The Greenbrier Companies, Inc.

Hello and welcome to the Greenbrier Company's second quarter of fiscal 2021 earnings conference call. Following today's presentation, we will conduct a question and answer session. Each analyst should limit themselves to only two questions. Until that time, all lines will be in a listen-only mode. At the request of the Greenbrier 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, Eilidh. Good morning, everyone, and welcome to our second quarter of fiscal 2021 conference call. On today's call, I'm joined by Greenbrier's Chairman and CEO, Bill Furman, Lori Sikorius, President and COO, and Adrian Downs, Senior Vice President and CFO. They will provide an update on Greenbrier's performance and our near-term priorities. 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 Securities 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 2021 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. And with that, I will hand the call over to Bill.

Thank you, Justin, and good morning, everyone. Greenbrier has adhered to a discipline management program throughout this year of the pandemic. Now, I know we said this in our news release this morning, but it's worth repeating. Our simple core strategy since March 2020 has been, number one, to maintain a strong liquidity base and balance sheet, number two, to safely operate our factories while generating cash, reducing costs, and adjusting to reduce demand for our products and services. That reduction in demand was clearly shown in this quarter's results. Number three, to prepare for economic recovery and forward momentum in our markets. We believe we're now solidly in this recovery phase. We believe that our Q2 just completed in February will be the most challenging quarter of our fiscal year, particularly affected by very bad weather in North America. There's good reason to be optimistic as vaccines expand in the United States. Vaccinations will bolster already accelerating infection and mortality rates and allow America to turn the corner on the pandemic at last. Globally, we are prepared for the pandemic to take a longer course toward resolution. Sadly, we learned last week that Greenbar lost two more employees, our sixth and seventh lost to COVID-19. Miralio Nisio, 58, was assistant to the plant manager at our Severin, Romania facility, where she worked for over 32 years. We also lost Luis Martinez, age 43. Luis was a maintenance manager in a Tlaxcala factory in Tlaxcala, the state of Mexico, in the state of Tlaxcala in Mexico. He'd been with Green Bar since December 2017. He was survived by his wife and four children, ages 19, 17, 11, and five. We mourn the loss of Mirela and Luis We're extending support and prayers to their family and to colleagues who worked with them. Our results in the second quarter reflect the current temporary difficulties in the operating environment, particularly in North America, but also in Europe and Brazil. And I emphasize temporary. In addition to lower production levels relating to the market downturn, and as earlier mentioned, severe weather conditions impact our second quarter results in North America. On a much more positive note, revenue aggregate gross margin and EBITDA all improved sequentially month by month during the quarter, indicating positive momentum. Our order pipeline of inquiries took a big jump in March. We completed our GBX joint venture post-quarter with Steve Menzies and funded the first $100 million tranche of rail cars from a newly established $300 million non-recourse credit line established for this business. Our financial results were also positively impacted by tax benefits related to the creation of the GVX leasing joint venture and additional capitalization of rail cars into the Greenbrier leasing fleet in our second fiscal quarter. Adrian Downs, our CFO, will touch on this in a few minutes. Finally, post-quarter and almost all in the month of March, we received orders for another 1,700 rail cars with an approximate value of $190 million, on top of the 3,800 rail cars orders received during the quarter worth $440 million, and all 5,500 cars worth about $630 million in the space of four months or more. In recent weeks, North American rail traffic grew in year-over-year comparisons, including double-digit increases in grain and intermodal loadings. The added traffic has driven year-to-date rail velocity down by nearly 6% compared to the same period in 2020, or about two miles an hour. Slowing rail velocity, as all of you know, impacts cars in storage, and demand for new rail cars. Consider that about 148,000 cars have been taken out of storage in North America alone since the peak storage levels of last year. Storage statistics have fallen now to 378,000 units, well below what we believe to be the frictional level of storage, 400,000 cars. At that point, new cars need to be built. With returns of cars to service, higher scrap pricing, and tax benefits for construction of new, more efficient, and environmentally friendly equipment, we expect this trend to continue. Throughout the course of the pandemic, we've been laser-focused on maintaining our strong liquidity position. We ended the quarter with over $700 million of liquidity, including nearly 600 million of cash and another 115 million of available borrowing capacity. We expect to add another $100 million shortly. Now let's talk for a moment about our plan for recovery. Vital to our ongoing success is the ability to rapidly align production capacity and execution with our forward view of the market. We began to reduce capacity prior to the onset of the pandemic, as our industry was already entering a weaker period due to PSR. COVID-19 compelled us to take serious further actions to protect the enterprise and to ensure Greenbrier attained its strongest possible financial position. We have maintained long-term profitability over the years by prioritizing our manufacturing flexibility. and refusing to allow our unique manufacturing platform to become a mere commodity. Refinement of our go-to-market strategy, adding GBX leasing to our successful formula of direct sales, syndications, and partnerships with operating lessors will reinforce our recovery. We reactivated a number of North American production lines in March, and several of our production lines are already booked well into or through fiscal 2022. The inquiry rate for new manufacturing business has picked up dramatically. We expect a continued high rate of commercial activity to continue April, May and beyond. Consistent with our earlier forecasts that the second half of calendar 2021 would be the time of a V-shaped recovery. Forecasts for rail traffic fundamentals in North America support GreenGar's outlook that we are entering a period of sustained and expanding rail car demand and production. FDR Associates projects that total rail traffic will grow by 5.7% year over year in 2021, and intermodal traffic will grow by 6.4%. In North America, the latest U.S. economic indicators reflect growing optimism. The consensus forecast for GDP growth has been revised up to 4.7% and 3.6% for 2021 and 2022, respectively. Both Bank of America and Goldman Sachs are even more bullish and closer to 7% for 2021. In February, the Purchasing Managers Index reached its highest level since February 2018. At the same time, however, supply chain disruptions that have been evident for months persist with congestion at West Coast ports, and these continue to weigh in the North American traffic flows. Strong consumer demand, manufacturing growth, and Fed policy on lower interest rates along with low-cost funding available globally will continue to spur economic recovery from the COVID-19 crisis. Federal stimulus spending in the U.S. is at extraordinary levels. Also, a federal infrastructure bill will provide additional stimulus for sustained growth into 2022 and probably beyond. Other bills in the works have passed to enhance U.S. job growth and further incent the construction of more efficient, environmentally friendly rail cars. In Europe, the large EU recovery and resiliency facility will begin to impact the EU economy, and money remains plentiful and cheap. A wave of pent-up consumer and investment demand is expected to materialize, although vaccine rollout has been slower than in America. In the meantime, rail freight has continued to perform well through the latest rounds of lockdowns and restrictions. Order rates have ticked up dramatically in the EU. EU policy and congestion and the environment is attempting to shift transportation from truck to rail, which is three to four times more fuel efficient and produces less congestion and better air quality in cities. Rail freight traffic has actually grown over crisis levels in some countries. In the UK, rail may turn out to be one of the few beneficiaries of Brexit as trade flows are rerouted to accommodate new circumstances. Longer term, Broad-scale economic European reforms to address climate change are ushering in an era of modal shift for freight, from polluting and congested road travel to efficient higher-speed rail service. This will drive significant growth in rail car demand in the years to come, above and beyond replacement demand growth. And the fleets in EU countries are aging. Many cars are already well-passed. the time for replacement. Finally, in Brazil, the continued impact of COVID-19 has left the country's health system in a very weak condition. Green Bar Maxion continues to operate well in a stressful environment. Demand for its products is strong. Earlier, we right-sized this business, and it has a strong and profitable backlog. About 30% of our present backlog is in Europe and Brazil. We expect tailwinds from both regions. Our approach globally continues on course to emphasize safe operations of all of our facilities under essential industry status. We continue to plan for robust liquidity and ongoing cost containment and to execute on the growing numbers of orders we expect while maintaining pricing discipline and control of cost, especially on steel and components. Entering the second half of our fiscal year, Greenbar enjoys an industry-leading manufacturing, leasing, and services franchise on three continents, and we've achieved scale. Our business outlook is significantly improving, which will bring advantages from that scale. Despite the lingering uncertainty created by COVID-19, the one thing I am certain about is that our franchise, will benefit strongly from all the things I've mentioned in these remarks today. Meanwhile, we will continue to preserve our strong liquidity position, make prudent business decisions about deployment of capital, grow our market opportunities, manage our manufacturing capacity judiciously. We will do all this with, at all times, respect for our customers, for our workforce, and through diversity and environmentally sound policies. Our team continues to work hard to accomplish these goals and to maintain focus as better days draw closer as the COVID chill on society melts away. Now, over to you, Laurie.

