The Greenbrier Companies, Inc. (GBX) Q4 2017 Earnings Report, Transcript and Summary

Hello, and welcome to The Greenbrier Companies’ Fourth Quarter of Fiscal Year 2017 Earnings Conference Call. Following today’s presentation, we will conduct a question-and-answer session. Each analyst should limit themselves to only two questions. At that time, all lines will be in the listen-only mode. At the request of The Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin.

Thank you, Amber. Good morning, everyone, and thank you for joining our call today. On today’s call, I’m joined by our Greenbrier’s Chairman and CEO, Bill Furman; and Lorie Tekorius, Executive Vice President and CFO. They will discuss the results for the quarter and the fiscal year, as well as provide an outlook for Greenbrier’s fiscal 2018. Following our prepared remarks, we will open up the call for questions. In addition to the press release issued this morning, which includes supplemental data, additional financial information and metrics can be found in a slide presentation posted on the IR section of our website. Matters discussed on today’s conference call includes 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 2018 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. And with that I will turn it over to Bill.

Thank you, Justin. Good morning. I guess I’ll go first this morning, and I’m going to start out by just complimenting the analyst who did a heads-up this morning with a couple of preliminary reports. We’re certainly going to touch on some of the issues that were raised. I’m going to address myself immediately to two of them and be very direct. We have a plan – each year, we have a plan and we attempt to manage to the plan and we do a very good job managing to the plan. The last three years, we’ve exceeded our plans. So with regard to guidance, I want to be more specific about guidance. Our goal is $4 a share in 2018 or more, and 22,000 orders plus in 2018. We also expect, if you look at the bottom of Page 3 and you see the headwinds that we have had, both from minority interests and from our issues at GBW, we expect to turn those numbers, if not positive, much, much better. And therefore, we expect that to be a source of opportunity in 2018 when you look at margins. I don’t believe that the tax rate is a driver in any way. I want to start my remarks this morning, though, in reminding everybody that business is not just about numbers, it’s about people who produce those numbers, and it’s about communities in which we operate. And I’d like to pause to remember three natural disasters that have occurred in late August and September that have affected our industry, but more importantly, affected communities in which all of us in our industry operate. Hurricane Harvey in Texas and two significant earthquakes in Mexico. Although these events did not directly impact Greenbrier’s business operations, they affected people in multiple communities, not only where we operate, but where our customers operate and where our people live and where our employees have relatives. There are many tragedies that are related to these natural disasters. I’m very proud of our Greenbrier employees, particularly in Mexico and in the United States, who individually and collectively responded with direct humanitarian aid and impressive fundraising, which in Mexico is matched 5x by billionaire industrialist, Carlos Slim, making what they did really significant in saving lives and providing relief. I know our employees rise to meet challenges every day, but I wanted to recognize them and their extraordinary response in recent weeks to communities in need. It does make Greenbrier different. We care. We care about the communities where we operate. We care about our customers, and we care about many things. We also care about the numbers, and we’re going to get to those soon. But I would be very remised not to take a moment also to remember the passing of our good friend and fellow former Greenbrier Director, Dan O’Neal. As Chairman of the U.S. Interstate Commerce Commission, O’Neill helped to implement railroad deregulation, thereby revitalizing – assisting in revitalizing the railroad industry. And he remained an active and respected figure in Washington, D.C. until his death at home earlier this month. Dan was Chairman of Greenbrier Intermodal and he helped Greenbrier play a big part, along with other intermodalists, in the double stack, an intermodal revolution in North America and around the world. Truly, Dan made a tremendous footprint on our industry and we remember him this morning. Now turning to our results. While fiscal 2017 was an especially busy year with many positive developments; in North America, markets for new and used railcars were under pressure, including lease rates on new and used equipment, something