we've achieved our liquidity target of $1 billion. We will continue to enhance Greenbrier's overall liquidity and with no significant debt maturities until late fiscal 2023 and fiscal 2024, we are on the path to emerge from the pandemic stronger company. Greenbrier's board of directors remains committed to a balanced deployment of capital designed to protect the business and simultaneously create long term shareholder value. Greenbrier has declared a quarterly dividend for 25 consecutive quarters with periodic increases. Today we are announcing a dividend of 27 cents per share, representing a yield of 5% based on yesterday's closing stock price. We will now open it up for questions. Christy?

Thank you. At this time, if you would like to ask a question, please press star 1. Please state your name clearly along with your company so that we may introduce you. Again, please press star 1 to ask a question. Our first question will come from Justin Long with Stevens. Sir, your line is open.

Thanks. Good morning, and congrats on the quarter.

Thank you, Justin. Thank you, Justin.

Maybe to start with deliveries in the fiscal third quarter, Adrian, I think you mentioned about 500 units. went to Brazil, but for the remaining deliveries, could you give the split between North America and Europe? And then also going forward, it sounds like you have pretty decent visibility in deliveries the next couple of quarters. So I was wondering if you could give us some kind of rough sense of how deliveries should shake out the next couple of quarters based on your backlog.

Sure. Well, Justin, this is Justin. I'll jump in there briefly. So just as a reminder, we are not explicitly providing guidance on the quarters ahead at this point. What I would say is that we had about 700 units delivered in our European operations in our fiscal Q3, and we would expect it to be a similar number in our fiscal Q4 going forward. But, you know, again, we are – things continue to be very fluid in the worldwide railcar network.

Okay, that's helpful. And maybe to follow up on North America, do you think that North American deliveries can remain relatively flat sequentially in the fourth quarter as well?

I would expect the fourth quarter deliveries will be down somewhat from the third quarter deliveries.

I think some of this has to do with syndication volatility as well as Laurie and Bill mentioned that our production rates, we continue to take a long, hard look at our rates and our burn rate out of our backlog going forward just to make sure we are managing things well and responsibly.

Yeah, I'd like to just add that yesterday we had extensive meetings on this subject and it appears that the remedial work we've done in sizing the facilities stabilizing the lines, the flexible lines, particularly the ones in Mexico. We're pretty much in balance with flow out, flow in. So I think we are, I'm honestly optimistic we will be able to maintain momentum on deliveries. But again, it's very hard to tell the future. It depends on the order flow in. As Lori mentioned, we have been very cautious in booking orders. We have a fairly large number of transactions order of magnitude three times the amount we booked in the quarter, about half in Europe and half in the United States. So I think that things will be less opaque at the end of our coming quarter, but I think we're still looking at a reasonably strong quarter given everything that's in the Q4, everything that's going on.

Great. That's helpful. And maybe as my second question, I wanted to focus on S&A expense. Some nice progress there and some helpful commentary. There were some unusual items in the quarter, some charges. So, could you give us a rough sense for where S&A should shake out on a run rate basis after all the changes you've made?

Well, I'll take that one. As I think I said or Bill said, we do expect fourth quarter selling and administrative expense to kick down from what we saw in the third quarter. Part of that driven by we did have some severance costs and the like that occurred in the third quarter. This management team is laser focused on making certain that we manage our costs and manage our spending so that we are right-sizing and having the right folks on our team for when demand comes back. You know, one of the things where it's easy to manage our costs right now is there's not a whole heck of a lot of travel going on or entertainment, but we're looking at every single part of our cost structure and reducing those. That will go into our fiscal 21 planning. As Justin continues to remind us, we're not giving guidance. But it is this team's focus to maintain the momentum that we've achieved in the third quarter and continue that into fiscal 21.

Okay. I'll leave it at that. I appreciate the time.

Thanks, Justin.

Thanks.

Thank you. Our next question comes from Matt Alcott with Callen. Sir, your line is open.

Good morning. Thank you. If we take a look back at the manufacturing gross margins, I think they peaked in the first quarter of 2016 at close to 24%. And then, you know, if we go back 10 years ago, and, you know, beginning of 2011, they were in the mid single digits. You know, after the Great Recession, you know, looking out for the next three years at the next, you know, up cycle and strength down cycle, Given the company looks much different now, can you give us an update on the range, the cyclical range of the gross margin?