Thank you, Bill, and good morning, everyone. I, too, am proud of how Greenbrier employees responded in our second quarter. We expected it to be a challenging operating quarter, but the extreme winter weather that impacted every location in North America added an additional test. I was impressed with the creativity and commitment shown to ensure operations continued as seamlessly as possible. Over the last several quarters, Greenbar has balanced right-sizing our global footprint and production capacity with maintaining our ability to respond quickly as recovery begins. The first six months of the fiscal year were painful, but we're seeing improved demand in each of our markets. And we've recently restarted several production lines in North America that are poised to flex our manufacturing footprint as conditions evolve. As you heard from Bill, we remain focused on executing our COVID-19 protocols by focusing on employee safety and maintaining our liquidity to ensure we're prepared for the emerging economic recovery. Regarding second quarter activity, Greenbar delivered 2,100 units in the quarter, including 400 units in Brazil. We received orders for 3,800 units in the quarter, valued at approximately $440 million. International order activity accounted for nearly half of the orders in the quarter, and the average sales price and backlog increased sequentially, reflecting a more favorable mix of rail cars. Our book-to-bill ratio of 1.8 times resulted in a growing backlog to 24,900 units valued at 2.5 billion. Our global manufacturing performance was not indicative of its true value. While a positive growth margin was achieved, the team's operational execution was tremendous in a challenging environment. Now bear with me while I throw some numbers at you. Compared to Q1, our deliveries in Q2 were down 37%, and that followed a 45% decline from Q4 to Q1. And then further, if you were to do a year-over-year comparison, you guys like all these year-over-year comparisons, of Q2, manufacturing revenue was down 59% on 54% lower deliveries. With such a steep decline in revenue and production, it's effectively impossible to quickly cost-cut your way to profitability. It was more a matter of weathering the short-term pain for the longer-term goal of responding effectively to increasing activity. Over the next six months, the manufacturing team will be focused on increasing production rates quickly and efficiently while maintaining employee safety, quality, and customer satisfaction. Volumes in our wheels and parts business improve sequentially although still well below normal winter levels. The volume and mix of work continue to lag in our repair business, although we are seeing some early signs of increased activity and improved efficiency as we right-size those operations. We've well-positioned shops that serve our customer base in an efficient and safe manner, and our network is prepared for the return of more normalized activity levels later in the calendar 2021. Our leasing and services team continued to navigate the downturn well, with fleet utilization improving sequentially during a time when approximately 25% of the total North American rail car fleet is in storage. Greenberg's capital markets team had a relatively quiet quarter with 100 units syndicated. This lower volume is reflected of the lower production rates in the prior two quarters and the types of rail cars being produced. As you can see in the press release, we produced 800 rail cars onto the balance sheet in the second quarter, and we expect syndication activity to increase meaningfully in the second half of fiscal 2021. Our management services group added another 38,000 new rail cars under management during the quarter, bringing total rail cars under management to 445,000, or about 26% of the North American fleet. After quarter end, we finalized the formation of GBX Leasing. The joint venture is an exciting development for us and an opportunistic deployment of our capital. The JV achieved several important goals for Greenbrier. From a commercial standpoint, it's a strong complement to our integrated business model of rail car manufacturing and services that further enhances our distribution strategies to direct customers, operating lessors, industrial shippers, and syndication partners. We expect the joint venture will help Greenberg continue to grow its diversified customer portfolio with a focus on industrial shipper customers and small batch production to leverage long-standing customer relationships and capabilities gained through the acquisition of the manufacturing unit of ARI. We've realized significant cost synergies following that U.S. manufacturing acquisition, and we expect that this joint venture will result in meaningful commercial synergies. Financially, GBX leasing delivers clear benefits. Over the long term, it reduces our exposure to the new rail car order and delivery cycle by creating a new annuity stream of tax-advantaged cash flows and sound portfolio practices, including asset diversity, staggered lease terms, and debt maturities. Adrian will discuss the tax benefits shortly. GBX leasing will acquire approximately $200 million of rail cars per annum from Greenbar with the initial portfolio identified from leased rail cars on our balance sheet or in backlog. The joint venture will be levered about three to one debt to equity through an initial 300 million traditional non-recourse warehouse facility, of which we've drawn the first 100 million, and it'll transition to a more traditional asset-backed securities financing as time progresses. GBS leasing will be consolidated in our financial statements, and we plan to provide additional supplemental information to illustrate the performance and benefits of this exciting new venture. Looking ahead, I'm optimistic about a recovery in calendar 2021 that will primarily benefit our fiscal 2022. And while the first six months of 21 were difficult, we still expect growth margins in the low double digit to high single digit range and will continue controlling costs to improve financial performance. Greenbrier remains healthy with strong liquidity and no near-term debt maturities. We have leadership positions in our core markets in North America, Europe, and Brazil, and see early signs of recovery in each geography. And you can see that particularly with what Bill mentioned, our recent orders for 1,700 railcar units in just the first month of our Q3. The decisive actions we've taken over the last 12 months have positioned Greenbrier to exit the pandemic economy a stronger and leaner organization. And now Adrian will provide commentary on the quarterly results.

