The Greenbrier Companies, Inc. (GBX) Q1 2015 Earnings Report, Transcript and Summary

Welcome to the Greenbrier Companies First Quarter of Fiscal Year 2015 Earnings Conference Call. [Operator Instructions]. At this time, I would now like to turn the call over to Lorie Tekorius, Senior Vice President and Treasurer. Ms. Tekorius, they may begin.

Thank you, Melinda, and good morning, everyone. Welcome to Greenbrier's first quarter fiscal year 2015 conference call. On today's call I'm joined by our Chairman and CEO, Bill Furman and CFO, Mark Rittenbaum. We'll discuss our results for the quarter ended November 30, 2014 and comment on our outlook for the rest of 2015. After that, we will open up the call for questions. In addition to the press release issued this morning which includes supplemental data, more financial information and key metrics can be found on the presentation posted today on the IR section of our website. As always matters discussed on this 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 2015 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. So we kicked off our fiscal year with strong results continuing our momentum from 2014 with revenue, EBITDA and earnings exceeding our high expectations for the quarter as all of our operations performed very well. Driven by previously enacted operational measures and mix, first quarter aggregate gross margin reached a record 17.8%, compared to 17.2% in the fourth quarter of 2014. Broad-based orders totaled 14,100 new railcars valued at $1.24 billion during the period, driving backlog to a record level of 41,200 units, the highest in Greenbrier's history. Subsequent to quarter end, we received additional orders for 3500 units valued at approximately $400 million. Now I will turn it over to Bill to give some more color on the quarter.

Thanks, Lorie. We are very pleased as our strong performance continues. This quarter, Greenbrier has announced record earnings, grown our diversified backlog and set 2015 expectations much higher. The reasons for this are couple of important ones. The tailwinds that we expected were stronger than we expected with increased efficiencies in manufacturing improving margins in manufacturing and in wheels and parts, execution in leasing, the return of the double-stack market and strong auto and other demand which benefits our new and efficient automotive products. In addition, the headwinds which we expected were weaker than we were concerned about, specifically our smoother than expected addition of new lines at our GIMSA joint venture, manufacturing operation in Mexico and a transition from a leased facility with Bombardier to a wholly owned facility in Mexico. We had much more efficient execution than we had earlier expected and even higher margins at those locations during a time of transition and major construction and moving of plants. So these strong factors and the weaker headwinds have helped set us up for the rest of the year which is why we've increased our guidance substantially to $5.20 to $5.50. Finally, I think it's clear that longer backlogs in our business give visibility in benefits of long production runs. Clearly, the new product introduction and the diversification model strategy we set out to accomplish two years ago is working and we’re taking market share from our competitors in very key product areas. I would like just to make a few simple points and we'll leave more time for questions. The first is that no single economic variable drives our business performance because of our diversified and integrated business model. We are well diversified among many different railcar types and as pointed out in our press release tank cars today represent about 25% of our total mix. We’ve other high-margin car types that are contributing to the value proposition at Greenbrier. The market clearly has reacted to the price of oil but with our model, low oil prices benefit the U.S. economy and therefore benefit almost all of our other car types. In fact, lower oil prices are expected to, with the strength of the U.S. dollar, improve consumption in the United States and add about 1% to U.S. GDP over what earlier expectations might have been. The leading indicator for our business is the condition of the U.S. economy. Further, our broad-based business is well-positioned to capitalize on the opportunities for either resumption of higher oil prices or a continued period of time in transition as we see these lower oil prices take place. Greenbrier has changed our strategy over time and the model we are using is producing substantial results. Over the last eight years we've transformed Greenbrier by broadening our product portfolio, modernizing and expanding our manufacturing operations in low-cost locations that are more accessible to our primary markets. We've embraced an asset-light leasing model that we’re scaling up rapidly, that's opened up a new channel for us to access growing railcar markets. And we've scaled up our repair operations with the premier joint venture partner in Watco Companies, accompanied by a strong new management of these operations in Jim Cowan. Finally, we've streamlined and focused our operations at our wheels and parts business and we've seen considerable capital improvements and capital efficiencies and wheels and parts margins as a result of that. As we focused on key areas, we will seek to continue to enhance long-term shareholder value. Our goals are to improve operational efficiencies in manufacturing on the strength of a very large backlog and great visibility, to continue to work with close customer relationships for multi-year transactions, a growing syndication volume of lease railcars that will drive increased margins and income in a leasing business and we intend to share success with shareholders. The Board approved a quarterly dividend of $0.15 per share and this quarter we've increased the share repurchase program by $25 million to a total authorization of $75 million under the current program with a cumulative repurchase program of $125 million since we began purchasing our stock. We continue to believe our stock is undervalued and the average purchases to-date have been just under $50 per share. We’re making smart investment today for results that benefit across the cycle. In terms of CapEx, we’re going to deploy CapEx toward flexible manufacturing. We don't see major expansion in CapEx in new car facilities but we do see opportunistic and highly efficient capital returns reinforcing our goal to have a 25% return on invested capital in mid-2016. Finally, we now -- with continued transition, our Board have six independent directors and including me, only two non-independent directors with the retirement of Bruce Ward after 30 years of service for this company who contributed greatly to the growth of our manufacturing business and has been an inspiration in terms of our manufacturing organization. I'm going to turn it now over to Mark Rittenbaum for a few additional remarks and we will then open it up for questions. Mark?