Sure. So, Matt, it's difficult. I mean, there are so many variables right now in this environment. It's difficult to give specific guidance, but I appreciate that you asked for a range. I would say that we're focused on... Margins being likely in the low double-digit area, we might have opportunities for that to be higher, and we'll work very hard to make certain that they're not lower. And I think, as you've seen in the past, as the cycle improves, we have tremendous opportunity to move those margins back up into the mid-to-upper teens.

Laura, what about in the current down cycle? Do you have an internal floor that you'd like to not go below? Clearly the company is in a much, much better position now than it was even six or seven years ago.

It's a good question, Matt. Again, we have a strong team and we're focused on reducing our costs. I would expect that there's a chance that our margins will get into the single digits, but I expect them to not drop as low as we've seen in past down cycles.

Okay, so I guess the target floor is, you know, high single digits in the down cycle?

That's fair, yes. Okay. I think we're all facing the same things, but there's quite a lot of pricing discipline that the major builders are introducing into their plans. We do have a flow of business that makes that look pretty interesting. And I have to constantly ask you all to remember that there are so many different kinds of freight cars, some tending toward more commodity cars which have lower margins and others with more proprietary features such as some of the lines that we have added to the ARI facilities. So it depends a lot, the average depends very much on the mix, and that's something that you guys ought to continue to zero in on, as you do such a fine job of doing that.

And Matt, you're right, we're a very different company now. You know, we've got much more diversity of products, so we're always able to service the parts of the market that can be hot, even in a down market, and we've got a much lower cost footprint that allows us to be very efficient. So that's one of the reasons why, you know, our lows should not be as low as what you've seen in our distant past.

That's very helpful. And Bill, you mentioned pricing discipline. And, you know, not only are you guys different now than a few years ago, but the whole industry landscape is different because, you know, your competitor with whom you have, you know, 75% or more of the market share is really focusing primarily on leasing. So, you know, you couple that with the fact that you just help consolidate the industry further and then rationalize your capacity. So is that why we're seeing more pricing discipline in this down cycle relative to past down cycle? These steps are starting to show benefits?

You have an excellent point on pricing a Relating to the sizing of capacity, we've been chronically in a situation in this industry throughout most of the time I've been in it with overcapacity. And arguably with flex manufacturing being the new buzzword, railroads have buzzwords, we have flex manufacturing in our industry. I expect our colleagues that are friends at Trinity to continue to make their facilities more efficient. and to size their facilities, if we understand their plans. They do have a very good focus on leasing, but they're excellent manufacturers as well. There's a lot of things that go into this. I think the customers recognize the need for a strong supply industry. It's not just the car builders who are at the tip of the iceberg, but it's the smaller component manufacturers that get hammered by a downturn like this. So I expect the railroads, the shippers to take opportunities to be in the market. And if they're wise, they won't push everybody to break even pricing on cash, which can sometimes happen. I think that they will allow, and I think that sensible pricing policies will prevail on the sell side to allow a margin that will allow the industry to keep its strength during this downturn. In addition, we're working on legislation that can address this issue very aggressively. You know, we have a lot of cars stored, but it's not as bad as it looks. We have a virtual level of storage, even in 2018, of almost 280,000 cars. When we look at the coal cars, the under-capacity covered hopper cars that make that up, now the sand cars. that go into that number, it doesn't take much to an improvement or a decline in velocity. Velocity is probably 150,000 rail cars locked up in the temporarily high velocity that the low traffic in the industry has provided to everybody. As that snaps back, it can snap back very rapidly. So one of the reasons we're more optimistic is that underlying theme.

Very helpful. Thanks, Bill, and thanks, everyone.

Thank you. Our next question comes from Bascom Majors of Susquehanna. Thank you.

Your line is open. Hey, good morning. I was hoping that you could give us at least a directional look into a couple of other items that haven't been discussed yet where you would seemingly have some visibility into or discretion in managing. And that would be any timing of further syndication activity or even a reduction in some of the finished rail car inventory that's not on lease that's on the balance sheet, gains on rail car sales, and maybe on top of that, the relationship of the non-controlling interest and how that relates to manufacturing profits. That seems to look more favorable under this temporary arrangement with GINSA. Thank you.

Yeah, Bascom. So, from a syndication perspective, we will continue to syndicate rail cars in our fiscal Q4 and into our fiscal 2021. Much of our syndication product is driven by the car types in demand in North America. So, So that will be kind of the governor going forward as we progress into 2021.