Thank you, Laurie, and good morning, everyone. Quarterly financial information is available in the press release and supplemental slides on our website. During the quarter, Greenbrier continued managing for near-term stability while positioning for a strong recovery. Obviously, the pandemic has had a major impact on our revenue and delivery levels. Nonetheless, we were able to achieve positive margins in each segment as a result of our flexible manufacturing footprint and aggressive cost reductions. Reduced deliveries and revenue is a power driver of bottom line performance, even in the face of dramatic reductions in payroll, overhead, and SG&A. Performance did improve each month within the quarter, And we exited the quarter with positive momentum, increasing production rates to build sequential momentum in Q3 and Q4. A few quarterly items I'll mention include revenue of 296 million, book to bill of 1.8 times, made up of deliveries of 2,100 units, including 400 units from Brazil, and orders of 3,800 new units. aggregate gross margin of 6%, selling and administrative expense of 43 million, flat sequentially, and 20% lower than Q2 of fiscal 2020. Net loss attributable to Greenbrier was 9.1 million, or a loss of 28 cents per share. EBITDA was negative 1 million. The effective tax rate in the quarter was a benefit of 62% due to net operating losses and tax benefits from accelerated depreciation associated with capital investment in our leasing assets. These deductions will be carried back to earlier high-tax years under the CARES Act, resulting in a $16 million tax benefit in the quarter and cash tax refunds to be received in fiscal 2022. We also encourage $2.5 million of incremental pre-tax costs specifically related to COVID-19 employee and facility safety. These costs will continue for the foreseeable future. Moving to liquidity, we have continued managing for near-term balance sheet strength and are positioned for recovery. Including borrowing capacity of $115 million, Greenbrier's liquidity remains healthy at $708 million, plus another approximately $100 million of initiatives in process. Cash in the quarter ended at $593 million, reflecting $48 million of inventory purchasing to support higher production levels beginning in Q3, and a $44 million increase in leased rail cars for syndication. Historically, tax receivables have been included in the accounts receivable line in our balance sheet, but to improve transparency, we separated this activity in the quarter to provide a more accurate picture of operating receivables, as well as the future tax refunds I just mentioned. Capital expenditures, net of equipment sales in the quarter was $9.2 million. Leasing and services capital spending is expected to be about $90 million in 2021, with about 42% of that already occurring in the first half of the year. This capital spending includes GBX leasing, which began operations in Q3 and approximately $130 million of leased railcar assets were transferred into the JV at that point, including some assets which were already on our balance sheet at the beginning of the year. An additional approximately $70 million of assets will be newly built or transferred later this year. Manufacturing and wheels repair and parts capital expenditures are still expected to be about $35 million for the year, with spending focused on safety and required maintenance. We continue to have healthy cushions in our debt covenants, and while we have no significant debt maturities until late calendar 2023 and calendar 2024, we are proactively evaluating opportunities to extend maturities and capitalize on the low interest rate environment. Green Browse Board of Directors remains committed to balanced capital deployment. Authorization of share repurchases remains in effect through January 2023, And today we're announcing a dividend of 27 cents per share, our 28th consecutive dividend. Since the start of our program, the growth of our dividend represents a compound annual rate of 9%. And now we will open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today will come from Matt Alcott with Cowen.