Thank you, Bill. Just wrapping it up here, we ended the quarter with $410 million of liquidity from cash balances and available borrowings under our revolving credit facilities. I'm sure many of you have noted that our cash usage during the quarter was about $100 million. We anticipated this would be the case with working capital usage for increased production, more volume flowing to our lease syndication model and capital expenditures as Bill noted as we invest in the future. In addition to that, we also paid out dividends in a share repurchase program. Greenbrier is hitting on all of our cylinders. We expect this trend to reverse itself in the second half of the year where we will generate significant cash flow. Our integrated business model and flexibility will allow us to achieve the financial goals that Bill and Lorie have referenced that is an aggregate gross margin with at least 20% by the second half of fiscal 2016 and ROIC of at least 25% by the second half of fiscal '16. We are confident about 2015 and beyond and plan to build upon the momentum in a continuing fashion. We updated our guidance today for the year significantly and to sum that up, deliveries in fiscal '15 will now be approximately 21,000 railcars, revenue of approximately $2.6 billion. As a reminder, this revenue excludes our GBW repair joint venture with Watco as that is now accounted for under the equity method. And diluted EPS in the range of $5.20 to $5.50 is similar to prior years. We expect this to be second-half loaded as we increase production rates throughout the year. That concludes our prepared remarks and now we'll open it up for questions.

[Operator Instructions]. Our first question is from Allison Poliniak, Wells Fargo. Your line is open.

Bill, I don't want to be crude up to much, but you've been pretty close to it. Any comments you can share related to your customers in terms of just given the pressure that they are experiencing from crude prices, how they are looking at equipment decisions retro-fit potential, the new standards, et cetera?

We have a surprisingly large number of our larger customers who are interested in tank car safety, which we frankly we think we've been leaders in that trend. We think that over the next few years' safety will sell and it's required in the system. So, we have a number of very substantial customers who've embraced the tank car of the future and also retrofit programs. The single largest issue is the uncertainty over regulations when we expect those will be out by the end of this quarter, but we had expected them to be out by the year end and I think GIMSA and the U.S. Department of Transportation [indiscernible] need to act to bring more clarity in the market. We do expect both regulations to create quite a lot of replacement demand and that people will respond to that. We haven't seen what people fear as some people have asked us. Do you see request for order cancellation or changes? We haven't seen any surge or really considerable activity in that area. We have seen a delay in action on -- due to the uncertainties on the tank car regulation. So, the new tank car order book has slowed somewhat from it's earlier phase as one would expect. Probably the first area here we see any slowing would be in the sand car market, but we haven't seen any real evidence of that. We're still accepting orders for sand cars, there is a very substantial volume of sand that has to get shipped. So we think that we are in pretty good shape there, too.

And then just in terms of line changeovers and the startups and the transition. How far are we through that? Is that sort of a second quarter issue as well potentially? How should we be thinking about that with our numbers.

I'll just reinforce what I said earlier and let Lorie give more granularity to that. We are really pleased with the way it's going so far, with the things we are concerned about that might happen that would slow us down, haven't happened. In fact, we've received a boost as the factors involved with us have really been much more efficient than reasonably could be expected given the amount of execution they had to do. Lorie?

Right, and I would just reinforce that. I mean, that's one of the things that was amazing, I think, this quarter. I think this first quarter that transition happened much better than we had anticipated. The line is up and running. They have delivered cars off that line, Allison. But, we will continue to see ramping of the going to the second order and through this fiscal year. So I wouldn’t expect headwinds, but we would see positive progression as we go through the second quarter and the rest of the year.

Just one last question, on the mix of the orders you received, the ASP was really high. Is that just the effect of the tank car facing or the lack of capacity out there driving pricing up? Or is there a mix of tank cars there? What should we be thinking on that side?

Back it's a mix overall, certainly it continues to be favorable pricing environment, but it is mix when you think of average sale price. You can also think of boxcars and automotive carrying cars, refrigerated boxcars, all of which have a high average selling price. It's not just tank cars that have a high average selling price.

