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spk10: Hello, and welcome to the Greenbrier Company's second quarter of fiscal 2022 earnings conference call. Following today's presentation, we will conduct a question and answer session. Each analyst should limit themselves to only two questions. Until that time, all lines will be in a listen-only mode. At the request of the Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin. Thank you, Chuck. Good morning, everyone, and welcome to the call. Today, I am joined by Bill Furman, Greenbrier's Executive Chairman, Lori Kikorius, CEO and President, Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer, and Adrian Downs, Senior Vice President and CFO. Following our update on Greenbrier's performance and our outlook for fiscal 2022, we will open up the call for questions. In addition to the press release issued this morning, additional financial information and metrics can be found in the slide presentation posted today in 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 2022 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. And with that, I'm going to hand it over to Mr. Furman.
spk09: Hey, thank you, Justin, and good morning, everybody. This past month has been an eventful time in the world and at Greenbrier. On March 1, Lori Chikorius assumed the role of Greenbrier CEO. Last week, our board of directors appointed Lori as our newest director. As we begin today's call, I want to first congratulate Lori on her new positions at Greenbrier. I'm very proud of Lori's development at Greenbrier, how we have managed this very important transition. I'm pleased that I now serve as executive chairman through the remainder of our fiscal year and as a board member and investor until 2024. With Lori's appointment, we've expanded our board's gender diversity. Four of our 11 directors are female. Further three of the directors identify as people of color. I'm confident that diverse representation at all levels of Greenbrier leads to better overall business performance. Omicron is still a factor in our operations, as you will hear today. But things are getting much better. Just as those impacts began to add, the war in Ukraine has impacted economies everywhere we operate. We are witnessing a true tragedy, and I pray for a swift end to the conflict and to all of the human suffering. While the word creates challenges for everybody in the near term, it also provides opportunities for major shifts in freight corridors and transportation modes that will enhance Greenberg's business as the world enters a reordered state. History demonstrates the integral role of railroads to support civilian life and economies in a heightened manner during wartime. The current war in Europe has created direct pressure on the availability and cost of commodities, ranging from minerals to food to fertilizer to crude oil, as well as coal and natural gas. Railroads and railway suppliers will help meet the challenge of keeping civilian life and economies functioning during the crisis. The commodity markets are traditionally leading indicators for expansion in rail freight. Most commodities shipped by rail are experiencing upward pricing pressure from demand constraints due to either sanctions on Russia or reduced production from Russia and in the Ukraine. We expect rising global commodity prices and shifting trade patterns to elevate rail car demand in North America and Brazil and elsewhere in the world. Already changing energy policies in North America and Western Europe are creating opportunities for rail transport of oil, ethanol, and other products. The impact will be similar on fertilizers and other items needed to produce food. Finally, the rising cost of diesel creates a distinct opportunity for modal shift from road to rail. Freight rail is one of the most sustainable and fuel-efficient modes of surface transportation. U.S. freight railroads with diesel electric power generation are three to four times more fuel efficient than trucks. Think about that for just a moment. One ton of freight can be moved by rail almost 500 miles per gallon of fuel. Additionally, moving freight by train instead of trucks reduces greenhouse gas emissions by up to 75% per ton traveled, and it reduces congestion and wear and tear on bridges and highways. As more freight shifts to rail, in many cases, this will induce longer rail car dwell times and lower railroad velocity. In turn, railroad congestion causes the need for more rail cars to make railroad service more efficient, notwithstanding the increase in demand we expect in major commodities like fertilizer, foodstuffs, and other products. We recognize the role and responsibility our industry must play in times of crisis, and as the geopolitical landscape shifts. The cruel irony of this war in Ukraine is that there will be ultimately beneficiaries. Now, we can't choose the exogenous factors that affect our business, but we almost always have to be ready to meet the challenges and opportunities that come with them. Free Bar has proven the ability to thrive on adversity and seize opportunities. I'm sure this legacy will continue for years to come under Lori's leadership. With that, I'll hand the call over to Lori to discuss our strong performance during the quarter. Lori?
