The Greenbrier Companies, Inc.

Hello and welcome to the Greenbrier Company's first quarter of fiscal 2025 earnings conference call. Following today's presentation, we will conduct a question and answer session. Each analyst should limit themselves to one question with a follow-up if needed. 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, Gary. Good afternoon, and welcome to our first quarter of 2025 conference call. Today, I'm joined by Lori Ticorius, Greenbrier CEO and President, Brian Comstock, Executive Vice President and President of the Americas, and Michael Donfris, Senior Vice President and CFO. Following our update on Greenbrier's Q1 performance and our outlook for the remainder of fiscal 25, we will open up the call for questions. Our earnings release and supplemental slide presentation can be found on the IR section 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 2025 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. Today, we will refer to recurring revenue throughout our comments. Recurring revenue is defined as leasing and fleet management revenue excluding the impact of syndication activity. With that, I'll hand the call over to Lori.

Thank you, Justin. And good afternoon, everyone. Happy New Year. As a new calendar year begins, our fiscal 2025 is well underway. Our strong performance in the first quarter builds on our accomplishments from the prior year. But our focus remains on generating more bottom-line results over a range of market conditions. In Q1, Greenberg generated EBITDA of $145 million, along with a robust aggregate gross margin of 19.8%. reflecting a 480 basis point year-over-year improvement. Over the last year, we achieved our highest aggregate gross margin since the peak years of the last decade, and today's market conditions are not as robust as that last peak, yet Greenberg is much stronger. More precisely, we're generating near-record earnings in a new railcar demand environment that is roughly half of the prior peak years. Since launching our Better Together strategy just two years ago, we've made significant progress in enhancing our manufacturing gross margin, which is a key contributor to our Q1 performance. Michael will provide more details on our financial performance for the quarter shortly. Our guidance for fiscal 2025 remains unchanged. Policy actions over the coming months by the incoming administration and Congress will help clarify the business environment in which we and our customers can expect to operate over the next few years. As Brian will discuss, the conversations we've been having with customers support a constructive demand outlook for the next few years. We at Greenbrier are currently on a multi-year journey to evolve our business and remain intent on executing our strategy regardless of market conditions. We're focused on increasing manufacturing productivity, limiting the impact of industry cyclicality on our results, and optimizing our business to unlock greater efficiencies. We continue to execute upon important strategic initiatives to ensure Greenbar's long-term prosperity. One of these initiatives is an organizational redesign that led to the combination of our manufacturing and maintenance services units into one reportable segment, Manufacturing. which operates alongside the renamed leasing and fleet management segment. Our new reporting convention aligns with our operating structure and allows us to function as a more thoughtful, holistic, and streamlined organization. This integrated approach situates us to maximize future opportunities. In our markets, the freight rail industry remains fundamentally healthy. In North America, rail traffic is projected to pick up as we move through 2025, and therefore railroad velocity will be under pressure, which benefits rail car demand. North American rail car fleet utilization is about 81%, with 318,000 units in storage. The actual surplus of rail cars is lower than reported, since many rail cars in storage are either candidates for replacement, out of regulatory compliance, or support commodities in secular decline, like coal. Fleet utilization is expected to remain generally steady, but we believe it will come down slightly during 2025 as North American railcar deliveries outpace retirements. Our European backlog remains healthy and our sales pipeline is strong as the commercial team continues to execute, including lease originations. As a reminder, The expansion into lease originations in Europe allows us to stabilize our production activity similar to what we do in North America and is integral to the long-term performance of our European business. Lastly, in Brazil, we're observing an increase in demand as customers finalize infrastructure investments and transition to purchasing rail cars. Greenberg is uniquely positioned to deliver strong performance across all market conditions and in every geography where we operate. I'm extremely optimistic about our future. And with that, I'll turn the call over to Brian, who will discuss our operating activities in greater detail.