Next question from Bascome Majors, Susquehanna Financial Group. Your line is open.

So you have built more railcars than you sold for, it looks like fourth straight quarter and the cumulative working capital investment in leased railcars held for syndication has roughly tripled over that. So now you’ve been very vocal about the financial benefits of growing the lease and syndication activity next year but as far as our modeling, what should we see that net working capital investment in finished railcars shipped from investment to monetization? Perhaps the follow-up, what are we looking for to drive that shift?

Let me just make a quick remark and I'm going to turn that question over to Mark and Lorie. At a board meeting yesterday we discussed us our leasing company, the leasing company is literally knocking the cover off the ball. But, it is reflecting in a higher balance of assets held for sale because the model is working. We're trying to drive more revenue through that model and we’re successful in doing it. In fact, we're ahead of the five-year plan with sum of these major relationships that we've established and we are continuing to work very closely with our customers. We’re one of the companies that did not turn away from the conventional car market. We’ve continued to embrace our customers for both sale and lease. So it's very important to remember is that model is successful, it will have more assets on its books by the very nature of doubling the revenue. So, that revenue isn't -- doesn't show up in our income statement because it's a syndication revenue. So, I think we need more transparency and more work to explain our leasing company which is highly profitable to the street and we are going to work the next quarter to do that. Lorie?

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I will just wrap up on this by reiterating what we've said, that all of these railcars are under lease. And all of these railcars we have firm takeout's with investors. The reason they are on the balance sheet for a short periods of time and we’re constantly cycling cars through, as we bundled them in packages to investors and while they are on our balance sheet we’re earning at a run-rate of about 8% to 10% per annum. The rent that we’re collecting and of course today we’re either sitting on cash or borrowing in our lines of credit at very low rates of interest.

I appreciate the clarity there. One more on the energy exposure and then I'll pass it on to the next guy. I appreciate the disclosure. You said the tank cars are a roughly 25% of your November backlog. How much of the backlog is in the small cube covered hoppers? And what's your sense of the proportion of those that are going to frac sand service?

As you know, we don't disclose granularity. But, it would be under or about 20% of the total backlog. We have had most of the order activity in doublestack, boxcars, continuing strength and planned and I think that it's going to be very interesting to see how the sand market plays out. There is just, the technology is driving the use of a lot more sand for fewer and fewer wells. So, it's a very complicated math and so far we haven't been any week this in the activity that’s really substantial as some people have expected.

Next question from Matt Brooklier, Longbow Research. Sir, your line is open.

First question, wanted a little bit more color in terms of where we are with adding incremental tank car manufacturing capacity. And then I just had a regulation follow-up question.

Good. Well we’re sizing our tank car capacity to maintain the higher market share that we've obtained over the past two years. We’re sizing it for a normalized market. So that we continue to be dedicated to building out the tank car capacity we announced earlier which we've been doubling our tank car capacity from a relatively low base. Having said that, we expect that the replacement demand will drive forward -- driven by safety we'll continue to create a much stronger tank car capacity than many people seem to be fearing. So I think that we’re on station to complete our plans as announced and we’re not going to shrink from that. On the other hand, I want to point out that this capacity we are adding is designed to be state of the art and flexible capacity and a simple matter of jigs and fixturing to convert to other car types. So we have a flexible capital like model. We have a very good position in our Mexican operations with the strength in the dollar and these are facilities that can be converted quickly to other uses.

Okay. And then you talked to, a little bit earlier but maybe the market slowing a little bit on the tank car side given the pending regulations and I guess the expectations are that we could have a final rule on tank cars by the end of this quarter. But I just wanted to kind of get your pulse on your expectations for replacement potential demand if your thoughts on that have changed with the correction in crude oil prices and then maybe you could talk a little bit about GBW and being positioned into what's likely a substantial amount of retrofits. If there has been any update in terms of that part of your business. Thanks.

Well, just briefly, as you know, the tank car of the future the car that we've designed parallels what we expect the government to require. This will be mandated changes in certainly crude by rail and probably over time ethanol. We don't see any change in that fundamental thing that we have a car that’s eight times safer, we're building the tank car of the future today. We have a backlog of over 3000 cars and we are retrofitting cars today to an expected safer standard. So, I think that the replacement and technical side of tank car demand is one that is -- we are all just waiting for. We are hoping that the government will one day come up with a solution and finally reach a conclusion. We believe they will and we believe that will happen in this quarter.

And we continue to believe when that does happen notwithstanding the price of oil that people will do this because as Bill talked about earlier, safety matters and many of our customers, many customers out there, safety is just cannot be denied and so we definitely expect that this will take place.