spk01: Thank you, Bill, and good morning, everyone. Before I discuss our results for the quarter, I'd like to express my gratitude to Bill and the rest of Greenberg's board for the opportunity to serve as CEO. We have an outstanding team at Greenberg who work hard and smart every day. While it's difficult to predict the specific opportunities or challenges that may arise, I know the Greenberg team has the experience, knowledge, and tenacity to make the most of any situation with a focus on increasing shareholder value. Greenberg posted strong results this second quarter, and while not all of our operating segments performed as expected, our business is highly diverse and in the aggregate performed very well. In the quarter, we delivered 4,800 railcar units, a 17% increase from the prior quarter, driven by our core North American market. Our lease fleet utilization increased to 98% and our leasing team generated robust cash proceeds and gains through regular lease fleet optimization and monetization transactions. Our leasing business is operating ahead of our expectations as we achieve growth at scale. Our strong quarterly performance was achieved as the Omicron variant of COVID-19 reached peak levels in the United States. Sadly, In February, Charles Wallace, a longtime employee in our maintenance services group, passed away due to COVID. Charles is survived by a son and four sisters. We send them our condolences for their loss. Further, we experienced significant absenteeism in the quarter as approximately 12% of our workforce contracted the virus. Recently, the infection rates have declined, and we're hopeful the worst of the pandemic is now behind us. Our manufacturing growth margin percentage was below our expectations in the quarter, impacted by supply chain and labor issues. Our global sourcing team continues to do an exceptional job of mitigating severe disruptions to support increasing production rates and simultaneously minimizing production delays. We have avoided any line shutdowns across our network due to material availability. Additional expenses were incurred in connection with sourcing spot materials and expediting deliveries. Operating momentum is increasing, and we expect improved performance in the coming quarters due to improved pricing and overhead absorption on higher production. In Europe, the situation is fluid. The period leading up to and the subsequent war in Ukraine have created a highly disruptive environment for many European manufacturers. Our operations have been impacted by rapidly rising energy costs and now finished steel and components in our supply chain. Ukraine and Russia are among the biggest suppliers of iron ore, finished steel, and wheel sets to European wagon builders. As Bill mentioned, railroads are an integral to supporting the economy during wartime. Our management team is working together with our customers and suppliers to maintain production and ensure the best outcomes for all parties. Our maintenance service business continues to be impacted by higher material costs and labor shortages during the quarter, with the Omicron variant having an outsized impact on the network of smaller workforces. We are beginning to see improving financial results from the action plan implemented to mitigate these headwinds in Q1. We expect to sustain our momentum in the second half of the year as we remain focused on executing our plans while also looking for additional opportunities to reduce costs and improve margins. Our leasing and management services group had another strong quarter driven by increased fleet utilization and regular asset optimization and monetization transactions. Our own fleet has grown by over 25% from the end of fiscal 2021 to around 11,000 units. And in addition to managing our lease fleet, our management services, or GMS group, continues to provide creative railcar solutions for over 25% of the North American rail flight rail, freight, fleet. Within GMS, we're launching an initiative to redevelop the service platform used to manage equipment and data. One of the goals of this important initiative is to ensure scalable support for our leasing and syndication business, as well as our external customers, as we continue to execute on our leasing strategy. Looking ahead, we see strong operating momentum continuing throughout fiscal 2022 and beyond. We've been able to maintain our market-leading position through discipline execution and by maintaining our strong liquidity position. These were hallmarks of our management team's plan at the start of the pandemic, and they continue to serve us well. There's no doubt that the market backdrop will remain dynamic, particularly with the war in Europe. Inflation, supply chain issues, and the continuing human impact of the pandemic will persist for some time. We are managing the business accordingly and maintain our optimistic market outlook. We expect our operating metrics to continue to improve as we move through the next several quarters and beyond. As we've said before, the market recovery won't follow a straight line, and there will be challenges along the way. We're managing our business to get ahead of these challenges wherever we can to continue to provide solutions to our customers and ultimately deliver value to our shareholders. As I said before, our leadership team has the experience, knowledge, and tenacity to make the most of any situation. And with that, I'll hand the call over to Brian Comstock to provide an update on the current railcar demand environment and our leasing activity.