Thank you, Lori. As you mentioned, the actions we are taking to strengthen Greenbrier's long-term prospects are indeed generating enthusiasm throughout the organization. Now I'll turn to the quarter. In Q1, we delivered 6,000 new rail cars. Manufacturing gross margin was strong. at 17.1%, benefiting from a product mix weighted to more profitable car types and an ongoing optimization in our manufacturing process and capacity. The leasing team continued to produce good results as well. Greenbrier's lease fleet grew by 1,200 units in the quarter, with stable fleet utilization of roughly 99%. Recurring revenue on a trailing four-quarter basis is $148 million or 32% higher than our starting point. We remain disciplined in our approach and we will continue investing up to $300 million per year on a net basis provided that the rail car fleet additions meet our return criteria. Lease renewal rates continue to grow at double digits during the quarter. As a reminder, we entered fiscal 2025 with about 10 percent of our leases up for renewal, and we have already successfully renewed about half of those in Q1. Given the ongoing strength in the leasing market, we are confident that we will successfully renew or remarket all of the remaining units. In Q1, Greenbrier syndicated 800 units with multiple investors. continuing to generate strong liquidity and margins. Our capital markets team executed its first transaction with a new syndication partner. The team also executed on a meaningful buy-sell opportunity in a secondary market that generated positive margin with a very short hold period. Looking at the new railcar market, Greenbrier secured global orders of 3,800 units worth $520 million in the quarter, with lease originations about 45 percent of this order activity. Based on what we've seen after the U.S. election in early November, we believe the slowdown in new railcar order activity over the last few quarters has been temporary. In fact, in the month of December, which has traditionally been very quiet due to the holidays, we secured global railcar orders of approximately 1,400 units with our sales pipeline strengthening. We expect favorable customer decisions to come quickly on the back of policy announcements. Our backlog is strong at 23,400 units with an estimated value of 3 billion, providing significant revenue visibility. In addition to our backlog, programmatic railcar restoration activity that is not included in our backlog has become more predictable in nature. As a reminder, this activity involves repurposing existing rail cars into new equipment service through re-bodying work, stretch conversions, re-racking, or deck conversions. It also includes tank car retrofits and re-qualifications. The impact of re-qualifications is highly relevant as this work is statutory and required to be completed every 10 years. This work is performed for large fleet owners who require work on hundreds and sometimes thousands of railcars at a time. In fiscal 2025, we will perform these activities on several thousand units and expect this work to continue at a healthy pace for the next few years. These activities are not just accretive to Greenbrier. They support our ability to utilize our capacity in an efficient manner. Railcar restoration and requalification work can be performed at our manufacturing facilities or at our maintenance locations, depending on various factors. This provides us significant flexibility to maximize the use of our existing footprint. Overall, we expect to deliver strong performance through fiscal 2025 as Greenbrier continues to successfully implement its strategic plan. With that, I'll hand the call over to Michael.