There is definitely an environmental backlash that’s tagged on to the crude by rail and ethanol products, the more flammable product there is a 150,000 DOT-111 cars in hazmat service. Many of the cars that have not been focused on are very dangerous and rivers or water shed. So, we expect over time, that if you can create a car that eight times safer, just the General Councils of these huge shippers will require them to be consider the risk they are taking if they don't improve the safety of the car. Moreover in retrofitting there are many, many ways that with cheaper amounts of money, you can make car safer with in-shields and top and bottom protection so that cars can be made incrementally more safe through retrofits. So, in general, we think the strategy of positioning ourselves in both the retrofit market and increasing our capacity to tank cars will be a successful one and a fallback position will be that we have paralleled all that with a very, very strong effort to diversify our product mix. And, I might remind you, we received quite a lot of criticism for that as we were ramping up because at the time, we were entering those various markets and improving the designs. That experience was costly and our margins weren't as great is our competitors who were going for the cream on the top of the cake.

The next question is from Justin Long, Stephens. Your line is open.

I wanted to ask first about the EPS guidance. Obviously, a pretty substantial increase to the outlook and it seems like most of that was margin driven. Could you just give some more color on the key drivers to this margin upside? And what gives you the confidence to be more positive with the outlook?

Certainly, Justin, one of the things that gives us this confidence level, two things. One is the performance in the first quarter here. As we noted, many of the things that we were concerned about happening didn't happen. We've initially guided people that we could anticipate that we would see some fall off in margin in the first half of this year and then build up momentum throughout the year as a result of the moving pieces, moving out of our plant one facility in Mexico into a new facility also bringing on tank car capacity and capital expansion at our GIMSA facility as well. So today, where we thought we would be at in the second half of the year and I think that, if you performed the math on 21,000 railcars and you look at the margins we’re realizing today and that the momentum that we would have here, that we currently have here, that you would easily get to the numbers that we have and taken a simple -- and then with the backlog that we have that become simple math if 4000 cars were generating roughly $1 a share than a 21,000 cars, if you divide four into 21, that will get you in the range that we're guiding alone. But, that's not why we came up or how we came up with this number in and of itself. It is the backlog and as you reference correctly, the momentum that we have in margins.

So it sounds like, just to clarify, the upward revision in margins is mainly on the manufacturing side. That's what I wanted to clarify. Do you have a more bullish outlook for the wheels and parts segment margins as well?

Well, certainly all of our operations performed very well this quarter. Manufacturing and leasing continue to drive the bulk of it, but, that's just the mix of the revenues. But if you look at the margin expansion in our wheel and parts business, that we certainly expect that to continue. Our repair operations are focused on integration and meeting demand that’s out there, so [indiscernible] is not a big contributor to earnings but, that as well, we would expect to improve in the second half of the year. So we're quite positive on all the businesses. It's just the pure math that today with the bulk of our revenues being through manufacturing and I'm sure as you know and as a reminder to all, that our lease indication flow-through manufacturing as well. So it's the combination of manufacturing and our leasing volume that's driving the bulk of it.

To give you of vivid of sample of how a stronger U.S. economy helps us, the resurgence and intermodal and some specialized boxcars and the marine business has given our Gunderson facility in Portland a real tailwind pushing it into the high 30s and maybe low 40s in EBITDA compared to only $5 million last year. So, that’s a big push, it's just an example of how a stronger diversified economy will help, really affirm our strategy of having a diversified product mix and increasing our market share in targeted product types where we're creating a bit better value proposition through excellent design engineering.

Just as a second question, if I look at your tank car backlog today, and tank car delivery rate, could you just talk about the magnitude of crude tank cars in the backlog? And that you are delivering today versus non-crude tank cars? And just thinking about that non-crude tank car fleet or opportunity going forward, what are your expectations on how orders could trend for that car?

We believe after the earnings, after the regulatory issues are resolved and we have more strength, that the crude by rail cars will be very much like the car of the future if not, in fact, the design that we've put forward. As I said, we already have 3000 cars in our backlog for that type of car. We're also targeting pressure vessels of other types because we believe there will be replacement demand. We actually have significant number of orders for pressure vessels in other categories of hazardous materials. And we have had a very long history in our European operation of producing all kinds of tank cars. So, we have more diversity and we don't publish the breakdown, specifically. Maybe Mark and Lorie can give a little more color on it.

Yes, Justin I would just say that obviously in today's environment, the current backlog is weighted a bit towards crude. But as we've seen across many cycles when you have long backlog as demand change we can make adjustments to that backlog working with our customers, if they want a general-purpose -- more general-purpose type of tank car.

Next question from Ken Hoexter, Bank of America Merrill Lynch. Your line is open.

Before I jump into my question, Mark, can I just clarify something you said earlier? Did you say all of the leased assets are committed to be sold? So if business dries up you're not stockholding on to those increased leased assets?

