The Greenbrier Companies, Inc. (GBX) Q1 2016 Earnings Report, Transcript and Summary

Hello and welcome to the Greenbrier Companies’ First Quarter of Fiscal Year 2016 Earnings Conference Call. Following today’s presentation, we will conduct a question-and-answer session. [Operator Instructions] 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 Ms. Lorie Tekorius, Senior Vice President and Treasurer. Ms. Tekorius, you may begin.

Thank you, and good morning, everyone, and welcome to Greenbrier’s first quarter fiscal 2016 conference call. On today’s call, I’m joined by our Chairman and CEO, Bill Furman; and CFO, Mark Rittenbaum. We will discuss our results for the quarter ended November 30, 2015, and comment on our outlook for 2016. 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 in a presentation posted today on the IR section of our website. Also, our Annual Meeting scheduled for 2:00 PM Pacific today will be webcast. 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 2016 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. The strong results in Q1 demonstrate the strength of our diversified business model. Initiatives we’ve implemented to enhance operations are translating into greater financial results. The first quarter represents the fourth consecutive quarter of record-breaking financial performance. Highlights for the quarter include adjusted EBITDA of $161.8 million and earnings of $69.4 million or $2.15 per diluted share on revenue of $802.4 million. First quarter aggregate gross margin reached an all-time high of 23% compared to 22.8% in the fourth quarter, driven by efficiencies in our Manufacturing segment, favorable product mix and pricing, as well as strong lease syndication activities. Our gross margin in the Manufacturing segment increased this quarter to a record 23.7%. Our Wheels & Parts business was impacted by lower volumes due to declines in rail loadings and falling scrap steel prices during the quarter. Our lease fleet utilization declined during the quarter due to two factors. First, the portfolio of about 4,000 railcars acquired during the quarter has an 87% utilization rate related to off-lease coal cars, and we have approximately 500 tank cars off-lease. Excluding these two items, our fleet utilization is a strong 97%. Orders totaled 500 new rail cars during the first quarter, and year-to-date, we’ve received orders for 2,600 rail cars with an aggregate value of nearly $250 million or an average price of about 96,000 per rail car. The orders were for a variety of car types, including various types of boxcars, medium and large cube covered hoppers, intermodal cars, automotive carrying cars, and tank cars. The fact that we’ve received 500 units in three months and an additional 2,100 units in a little over a month demonstrates the lumpy nature of orders in our industry. Our November 30, diversified and high-quality backlog of 36,000 units valued at $4.1 billion, continues to be a key positive for Greenbrier giving us good visibility into fiscal 2017 and beyond. This backlog contains favorable pricing and margins with less than 30% being energy-related. Based on current production schedules, approximately 10,000 to 11,000 of these cars will be built in fiscal 2017. Of course, we expect additional orders for delivery during the period – during this period. And now, I’ll turn it over to Mr. Furman.