And I would just add in there that, you know, as we've talked about in the past, we have great lease origination capabilities. And so through the third quarter, and we expect it to continue this quarter and going forward, we will continue to originate leases, build the rail cars, which will go into our rail cartel for syndication and feed into that model that Justin's referring to.

And then with regards to gains on sale, we would expect that to move down into a more historical number going forward into fiscal 2021. Just as a reminder, this is the final year of our kind of agreement or alliance with Mitsubishi on that front. It was a three-year agreement to kind of work on our lease fleet and refresh it for Greenbar's purpose, but also to allow them to build it out. While we continue to have a strong ongoing multi-year agreement with them from a new rail car perspective, we would say that our historical gains on sale is a little more realistic going forward and will be more opportunistic based on activity in North America.

And the last piece about non-controlling interest in GEMSA, that looked a bit more favorable versus your overall profits this quarter. trying to understand how durable that is. Thank you.

Yeah, and we had indicated in our last press release that we would have a benefit of 25 cents for the back half of the year. So you did see that pace in Q3 and should see it continue into Q4. And then we'll also have a benefit for the first six months under this arrangement next year, and that will be at a lower rate. So we had indicated 40 cents over the 12-month period of the arrangement, 25 cents in the back half of this year, part of that delivered in Q3, and then about 15 cents for the first half of next year. That's assuming various production levels.

Thank you, Adrian. And the last one from me, Bill, congrats on officially marking the path to retirement here. You had made some comments earlier about, I think, quoting Carl Icke, when things are tough, you want to look for good opportunities. Was this referring to you seeing value in your company's shares here, or were you actually suggesting that Greenberg could go on the offensive and perhaps be more acquisitive in this downturn?

Thank you. It was not the latter. I think their stock is, given the franchise that we've grown, the team has grown, and the way things are clicking over here, we're really focused on the right levers right now, and I think we can create Really strong cash flow. I bought 100,000 shares in the last opportunity. I've reached an understanding. If you read the agreement to take stock in lieu of cash, I may still continue investing. I'm very bullish on Greenberg. I've seen this cycle go in earlier times. I know that the industry can flip around. It's baffling to people who are not immersed in the industry, but it is, while a cyclical company, very, very strong company. We have strong, reliable competitors. We don't have the type of overcapacity that existed in earlier eras. I really believe that we can drive cautiously, of course, value opportunities. We are contracting our footprint and consolidating. We're not looking at new acquisitions in any way, shape, or form. At this point in the in the crisis. So as soon as we're through our phase one, which is liquidity, capital preservation, cost reduction, we can look at meritorious growth. But the first goal is not to run out of cash in a business like this, and we are going to have a good level of cash. We're going to exceed our goals way beyond the billion dollar goal, and we're going to be able to deploy capital sensibly, including continuing to consider the returning cash to shareholders through the dividend policy, and we may revisit stock buybacks as that opportunity might exist. But right now, it would be too early to get into all that. But it's certainly – I just think the company is undervalued at its current price.

Thank you both.

Thank you. Our next question comes from Steve Barker with KeyBank Capital Market. Sir, your line is open.

Hey, good morning. Good morning, Steve. Hi. Remembering back to the wind down of the shale plays, your earnings were more resilient than some people expected. So do you think this down cycle will be the same? And just generally speaking, given all the cost cuts, what you see in backlog syndication opportunities, international, would you expect a big decline in earnings next year versus this year, or could that be stable, plus or minus?

I think it's a great question. Again, there's a lot of uncertainty, and I appreciate you pointing out the resiliency that we saw and how many didn't think that we would be as resilient as we were. I think if you look at expectations from the folks who cover green bar, you can see it is a very, very wide range. I would expect us to be more in the area where you're seeing groupings of those outlooks. I do expect, I mean, we are going definitely into a period of time where we'll be delivering fewer rail cars, but I don't think we're, I don't expect us to be in a period where we're reporting losses, but, you know, maintaining modest margins and continuing to be focused on keeping our cost level appropriate.

So even if you expect reported a loss in a specific quarter, you wouldn't expect that for the year or a year?

That would be my expectations, yes.