Yes. Specifically the line item on the balance sheet, railcars for syndication. That market, indeed, all those cars are under lease and all of those cars have a firm takeout with third-party investors. And that end of the market remains very robust in today's environment, while the demand with users of railcars is very strong. The interest by investors investing in railcars that we manage is even stronger.

Yes. We don't have any material exposure in that area. The road to hell is paved with car builders who build without firm takeout.

Yes. I just wanted to clarify that statement earlier. So your GIMSA payments or your below the line income went down. The minority interest payouts got cut in half despite cars kind of going up. Just wondering, what we should look for? I know you've now deconsolidated the Watco joint venture, but that was I think only $300,000 of income. So why would that have gone down more than thought if building is improving?

So one of the things that happened as we have talked about on some of the prior Q&A is just the volume that we’re putting through the leasing model or the syndication. So as cars are built, at our GIMSA facilities that are going into railcars held for syndication, those cars are eliminated upon our accounting consolidation and therefore not in revenue and growth margin during the periods. So therefore you’ve less gross margin that needs to be shown as our partner share or that minority interest. So, that activity relates to more so how much volume is going through the syndication activity. And then we would expect as we were talking about earlier with that capital expecting to trend down towards the back half of this year, that you would see that minority interest line item increase, reflecting the period in time when we actually sell those cars to a third-party and recognize the revenue and growth margins.

So despite it going from 12.5 million to a 13 million in each of the back half quarters last year and almost $8 million in the first quarter, dropping all the way down means that GIMSA was producing solely or mostly for the leasing and then that can ramp-up as those assets get sold in the back half of this year?

Absolutely. And so we would say that it would ramp-up considerably in the back half of this year more towards what you were seeing or even beyond what you were seeing in 2014.

That's one of the reasons we need to give you guys more transparency on the leasing business, because we see that leasing inventory as virtually money good or cash, almost cash equivalents because we have firm takeouts and we have long-term leases and there is very little execution risk if we wanted to cash it in, we could, but, we have manufacturing margins as well as leasing and servicing margins locked up in that inventory.

Yes. I mean I can't speak for the street but for us I mean that was the biggest differential was that minority interest just such a big swing aiding the EPS. So it will be helpful to understand how much kind of GIMSA, what is tied to that distributed leasing side. And then just lastly, can you detail how much of the transition impact of the manufacturing volumes? Just trying to under what is seasonal in volume versus what is impact from the transition in Mexico? And then did you quantify what marine revenues were in the quarter or can you?

So on the first part of the question, Ken, on the manufacturing volumes, it's about a 1000 units. It impacted it to the negative. If you just look at the production in Q4 versus Q1, Q4 of last year versus Q1 of this year, that is -- about 1000 units, it pretty much is attributable to moving out of plant one into plant three. Again, similar to prior years, and I say years because it's almost every year -- that ramp-up throughout the year, the volumes in production because, we're not only increasing production in our [indiscernible] rail facility, we will be increasing in all of our facilities within the U.S. and Mexico and that's how we get to the 21,000 units and to the marine piece of this, I will let Lorie speak to it.

Sure. So Q1 marine revenue was very similar to Q4, so kind of in the upper teens, millions. We would expect that to ramp as we progress through this year. They're doing a really good job over the ramping up on that first curving barge, the articulated tug barge and we expect that that activity will continue as they progress on that barge and then start up on the second barge.

And we believe the revenue there and the outlook there is very, very solid and disconnected from any issues on oil pricing. We're still seeing solid demand. And in fact are concerned about capacity constraints if we continue to take new orders over there.

So you’re still seeing that demand despite the oil decline? Because it seems like that I guess general consensus --

Another types of service and still some energy related products as well. Specialty chemicals and other kinds of things that are driven by cheaper energy pricing. Gas prices, not only gasoline prices but natural gas prices have fallen. The dynamics -- I know the market is very fearful about falling oil and volatility that’s caused by it. Boy, there is a lot of positives going on. There is a real colorful rainbow in all of this for the U.S. economy and for global stability. I think that it's a much more complicated issue than the press seems to be making it out.

Next question from JB Groh of DA Davidson. Your line is open.

Mark, I wanted to ask another cash flow question on the inventory build in the quarter. Was that sort of all related to future growth? Is there any impact from the move on that number that we saw in the quarter?

Which number are you referring to, JB?

The inventory build -- the inventory number in the cash flow.

Yes. So, indeed, inventory balances increased and that is separate from the line item, the lease railcars for syndication. And inventory balances increased as we are ramping up production for the second half of the year as well as in this environment supply chain is very important and the key is the entire industry of course is operating at high production levels. So we’re making some strategic purchases as well to ensure a smooth production.