Thank you, Lorie, and good morning. Well, obviously we posted a strong quarter and we expect to be able to continue our momentum even though circumstances in the industry are a little more cloudy as far as visibility is – in terms of orders and outlook. Record revenue and adjusted EBITDA in the first fiscal quarter, and this is possible only because we’ve had a strategically transformed Greenbrier with an integrated business model, diversified product offerings, operating across multiple geographies. The latter part is very important. Greenbrier is efficient because we’re nimble and we utilize flexible manufacturing capacity and low-cost facilities. I’m very proud of the results of this transformation thus far during a business cycle marked by dynamic changes in energy prices. Let me address directly the concerns that many analysts that follow our stock and many of you who are reacting to the Chinese economies issues. The industry is going through a period of adjustment and industry forecasts have been revised reflecting the rail car market is expected to approach more normalized levels. I think it’s very important in historic terms to look at the drivers of this, and it’s also important not to overreact to it. We do not intend to overreact to what I personally see as a form of mild hysteria. Fracking activity has slowed, and as a result, demand for tank cars carrying crude and small covered hoppers has also slowed. We’ve spent the last nine months to a year balancing our production negotiating with customers reaching win-win solutions, and we feel very comfortable about our backlog and run rate through the balance of 2016, and indeed through 2017 in terms of our fiscal years. That gives Greenbrier a great deal of time to maneuver. So we don’t see, as a matter of fact, the softness in order intake, as a cliff event in anyway, but rather a step down to a more normalized environment. We see a normalized environment in our industry in the 60,000 car replacement range dipping to 50 in terms of economic adjustments if things were to get worse. Tank cars for crude and sand cars, hydraulic fracking, our overall energy exposure represent approximately 27% of our backlog. Specifically, tank cars for crude transportation make up less than 11% of our current backlog, and yet people seem to connect our company with the energy phenomenon, and yet that is yesterday’s news. In fact, it’s news from two years ago as opposed to a profile of what we are doing with our business today. More importantly, we’re still seeing healthy demand for other car types, automotive cars. These are for us profitable cars, because we’ve invested over a five-year period and improving the efficiency of these cars and demand and replacement cycle in automobiles is still strong. Boxcars, we have been awarded recent orders in boxcars and we’re running two lines of those, and we have a very high market share. And boxcars remain the workhorse of the North American fleet. They’re older portion of the fleet, and not very many have built – been built over the last several years. In fact, the energy phenomenon in specialized tank cars and other things have driven some cars that should have been replaced long ago to the sidelines and those cars will be replaced. Larger cube covered hoppers for plastic pellets, also we expect with the building of chemical companies in the United States and plastic companies that have invested in U.S. infrastructure, coupled with low gas demand will continue to provide -- or low gas prices rather will continue to provide demand for that type of car. We are not seeing any order cancellations. We don’t expect to have order cancellations. We continue to work with our customers to renegotiate production schedules, and they assist our customers, because there are customers, and we help to fill their current needs, which proves to be beneficial for both us and for them. History is not a good guide for Greenbrier, because we are a much different company today than we were just a couple of years ago. We are no longer limited by a narrow project range, and we have larger more flexible backlog, which gives us time to adjust. And our order activity over the past two give – years gives us a very diverse and high-quality backlog. We’ve grown our market share to 30% of the railcar industry backlog compared to 13% during the peak of the last cycle. Greenbrier has approximately two years of car building at full capacity, given the theoretical ability to produce 21,000 cars at full production annually. And we don’t expect to sit here and do nothing with the resources that we have. We have a strong balance sheet. We have the capability to employ capital at very high rates of return. And indeed, as you can see, our ROIC numbers we have been doing exactly that, and we intend, as you’ll hear from Mark and Lorie to invest those funds wisely. Historically, Greenbrier was primarily an intermodal and forest products company. Today, we build virtually all railcar types. In fact, we do build all railcar types other than coal cars. And as North American markets moderate, as you track the reasons for that moderation, a high U.S. dollar, improved velocity in the rail system, decline in coal, decline in oil, loadings. At the same time, those forces favor other countries building a railroad infrastructure. And indeed, our investments in Brazil and in the Gulf Cooperative Council with a major contract to Saudi Arabia reflects our intentions to diversify our international mix to make up for the softer markets in North America. I think that that covers the fundamentals, and I’ll turn it back to Mark to make some remarks.

Thank you, Bill. We ended November with nearly $500 million of liquidity from cash balances and available borrowings under our revolving credit facilities. The continued improvement in our net funded debt to EBITDA, which is on a last 12 months basis is at 0.6 times compares to 2.7 times just three years ago. Our strong balance sheet in bringing down our funded debt in this manner reflects our continued focus on creating a very strong balance sheet. This balance sheet, the liquidity, and our outlook for positive operating cash flow provide us great flexibility in deploying capital. We remain committed to enhancing shareholder value and returning capital to shareholders, while also seeking and identifying opportunities within our core competencies to generate future diversification growth. We announced our six straight quarterly dividend $0.20 a share. Also in the quarter, we repurchased 521,000 – approximately 521,000 shares. And over the past two years, we’ve returned nearly $150 million to shareholders through buybacks and dividends. We have remaining Board authorization for approximately $101 million for – under our current share repurchase program. We are confident about the opportunities in 2016 and planning to build upon the momentum we’ve gained in 2015. With our strong Q1 and our current outlook for 2016, we reaffirmed our previously disclosed guidance and are confident about our ability to achieve there for 2016. We expect the cadence of our financial performance to be more weighted towards the first-half of the year, as the second-half of 2016 will be impacted by line changeovers, product mix changes, and lower production rates in certain lines. And just to recap our guidance, it is that we will deliver approximately 20,000 to 22,500 units with about 55% of the deliveries in the first-half of the year and 45% in the second. Revenues exceed $2.8 billion and diluted EPS in the range of $5.65 to $6.15. Just providing a little bit more color on some of the line items, we expect gains on sale of equipment, which includes the syndications of 4,000, approximately 4,000 car lease portfolio we acquired during the first quarter. We expect these gains to be about $10 million to $15 million. With the timing of these sales to be weighted to first-half of the year, some may wonder whether any of those gains or sale from the lease portfolios were included in the first quarter results. While the purchase did the sale, there were no sales included in the first quarter results, again, we – since the quarter end, we’ve sold off about a third of that fleet, and we expect to sell the bulk of it, again, during Q2. Just in – on an accounting front, as we sell those 4,000 cars that we acquired last quarter, those are currently held in, at least, lease railcars held for syndication, and when we sell them, we will record revenue and cost of revenue on our leasing segment. Annual depreciation and amortization will be about $50 million. Our tax rate we continue to expect to be around 30% minority interest or earnings attributable to our GIMSA JV to be about $85 million to 95 million, and the quarter-to-quarter now will vary based on the timing of railcar syndications. Gross CapEx was – we expect to be about $94 million, primarily related to North American manufacturing enhancements and investments. And Europe related to our Saudi contract and proceeds from the sales of leased assets to be about $85 million. This includes $41 million that was transferred – that was entered to as sale leaseback. We remain committed to our financial goals that we established little over a year-and-a-half ago, and we are confident they will serve to focus management and enhancing shareholder value over the long-term. And now I’d like to turn it back to the operator to please open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] One moment please for the first question. And our first question comes from Bascome Majors from Susquehanna. Your line is now open.