Good morning. Thank you very much for taking my question. Do you guys think the net profitability in fiscal 21 is still plausible?

We certainly thought that last quarter when the question was asked, we, depending on the cadence of the recovery in the last two quarters, we still believe to be true. Would you like to comment further on that?

I agree with you, Bill. I think it's, you know, certainly the second quarter was a lot more difficult than we anticipated with COVID continuing longer, I think, than anyone had ever hoped, as well as the severe weather. We're doing everything that we can to take advantage of the momentum we see in our markets.

Okay. And, Lori, can you give us an idea on what kind of a step up in deliveries we can expect in the third and fourth fiscal quarters?

Well, I'd say it's definitely going to be a nice step up from what we saw in this quarter, probably more in line with what you saw in the first quarter and then ramping up further in the fourth quarter. Some of this will be dependent, as I stated. We do expect syndication activity to pick up in the fourth quarter or in the second half, but sometimes the timing of our customers' ability to close doesn't always perfectly coincide with our fiscal activity. quarter or year end. So that's where there's a little bit of a play. But yes, we do expect to see a nice step up in third quarter and a further step up in the fourth quarter.

Okay. And just maybe one more kind of a higher picture question. You know, based on some of the assumptions, some of the macro and rail traffic assumptions that are pretty consensus, some of which Bill talked about earlier, could we expect 2022 or 2023 to be your peak earnings year in this cycle?

Well, you have to qualify within this cycle because certainly we don't expect that to be our peak ever.

That's true. I think that, you know, I don't want to get into an active phrase like these are extraordinary times. But the stimulus and the other economic policy that's going on today has caused particularly Goldman Sachs to be very bullish on the economy through 2023 and into 2024. You can look at consensus estimates, but some of the really smart people are looking at the math with the amount of money available, the amount of stimulus coming in in North America particularly, and then in Europe you've got these extraordinary policies being made that will create a big boost for a long time. I remind everybody, and I'm not saying that this is going to occur, but the 1918 pandemic, if you look at history, gave rise to the roaring 20s. And part of it was spending, but part of it was relief. Consumers loosened up. So it's really hard to navigate the future. But I really expect that we'll be looking for 24 months of very strong economic activity in North America, Europe, and in South America.

Got it. And Bill, you mentioned rail traffic being up. It's true. It's up 3% year-to-date. after two years of decline. But if you X out intermodal, it's down 4%. And if you X out intermodal and grain, it's down 7%. Can you talk a bit maybe about what these trends mean for you guys, the fact that it's mainly an intermodal and grain recovery so far? And if it continues to be so, what does that mean for all other card types?

Well, I think that if you look at other isolated card types, There are others where there's a lot of growth. We're seeing activity. It's a little tricky because there's at least 20 different kinds of car types. And as we've said many, many times, a rail car is not a rail car is not a rail car. But there has been growth in certain chemicals, smaller lot sizes in agricultural products, boxcars, and gas. a number of other car types that we track. We make almost all cars made anywhere in the world, with the exception of coal cars, which also curiously have seen some recovery in the storage statistics. But I think that it's more broad-based than the trailing traffic statistics might suggest. Keep in mind that there has been a damper also on traffic due to the weather conditions and some of the other activities going on. If you look at some other indicators, calendar company just put out a very interesting report on dry van and other truck rates. Those have gone up on the spot market 40%. It's just a booming transportation market, somewhat dampened by weather. and supply chain congestion. And by the way, getting back to your earlier question, when we have weather delays, we try to recuperate, so we shouldn't have much of the delays from inbound freight that affected us and deliveries will come popping into the third quarter.