I don't think we would want to be quoted as saying we expect a loss in any quarter. That requires our foretelling the future and there's plenty of funders out there who have can foretell the future one way or the other way and probably none of them are correct. So I think we're going to be a disciplined machine focused on what we told you we're focused on and we'll let the future unfold as it will. I am optimistic about the future for many of the reasons I've expressed and many more that we don't have the time to get into. If you look at the demographics, you look at FTR's recovery rate, they're going back in 2022 to replacement plus levels of demand. And again, this industry, because of the demographics of velocity and the stored demographics, can really flip back quickly. So it's just so hard to tell, and that's why we're not going to give guidance. And by the way, we don't give guidance in the third quarter. Anyway, we always wait until the fourth quarter if we're going to give guidance, which I doubt we will unless things change dramatically in the future. like in the next couple of months, and everybody's really happy, and COVID-19 has gone away, and we have a vaccine, and there's plenty of things to look forward to. This is nothing compared to what has gone on before. Nothing. It's just unfortunate, but we can all get through it.

Got it. And, you know, to your point on a small increase in velocity could unwind cars and storage pretty quickly, I'm curious if you think the industry needs to see a backlog contraction like we saw in 2009, or is there enough specific car-type catalyst that the backlog doesn't need to get down to those kinds of levels?

Again, it's very hard to tell the future. Typically, in this type of cycle, you'd see the backlog decline. We all have tactics that we use to counter that. Greenberg generally does much better because of its commercial go-to-market strategy and a downturn. We have some really great accounts with multi-year orders, particularly very strong companies that are committed to multi-year relationships. So it's very difficult to say. I would prefer not to give you any sort of guidance. Great question. You guys are always trying to give guidance to me. We're slogging through this very much like a prize fight. We're in the ring, and we're doing the right things. We're going to get out on the other end, and I think we're going to win.

Just one last follow-up to that. Bill, you've seen a lot of cycles. Is the primary thing you're looking at to respond? make you feel better about where we are, just traffic levels, or is there anything else that you would look to as kind of a leading indicator to moving into a more comfortable position?

Well, I think the general economy, you know, we've taken a real hit to the economy at 5% GDP decline in 2020, probably is consensus, roughly maybe a little under consensus. But then if you look at the stats for that and you look at maybe 4% growth, Under moderate scenarios, just look at the facts. Look at the projections from reputable economists. Unemployment claims have gone in March from 6,800 to projected all the way down to 1.8 billion in May. We're able to reopen the economy despite the ups and downs of the COVID-19 pandemic. That's going to produce more income. The government subsidies have been very helpful. More is probably on the way, depending on your political preferences. Maybe a lot more. Maybe probably certainly more. Maybe not as much under one administration or the other. One type of Congress than the other. So you look at these things, and you just see that while we've taken a tremendous hit to the economy, and to the health and probably confidence of the consumer, it's all about the math. And the FTR has us recovering to 50,000, 60,000 cars, 22, 23. Our own projections are a little more optimistic than theirs in 2021, 2020, 2021. So it just depends, again, on the math. Carlos are recovering. We expect them to recover in 2021. You know, they're down 8%, but that's a lot better than being down 12 and 17 earlier in 2020. We expect very rapid recovery in Carlos as soon as the economic fundamentals are restored.

Yeah, I think just to add on to that, Bill, it's looking at what's going on in the overall economy and then getting – the manufacturers back up, the service providers that are going to transport goods on the rails, right, and getting that going again, and that will then start compounding that rail traffic recovery, which will then result in increased demand again.

Yes, we have an industry coalition that's promoting and working with Congress on a rail car act that would be an incentive in future stimulus to scrap and take out bipartisan support for that. Whether that will get through this Congress in that form, hard to say. But we do expect the infrastructure bill to come in. That'll be a boost. And if we could do something to help shippers and railroads address their obsolete cars, the stored cars would make the railroads and the shippers more efficient. It would help the economy. It would be green. It would be a socially good thing to do. And we've got a real strong team, interdisciplinary team address that. So there's plenty of things that can be done to address these things. They're quite rifle shot specific. And I'm optimistic that we'll see better times than these sooner than others think. It depends a lot, however, on COVID-19 and what's happening right now is not encouraging with spiking that.

That's all a great detail. Thanks so much for the time. Thank you.

Thank you. Our next question comes from Allison Poliniak of Wells Fargo. Ma'am, your line is open.

Hi, guys. Good morning. Some nice efficiencies coming through on the wheels repair and parts business, you know, making the assumption that, you know, the worst in traffic is now behind us. You know, how should we think of that even margin? Is that a decent one to build from? Are there some nuances there that we need to be mindful of going forward?