Thank you, Brian. I will cover our financial highlights and drivers of performance in Q1 that leads us to affirm our fiscal year 2025 guidance today. As Justin mentioned, you can find our earnings release and supplemental slides on our website. Greenbrier's fiscal 2025 is off to a great start with strong operating performance highlighted by a sequential increase in aggregate gross margin percent and operating margin percent. Revenue in the quarter of $876 million represents a new first quarter record for Greenbrier. The decrease compared to Q4 was primarily attributed to lower deliveries resulting from reduced syndication activity due to timing. Aggregate gross margin increased by 160 basis points to 19.8 percent, marking the third consecutive quarter of margin expansion. This increase is primarily due to a beneficial product mix and strong operating efficiencies. First quarter operating income was 112 million, or 12.8 percent of revenue. The 100 basis point increase for the quarter was due to improved profitability, and lower selling and administrative expenses. Our quarterly tax rate of 37.8 percent was higher than the fourth quarter, mainly due to the geographic mix of earnings and the impact of unfavorable items related to foreign currency exchange rates. Net earnings attributable to Greenbrier of $55 million generated diluted earnings per share of $1.72 and was the strongest first quarter earnings per share since 2016. And finally, EBITDA for the quarter was $145 million, or 16.6% of revenue. For 12 months ending November 30, 2024, our return on invested capital, or ROIC, was 11.2%, marking 140 basis point sequential increase and was in our 2026 target range of 10% to 14% that was announced less than two years ago. The improvement in ROIC reflects the enhanced operating and capital efficiency generated by the execution of our Better Together strategy. Moving to our balance sheet and liquidity, Greenbrier's Q1 liquidity remains strong at $549 million, consisting of $300 million in cash and $249 million in available borrowing capacity. Our cash flow from operations was a use of cash of approximately $65 million. This was primarily due to leased assets placed on the balance sheet during the quarter awaiting syndication or capitalization during the year. We expect liquidity in fiscal 2025 to increase, driven by continued strong operating results, working capital efficiency, and increased borrowing capacity. We will remain disciplined in managing our capital structure and balance sheet. Our net debt to EBITDA stands at approximately three times and has been trading lower trending lower as we continue to generate strong operating earnings and work towards reducing our recourse debt. Switching to capital allocation, we remain disciplined and are committed to returning capital to shareholders through a combination of dividends and stock buybacks. Today, Greenbrier's Board of Directors declared a dividend of 30 cents per share. This is our 43rd consecutive quarterly dividend. Additionally, Greenbrier's Board of Directors renewed and extended 100 million share repurchase program. We are committed to deploying capital to create long-term shareholder value and will continue to utilize this capacity opportunistically and within the framework of our broader capital allocation strategy. Finally, we affirm our previously issued guidance based on current trends and production schedules and our fiscal 2025 revenue delivery and margin guidance are unchanged. I want to highlight a few points regarding our margin guidance. We expect improvements in operating efficiencies to continue. However, the product mix in the second half of the year will change as expected. Our margin guidance target remains intact and is unaffected by this product shift. We are updating our capital expenditure guidance modestly and investments in manufacturing are unchanged and expected to be around $120 million. Gross investment in leasing and fleet management of $360 million and proceeds of equipment sales of $60 million have been reduced. This is approximately a $5 million reduction in guidance on a net basis. This is primarily due to better visibility into our plan for fiscal year 2025, and while the number of rail cars to be capitalized and sold out of our lease fleet will decrease, we still plan to deliver against our targeted investment of approximately $300 million. In conclusion, we are incredibly pleased with the first quarter results. Our financial position is strong, our strategy is progressing well, and our outlook for fiscal 2025 is positive. I'm confident in our near and long-term ability to grow earnings while continuing to deliver strong returns on the capital we invest. This all supports increased shareholder returns in years ahead. And now, we'll 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 telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster. Our first question is from Ken Hexer with Bank of America.

Please go ahead.

Hey, great. Good afternoon. Laurie, congratulations. Some phenomenal improvements over the last few years. The strong margin gain, the 17%, not sure if you can parse that to the old category just so we can kind of understand what's going on with the manufacturing, but maybe just delve into it if only on a combined basis. what drove it? I guess you talked a little bit about mix product mix that might shift in the back half. Um, we see pricing, especially on the new orders, uh, kind of is up some, maybe you can talk about what, what drove the margin gains. And then Brian, in your commentary, you noted the slowdown was temporary. Um, but in the press release, it noted demand is easing slightly for certain rail car types and, and in some markets. So I just want to understand, it sounds like you're saying it was temporary and it's inflected in the, Press release may be saying it's maybe potential for slowing. So if I can just get an understanding there, too. Thanks.

Sure. Thanks, Ken. And I'll say that I appreciate the congratulations, but it's definitely a broad team effort to be able to achieve the results that we've achieved the last couple of years. Regarding the margin gains and parsing it between the historical or legacy manufacturing versus our maintenance services, if you think back on some of our historical financials, maintenance services is – You know, it's a fairly modest-sized business, so when it blends in with manufacturing, it doesn't really move the dial on that margin percentage. We looked at that when we were putting this together to make certain that we weren't going to be skewing any historical data either. So the real driver is the fact that our... teams have been focused on how to continue improving manufacturing efficiencies. How can we insource the things that we need to insource, eliminating transportation costs? How can we drive hours per unit down more? How can we manage our overhead? It's the kind of work that will sustain us across a variety of car types, product mix, markets. I will say that Q1 did benefit from certain car types that Brian can speak to, but they're more specialized car types that end up having a better gross margin.