that all of you in the analyst community certainly are focused on. We met those challenges by introducing new products and improving existing designs. And other accomplishments this year included efficiency improvements in manufacturing operations and developing deeper relationships with existing customers. Greenbrier also brought new customers to the railcar asset and services market, structuring innovative commercial transactions and channeling low cost of capital into the industry for the benefit of our customers. We make no apologies for that. Guided by our strategy established at the beginning of fiscal 2017, we increased Greenbrier’s market share not only in North America, but we built solid foundations for future growth internationally. And we expect to see those growth initiatives pay off in orders during the coming year in our fiscal 2018. To be more explicit about our international goals, our international backlog now at the end of 2017, about 12% of our total backlog. What does that mean in tangible terms? It means over 3,000 railcars and about $300 million. We expect to have orders out of the 22,000 cars plus that are our goals. I don’t think we really think in terms of the range. This is something the Street has sort of expected us to do. Our goal is 22,500 orders for 2018. We expect 5,000 of those to come from the international underpinnings that we have produced thus far. And we expect to grow in the future, internationally, during 2018. While markets remain competitive, we continue to see improvements in the North American rail operating environment. I remain an optimist about our industry. I remain an optimist about order projections. And I believe the experience that we all at Greenbrier have had and others in our industry have had support that optimism. And 2017 it was a welcome rebound in railcar loadings. This continues to be underway with all the larger commodity groups posting strong year-to-date growth. Even coal had a very nice recovery during 2017. While we don’t expect that to be an underpinning of traffic growth, we expect intermodal, frac sand and metals, which have all been standouts in loadings this year, to show a great deal of strength. And looking forward, these loadings are expected to grow over the next couple of years, roughly in line when you look at all loading types in line with GDP, but led by intermodal with a forecasted average annual growth rate of 3.5%. This is a loading profile that benefits Greenbrier. Another measure we track closely is rail velocity. This is a rail industry estimate that, to maintain constant surface levels, equates demand for additional railcars for every one mile-per-hour reduction in rail-road delivery performance. Now people might, may differ on the amount, which range, and here and I am going to give a range from 25,000 to 50,000 cars. 50,000 additional railcars for every mile-per-hour reduction in velocity on an aggregate can be accurate and is not a bad index. But of course, as everything in our business, does, it depends on the specifics. With year-to- year loadings up 5.1% through September, rail velocity is currently down 4% compared to the same time last year and has been down as much as 6% early this year. Leave you to do that math. The loading’s up, velocity down. The current fundamentals of the railroad business in North America are clearly trending well for Greenbrier and the railroad supply industry, especially in intermodal where our market share is over 50%. It’s important for us sometimes to take our nose out of the numbers and look at the economic environment in which we operate, look at our strategies, to see what will be the underpinnings of true performance. And for these reasons, I’m an optimist about 2018 and 2019. And of course, all of that, as Justin rightly points out are forward-looking statements. And I will suppose the Greenbrier story, like many in our industry, depends a great deal on health of the U.S. economy. Greenbrier’s strategy is to maximize its presence in North America while expanding its international footprint or diversification and growth. The strategy is clearly paying off. Greenbrier’s strong base in North America enables us to reach international markets across the Americas and in Europe and in the Gulf Cooperation Council region and Eurasia. The benefits of our strategy are clear. We expect greater revenues and cash flows, lower volatility through the business cycle particularly as our international strategy takes hold. This strategy also, of course, optionality as a first mover advantage in new markets. In other words, the power of the initiative, something that we believe in a great deal at Greenbrier. Strategy is, of course, only one part of the equation. During fiscal 2017, we continued to strengthen our balance sheet, a trend achieved through two