spk08: Thanks, Lori, and good morning, everyone. GreenGuard secured new railcar orders of 8,500 units valued at $930 million. With deliveries of 4,800 units in the quarter, the book-to-bill increased to 1.8 times. Orders through the first half of the year are already over 85% of fiscal 2021 activity. New railcar backlog of 32,100 units has a market value of $3.6 billion and provides multi-year visibility. This is Greenbar's largest backlog in six years. Historically, when our backlog reaches this level, it includes several multi-year orders. In this case, there are a few multi-year orders which illustrates the strength of the overall demand environment. From an operations perspective, this means that a greater portion of our backlog is scheduled to enter production in the short term and translate to revenue sooner. Also, as production space becomes more valuable, we expect multi-year orders to follow and pricing to continue improvement. As a reminder, our new railcar backlog does not reflect 3,200 units valued at 180 million that are part of Greenbrier's refurbishment program. Because of the large scale and nature of this activity, this work occurs at our manufacturing facility that absorbs production capacity while contributing to overhead absorption. Our refurbishment program is an important part of ensuring rail remains the most environmentally friendly mode of surface transport. I'm excited about this growing partnership with our customers to sustainably repurpose North America's aging railcar fleet. Turning to leasing, fleet utilization ended the quarter at 98%. Lease pricing and term continue to improve sequentially, and we are seeing strong demand for new and used lease equipment. As part of our enhanced leasing strategy, GBX Leasing closed our inaugural asset-backed securitization by issuing $323 million in investment-grade rated notes with a blended coupon rate of 2.9%. and an anticipated repayment date of January 2029. Our capital markets team executed well this quarter and syndicated 1,400 units, the highest level of activity in nearly two years. Syndication is an important source of liquidity and profitability, and we expect to continue strong syndication activity in the second half of the year. As many of you know, syndication and asset disposition are important activities for leasing that will continue well into the future. Looking ahead, I remain optimistic about the momentum that has been building, especially in light of the strong demand environment in North America. Rainbar is well positioned for a period of strong growth. I believe the combination of market forces, the ability of our focused and experienced management team to capitalize on them, will deliver results in this early phase of this real-car cycle, which is substantially better than we've seen in previous cycles. With that, I'll turn it over to Adrian to provide more color on our Q2 financial performance.
spk03: Thank you, Brian, and good morning, everyone. Quarterly financial information is available in the press release and supplemental slides on our website. Today, we'll discuss highlights from the quarter, and we're also affirming guidance for fiscal year 2022. Second quarter highlights include revenue of 683 million, deliveries of 4,800 units, which includes 400 units from our unconsolidated joint venture in Brazil. Aggregate gross margins of 8 percent reflect continued effects from ramping of new railcar production, the impact of the Omicron variant, mitigation of supply chain, labor shortages, and an additional warranty accrual for certain older railcars. Selling at administrative expense of about $55 million is higher sequentially, reflecting increased employee-related costs, consulting, travel, and legal expense from higher levels of business activity. Net gain on disposition of equipment was $25 million. This activity was part of our ongoing optimization and monetization of our leasing portfolio. Non-controlling interest provides a benefit of $1.6 million, primarily resulting from the impact of line changeovers and production ramping at our Mexico joint venture. This improves sequentially, and we expect our Mexican JV to be profitable in the second half of the year. Net earnings attributable to GreenBar of approximately $13 million, or $0.38 per diluted share. An EBITDA of about $52 million, or 7.6% of revenue. In this quarter, we recognize $2.1 million of gross costs, specifically related to COVID-19 employee and facility safety. This expense increased almost 75% sequentially and was our highest level in the last 12 months. Reimbursed liquidity increased to $804 million at the end of Q2, consisting of cash of $587 million and available borrowings of $217 million. Because of the strength of our balance sheet, we are well positioned to navigate any market dynamics. We expect to receive a