Yeah, I think that maybe just to complete what Lori said is at the end of the day, it's a little bit of everything. It's like the perfect storm. You've got some of it is product mix, which is you know, weighted primarily towards the auto sector and some of our specialty cars that we have highly engineered. And, you know, and some of it is the efficiencies and the insourcing initiatives that we took on, yeah, I guess 18 months ago, give or take. And we're starting to see a lot of that benefit start to come through the P&L. As we look forward on the commercial side, the question towards the commercial side is, you know, leading up to really kind of the elections, I think you saw a lot of apprehension from customers trying to figure out what is policy going to be, how are things going to look, and if we can defer decisions, we'll defer decisions. We're starting to see some of that break loose. Not only are we seeing it break loose, we're starting to see the pipeline build. December was a very strong month for building the pipeline. January looks like it's going to continue that rate. It's car types, I would say, that are more traditional. It's covered hopper cars. It's chemical tank cars. It's some various guns, box car replacements. It's those types of cars that we're seeing that are gaining some momentum versus where we've had a strong emphasis on some specialty gondolas and highly engineered cars as well as auto. So hopefully that helps.

No, it does. It's a great explanation. And then just if I can sneak one more in, just it looks like the backlog came down, right? So you've gone down from what, $3.8 billion, $3.7 billion, $3.4 billion down to $3 billion. Is that kind of the tentativeness you're talking about, and maybe it bounces back, or do you think just in this environment we're going to kind of draw down on that backlog?

Let me start with something, and then you can add, Brian. You know, it is interesting when you say that, $3 billion worth of backlog. That's pretty incredible, right? So I think sometimes we forget to appreciate how far we've come and where we sit. So we're very pleased to have that sort of backlog. But this is why we've been focusing our... attention on our footprint and thinking about how do we utilize the footprint we have to the best of its abilities. And so that's, you know, our footprint in the U.S., that's our footprint in Mexico, and what does the, particularly the North American industry need? Do they need new rail cars? Do they need requalification? Do they need some of these re-bodies that Brian was talking about? So that work is not part of backlog. So I think if we were able to bundle all that together, you would see growth in backlog. That's what gives us the confidence and the positiveness about our outlook is we have all this different activity to utilize the footprint we have. It just doesn't always show up in that backlog bucket.

Yeah, and I'll just tag on to what she said because that really is, you know, the phenomena of what you're seeing is as we think about our manufacturing footprint and how we utilize that The whole of Greenbrier and all of our strengths, you know, one of those strengths is in, you know, doing these re-bodies and these sustainable conversions. And we've kind of built on that factor. So as the needle on new car kind of ticks down a little bit, we tick up. what we do on the refurbishment side, and then as demand comes back, we can look at rebalancing that on the refurbishment side. But if you think about backlog, keep in mind, to Lori's point, there's several thousand cars that aren't in that number that fit into that category that typically have an ASP of $50,000 or $60,000 per car. So that really makes a pretty big swing as you think about backlog numbers. And it's margin, very margin accretive. It's very margin accretive.

Great. Appreciate the time. Thanks, guys. Thanks, Ken. Thanks, Ken.

Again, if you have a question, please press star then one. The next question is from Bascom Majors with Susquehanna. Please go ahead.

Thanks for walking through sort of the incremental recovery and optimism and the order flow and inquiries over the last several weeks here. Can we talk a little bit more of the production plan as you have it guided? I know that can get different than deliveries with some of what goes on the balance sheet and what goes out in syndication and the timing of that. As guided today, how does the production plan look versus what you did last quarter into the second half? When do we get to the point where you need better orders to come through to sustain that or have to make a decision to taper that to protect margins?

I'll take the first part of that, and then Brian and Lori can kind of talk about the decisions that need to be made. So big picture, Bascom, production is probably going to be similar in the back half of the year as it is in the first half. Within a few hundred units, again, part of this is you think about a rail car is not a rail car is not a rail car, so size matters. And as you shift from maybe larger car types to smaller car types, so on and so forth. But big picture, we don't see a significant shift in our production rate per se, but it is more about the types of cars moving to a little bit more of a commoditized type of car in the back half versus the first half. And then from a decision perspective about when you think about orders and... Yeah, I think it really comes down to visibility.

As visibility, for example, had some of the orders continued to slow through the next few months, then we may be having a different decision. But as things kind of pivot and come back and visibility on the lines and material order dates are still reasonably in check, then we continue to maintain our production status. So we don't At this stage, we don't see any change in our production status. Go ahead. I'm sorry.