successive CFOs. Our industry and the financial markets in general focus overly much of the P&L and quarter-to-quarter earnings, but the balance sheet is a very, very important item in the stability of a business. Under two successive CFOs, Mark Rittenbaum and Lorie Tekorius, our balance sheet has improved dramatically. At the end of the quarter, we had over $600 million in cash and negative net debt, a record for Greenbrier. We continue to take steps to ensure we’re deploying capital efficiently, one of our most important jobs. In fact, our board believes it is our most important job. And effectively, both to support Greenbrier’s strategy, boost cash generation and share positive ROICs on invested capital, and to return cash to shareholder in the form of total shareholder return. We are focused on total shareholder return. And over recent years, we’ve returned $200 million to shareholders in dividends and stock buybacks. You’ve noted that we’ve raised the dividend. Our board has approved the raising a dividend again sequentially, and you’ve seen our capital used most prominently this year with our investments in Brazil and Europe. But while these transactions are complete, we are going to continue to invest in our international footprint. We’re now the largest manufacturer of new railcars in Europe and we are the largest in South America. These activities, as well as our dividend policy, demonstrate the deployment of our expanding capital base for the benefit of shareholders. We have had, in past years, incremental rates of return on investments in the 20% range. It is difficult to see where else you can realize that type of ROIC with the exception of pockets in the railroad supply industry. Lastly, the impact of Greenbrier’s business strategy and financial strength is revealed by our operational progress during the fourth quarter and the recently ended fiscal year. Deliveries revenues and earnings exceeded our guidance range for the year. Gradual improvement in rail freight markets and the successful implementation of the strategy that we’ve talked about helped Greenbrier to increase our revenue and deliveries in the fourth quarter. So revenues were up in the fourth quarter over the third quarter. We expect them to be materially up in 2018. The story again there is being driven not only by domestic market share, a slightly more optimistic view of the market than many observers in the industry, and international growth. Total orders in fiscal 2017 were more than double last year’s total. There are more railcars in Greenbrier’s backlog today than at the end of fiscal 2016. We have had no order cancellations. I have to strive hard to see what’s wrong with this picture. We are gaining traction internationally, with important strategic developments as earlier talked about. We now have manufacturing operations on three continents, strong presence and commercial activities on four continents, and we intend to do more. We have strengthened our commercial relationships, as earlier talked about. And in the area of asset management, have added 70,000 new railcars to our managed fleet in 2017, and an additional 15,000 railcars after quarter end for an increase of more than 30% since the beginning of fiscal 2017. This generates valuable fee income for Greenbrier as well as many other benefits. All this growth was with Class 1 railroads where quality service and reliability are essential. Today, almost Class 1 railroad in North America relies on some portion of Greenbrier’s portfolio of railcar management services to help conduct their operation. And our services touch over 20% of the North American railcar fleet. In aftermarket services, coal loadings that are on all-time lows continue to confront Greenbrier’s Wheel & Parts unit, which is still doing well in the circumstances as well as our GBW joint venture with Watco. However, the Wheels & Parts team lead by rail industry veteran Rick Turner, is actively engaged in improving efficiency and finding new avenues for increasing demand for wheel sets, such as our summit investment this year with Sumitomo, and expect progress on this during fiscal 2018. Our major area for improvement is GBW. We expect meaningful advancement on this goal in 2018. We continue to invest in our people, in engineering, design and product development, all in response to the competitive markets where we operate. In summary, Greenbrier’s strategy is working and it’s producing good results. And the future in our industry over time, in particular, is very bright. Strong balance sheets and cash flows in our industry are good things for the future. We strongly believe all this boosts our competitive position and facilitates significant cash flow generation over the cycle. With that, back to you, Lorie. Actually, over to you, Lorie, because I got to go first today.