Yes, good morning. First off congratulations on the results. It does feel like a long time ago. But it was just 2013, we earned less in a full year than we did in this first quarter, so congrats on the results and the earnings here. I want to drill down one of your comments early, you said about 500 off-lease tank cars were partially responsible for the drop in your railcar lease fleet utilization you saw in the quarter. It was my understanding that you own just a few tank cars in your long-term lease fleet, so can you help us understand, am I wrong there, are these potentially newer cars that are sitting in storage without a live lease? Just help us understand what’s driving that that utilization from the tank car fleet there?

Sure, Bascome, and you’re correct in a thread there that our long-term, the line item equipment on operating lease on our balance sheet, which is our long-term ownership of assets contains a very few tank cars and a couple of hundred cars, all of those are on lease. We do have some newly built tank cars that are in finished goods inventory, so now railcars held for lease syndication or lease railcars held for syndication, the finished goods inventory, which is part of our line item inventory that are off-lease, and that is some bridge production in there, so that’s where that line item is.

You know, I – okay. So there are some newest cars on the balance sheet, I guess, this was my understanding that when you are producing, you always had a long-term lease attached. Can you just help us understand how those ended up in inventory or is that something that we should be concerned about?

Sure, Bascome, and thanks for joining us this morning. We generally have a policy of not building in anticipation of orders although that’s a policy that we across our product lines sometimes have exceptions too. In this particular case, we – as we’ve said, we haven’t had order cancellations, but we’ve negotiated aggressively with customers who have had issues. This was a fairly small number of tank cars and storage compared to the tank cars that many in the industry now have with the oil issues, and energy issues, and the pricing oil has come down. So, we have in our negotiations substituted cash purchases, extensions of the relationship to broader product mix, negotiated changing pricing, and in all that we’ve taken some of these cars and delivered them in storage. We do have targets for those cars. There are pockets of opportunity that we are continuing to pursue. So we’re not terribly concerned about it. But it isn’t in anyway contradiction to the policy that we’ve -- that we generally follow, and it is an indication of speculative behavior. It’s really the fallout of very positive negotiations with customers and are absorbing a little bit of pain along with some of the pain that those customers have absorbed by buying cars.

Understood. I’ll let – I’ll let someone else follow-up there. But, Bill, I just had one more for you, I’ve got you here, I mean, you’ve – as you mentioned earlier, you’re coming out of two of the best quarters your company has ever had. You transformed your business into much more diverse and profitable one than it was even six or seven years ago. You’ve got a deeper bench thing you had, and you just sold about half of your stock. As the Chairman of the Board, can you shed some light on the CEO succession plan that you’ve got for Greenbrier? And to the extent you can, who internally is on the shortlist and whether or not you have external candidates in mind as well?

I wouldn’t like to comment on that overly much other than comment you guys already said. Our Board is very focused on building a strong organization over the past two years, in particular, three years we’ve built a very strong manufacturing organization with a very strong leasing and commercial organization. And within that bench, we have strong internal candidates. We actually are looking in this year to take action to make the steps for CEO succession. And we have been doing that over the course of the past year, although it’s not been obvious. I don’t want to say that they’re going to have to pry my cold hands off of the steering wheel or anything like that. But I don’t have any immediate plans to cutback my time devoted to Greenbrier, I enjoy the job. I think, we’ve been very successful together with this team. But over the period of time, we definitely will be doing that. As far as the stock sales that I made, I think it’s only prudent when one sees kinds of markets that we’ve seen and the lack of constancy in the view of our industry, which I don’t share. I’m much more optimistic about this industry and about the positioning of our industry than others. But, I have very few opportunities to sell stock in terms of your comment. It’s only prudent to do, say planning and who knows what the future will bring. So, I did take the opportunity to sell half of my shares. I don’t have any future plans to sell stock. I’m certainly committed to, if this is a cycle too, staying available to Greenbrier and working through this cycle, at least in terms of visibility. So those are the things I would say about your question. Thank you for the question.