large portion of our $106 million tax receivable in fiscal Q4, reflecting delays in processing with the IRS. This refund would be in addition to Greenbar's available cash and borrowing capacity. In the quarter, and shortly after the quarter, Greenbar entered additional interest rate swaps to fix long-term floating rate debt for the next several years, reducing the risk of increasing interest expense in a rising interest rate environment. At the end of second quarter, effectively all of our outstanding leasing debt was at fixed interest rates, and approximately 90% of our corporate non-leasing long-term debt was fixed. Together with executing on over $2 billion of new and refinanced borrowing facilities over the past year, including the ABS lease financing completed in Q2, this positions Greenberg quite well as we move forward. On March 31st, Greenbrier's Board of Directors declared a dividend of 27 cents per share, our 32nd consecutive dividend. Based on yesterday's closing price, our annual dividend represents a dividend yield of approximately 2.3%. Since reinstating the dividend in 2014, Greenbrier has returned nearly $380 million capital to shareholders through dividends and share repurchases. Based on current business trends and production schedules, We're affirming Greenbar's fiscal year 2022 outlook to reflect the following. Deliveries of 17,500 to 19,500 units, which includes approximately 1,500 units from Greenbar Maxian in Brazil. As a reminder, in fiscal 2022, approximately 1,400 units are expected to be built and capitalized into our lease lease. These units are not reflected in the delivery guidance provided We consider a railcar delivered when it leaves Greenbar's balance sheet and is owned by an external third party. Selling and administrative expense guidance is unchanged and expected to be approximately $200 million to $210 million. Gross capital expenditures of approximately $275 million in leasing and management services, $55 million in manufacturing, and $10 million in maintenance services. Net of proceeds from equipment sales out of 150 million, leasing capex is expected to be 125 million. Gross margin percent is expected to increase sequentially in Q3 and Q4, with Q4 margins between low double digits and low teens. To close, I will add that I shared a view expressed by my colleagues earlier. Specifically, Greenbar will successfully navigate the challenges we face in the second half of the fiscal year. Greenbar's highest backlog in more than half a decade, ample liquidity, and a strong balance sheet make this possible. Despite the lingering effects of a multi-year pandemic and the impacts of war on a stressed global supply chain, we are better positioned than at any point in time to achieve our ambitious goals. And now we will open it up for questions.
spk10: 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're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Justin Long with Stevens. Please go ahead.
spk04: Thanks. I wanted to start with a question on manufacturing gross margins. And I was curious if you could give any color on how that metric is progressing on a monthly basis, even into the month of March, if that's possible. I'm guessing you started in the quarter at a lower point than where you're running right now. So just wanted to get a sense for that ramp and then any updated thoughts specifically around manufacturing gross margins in the back half. Thanks.
spk01: Sure, Justin. Good morning. This is Lori. I would say that we're – it's kind of interesting to think about now we're going from quarterly projections to monthly projections, but – We are seeing continued momentum month to month as we build on the momentum that we've achieved in manufacturing as we work through older orders. We bring our workforce back. They get into that steady groove of building at higher rates. So we are seeing that progression, and we expect that to continue through the year.
spk08: Yeah, Justin, this is Brian as well. I'll just add to what Lori said is also keep in mind that Q2 was was kind of the period where most of our ramp-ups were in process as well. So a lot of those, we just visited the plants last week with some of our board members, and a lot of those ramp-ups are now well underway, and so the efficiency should kick in as well.
spk04: Okay, got it. And secondly, maybe just a quick one for Adrian. Curious what you're expecting for gains on sale in the back half given the number we just saw in the second quarter. And then, Lori, I know you're new to the role. We're about a month in, but would love to get your thoughts on strategic priorities for the business. There are a lot of moving pieces with the geopolitical events, with questions about the freight cycle. How are you thinking about the best company-specific opportunities for Greenbrier going forward?