Yes, on that field.

How great.

Excellent.

Thank you.

Thank you, Bill. As Bill indicated, we did finish fiscal 2017 with very strong results, a testament to our ability to execute on our strategy of enhancing our core North American business while simultaneously expanding our international presence. Deliveries and revenues were within our guidance range, while earnings exceeded our guidance. And we’re pleased that the aggregate gross margins for the year were a healthy 19.4%. Highlights for the quarter included adjusted EBITDA of $73.3 million, adjusted earnings of $27.3 million or $0.86 per diluted share, on fourth quarter revenue of $611.4 million. Reported earnings in the fourth quarter were affected by a goodwill impairment charge recognized by GBW, and I’ll talk about this in a bit more detail momentarily. But in the fourth quarter, the non-cash impairment had $0.11 per share negative effect on reported EPS. Operationally, we recorded deliveries of 5,500 units. Our tax rate for the quarter was 21%, which gave us a $0.13 per share benefit in the quarter as well as the year. Our tax rate can fluctuate from period to period due to changes in the geographic mix of earnings and cumulative adjustments from a slightly reduced annual rate. The lower fourth quarter tax rate reflected a true-up of those factors. In general, we expect our annual rate to be somewhere between 28% and 30%. As we previously announced, orders in fiscal 2017 were strong, with fourth quarter orders of 2,500 units valued at $200 million. And after quarter end, we received orders for another 1,400 units valued at $120 million. For the total year 2017, we received orders for 16,500 units, more than double the 7,500 units in fiscal 2016. Our order strength demonstrates the benefit of enhancing our core North American operations with international growth. We continue to view backlog as a key indicator of future earnings and cash flow generation. The diversified backlog as of year-end was 28,600 units with an estimated value of $2.8 billion. Based on current production rates, our backlog gives us visibility through 2018 and into 2019. This visibility combined with our strong balance sheet gives us the flexibility we need to build railcars when and where our customers need them. Greenbrier-Maxion, our Brazil railcar manufacturing location, is included in order delivery and backlog information as we effectively own 70% of the operation. But it’s not consolidated in our financial statements. Turning our focus to our business segments. Quarterly gross margin in our manufacturing business was 16.3% and reflect a product shift to more open market activity in our production and a greater weighting on lower margin units we delivered in the quarter. Please note, I did not say low margin. These are still profitable railcars, just more general purpose in nature. Wheels & Parts quarterly margin was 7% and reflects lower wheel set and component volumes. Our aftermarkets business continues to experience headwinds associated with these lower volumes, but as Bill indicated, this is part of our focus in 2018 is to make adjustments to this business. In the fourth quarter, our 50-50 repair joint venture with Watco, GBW, recorded a non-cash goodwill impairment of $11.2 million pretax as our sales and profitability trends declined beyond what has been anticipated. Since we account for GBW under the equity method, our share of the impairment loss was $3.5 million after tax or the $0.11 I mentioned earlier, and this is reflected in earnings from unconsolidated affiliates on our income statement. Leasing & Services gross margin was 42.1% in Q4 and reflects fewer externally sourced syndication transactions, which typically have lower gross margin percentages. As Bill mentioned in his remarks, Leasing & Services added approximately 70,000 railcars into our managed fleet and we now provide management services for over 20% of the North American fleet. Included in quarterly deliveries were about 1,200 railcars that we delivered into a newly formed lease warehouse facility owned 40% by Greenbrier. The ownership structure allows us to recognize 60% of the revenue and margin from these deliveries in the quarter, and the remaining 40% of revenue and margin will be recognized when the railcars are ultimately sold to a third party, which is expected in 2018. We’re excited about the flexibility this new tool brings to Greenbrier and the additional capital efficiency it provides. Greenbrier is in a strong financial position, and our balance sheet provides us with significant optionality and flexibility. We entered fiscal 2018 with liquidity of over $950 million from cash balances and available borrowings on our revolving credit facilities. Our capital management strategy remains focused on cash flow generation, return on capital employed and creating long-term shareholder value. This balanced approach enables us to invest through the cycle, both organically and through bolt-on acquisitions to profitably grow our business, while at the same time enhancing shareholder return. The benefits to shareholders of this approach are evidenced by the board increasing the quarterly dividend 4.5% to $0.23 per share per quarter and extending the share repurchase authorizations until March 2019. We have declared 14 consecutive quarterly dividends worth a cumulative $2.65 per share. Our backlog, combined with strong order activity in the first month of 2018, provides visibility and confidence in our outlook. We expect higher revenue and deliveries to drive higher earnings per share in 2018 with our international operations, in particular, making a larger contribution to our business. Based on current business trends and production schedules, our detailed guidance for 2018 is as follows. Deliveries of 20,000 to 22,000, which includes our Brazilian operation, which should account for up to 10% of deliveries. As a reminder, we recently made this investment in as doubling our European operations on June 1, 2017. Revenue is expected to grow to $2.4 billion to $2.6 billion and diluted EPS will be up to $4. Further, we expect aggregate gross margins to remain robust compared to our historical performance at similar points in the North American rail cycle although below record levels of the last couple of years. And in anticipation of the first, second and third question on the call, we expect those aggregate gross margins for manufacturing to likely be in the mid-teens. We expect G&A expense to range between $175 million and $180 million. Again, bear in mind that this reflects a full year of our larger European operation formed in June. Internally, our goal for G&A continues to be 6% of revenue and we see a path forward to achieving that goal, which includes nearing the end of a company-wide ERP systems implementation. Gains on sale will range between $30 million and $35 million reflecting used equipment activity in our expanded MUL relationship. And growth capital expenditures are estimated to be about $165 million, with $150 million of proceeds from the sale of leased assets as we refresh our lease fleet. Depreciation and amortization is expected to be about $70 million. Our tax rate is expected to be 28% to 29%, again based on the geographic mix of results and earnings from unconsolidated affiliates, which reflects our share of the results from operations that are not consolidated though primarily GBW and our Brazilian operations. After a challenging fiscal 2017, we expect improvements in these operations, which will provide a tailwind to 2018 results, and we expect them to be closer to breakeven for the year. We expect 2018 earnings attributable to non-controlling interest, or minority interest, to be $25 million to $35 million. Again, as a remainder our financial statements consolidate the results of two significant operations, our North Mexico-GIMSA joint venture as well as now our expanded European operations Greenbrier-Astra Rail, that are not fully owned, the non-controlling interest represents our partner share as a result of these operations. There will be quarterly variations reflecting the timing of syndication of railcars built at GIMSA. The cadence of deliveries and earnings is expected to be slightly weighted to the second half of the year based on current production schedules. And with that, we’ll go ahead and open it up for questions, Amber.