And I'd just like to add one thing. I do think part of what's keeping some of the loadings down or not showing as much growth is the railroad's ability to operate in a growing market with PSR. I have no doubt that the railroads will figure out how to decongest some of the ports and get moving. I'm certain that they don't like to see their loading staying flat or down in certain areas because they can't get the equipment there. So I expect that to get worked out in the near term and to start seeing more of those numbers, loadings improve across the commodities.

Got it. Thanks for the insight, Lori and Bill.

By the way, on our next conference call, we're going to have one of our chief commercial officers join us to give more insight into our markets, and we'll put a little more depth into that kind of question and do some preparation for that call. It's good for you to meet some of the emerging leaders in the company, I think.

Our next question will come from Justin Long with Stevens.

Thanks, and good morning. So I wanted to start with just a clarification on the first question around full-year expectations for EPS to break even. Are you assuming a 2Q loss of 28 cents when you make that comment or a loss of 77 cents when you exclude the tax benefit?

So I'll just answer the question. We're using the GAAP EPS of 28 cents.

Okay, thanks. Just wanted to clarify that.

And then, sorry, go ahead. I've learned a lot from Bill. I can't just answer the question and move on. There's a lot more to that. We are not disregarding that tax benefit because it is part of the strategy of why we're focused on growing a leasing business and keeping that on our balance sheet because there is tremendous benefit from the tax regulations that allow us to take these benefits. So we don't see that as extraordinary or one-time. It's part of how we will continue to operate going forward.

Okay. That makes sense. And Wanted to ask about manufacturing gross margins. I know you gave and reiterated the consolidated gross margin guidance for the full year, but any color you can provide on your expectations for manufacturing gross margins in the back half of the year?

I think consistent with answering Matt's question about deliveries, we would expect it to step up a bit in the third quarter and then further in the fourth quarter. As you can appreciate, while our manufacturing team is great at operating efficiently, it's a bit easier when you have a little bit more volume going through those facilities to absorb some of the overhead that you can't shed, particularly quickly when you have such a big drop in production.

Great. And last, just a quick one, and then I'll... hop back in the queue, but on the orders in March, could you share what the split was between North America and international orders for that 1,700 number you provided? Most of those were in North America.

Okay. And a little bit of a dribble of that 1,700 came in the first week of April, but just a small sliver of it.

Okay. Great. That's helpful. I appreciate the time.

Thank you. Thanks for your coverage.

Our next question comes from Baskin Majors with Susquehanna.

Hi, Baskin. Thanks for taking my questions here. Great. I wanted to go back to kind of maybe extend on Justin's last question there. Can you give us maybe a better flavor of the kind of demand that you're seeing in the marketplace and that's driving these higher inquiry levels in what looks like a much better trend, at least in the last couple of months, on firm orders. Are you seeing leasing companies look to get in hopes that the cycle is turning? Is some of this from your JV new car orders? Have spot steel prices impacted some of the more near-term needs? Any of these themes that you could unpack for us and help us understand what your customers are feeling would be really helpful. Thank you.

Okay, let's try to take that question apart just a little bit on the – I wouldn't say that the order activity is influenced by our leasing company at all, and I'll let Justin or Lori correct me if I'm wrong directionally there. That's not it. We had one very interesting order – That is, we had quite a number of boxcars in this order cycle, counting these 1,700 units that we just talked about. We're running boxcars in Mexico. We received a tack-on order so that we have a very long run now at our Hidalgo factory in Mexico for boxcars. And some insulated, including in that, would be insulated boxcars for... including mechanical refrigerated services. So there's a good strong base there. There's a big replacement demand in that segment that is looming, aging boxcar fleet. So we're expecting to see that trend continuing. We haven't received any intermodal orders, which is at this stage in the cycle of a rising cycle, because we're not really in the cycle yet. We're in a B-shaped recovery. We haven't seen any immortal. That's going to be a big pop when it comes. And it's going to have to come at some point. And it's usually very sudden when it happens. Again, some chemical and other tank cars. And, Justin, what else am I missing?

It's actually some general purpose also. So you've got gondolas. You do have different sizes of covered hoppers. And, you know, again, tank cars as well. So it is very broad-based and diversified.

Yeah, again, the traffic statistics, they're very important to look at them. They've been erratic over the last year. So a growth from a low base doesn't mean a lot. But the momentum, I'm looking mostly at the momentum on the demand side from fiscal policy and cheaper money. These tax benefits are really a driver for everybody to invest in rolling stock. High scrap prices are going to continue to erode that storage number down, which is a very meaningful statistic.

And, Bill, could I add two things on to that? I think, Baskin, we would say that the customer orders that we've experienced over the last four months have been customers who have firm needs, and it's not really someone trying to kind of get ahead of a – recovery it's it's you know a shipper who's got capacity coming online it's someone who's got replacement needs in their fleet and then I would also just want to underline because I have received this question a couple times already there are we are not treating orders or backlog activity differently than how we have in the past so we only include firm orders in for external parties. We are not including any order activity that does not have a third party lease attached. And since we own 90% of the GBX leasing JV, we consider that as a affiliated or subsidiary company from that perspective.