All right. Thank you for the time, guys.

Thank you. Our next question comes from the line of Matt Elkott from Cowen and Company. Your line is now open.

All right. Thank you for taking my question. Can you guys provide additional commentary regarding the types of railcars included in the 800 car order since the December 15th order? And on the plastic pallet front, it was obviously good to see that guys received some orders in December, and as you try to establish and grow presence in that market. What are the areas where you feel that this product still requires some fine tuning, given it’s a fairly new product for you guys? I mean, is the lining – is it the lining, is it other things? And how has it been received by customers so far?

That’s a good question, and thank you for your coverage and thank you for the question, and I know you’re interested in plastic pallets. That’s an area where a number of orders have already been placed. But in general, we believe that that market is approximately 22,000 to 25,000 cars will have to be built to address the demands of the industry. As a result of the huge investments that have been made in the Gulf on the low energy prices with gas here in North America, so we do see that as robust market. In some ways, our entry into the market has been crowded out by other car types. The car types that are stronger today and will be stronger today even with the good news from China is that weaker economy there and a slight devaluation of their currency will allow intermodal and other cars to probably move eventually as consumer confidence continues to build. Although consumers are really spending as much. We do see that as a car that will be strong in the future. So the other production has limited our participation in the market thus far. However, in both our GIMSA facility in Mexico and in our facility in plant two in Sagoon [ph], we’ve invested substantially in lining and construction of not only prototypes, but assembly runs, a plastic pallets, we believe we have an excellent plastic pallet car, and we believe we can be very, very competitive in the marketplace. There are several excellent participants in the market already. So we are competing with them. But we believe, we can be one of three strong participants in that and that our cost basis will be equal to any of the others, or below the others and our quality will be superior.

And, Matt, in fact, your initial question as to what was the mix of car types that were ordered since December 15? It is the mix, it’s a mix that it includes automotive-related railcars, intermodal, refrigerated boxcars, and a variety of non-energy tank cars.

That’s very helpful. And just one more follow-up. Just I wanted to make sure that I understand this correctly. You guys don’t think that you will have to do any major tweaks to the initial design of the 300 plastic pallets that you delivered in 2014, I believe and then to order?

Well, okay, that’s a great question. We already have done a lot of design work on the standard offering that we have in the marketplace. So there were – there were not any issues with that, but in terms of capacity – total capacity and efficiency. We think we have a very good strong contender now. While we haven’t been producing a lot of plastic pellet cars, we have line space opening up and that’s definitely an area, as I think, you’ve observed in your analysis that Greenbrier is intending to push.

Absolutely. And on the tank car front, have you guys shutdown any capacity over the past three months to four months?

We’ve made some adjustments to our capacity. We’ve slowed some lines, which will be reflected in the guidance that Mark and Lorie have given for the second-half. We have backlog, for example, we have about 11,000 cars in North America in our backlog in 2017, and will be until 2018 that we see the necessity of closing lines. We would prefer to keep stable workforce and slow production as we see things through this cycle. By 2018, most of the analysts who are following energy expect a much different energy picture than we see today. And indeed, if there are vantage points in Saudi Arabia, we see that there is a limited amount of time that Saudi’s themselves and others in OPEC can handle these low oil prices. It’s very effective what they’re doing today. They’re succeeding in their goals, but their break-even pricing is much higher than many frack producers in terms of their budgets, their annual budgets. They’ve got very, very low cost oil. So they can afford to do this now. But on longer term they can’t afford to do it, so they’re facing the – they’re facing this in a few years. So we believe that as production is diminished and marginal producers are driven out and balance of the world that the things will come back. So right now we’re slowing our lines to some degree adjusting and substituting with manpower into products, which have higher demand like boxcars and items like that.

Great. That’s very helpful. Thanks, Bill. Thanks, Lorie.

Thank you.

Thank you. Our next question comes from the line of Ken Hoexter from Merrill Lynch. Your line is now open.