Sure. Baskin, I was just going to say, and just to reemphasize, I think something that you said earlier, Brian, is we really have scenes. the pipeline of activity pick up in the months of December here and in early January with some pretty exciting opportunities, particularly for the North American markets. So that's what gives us that optimism and, you know, looking at our however many different production lines we have going at any point in time. That's just part of what we do week in and week out.

Go ahead, Jesse. And the one thing I would say to ask them is this is an experienced management team that's agile, and they will move... Sorry, I got... a stare for saying experienced, a seasoned management team that is, you know, has been through several different types of cycles and several different commodity plays. And at the end of the day, with the extensive relationships and experience in the marketplace, we feel like we're very well positioned to understand what's coming our way and be able to react quickly, good or bad.

And thank you for talking to us.

It sounds like the inquiry and order rate you've had recently is supportive of that backlog if it continues, or do we need to see it pick up further from the last few weeks or month and a half to really support the delivery guidance?

I would say we don't really need to see a material increase or uptick. What I would say is we do have a little bit of open space kind of in the July-August timeframe, which is pretty normal for us in this time of year. And I would say at this point we are not concerned about being able to fill that at expected rates.

And I would say sometimes we like having a little bit of open space in our production because that allows us to be responsive when a customer maybe has a need pop up that they didn't fully appreciate.

Thank you. Two guidance clarifications, then I'll pass it on. The tapering from the gross margin where you are in this quarter to where the guidance is, How much of that is the mix impact you've talked about from going to more commodity car types? Are there other pieces in that? Or is there just some conservatism with the second half from not knowing exactly what the orders and car types look like? And maybe that could be better if things go as planned. And to the second point, you made some comments on liquidity. working capital. I mean, it sounds like the views on cash flow were a bit more constructive than we've heard from you recently. Any clarification around what that means for operating cash flow or free cash flow or however you'd like to frame it? Thank you.

I'll jump on margin if you want to take the cash flow, Michael. That was great. So what I would say is that given where we're at and the fact that we are I think 12 days away from a new administration stepping in. We believe that we have pretty good visibility on margins, but also do have a little bit of, I would say, caution baked in just in case things happen that we aren't expecting or there's unanticipated events. A lot of, I think, the margin shift is related to the mixed shift first half versus back half. But at the end of the day, we just want to make sure that we are not out over our skis from that perspective and we're constructive but not overly optimistic or out of touch with reality from that perspective.

And just maybe before Michael goes to liquidity, I'll say, and that's why I tried to emphasize early on that we are focused on finding ways that we can improve our production efficiency that sustain us across various demand environments.

Right. And just jumping in on liquidity, you know, having the strong margin tailwind going into the year and kind of moving through the years helping us. the efficiency that we're seeing from a manufacturing standpoint is helping as well. And we're very careful and diligent in how we invest our capital. So I think that's been a real positive for us. We also have teams working on working capital really across the globe, and we're watching that very closely too. So I think we have good visibility into it, and I'm pretty excited about our plans as we finish through the year.

Thank you all. Thanks, Bascom. The next question is a follow-up from Ken Hexter with Bank of America.

Please go ahead. Hey, thanks for the quick one. Maybe just to summarize, Bascom's kind of hitting on the guidance, right? So if you such a strong beat this quarter, you didn't raise fiscal 25. So I guess, Justin, you just threw out there it's just conservatism or maybe what what gets you back into range? What do we need to see that you're not raising the target at this point, given the strong first quarter performance?

Well, I think what I would say is we have a, we do have some open space in the back half of the year and we are seeing strong pipeline and, and increases in that activity. Um, but part of it is also, um, looking at the kind of mix of orders, the types of cars we see coming down the pipeline versus what we've been building. And also just bearing in mind that this is full year guidance. And I think we would say we would love to be at or near 20% aggregate margins for the entire year, but I don't think we are ready to commit to that at this point. Okay.

Thanks, Seth.

Appreciate it. Thanks, Seth.

Yeah. This concludes our question and answer session. I would like to turn the conference back over to Justin Roberts for any closing remarks.

Thank you very much for your time today. If you have any questions, please reach out to InvestorRelations at GBRX.com. Thanks and have a good day.

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