Thank you. We will now begin the question-and-answer session. And our first question will be coming from Matt Elkott of Cowen. Your line is open.

Good morning, Matt.

Good morning. Okay, so you guys talked about EPS growth into 2018. And I was wondering what is the 2017 EPS that’s – that that’s based on? Is it the reported $3.65 or is it the adjusted $3.76?

It would be on the GAAP $3.65. But either way, right, we’re – our goal is $4 of EPS in 2018.

Okay. All right. So if we’re looking for a low end of the guidance range, as Bill was talking about earlier, it would be $3.66, that’s the – at least $3.66?

Let me address that. It is up $4 a share. $4, that’s our goal. The last three years, we have exceeded our plan, and that’s the number that’s approximated in our plan. We are going to and the board is tired of having us underpromise and overdeliver for various reasons. It’s not good for our stock values, it’s not good for total shareholder return and it’s not good for predictability. Our target is $4 a share. I expect that we would see that target, and we will manage the company to do so.

Great, thanks for that, Bill. You did touch on margins. I was wondering if you guys can remind us how long the Saudi Railway deliveries will go on. And do they stay at the same level or do they decrease as the year progresses.

The financial respect of those deliveries will carry through our fourth quarter 2018, and that contract effectively should be all consummated, delivered and paid for by the opening bell in 2019 fiscal year.

Okay. And if no more orders or some more orders come in between now and then, how big of a – kind of gross margin impact would that hit if everything else in the environment stayed the same.

If that occurs, I will follow the guidance of our esteemed colleague in the industry, Hunter Harrison. But I don’t expect that to occur. We will have additional orders, we believe, in that market. We certainly put a strong investment into it. We believe that we’ve got legs on that market. So we believe that, that will – we will continue to have and we have in our 2019 plan something for that market.