Great. Thank you. Good morning. Maybe either Bill or Mark, can you talk about why the bigger build upfront, I know, you talked about some changing of lines. Can you maybe detail that a little bit in terms of what kind of margin impact do you expect that to have, or does it not based on the current – the build that will continue in the back-half. But maybe a little bit more detail on what’s shifting within those lines through the timeframe of the year?

Sure. I’ll let, Lorie, talk to that. Margins are always an issue in a market that’s adjusting downward. However, we have made some real momentum in cost improvements, so our margins have been improving, and it’s like what people may think the outlook for the margins particularly the cars and backlog is very, very strong. So, Lorie why don’t you take that question?

Thank you, Bill. Thanks, Ken. Yes, as we look out towards the back-half of the year, we are making some production line changeovers, and the impact of that, as well as some of the adjustments that we’ve made to some production rates will be a bit of a headwind to our financial results. But we still expect margins to be robust. And you guys have been following us for quite sometime. So you’re aware that when we’re going through some of these line changeovers like starting up boxcars, we tend to be potentially a bit on the conservative side as to our expectation. So we’ll see how our manufacturing group who has done an outstanding job over the last, excuse me, two years, as they get a little closer to that startup how they’re feeling about things.

Just to understand that then, is this a line changeover, yes, you threw in the adjustment to production rates. Are you slowing production, so you don’t burn the backlog too fast and our customers requesting kind of delays to deliveries, or is this we’ve built all that tank cars we’re going to build now. So one of those lines we committed we’re now shifting to box and auto cars. I just want to understand again that’s what I was asking in terms of the timing of that build?

. : But with respect to sand cars, we have changed the production rates in those cars and in some cases moved out of covered hoppers and into boxcars, we’ve been changing our auto lines and increasing production in that area. So the – it’s really in the second category of line changeovers related to different emphasis on different products. Again, our whole strategy in the last five years has been and is today to continue to diversify and improve the cost efficiency of our designs, our tooling, and our ability to quickly and nimbly move from one car type to another. However, whenever we have a changeover, as we are having with boxcars and auto cars today, and in the second-half of the year, we will have the effect of having some downtime or debt time that has to be absorbed into the financial results.

So, I know you mentioned still before, where I know the first question was kind of hey, the great profits in the first quarter versus kind of multiple years ago what you earned in a whole year. But when you think about what’s going on in the rail sector right now in terms of the pace of carload declines and really we only, I think, we’ve only seen this a couple of times in the last 30 years. What is that indicate for you in terms of your customers needs and demands in terms of keeping that backlog robust enough to live through what may be a downturn versus what we’ve seen on the car manufacturing side over the last couple of cycles? Obviously, your diversity and kind of increasing presence in Europe and South America, you’ve kind of shifted a little bit to keep that going? But maybe just from your perspective having seen this industry for so many years, your thoughts as we what – enter what looks like another one of these many downturns?

To be specific about the last part of what you said. We expect to be building backlog in the Gulf region with the members of the GCC. We expect to build backlog in Latin America, and specifically in Brazil. That investment is going quite well. All right. We anticipate increasing our investment in Brazil. The issues that cause exports to decline here that stronger dollar in, specifically in weak currency markets like you have elsewhere cause exports to rise. So the replacement cycle for the freight fleet is – the timing is much better in other countries that are exporting, when the United States commodity exports are diminished by the stronger dollar. But I think, Mark, you want to take a shot at the first part of the question?

Well, Ken, I just say, coming back full circle to Bill’s comments about what we expect to be more normalized demand and indeed the industry forecast of that 60,000 cars and then dropping to 50,000 cars that we subscribed to those forecast with the underlying assumptions. And we believe that in that type of environment given our diversified product offerings and our low-cost footprint that will compete very well in that and be able to deliver solid base of earnings off of that. But…

More specifically in terms of backlog, I could understand with about the backlog is rather remarkable to have $4 billion for backlog. In our entire history, we’ve never really seen the kind of spikes in orders and demand that we saw during this energy boom. I think that boom is yesterday’s news. What we have been used to doing is operating with a much smaller backlog. In many ways, it’s easier to operate with a smaller backlog when you’re competing against people who aren’t as successful and have open space. And you can certainly see, look around the industry and see some producers do not have the margins we have but that are getting some market share. Why is that? Because they’ve got open space and we don’t. We’ve got to offer deliveries in 2018. So, when you have a lower backlog and we have a chart on that, we should publish it. We use different techniques than we do and our market share is always double, always without exception doubled during periods of low market demand. We’ve been used to operating with four or five months backlog in the past. So it’s just, we managed the company differently. We experienced, we have a team that knows exactly what to do. And I think that it’s not something it troubles me whatsoever. In fact, I’m delighted to have the backlog. We’ve got and virtually two years to maneuver. And with a strong balance sheet if we can’t figure out the way to sell cars and make investments in a climate like this, well then, my succession plan ought to be accelerated, but the rest of the team ought to be accelerated faster. So I’ll go after them.