And everything that goes into that fleet has leases attached and the high quality staggered maturities as Laurie mentioned earlier. I hope that gives you some flavor

No, no, thanks for that clarification. I think there maybe was some confusion about whether speculative orders could show up with this new structure, and thank you for firmly clarifying that that policy has not changed. And you answered my second question, which was about was intermodal included in there. It sounds like that order has not happened yet, but can you comment on the inquiry levels? I mean, that's historically a pretty concentrated customer marketplace. You know, is that broadening out? Is that something that you think happens this year? Just anything you can give us on your expectations for that market?

Just kind of in general, we use a system of anything over 1,000 cars or a certain dollar quantity, because cars can cost different amounts. We do a very disciplined white paper and review the market intelligence, the customer need, where other cars are being built competitively, and so on. We've been doing an average of two of those a week over the last month, Some of those have been inquiries that haven't settled down yet into order. Some have been awarded, and we received a fair amount of those that have been awarded. So that activity level by itself, we're tracking probably certainly many more than 10,000 inquiries for cars, 10,000 cars or more. That's the highest rate it's been. It's probably 15, closer to 15. It's higher than it's been since 2018. Lastly, let me go back to your question on backlog. One of the things that always somebody typically asks or curious about, what are we doing about steel prices? Well, we're indexing. They've doubled in the last number of months, and that's not just spot. There's a indicative of the kind of incipient demand that's out there. We expect those to fall back a little bit, but we're not speculating on steel. We've passed on some big orders in Europe. that required multi-year commitments at fixed steel prices. Happy, very happy we didn't take any of those orders. So we're using indexing and the quality of the margins built in the backlog is good.

Thank you, I'll pass it on to the next.

Our next question will come from Allison Poliniak with Wells Fargo.

Hi, good morning.

Morning, Allison.

Could you talk a little bit about the margin, just trying to unpack it? I know underabsorption within manufacturing, and speaking more to manufacturing, is a huge part of that. But you also mentioned weather, and it sounds like there was some production line startup costs. Were the weather and any way to quantify what those weather and maybe production line cost startups would have been? Or is that not as meaningful there?

Hey, Allison, this is Justin. I would say that... We aren't really ready to quantify that explicitly, but with regards to the weather, we lost for effectively every facility in North America. So that would be wheels, repair and parts and manufacturing anywhere from a few days to a week to more than a week of downtime. So you kind of think about what that does to not just a manufacturing facility from a throughput and overhead absorption perspective. but you are talking millions of dollars ultimately. It's one of those things where it is a part of life and it is a part of running a business. Again, hats off to our manufacturing and wheels repair and parts team and all of the employees who were able to execute well in very trying circumstances, but it was definitely a headwind for us. Some of the startup costs definitely occurred towards the end of February, but we'll see some of that more in March and April as we are ramping up activity a little more aggressively.

Got it. You're right. It did affect overhead absorption dramatically. It was on outgoing cars we couldn't ship. We couldn't get inbound freight to have parts. We're hand-to-mouth in that regard. So I had multiple concerns. number of effects on each of the factories, as Justin points out. And we hope to recuperate that in the coming quarters.

Got it. And then it sounds like the line startups will be sort of that near-term headwind as we kind of start to ramp up production. Should we assume that sort of lessens in Q4, or does that start to accelerate, you know, based on the expectation that, you know, the sort of V-shaped recovery behind it? Any thoughts there?

I would say that, as Justin said, we'll see a little bit of that – Saw a little bit of it at the end of February and see a little bit more in March, but our manufacturing team has done a good job of bringing those lines back up as well as just transitioning from car type to car type. So I wouldn't expect there to be a big spike in inefficiencies of bringing additional lines on. There'll be some headwind, but not a big spike.

Let me add some granularity there. In our ARI facilities, we have had the benefit of fairly smooth production and so we don't have any line startups. They would be the more affected of the factory system as they haven't been fully absorbed in the Greenbrier manufacturing system yet. In Mexico, we have worked for years to have a flexible manufacturing system, and we've used some very innovative techniques that bring the startup costs down dramatically from historical levels. So we believe that As long as we don't take too many orders and try to do too much too soon, we will be fine on the startup costs. And we don't expect to have a lot of CapEx involved with that. It would be mostly working capital, consumption, and cash, which would pay off as the revenue comes in.

Got it. And then just last question for me. The wheels that repair on parts, how should we think of that through the balance of the year? Should we assume that just sequentially improves with sort of traffic and just activity going on in the rails. Any thoughts there?

I think that's a fair assumption. We are starting to see some pickup of volume in our repair shops as cars are pulled out of storage and as loadings improve, and I would expect that to continue as we progress through the year. Steady improvements.

Hey, Allison, you know who's in charge of that now? It's Lori Takarius. She's running both that unit and our rapidly growing green bar management services business with 445,000 cars under management. She's pushing them together to make new synergies and that unit should really shine in 2022, right? Yes, sir.

That's great. Thanks so much.