You also have rail velocity issues that catch our production in Mexico. Sometimes, we have delivery at the border. So, we will have in transit delivery hung up in the balance sheet and as U.S. rail congestion has occurred, that factor has influenced it. But there is definitely effect of the line changes, as we fine tune the production of the new plant and the extrication from the leased plant and so on.

And again, that will reverse itself. We anticipate that will reverse itself in the second half of the year.

Okay. Good. I don't think you've talked much about the other announcement today, the Brazilian investment. Could you kind of give us the strategic thinking behind that? And I guess this will be rolled up on the consolidated until you exercise the option?

Yes. Maybe two or three important point, with a little more color from the press release. First of all, Amsted Industries has been out good strategic supply chain partner to not only to Greenbrier, but many other companies and they are a very sophisticated company. They’ve been in Brazil for 20 years, Maxion itself, Iochpe-Maxion is a premier auto parts company that has a substantial investment and a lot of employment in the Monclova area where we have our GIMSA facility. In other words these are people we know and people we trust and Amsted has been in Brazil for 20 years and it's castings is part of Maxion. So, we have a base of about 7000 employees in Mexico, today, about 65% of our revenue is international, accounting Europe and Mexico. And we believe that in the future, that South America will be an important trading partner and as part of an Americas strategy, we want to leverage the base in Mexico, the base that we have a collaboration with Iochpe-Maxion and Amsted. While the total market in Brazil is relatively small, it's an important exporter to the rest of South America and coupled with the trade agreements between Mexico and Brazil, the opportunities for diversification out of that base are very, very attractive. The fleet is aging. There is a significant fleet, there's a real move toward transportation infrastructure in Brazil. So while it is not going to be a homerun in terms of 2015 and 2016, it will be a good long-term earner and a building block for in Americas strategy which we expect will allow us further diversification from vulnerability to U.S. car building cycle.

Next question from Mike Baudendistel of Stifel. Your line is open.

I just had a follow-up on that last question on Brazil. Just under what circumstances do you expect to exercising the option to purchase the larger equity interest?

I think that the combination of these three companies and the experience from each, the element that they may find very beneficial is our experience in frankly, freight car engineering and manufacturing and assembly and commercial strategies related to selling and leasing freight cars and exporting freight cars and parts. So, we believe that we can add material to the value of that company both commercially and in engineering and manufacturing efficiencies. So, if that is indicated we will have the optionality for a very modest amount of money to potentially be in at a very inexpensive price in a country that’s the six largest economy in the world, I believe, today, and is very rich in natural resources. We think longer-term about this sort of thing, we are interested in diversification of our revenue base and we just think that the optionality we're getting here is one of the most valuable aspects of the entire deal. So if we can validate this model and create strong EBITDA growth, company is profitable now, we think we can materially increase its profitability together with our partners and we'll make a dream team. And if that happens then we will be certain to exercise that option. But for a very modest amount of money, we are buying the potential of a 60% interest in a really very important company and market.

I also just wanted to ask on the wheels and repairs services business. Where do you stand now as far as consolidating the underperforming service centers?

You’re referring in our repair operations?

That’s right.

So, really, since the time of the acquisition as I’ve referenced earlier, we have as much in Jim Cowan and his team as much being focused on, indeed bringing the two businesses together and operating a number of common set of practices and principles and making that great progress in this regard and that’s where the focus has been. And indeed the focus this year overall is operationally and while we are focused on the bottom line, we're also focused on building the right property here. So in the second half of the year we'll indeed -- Jim and his team will be focused. Today, they are focused on the underperforming businesses as well as the businesses that are performing very well. But I would expect in the second half of this year that we will be taking a closer examination and Jim's team will be taking a closer examination of either the ones that continue to underperform or where we have overlapping operations.

I think the overlapping operations is very important. Mark and Rick Turner are our two board representatives on this four person board to Watco representatives and Rick Webb and I have a very close communication on the company. We are very positive about the work that Jim Cowan is doing there, he is a good operator. He is very experienced in operations both new car manufacturing and repair, and he is really going to make a difference, we will see most of that coming in the second half and in 2015.

Next question from Steve Barger, KeyBanc. Your line is open.

Mark, you gave a good walk-through on the thinking behind the guidance increase and that got me to wondering about opportunities and risks to that new forecast of 21,000 cars and 520 to 550. Is there anyway deliveries could come in higher? Or will you be running at what you would consider full capacity in the back half?

A short answer to your question is yes, they could be higher. Probably more possibility of that than on the downside.

Just thinking about that downside scenario, would it be a capacity or operating reason? Why would they fall below that range?

Major acts beyond our control, strikes, supply-chain interruption, fire in a crucial supply chain partner, war, famine, pestilence.