Okay. Thank you very much for that. Just a real quick one. Do you break-out the marine revenues within the sector, or can you give us an update on how marine revenues did? And that’s it for me. Thanks a lot for the time now?

Thanks, Ken. You’re always very attentive, but although you’re sometimes pessimistic. And, Ken, marine, let me just quickly – I want to get that in a minute, Lorie. But the marine area is important to Gunderson. Our Gunderson facility has – had trailing EBITDA in the $50 million range. It’s a company that we’re – it’s our primary intermodel car builders. It’s the only marine builders. You might notice that our marine backlog has declined from a $100 million or so that we had. That market has also been affected by oil. But we do have visibility in a pipeline, so we expect to be able to continue that marine business. Margins, I will let Mark and Lorie address that as far as what we’re doing in the margins.

Excuse me. On revenue this quarter, Ken, was similar to the last several quarters, so right in the $20 million range. So our activity in marine has been fairly consistent for probably, at least, the last five quarters.

I would say that the two major barges that we’ve taken on. The Kirby barges have really good features, because Kirby is an excellent company and we want to make them very, very happy. But obviously, when you’re doing one of the largest vessels you’ve ever done, we probably had a little drag on our margins at Gunderson from more than little drag from the marine side, because Kirby is a very efficient company that negotiates hard and we really wanted those contrast. It really establishes us in a different level of the game. And margins on those barges have not turned out to be as much as we had. And that would be an upside not a downside, because as we transition to other customers, we would expect more traditional – with more traditional margins and actually our margins are improving on the second barge.

Bill, Mark, and Lorie, thanks a lot for the time, again. I appreciate the insight.

Thank you. Our next question comes from the line of Justin Long from Stephens. Your line is now open.

Thanks and congrats on the quarter. I think for our first question, I had one on the guidance. Could you just talk about the quarterly cadence of EPS that’s assumed in the guidance over the remainder of the year? And within that you’ve talked about the delivery guidance and you talked about some of the changeovers that are occurring in the second-half. But could you provide some more commentary on what you’re assuming for your non-manufacturing segments some of those key assumptions for the remainder of the year?

Yes, I’ll make one comment and Lorie can also chime in. One of the comments we made, Justin, was on the gains on sales either out of our lease fleet or from the acquisition of the former WLR GBX fleet. We expect that and we had very little gain in Q1, we expect for the year that to be in the range of $10 million to $15 million. And that the majority of that we expect to be in our Q2. On the other hand there we said that deliveries would be weighted about 55% to the first half of the year and 45% to the second half. We can back in – we can back into our Q2 deliveries from that given that you know what Q1 is and our outlook for the year. So that means in terms of deliveries, our Q2 would be the lowest quarter in terms of deliveries really driven by the timing of lease syndications. So, Lorie, would do that.

And I would just clarify when you say the timing of lease syndications and how that impacts our delivery, that’s what we’re indicating our own newly built cars, because that’s what goes to delivery. The syndication of the 4,000 unit portfolio is not included in backlog, nor that included in delivery. But as you stated, we expect the bulk of that to occur in the second quarter, which will drive that.

All right. The only addition I would make to that is that, we have both risk factors and possible tailwinds or upsides in our plan. Our finance folks have a very strong opinions that we make our plan. Our Board has tested those options. I agree with their conclusions. We think that the, as we may have some assumptions in the plan, which is what really directed to your point that could not come to pass, but we have others that are not in a plan that probably will come to pass. So on balance, we are a nimble company, and every month we meet in a management session for a day and we go through each operating units. Some of the upsides would be GBW, recovery in the wheel margins, which are inventory related. Transactions that would allow us to run that higher rates that are in the plan. Some of the downsides would not be able to be executing on some of the syndications that are in the plan. And if we had margin erosion through some stochastic event, which we don’t anticipate. But that was just examples of kinds of things that are swelling around in the quarter-to-quarter management of a company like this right now.

And I would just add one more thing Justin is that, as I mentioned earlier, we do have some line changeovers that are – that would be likely in our fourth quarter. So that would be, if you look at that back-half and you are thinking about weighting across the quarters, I think, Mark already talked a little bit about the second quarter. And so then the fourth quarter will be kind of a bit of a potentially a lighter quarter depending on how those changeovers go.