spk01: You know, it's a great question. We've been talking a lot about that, Justin. As Bill mentioned in his remarks, while no one would wish for war, certainly the things that are going on in the Ukraine and Russia are going to be tremendous opportunities for transportation of bulk commodities by rail. That's going to not only be beneficial, we believe, in Europe, but also in North America. We were fortunate enough to be with a bunch of shippers a few weeks ago talking to them exactly about what they're transporting and how they're dealing with the situation. And while it's difficult to predict exactly how those transportation lanes are going to change, everything seems to come back to it should improve transport of goods on the rail. So that's going to be fertilizers, it's going to be grains, it's going to be crushed rock, it's going to be petroleum products, it's across the board that we're going to see that sort of pickup. And while the railroads themselves can be very efficient, sometimes these increases in traffic, it takes a little bit of time for them to catch up, which tends to drive demand for more rail cars. So there are good things that can come out of war, and we believe that our industry is one that will benefit. and I'll turn it over to Adrian to answer your first question. Sorry for jumping in.
spk03: Yeah, and thanks for the question. We're not going to give specific guidance on gains and fail. You know, we'll be looking at that based on the market, so I think it's a little early to tell.
spk04: Okay, fair enough. I'll leave it at that. I appreciate the time.
spk10: The next question will come from Boscon Majors with Susquehanna. Please go ahead.
spk06: Yeah, Adrian, you talked about getting the margins up in the fourth quarter to low double digits slash low teens range. Can you clarify if that was a consolidated comment or a manufacturing comment? And if that was consolidated, you know, what's the manufacturing assumption that's underlying that?
spk03: Thanks. Yeah, I was talking about consolidated margins. And, you know, as you might imagine, we would expect a strong improvement in manufacturing to drive that.
spk06: Okay, and going back to the January call and some of the inter-quarter comments, you know, I believe you said that you think the business gets to the upper teens, maybe even back into the 20s over time, at least in the manufacturing margin. Can you talk a little bit about, you know, do you still have line of sight into that and what needs to happen to unlock that potential that we've seen from you before?
spk01: And, Bascom, I'll take that because I think I'm the one that was saying that because I think I was being really trying to look forward if we were to see sustained demand in the 50,000, 55,000 rail cars per year basis here in North America, and if we were able to enjoy that sort of sustained demand, we would expect our manufacturing margins to get that. Right now, I think it's a little bit too early to say exactly when that might occur, but I know based on what I've seen out of our manufacturing operations as well as our other business units, that is definitely achievable.
spk08: Yeah, I would say this is what I just chime in as well as one of the key metrics that we really look at as well aside from margin percentage. Margin percentage is important, as everybody knows, but at the end of the day, it's really about margin dollars per day. And so if you think about the additional volume that we have going through the facilities and the margin dollars that we'll be creating That's really what we're focused on right now. And we see substantial increase in the margin dollars coming out of the operating units.
spk10: Thank you. The next question will come from Allison Poloniak with Wells Fargo. Please go ahead.
spk02: Hey, guys. Good morning. I just want to go back to, you know, Omicron, it sounds like a pretty significant headwind for you guys with 12% of your workforce out. I guess, one, can you quantify the impact to margin that you think came from that? And I would say along with that, you know, you had talked about, I think, reaching 21 lines running by Q3. Did that delay any of those startups for you guys? Thanks.
spk10: Hey, Allison, this is Justin. That's a great question. So Adrian spoke to direct costs that we incurred of about $2.1 million. And those are what are readily measurable or identifiable. The underlying, as you illustrated, the underlying impact of the ramp-up is very hard to identify. It definitely impacted our plans and our abilities to bring people back effectively, and it did slow things down modestly, but it's really challenging to figure out, based on what we were thinking, how much is driven by just normal ramping activity versus people in and out, and when you think about, you know, 1,500 to 1,700 employees out in kind of a four- to six-week period, it's a pretty material impact in the quarter.
spk02: Understood, understood. And then are you guys at the 21 now, lines going at this point as we're into Q3, or are we a little less and still getting some impact from those costs?
spk10: We're actually north of that at this point and still have some, all of the lines are active that we have brought back, and then it's a matter of continuing to increase the rates. Got it.