Hey, Allison, this is Justin. I would say I think it's a good starting point, and I think if traffic continues to improve, we believe that we would see improvements in that going forward. But I would say that that is a business that has the most explicit exposure to traffic immediately. So to the extent traffic kind of is volatile and moves up or down, that's what we would expect to see.

And you're referring specifically to the wheel side, but it's also a repair side where we'd want to see cars not going into storage, but asset owners being interested in repairing their cars. And that's where our management team is working very closely, the management team of the repair group, working very closely with our management services team, where Bill indicated we manage a quarter of the North American fleet. And so it's looking at how can we capitalize leverage that relationship we have of our customers who need their cars repaired and doing that in some of our shops. If we can do it in an efficient and quality way.

Allison, I appreciate you bringing it up. I'll just put a plug in for Lori here. She's been in charge of that business unit along with Rick Turner for a year now. When she was promoted, she took that very challenging assignment on and gave her one of the hardest assignments that existed. And she and Rick have really turned it around. We've got a new team in place. We've rationalized the network. Our repair business is actually making money now, which I didn't think I would see in my career, the way it was going. But the poor thing took a lot of hits, and she has righted the ship, and I've got to congratulate her. I think more good things are going to come out of that in the future.

That's great. And then just one, I guess, clarification on what one of the questions Baskin asked in terms of GEMSA. I know you talked about 25 cents in the back half of this fiscal year in terms of the restructured agreement. Is that weighted towards Q3, or is it more balance between both? Just trying to understand in terms of modeling.

Balance between both.

In both. Okay. Perfect. Thank you.

Thank you. Our final question comes from Ken Hexter of Bank of America. Sir, your line is open.

Great. Good morning. Can we dig, Bill, maybe dig into pricing a bit more? Your backlog fell from about $103,000 average per car to $101,000. But if I look at the new orders book, it drops all the way down to $81,000, down from about $107,000 average ASP per car. So maybe you can talk a little bit about mix change that's going on, or is it this environment you really do get a bit more aggressive on pricing to keep the lines working? Thanks.

Yeah, this is Lori. I'll take that. About half of our orders this quarter were generated in Europe, where the mix of that car type is what brought the average sales price for orders a bit lower than what we've seen recently. But I think it's a testament to our strong backlog and our strong pricing discipline that our overall backlog ASP only moved just a bit.

Right. Also, just basic statistics we learned in the Business school, bad sample size, not really characteristic of maybe the next we expect going forward. 800 cars, a mixed 50-50. Europe, domestic, probably not characteristic of anything in particular.

So is it more Europe-U.S. or North America than it is the type of car, or are you saying the type of car in Europe is typically a lower... margin or lower, maybe not margin, but maybe just lower ASP type of bill?

The cars that were ordered during the third quarter in Europe were of a car type that had a lower average price. Just like if you think about years and years ago when there was heavier intermodal demand and in those periods of time, depending on mix, it could bring your average sales price down. So it wasn't being overly aggressive on pricing. It was just the specific car type in Europe that has a lower ASP.

Okay. That's helpful. And then, AJ, maybe jumping over to the finances, it looks like I know in the large moves you've made to get to that billion-dollar target, it looks like day sales outstanding dropped from 47 to 30 days. Have you changed payment plans with customers, with your major customers? Is that another trigger you're looking at to kind of, you know, keep cash on the books?

It's more syndication that would have driven that change. So we did not change terms, in other words. It's just a mix of direct sale versus syndication activity in the quarter versus what you'd seen in prior quarters where we had less syndication activity.

I presume our customers have excellent credit ratings. They have followed admirable discipline and they haven't and collections and so on.

No, it makes sense. I mean, given you have larger, obviously, major customers who are well-capitalized, yeah, I just wanted to see if you were putting the screws on that, but it sounds like, yeah, just a change in where the cash is coming from for the quarter. All right. That's great. Thank you very much.

Thank you, Ken. Thank you, Ken. Thank you, Ken. Thanks, everyone. Thank you very much, everyone, for your time and attention today. And if you have any follow-up questions, please reach out to myself, Justin, or Lori Ticorius, and have a great weekend. Thank you very much, everyone.

Thank you. Stay safe.

Thank you. This does conclude today's conference. You may disconnect at this time, and have a good day.