Thanks. That’s all really helpful. And I’ll just add in one more. So, Bill, you talked about your ability to adjust to the changes we’ve seen in the demand environment, and clearly there have been a lot of improvements in Greenbrier over the last several years. So with that context, if we see the industry transition to building around replacement levels, how should we think about the gross margin profile of the business in that environment?

I think you guys have long time to get around to that one. So we – I think, I’m going to let Mark and Lorie address that. You know, there’s positive things, there’s negative things that certainly with lower demand. People are going to become more aggressive on pricing if necessary and we are seeing pricing behavior. The mix also addresses and the mix is very important to margins. But what would you like to you say about that?

I’ve been muzzling in some questions and I’m not allowed to address to that question.

Anyhow that’s working out.

But I mean, Bill, I think you touched on some of the difficulties and trying to quantify something like that, because it does, it’s very dependent on what’s going on in the market. As we look across kind of the broad base of demand that might be happening in a more normalized year of, say 50,000 to 60,000 units of delivery in North America, thinking about our broader product mix which – so Greenbrier is a different company today than we were the last time we were in that environment, and trying to do our best guessing of what does normalized pricing look like, and how that might play out when you think about gross margins, particularly where we’ve invested quite a bit of money to be very efficient in our manufacturing. We are thinking that margins are going to be strong in that sort of an environment likely, over 15%, I don’t – I’m don’t know, be so bold as to say 20% which is a bit lower than where we are today. But definitely not falling back to the levels that you’ve seen Greenbrier in the past. The other couple of things that I’d point out, because sometimes in reading everyone’s report, it seems like people have kind of thinking about 2016, as we have 2016 in the bag and looking forward to 2017, as maybe the more normalized market. And I would just want to point out a couple of things that make that not so much the case forGreenbrier. Number one, we do have a very strong backlog with good pricing and excellent margins going into 2017. So, as I said in my comments, we’ve got about 10,000 to 11,000 cars in current backlog that will be built in 2017 based on current production plans. The other thing that’s happening for us in 2017, as we’ll be delivering those Saudi cars out of our Polish facility, which we expect those to have very robust margins. And then as Mark was mentioning earlier, GBW continues to gain traction and what Jim Cowan and his team have been doing throughout their organizations. So those are all reasons why I would say, if the market is looking at Greenbrier and kind of looking past 2016 to say so 2017 as a bit more normalized, here is a few reasons why that normalized market maybe is a little bit further out and what people are anticipating.

Okay, great. That’s really helpful. I know it’s a tough question. Thanks for the time.

Thank you, again.

Thank you. Our next question comes from the line of Allison Poliniak from Wells Fargo. Your line is now open.

Hi, guys, good morning.

Good morning, Allison.

Just a question on leasing and services business. What’s the gross margin decline? You highlighted transportation and storage costs. Was that related to the portfolio acquisition, or is there something else there? I’m just trying to think about how to think about that one as we go forward throughout 2016?

Well, we would, Allison, it’s a good question. And the, as we discussed earlier in the call decline in the fleet utilization that we reported is due to the portfolio that we acquired has about an 87% on lease utilization rate. And so since we count that in the statistics, of course, that brought the number down. The other thing is that we had 500 newly built tank cars that were off-lease and incurred some transportation and storage costs. So we would expect, as Bill talked, we expect to get those cars and the service and we would, while we’re all constantly managing the fleet, I would not expect that – I would expect that those numbers would temporize that going forward here and the decline that you saw is not something that we would expect to continue.

Okay, perfect. And then just on the lease syndication business, in the presentation you talked about 12 times, I think, it’s a bit three months. Has that changed at all? And then also if you can give us any color in terms of backlog and what – how much of that is related to the syndication business?

Sure. The if you actually look at our supplemental slides, you will see that and here, well the first part of your question, yes, three months about an average time, that is correct. And in fact on the fleet that we acquired in Q1, we’ve already sold off third of that – about a third of that fleet and we expect to complete that substantially complete it this quarter. And similarly on the new cars, the average well time is about, it does average three months. And if you look at the detail of our rail car assets and lease syndications, our newly built cars that are in there have actually gone down. So we’re churning those right now faster than we’re replenishing that we expect that to more even out in the second-half of the year. As far as the backlog that is subject to lease, we’ll get that information.

About 5%.

Okay, great. Perfect 15.

15.

15% sorry.

Of the backlog is in the lease, and that would be addition to the rail cars that are already on the balance sheet as rail cars from these syndications. Allison, you have to hang out with Barbara Wilson. Wells is now the largest leasing company in North America, so there…

Everybody complaints. He puts a stab on that one, but now I guess, Wells Fargo Rail as of today so…

They’ve done a great job of growing their business and they’re a good customer of ours.