spk09: I'd just interject something, Allison. I think Brian could speak to the operating momentum and the numbers of cars per day. As Lori said, we were just down in our facilities in Mexico around to ARI yesterday, The volume is going to drive margin, and you can talk anecdotally at least about the number of cars that's increasing every quarter.
spk08: Yeah, you know, as Justin said, we're north of 21 lines at this point. We have all of the transitions are well underway, and we see that we'll be increasing production somewhere in the line. neighborhood of between 90 to 110 cars per day once we get our pulse dry here this quarter.
spk02: Great. And then last question for me. Any color on percent of backlog that is expected to produce for the balance of the year? You know, orders were strong, I'm assuming. Are they sort of this year production or are they getting pushed into 23 for you guys?
spk08: Yeah, we have this year's production is full. It's Brian again, and we are working well into our fiscal 2023 at this point. I don't have those figures in front of me, but a great deal of the backlog. We'll continue our momentum into Q1, Q2, and we're even talking to customers about production in late 2023 and 2024 at this stage.
spk10: The next question will come from Matt Elcott with Cowan. Please go ahead.
spk07: Good morning. Thanks, guys. My question is on the kind of order momentum past the second fiscal quarter. Can you maybe talk about how things have been in March and so far in April? And can we expect this, you know, level of order that you had in the second quarter to continue for the next few quarters?
spk08: Yes, this is Brian again. And at the end of the day, the pipeline continues to be very, very strong. Order activity is still robust. We've seen good activity already this quarter, kind of on the lines of what we've seen over the last three quarters. And so we don't see anything that has stopped momentum at this stage. In fact, if anything... we're seeing maybe more and more reaction to customers not being able to get immediate space. So that is propelling them to get their orders, you know, in the queue.
spk07: And, Brian, the customers that are trying to get immediate space, what types of cars are they looking for?
spk08: You know, it is, I've said this, I think, the last couple of calls, and I maintain it is extremely diverse customers. It is everything from wood chip cars to EDG cars to commodities of all sorts to upstream and downstream chemicals. It is truly a very, very diverse pipeline and demand.
spk07: Got it. In a way, I guess it's good to have this diversity into the order of book, but I guess maybe the flip side of that is you know, is that going to be one of the reasons why you may not be able to achieve, you know, optimal gross margins is because historically all, you know, cycles have been driven by one or two types of cars and then you can adjust your production lines to that and now you have to do more shifting and you have to have, you know, does that involve more costs that would limit the gross margin potential?
spk01: I think that's a good question and a good observation, Matt. It is, you know, prior peaks or prior periods where we were focused on a particular car type. So, for example, crude by rail allowed us to really concentrate production in a certain way. While having a broader base demand will be a blending of gross margins across a variety of car types, as Ryan was talking about, we are focused on margin dollars versus percentages and Across the time, since we were in the crude by rail, we've improved our manufacturing production processes that I still think would allow us to achieve higher margins than we've achieved in the past when we've had broad-based demand.
spk09: Bill Furman, I'd just like to add something on the manufacturing side. We really have streamlined our processes. The acquisition of ARI was very useful in sharing best practices in North America with our Mexican operation. And the length of the runs on each of these specialty car types, we have a luxury of the plant capacity to build long runs of similar car types. Lastly, on that score, we have created the ability to reduce changeovers between materially different car types on a single line down to just a few days, which used to take weeks. So I don't see that myself in the manufacturing side of the business, which I continue to be deeply involved with. I don't see that as a big impediment to bigger margins. The volume drives margins, as you know, Matt. The more volume you have through facilities, the better you can be. But we're capable of dealing with smaller quantities. quite efficiently at this point after the last five years of improvement.
spk07: Got it. Thanks, Bill. And just one final question for you or Lori or Brian. On the auto racks, can you tell us if you have a material number of those in your backlog? Are they at any kind of risk because of the chip shortage? And then the flip side of that question is when we eventually do have a pent-up production cycle for autos, does the industry have enough auto racks to handle a potential surge in auto production once the chip shortage eases?