Our next question will come from Ken Hexter with Bank of America.

Great. Thanks. And good morning. And great to see the building book to build. And also I offer my condolences, Bill, to you and the team on the loss of your employees. Just really highlights the situation we're all dealing with. So can we talk about the just on that last question from Allison, talk about the pace of bringing some of the shuttered facilities back and not just the lines. You had talked about closing your facilities in Mexico. What is operating now and what have you brought back online or are working to bring back online?

Alright, principally the facilities in Mexico and North America and to optimize our production in Europe. We're in great shape in Brazil. Laurie Alejandra Centurion and Brian Comstock went down there and sized that facility. We have a very good backlog now and some momentum, although Brazil's economic woes are well known. The sector we are in should be doing very well. ARI is running Well, so it's mainly our Mexican facilities. Our Gundersen facility is running only marine right now, and we're deliberating about what kind of rail footprint we may want to have there. It's a higher-cost facility, and I don't see us bringing back rail there very soon. So our Hidalgo plant, the state of Hidalgo, we operate in three states, Tlaxcala and the city of Tlaxcala. in the state of Tlaxcala. We operate in Hidalgo and the state of Coelho. In Hidalgo, that factory had almost been down to just a bare-bones minimum with only one line running, and we're having to bring that one back. We're also underutilized at our GEMSA joint venture facility largely due to the demand in tank cars. So the two areas, and Tlaxcala has been fairly consistently maintained. So those two facilities are the ones where the impact will come. In our tank car facilities, we also started a new venture to make over the road trailers, tank containers for the Mexican market out of that facility and we expect some promise from that. But that's kind of where we see the activity coming back.

Thanks. And then, Lori, I guess just a quick clarification on the – I think Baskin was kind of hitting on the ASP of the backlog, right? So you've got – if I take the whole backlog was 115,000, the 1,700 new add-on dropped down to 100,000. Can we presume that that's more mix of your car types since you don't – you never give those details, but is that just a mix of shifting car types? Is there anything that stands out amongst that?

You're spot-on. It is mixed. We've looked at that a couple of different ways just to make certain that we're understanding, but it is the value of the cars. As Bill mentioned, we had some nice opportunities in box cars. Those tend to be higher-priced cars because there's just more steel. There's more componentry. I would just say, overall, it's a mix of cars. To Bill's point... We do have steel pricing index, so to the extent that steel pricing moves up, down, left, or right, our focus is on maintaining our margin dollars. Margin percent is always fantastic, but we really do focus on maintaining those margin dollars when we think about steel pricing and indexing.

Plus contribution to overhead, which is important. Pricing is maintaining pretty well, and for this part of a recovery from an Absolutely extraordinary event, a pandemic. I think that the recovery is looking to us like a V-shape.

Perfect. And then, Adrian, really interesting stuff on the new segment. Can you talk about the tax impact of leasing and your thoughts on how we should think about tax rate, effective tax rate, near-term, long-term?

Yeah, I would say we've seen a very nice benefit in the quarter from that investment. And with the CARES Act, we're able to take back those tax benefits to earlier years where we were paying taxes at 35% for federal purposes versus the 21% today. So that's a nice benefit. On an ongoing basis, the accelerated depreciation you get on investing in leasing is very good because it reduces the effective net investment that you're making to build that portfolio. So those cash tax benefits are very meaningful in the long term as well.

So is there a rate you're throwing out in terms of your thoughts on where that stands going forward?

I would say we will not see a benefit – to the extent we did in Q2, but you will still see incremental benefit from that CARES Act and from those tax-advantaged investments into Q3 and Q4. So we will have a favorable tax rate in Q3 and Q4, but I'm not trying out a particular rate at this point.

Okay. And then on that same vein, I don't know, maybe Bill or Lori, there was no EPS guide in this quarter on what we've seen from you in the past. Any thoughts on why, your thoughts on getting back to that $4 to $5 peak. You mentioned, Lori, it's not the peak yet, so maybe your thoughts on that overall.

We're not even thinking yet about a peak, are we, Lori? No.

No. Peaking is way in the distance. If the question is around guidance, you know, again, this is such a fluid environment. We really want to focus on getting our business back running more effectively, taking advantage, and being prepared as the economy improves and as we see order activity pick up, volumes pick up, and the other parts of our business, we'll take into consideration what are the metrics that we're looking at and how the pace at which we're looking at that long term to figure out what is the right sort of guidance to provide in the future.

I appreciate that. Thanks, Lloyd.

By the nature of the times, we've got a lot of lumpy activities that we want to get through this year. I think once we have a more stable revenue base, I think the big event this quarter really was the precipitous decline in revenue. We don't expect that to continue. In fact, we're now moving back up that revenue curve. But as Lori says, we hope to restore normalcy And prosperity here, we've got a great franchise, and now that springtime is here, people are past Easter and are more optimistic. I think that we're going to continue to see a really good run for some time in the United States into the future. There are a lot of things we can't control, but those things we can control, we feel pretty comfortable about them right now.

And our last question today will come from Steve Barger with KeyBank.