Got it. And what could drive upside?

The continuing operating efficiency, we've really had an amazing first quarter. We have a slingshot effect every year where our first quarter is always a little disappointing and we build momentum in the second half. We've been going around telling people cautiously that we are going to have a weaker first quarter and the operating people just kind of really embarrassed us here and I think they continue to intend to do this. So, I'm not baffled by it, I'm delighted by it. But, we've been overly cautious in our concerns about the downside. Sometimes, everything starts going well and it seems like this is a time that really favors Greenbrier. It's really remarkable we have this kind of backlog and continue to negotiate multiyear agreements with people who are very, very classy people. And, so, we've got a product people are wanting and I'm humbled by it. I'm humbled by the performance that we had in the first quarter. But this is going to be a good year unless something really strange happens.

And you all use a simple math of if 4000 cars is a $1 then 21,000 should be $5. As you look at the backlog mix and you're operating plan going forward, is there any reason that we shouldn't extrapolate that simple math to next year as a base case and then assume you just get more efficient as you go?

Well, I'll just mirror back what everybody worries about. I guess everybody's entitled to worry if they want to, order cancellations, labor, supply-chain interruptions, but we’re continuing to have momentum and order inquiries for the product that we can offer. We have a reputation for reliability, excellence in engineering and we keep our promises. We’re taking market share. These are big changes and we have a diverse product mix. So we have great visibility into 2018 and beyond. And, we are booking space. We may, on a win-win situation of customers come twice and they want to change a product and we can make money on it and they can and we can help them and we may do those kinds of things. But yes. I would say that this momentum should carry us into -- through 2016. Again, what can go wrong? As always something that can go wrong. We worry about those things too. And, we worry about them sometimes too much. But sometimes when things are going well, you just have to accept it and it is going very well. This quarter, it should have been closer to what the street was estimating and we were guiding to that. And it's a little embarrassing actually because our operating people just really got the bit in their mouth and went. They're going to continue that momentum.

So I will follow up one thing you said, you talked about order cancellations and some of the other OEMs have talked about non-cancellability of contracts for railcars. Is there is a scenario where you could see cancellations? Or do expect that that backlog gets delivered work?

We expect the backlog to get delivered. The orders are not cancelable, but one has to appreciate that huge corporations often don't keep their agreements. So, there is always conflict potential. We don't see it happening in the marketplace. We just don't yet and we understand the reason why the question is out there because of this roller coaster with energy. But, you know, this is not the first rodeo for most of these energy people and they're used to long-term thinking and if you look at the dynamics here, just look at what it's costing, Saudi Arabia $180 billion. I can't imagine it as a rational strategy, you want to do this forever and they have said they don't want to. So I think that they are sending signals to a lot of different folk. I think those folks are getting those signals but we don’t want to overreact. And right now, we've got some pretty tough customers who are still dedicated to carrying out their production plans.

And so just to ask the question directly, has anybody approached you to talk about deferrals or cancellations?

One small customer has. But, you know, we have talked it through with them and we could -- they haven't canceled anything and we are working with them to see if we can move production around on a win-win basis if they really want to do it. I think there is just a lot of anxiety underlying that particular discussion. That's not to say that we won't be approached or others won't be approached. It's a risk factor that we are watching very closely, but, we've got a great backlog, a great visibility and if you'll recall, we had a very tough time with General Electric a few years ago when they attempted to cancel. We don't -- we won that. We felt we came out of it very, very well. So it's not easy to just say we're not going to take a railcar. It's a contract and people have to be accountable for their choices. But, we will work with customers if customers want to come and talk to us and we've got some flexibilities in our model, our production model in doing that.

Your last question comes from Sal Vitale, Sterne Agee. Sir, your line is open.

So Bill, first a clarification on a point you made earlier. I think you said roughly 20% of the current backlog, was that the small -- the overall small cube covered hopper piece or is that just a frac sand piece?

Accounting the small cube, it could be a little higher than that for cement and other items. We're getting some of our mix in that category. So, I don't think I was thinking of -- I was thinking of all of the small cube covered hoppers when I answered that. I might be a little low on that number because I might have been confused about the -- I might have been thinking -- I might have said -- the number might be frac sand and I just don't have that number right at hand.

Right, so the frac sand piece is probably some number smaller -- lower than 20%?

I would guess that's probably about right. I think that the total small cube covered hopper is probably a little bit high. I think Bill was probably focused on frac sand and total small cube covered hoppers is probably in the upper 20%.

And then the next question I have is just to drill down a little bit more on the minority interest phenomenon regarding the cars for syndications. Was the dramatic drop-off in the minority interest sequentially, was that the sole reason for it? Or was it also that just in general that tank cars comprised a smaller percentage of your overall manufacturing operating profit?