spk08: This is Brian. It's a great question. It's something I'm really personally focused on. To answer the first question is we don't have a significant number of auto in backlog relative to our total backlog. We do have auto in backlog, however. The chip shortage, though, really shouldn't impact any of those orders as well as just the momentum in that industry. With Velocity where it is today with the railroads, the auto rack fleet, the bi-level fleet in particular, is oversubscribed at this point. So they're already short assets without the chip dynamic solving itself. Once the chip dynamic solves itself and OEMs start to ramp up production, there is going to be some fairly sizable demand for auto rack production. I believe there is enough capacity in the industry to fulfill that demand and that need, but there's also the shift to the high-band market as well, which will also put pressure on the railroads and on manufacturing. I see this as a good long-term sustainable opportunity for our industry, quite frankly. And it's really good that it's been delayed.
spk09: Brian, just one clarification. When you say there's enough capacity in the industry, you mean manufacturing capacity.
spk08: Manufacturing capacity.
spk09: I know you've really put a lot of personal attention into this, and it's going to be a big market, I think. I agree with you.
spk07: Got it. So, Brian, I guess you do think that there will be a need for new builds. It's not that there's enough capacity within existing assets.
spk08: Correct. There will be a demand for more builds.
spk09: You know, railroads are going to be short, and it's the diversity also of the kind of vehicles that might be put into these buildings. So we're seeing, not just us, but our railroad customers and shipper customers are seeing that this is inevitably going to come. Great. Thank you very much.
spk10: The next question will come from Ken Hoekster with Bank of America. Please go ahead.
spk05: Hey, great. Good morning, everyone. Just maybe a follow-up on a question before. You talked about the gains, and Adrian, you said not forecasting it, but I guess does the growth of leasing mean the gains on sale becomes an ongoing entity, or was that one time related to this quarter? Just clarification there. And then my question would be, congrats on the backlog, but thinking about the cycle, and you've talked a lot about the different levels and diverse demands. Any thoughts on the consumer here? Obviously, that's been a big issue recently. Is there any intermodal thoughts in terms of demand or switching from intermodal to other cars, given the presumption that the consumer may slow? Any initial thoughts on that, or is it still too early for that?
spk03: Well, I'll take the first one, which is, you know, we really see gains on sales being a normal ongoing part of being in the leasing business. And we've had gains on sale every year to look way, way back in time. So, you know, what we saw here was maybe a little high for one quarter, but over the course of the year and over the course of our business, this is just very normal activity.
spk01: And I'll just emphasize the fact, you know, that we do have a cost advantage lease fleet. So, We can look at the markets and decide when is the right time, when is the right opportunity for us to enter into some of these transactions. But it is something you should see on a regular basis. And then, you know, regarding the other question, I do think, Brian, we are seeing a lot of shifts. We're expecting a shift in demand for more intermodal as opposed to less intermodal combined with the expectation of whether it's automotive or other bulk commodities.
spk08: Yeah, that's an accurate statement, Lori. The reason you haven't seen a big shift in intermodal or a push in intermodal is because of the bottlenecks and constraints they continue to have, not only at the port, but with chassis and takeaway capacity. As the railroads resolve the velocity issues, which there's a lot of announced programs on that, and as the ports get more fluid and as the chassis manufacturers catch up on production, You're going to see those bottlenecks go away. When those bottlenecks go away, you're going to see more truck-to-rail conversions, which is going to drive more long-term sustainable intermodal growth.
spk05: Great. And then you mentioned kind of the... Laura, you mentioned kind of sometimes you can benefit out of a war in terms of increasing demand. What about the, you know, from your Poland production, where are your customers? Are they... In Russia, Ukraine, do you have exposure to parts? And you talked a bit about the supply chain before. Can you talk about your exposure there?
spk01: Sure. And most of our customers are Western European customers, so no customers in Russia or in Ukraine. There are impacts to supply chain with the bulk of iron ore and steel coming out of those areas, Russia and Ukraine. but our global sourcing teams are very engaged and are determining areas where we can source commodities or the appropriate components in other areas. So that's one of the benefits of having such a strong global sourcing team. So, you know, we're not seeing any pullback right now. It is a fluid situation. We're focused on maintaining our production, making certain that we've got the right inventory on the ground to build the wagons and satisfy our customers' needs.