Sure. Good things to take to. Thank you.

Bye-bye.

Thank you. And our last question comes from the line of Matt Brooklier from Longbow Research. Your line is now open.

Hey, thanks. Good morning. So first question, I’m trying to get a sense for ASP progression, as we move through the year. I’m just trying to, I guess your guidance suggest that ASP is going to moderate throughout the year. I’m just trying to get a sense for, if revenue per railcar in fiscal 2Q looks kind of similar to what it was in fiscal 1Q and there’s a bit step function in the second-half, or is there our expectations for just kind of linear ASP moderation, as we move through the year?

That’s a great question, Matt. In general terms I would say the ASP is going to probably be fairly linear, and I would bring that back to what Mark was saying earlier, since we have indicated that about 55% of our deliveries are going to happen in the first-half, 45% in the second-half, and since we had a really great first quarter that would kind of lead you if you’re thinking about the pace of manufacturing revenue, second quarter is going to be a lighter quarter than the first quarter.

Okay.

From a revenue perspective for manufacturing.

Just to get a little color, as we change our production mix, we would move away from a higher value tank car, if we were to increase our backlog in double-stack cars that would tend to reduce the ASP. On the other hand, boxcars and the auto cars have higher ASP. So that’s more – that was more of the background of the reason why we expected to stay rather linear in the next year’s timeframe.

Okay, that’s helpful, and also realize tough question. Second question with respect to tank car regulations, the market doesn’t really seem to be in any hurry to replace cars or retrofit cars, at least, in my opinion. Could you talk to the potential magnitude and cadence of retrofits this year? I don’t think you have much retrofit revenue baked into your fiscal 2016 guidance. But I’m trying to get a sense for, if tank retrofits do eventually to start to happen, does that happen in a meaningful fashion this year, or is it, do we think it’s more of a next year event?

We are doing retrofits now and we’re seeing order activity in terms of the pipeline increase at GBW. The driver of the recovery margins in GBW, the operational improvements, and amortization [ph] of the network. The modest amount of retrofits in our budget for this year couple of hundred cars and then more importantly on tank cars, what was the HM201, there’s a new name for it, a designation for it. But each year – each – every 10 years tank cars and hazard service have to go through a fairly rigorous inspection and that has evolves upgrading and repair. And the demand for that is sufficient to really create a base load in the repair network that we have for tank cars. And that’s the question. But the – there has been a lag in accepting, all right, in responding to the federal regulations of regulations have been modified slightly. But from the perspective of implementing safety all stronger and people are just taking the time that they have given that their surplus cars in the system they’re letting the clock run out. They’re returning cars to lessors and we don’t have any cars like that in our fleet. And if you’ve got cars that you’re operating with and you’ve got two more years to decide what to do with them or year-and-a-half, you’re probably going to turn that cars in that window and then either buy new ones, or buy a car that can be retrofitted and retrofitted then. The cars – the companies that have cars that they own, these are typically all companies are actually beginning to commit to retrofits, because there’s really no way that they can duck that issue. So the sub-costs in those cars will be evaluated compared to cost of a new replacement car. And in general, if the retrofit makes sense, say $60,000, then they’ll go ahead and do that. And so that’s where we see the immediate demand as people that have the cars and are just going to go ahead and do them.

Okay, helpful. It just seems to me like we’re pushing a lot of potential retrofit work out to 2017, and 2017 could be a very, very busy year, especially if crude prices recover here, I appreciate the time.

Yes, that’s exactly what happened with the OPA 90. People had 15 years to double haul the oil tankers that were used in the Alaska trade related to the last three years to do it. There was a huge rush and we expect that phenomenon to occur, if energy prices recover. But there is a glut of, I mean that oil prices now have really declined. That’s not something we track, particularly expecting our business. But there’s just a glut of the cars out there and makes economic sense for people to do what they’re doing. But in 2017 and 2018, they’re going to – there’s going to be rush to the door and that’s when we expect much more robust demand. It’s not the way we thought, it would play out. We didn’t anticipate the drop in oil prices that would cause demand to fall for the cars themselves.

Okay. I appreciate the color. Thanks, again.

Thank you. I appreciate the time.

And with that we’re going to draw this call to a close. We do appreciate everyone’s time and attention and interest in Greenbrier. For those of you that we weren’t able to get to your questions today, we’ll look forward to following up with you tomorrow. And once again, we will be having our Annual Meeting later today on the West Coast, 2 o’clock webcast if you’re interested. Thanks, again.