No. The beautiful part, Sal, is that it is just because of those cars that were being built at that facility are not in gross margin because they are hung up on the balance sheet. So it's solely because those cars are going through our leasing syndication model at this point.

. 1Right. So then your current guidance for the year encompasses that ramp-up in the minority interest toward the back end of the year?

Absolutely. And it would be a significant ramp up in the back half of the year. Again, if we are guiding towards that back half revenues and margin and overall earnings are going to be much heavier than the first half that goes along with the fact that we are going to be monetizing some of these assets that are currently on the balance sheet.

Right. I guess a related question. I assume -- was it fair to assume that if I look at your ASP for the quarter, I see a roughly -- call it $7000, $8000, $9000 decline sequentially from 4Q. Is that also the effect of the syndications issue? You are not realizing that revenue, essentially?

There may be some coming up from that. Overall, is going to be mix because we're going to have more intermodal cars. Again, depending on the timing of small cube covered hoppers, so that's just more mix oriented issue.

Is it fair to say that if you look at your overall deliveries in 4Q and 1Q relative to 4Q, that the tanks as a percentage of overall deliveries that declined?

They may have been down a bit, yes.

Okay. That's fine. And then the last question is really on your ASP for the December orders, thus far. I think it's about $114,000. You mentioned some of the car types that could be driving that. I think you also said that you probably didn't receive too much in the way of tank car orders in December? Is that fair?

I think that is fair. Is going to be more heavily weighted to some of the car types Mark was talking about that also have high ASPs. Maybe not as high as tank cars, but box cars, automotive flaps and racks, all of those have sizable ASPs.

Okay. And then just the last question is really on, I guess, if I look at your current -- I was about to ask about the backlog you had offline. On the cancellations, I understand your position there. Is it possible that rather than see an outright cancellation, that you basically negotiate with the customer so that perhaps the price on the railcar is reduced somewhat?

No. We wouldn't probably do that. I would emphasize, these are our customers and there have been no cancellations. There has one discussion which worked out so there was no accommodation required in the orders going forward. However, these are customers and we want to please our customers. We want to serve our customers. So we will be happy to talk about swapping car types, swapping positions with people who need cars faster than they were able to get before. There is ample opportunity to be very creative in this kind of environment with our total backlog the way it is. So we have many customers who would prefer to have cars earlier and that we can accommodate them and make them happier and we can defer a capital expenditure for another customer that maybe has some issue that we can address, we will be happy to do those kinds of things in a creative win-win approach. But right now, we just haven't seen it and don't see it yet.

Okay. That fair. And then of the remaining say -- so based on your guidance of, say, 21,000 cars for the year, and you did 4000 in the first quarter. Of the 17,000, so beyond that -- so just based on backlog of 41,000, that leaves about 24,000 cars beyond 2015. How do I think about how many of those are slated for say '16 delivered at this point?

We haven't broken that out, of course, and that's part of the reason that you are asking the question. Part of that is that we don't break it out for competitive reasons of how much open space that we would have in our fiscal 2016. Certainly, on some of our production lines the backlog goes out well beyond 2016 and then some of the lines that does not. Quite a bit of that is for 2016, Sal, but for competitive reasons we don't want to provide that information now.

We're also working with established customers with long-term needs for multi-year orders to book space, firm space from production in '17 and '18. So our strategy is to work with premiere customers, be loyal to our customers who brought us to the party and work with them on their issues and then have multi-year agreements that will continue to build the backlog in the years to come.

That last point is an important point as people have asked numbered these questions about what is going on in the industry and what are we seeing from our customers. Bill has addressed the piece about that we haven't been -- there have been no cancellations. There have been no significant requests by customers and only one customer has approached us discussing their order. But in this environment, we're seeing not only did we announce very large orders of a broad based orders, but we are in a number of discussions that continue about multi-year type of arrangement and this is in all of our business lines today. So the players, as Bill noted, that are to long-term players out there that have been through many of these cycles, they appreciate what's going on here. Bill said it's not their first rodeo when indeed they appreciate that space is still very prized commodity out there. So those players continue to be very bullish on the market and we continue in this environment to talk about multi-year type of arrangements.

Okay. Lorie, just a clarification. Is the '17 for the rest of the year, is all of that already in the backlog?

Yes, Sal. Most of it is in the backlog and we will probably have to wrap this up so that we can move--

Very good. Thank you very much. I appreciate your time.

Good question, Sal. Thank you very much.

All right. And thanks, everyone. We appreciate your time this morning. And if there are any further follow-up questions don't hesitate to reach out. Thanks so much and have a great day.

Thank you. That does conclude today's conference call. You may disconnect at this time.