spk05: Great. Congrats on the CEO role, and thanks for your time.
spk10: Thanks, Ken. The next question will come from Steve Barger with KeyBank Capital Markets. Please go ahead. Thanks. Good morning.
spk00: Just so I understand the consolidated margin progression in the back half, I think you said sequential improvements in 3Q and 4Q with 4Q between low double digit and low teen, right? So 11%, 12% probably. Should we think that 3Q is more high single digits, or does that get to low double digit as well?
spk03: Low double digits.
spk00: So both quarters. That's great.
spk10: And Steve, just to be clear, we do expect to see progression in Q4 from Q3.
spk00: Understood. OK. So a sequential step up there. Just another question on your European operations, just given current events relative to the location of Poland and Romania versus Ukraine. Can you update us on the situation on the ground in terms of operating costs for electricity and natural gas and issues with parts availability? And same question on labor, just how much disruption is going on there? And can you remind us what percentage of your deliveries are expected to come from Europe?
spk09: I'm going to take the first part of that. Bill Furman, Steve, thanks for your always being on these calls. We appreciate your questions. Europe, in Romania and Poland, both countries are adjacent to Ukraine, but in both cases they're adjacent to parts of the Ukraine that are not directly affected by the war. To the west, Poland is... and very safe, and so the location is important. There is an effect on customers from the war and the increased costs associated with certain key components and steel. Thus far, we plan to pass those costs on, and we haven't seen refusals at this point. as most of our customers have contracts themselves in the shipping side that require the delivery capacity. Going back to an earlier point, none of the traffic in freight in Western Europe, none of it affects our business, is east-west into Ukraine or in Russia. So there's no trade effects there. The major effects are going to be in foods and fertilizers because between Ukraine and Russia they produce something like 20-25% of the fertilizer in the world and there are 25 countries that rely on combined Russia and Ukraine for half of their wheat and grain production. It is a fluid situation and it is dynamic but both Romania and Poland are NATO countries We do not expect to see any pollution of the war across borders, at least at this stage. Yep. Why don't you repeat the second part of the question?
spk00: I'm just wondering what percentage of the deliveries were coming from Europe for the guidance this year.
spk10: It's about kind of around 20%. Okay. Okay.
spk00: And I think the window just opened or will soon open to transact the remaining part of Astra that you don't own. How likely is the deal? Or can you just tell us how you're thinking about that given the longer-term dynamics that you're talking about from rail prospects?
spk09: Let me deal with that also. Lori and I are very close to the situation with our partner, Our partner owns 25% of Greenbar Aster Rail Consolidated. We're actually expecting this to remain a stable partnership relationship. There's certain advantages of having partners in international jurisdictions. A German partner is a very, very valuable asset to us right now, so we're not intending a change in the ownership structure in the near future.
spk00: Got it. And then I'll just sneak one last one in. Loan-to-value on the lease fleet went to 80% from 65% at year-end. I know that's not a huge difference in terms of dollars while the lease fleet is small, but just philosophically, what do you see as the right target range for leverage?
spk09: Well, keep in mind that a large part of this leverage, especially now that we've done this asset-backed security, is a very successful issuance. We have fixed rate and it's non-recourse debt. So while it is on our balance sheet, we have certain insulating factors. 80-20 ratio for a leasing company is, you know, standard is something like 75 to 80, 85% leverage. So it's well within the range. And as we're constantly monetizing now, what you guys are calling assets for sale, we're Asset sales, we're constantly monetizing the suite. It's growing. It's diversifying, and the leverage is appropriate to the quality of this portfolio and the maturity ladders and diversification. That's all very important, as you know, in managing a leasing company.
spk00: Right. Okay. Great.
spk09: Thank you.
spk10: This concludes our question and answer session. I would like to turn the conference back over to Mr. Justin Roberts for any closing remarks. Please go ahead, sir. Thank you very much for your time and attention today. If you have any questions, please reach out to InvestorRelations at GBRX.com. Have a great day. Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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