Hey, thanks for getting me in. Great to hear about improving conditions. If I look back at FY18 through FY20, Greenbrier averaged about 22,000 deliveries per year. Do you think 22 can get back there, or is that more like a 23 thing in your mind?

Well, I think all things are possible. You know, that would be a pretty steep increase, as Bill has talked about. You know, we want to make certain that we are mindful of how we accelerate production, focusing on employee safety, making certain that we're making a quality product and keeping our customers happy. So we're not going to amp up deliveries just to try to beat a number. I would say we're going to run our facilities more in line with what we believe that we can deliver. do what satisfies demand and what meets our customers' needs.

Yeah, that makes a lot of sense. And just as you look forward to that time as you're ramping, given the cost and efficiency actions you've taken, what do you think consolidated and incremental operating margin looks like for the next upcycle?

Hey, Steve, it's all right. I'll take a shot at that. I think we'll kind of think about – gross margins, and then, you know, we can kind of talk operating margins later. But ultimately, we do see that in some type of a mid-cycle, we're going to be, you know, upper teens to low 20s is what we're working towards. And then you layer in the reduced G&A costs that we've – the G&A costs we've taken out of the system. So, you know, I think if you look at our kind of all-time peaks, we're in the low 20s for manufacturing, and that effectively – influences aggregate margins, we would definitely be working to get there and see a path to potentially exceed that, I think, in the near term. Well, maybe not in the next few quarters, but we do see a path to that.

And so as you ramp, I appreciate that detail. And as you ramp up, do you think this SG&A and 170, 175 million range is sustainable, or is there some variable SG&A that's going to come back with with volume increases?

There are probably some variable SG&A that comes back as travel starts again, but I would say that being in this work remote, no travel for a period of now 13 months, I think that has maybe reset the bar as to what sort of meetings and activities will occur. Again, being very mindful, a lot of our customers, they're not meeting yet, they're not going back to their offices. So I think that some of that will allow, there'll be less variable SG&A coming back than I would have thought.

Yeah, in fact, Lori's being modest. She's initiated several initiatives that will look to reducing our long-term G&A footprint. The use of offices, of office sharing, People can be very productive working off-site and working remotely, particularly in the area of needless travel. We're going to be doing some interesting things over the next 18 months as her programs show some real fruit. So I think everyone's rethinking this. Some of our customers actually closed their offices virtually yesterday. going to a virtual footprint. We're not there yet, but we're really hard looking at this and we're going to be watching. We're going to be watching total shareholder return. We're very focused on our new ideal program for diversity and inclusion. We have to make these programs profitable. We're a business for a profit. And we want to do so with equity and fairness to everyone associated with the company. So we're really looking hard at the bottom line, capital expenditures, cash, and constraining these costs as we go forward. We don't expect to have those costs suddenly just reappear because they're back.

Well, that's a really good segue to my last question. You're at the bottom of the cycle. Plus or minus, balance sheet's in good shape. Laurie, you said you're focused on an orderly production ramp. If that goes really well, what's next? Could you build the lease fleet faster, or is there any M&A you're looking at? I'm just trying to get a sense for capital deployment priorities over the next, call it, four to six quarters.

I think it's steady as we go. We are looking at leasing. We have other venues where leasing could be applied. Internationally, with a capital... a light footprint. Our syndication model has worked very, very well. We have some refinements in that. Not an awful lot of new capital projects, however, unless we were to expand leasing. A moment on leasing, it would be practically ridiculous if GreenGuard didn't take a stronger step into leasing. We have not leveraged our leasing portfolio in the past like other companies do. We have, at best, a one-to-one debt equity ratio. We haven't leveraged. We use it a lot for our syndication model, the leasing fleet, I mean. So with this new arrangement, we can generate the equity required from tax and other cash benefits to leverage create a very strong portfolio that creates a revenue stream over time. It's actually very cash positive. We'd be foolish not to take advantage of that and expand it judiciously. Again, we want to do it at a pace that doesn't overtax our resources. We're very pleased to have an industry veteran added to the team and Steve Benzies and someone who's run larger manufacturing and leasing operations than ours. So we expect some growth, possibly growth in other foreign jurisdictions, but at a manageable scale.

And I just add in that now that we're managing over 25% of the North American fleet through our Green Bar Management Services operation, obviously that puts us interfacing with a very, very broad base of customers. So how can we, with our integrated business model, continue to service those customers? So it may not be... any sort of M&A, but there are definitely things that we should be able to leverage as we have that sort of a window to our customers and their needs. How can we serve them differently? How can we serve them better and create value for both our customers and ourselves?

That's a really good point, and you're doing a lot of great work to create these alliances. You don't have to acquire a business to create value for it and to create value for yourselves if you're like-minded and you have a common goal. So these alliances, and this has been something that Greenbar has built over the years, has been a key to some of the opportunities we're looking at in the future. Great, great point.

Thanks for the time.

Thank you for the time. Thanks for the questions, everybody.

This will conclude our question and answer session, and I would like to turn the call back over to Mr. Justin Roberts for any closing remarks.

Thank you very much for your time and attention today. We hope you have a great rest of your Tuesday. And if you have any follow-up questions, please reach out to me or through our investor relations email address. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.