Great, thank you very much.

Thank you, Matt.

Thank you. Next question will be coming from Justin Long of Stephens. Your line is open.

Thanks, and good morning.

Hi, Justin.

First question I had was on the backlog. And I was wondering if you could provide an update on how much of the backlog is allocated for delivery in fiscal 2018 and how much is beyond that time. I just wanted to get a sense for your level of visibility to the delivery guidance.

So first, for fiscal 2018, about 16,000 units that are in the August 31 backlog we expect to deliver in 2018. So that’s about 75% to 80% of the guidance we expect to – that we already have booked.

Okay, great. That’s helpful. And then I wanted to ask about the international markets as well, given it seems to be a growing piece of the pie and you talked a lot about it in the prepared remarks. But I guess, first, where do you see the international markets progressing over the long-term as a percentage of your total deliveries? And secondly, maybe in terms of the margin profile, how do the international deliveries compare to North American deliveries?

Well, it’s not homogenous and differentiable. It’s not a clear differentiable curve. So it – and it varies from market to market. Brazil is different than Western Europe, where we are now especially strong. We expect that to be different in the Eurasian market and the GCC. And so it’s difficult to give you anything except goals or kind of our idea where we’re trying to take that market. We’re trying to scale it and we see these various markets as somewhat counterbalancing as it relates to risk. Individually, the investments that we’re making are not a – in each market are not by themselves something that would bet the company or be a huge drain flipped over. In the nature of international markets, when you look at the stock market, emerging markets, of course, have been very hot this last year with 20% growth. I guess basically just following expected trends and looking for the diversification across those markets. Where one is up, we expect another one to be down. So that’s kind of the underlying theory. To be specific about your numbers request we’re targeting at least a 25% component of international over the next two years. And already, we’re seeing very strong order rates. The first part of introduction in a new market generally doesn’t have really high margins, falling to the bottom line. It may have high margins, but the bottom line is basically pioneering in investment. So it’s not an easy thing to get started. It takes a couple of years. But we’ve spent two years on the international agenda, we have other markets that we’re bringing on. Actually, right now, we’re trying to pace our growth so that we don’t overextend ourselves because there are – once you start this, there are plenty of new potentials that come alone. So I hope that’s helpful.

That is, thanks Will. Very helpful and I’ll leave it there. Thanks for the time.

Thank you.

Thank you. Next question will be coming from Bascome Majors from Susquehanna. Your line is open.

Thanks for taking my question this morning. As a guy who’s modeling $2 in earnings for this year, about 12 months ago, I just want to congratulate you on the way that you managed the business and proved me very wrong over the last 12 months here. But if we kind of think about how this year has developed, or at least your outlook this year has developed, I wanted to see – when you first started talking about potentially having an opportunity to keep earnings flat-ish, I think that was in January. How was the makeup of how you got there maybe evolved between now and just 11 months ago?

By the way, I thought your notes this morning, Bascome, were very useful. We actually read each one of these if we get them before the conference call started. You’re kind of looking for a bridge of – why the bridge to optimism, if you wish to characterize it that way, I guess. The thing I’d say is that we are seeing strength from our diversified model. We’re seeing revenue growth internationally. But domestically, the variety of car types we make, we make almost all car types now. We have been gaining market share in general. It seems that we and Trinity have emerged with better profiles at better doing this, and I think we do intend to continue to see that. We’re even seeing today a lot more green shoots on tank cars than we expected before. And lastly, we have a lower cost of capital we can deploy into the marketplace. And we have three very strong traditional leasing company partners, CIT, Wells Fargo and SMBC, which we work with in collaboration. So we think that our domestic volumes will improve over 2017. We will have about 5,000 new orders in 2018 for the international market, and that’s part of the bridge.

And if I could just clarify, Bill, when you say 5,000 deliveries for…

It’s approximately what I expect the order rate to be as well. So being able to sustain itself at that level.

Absolutely. And the one thing that I would also add is as you’ve seen over the last few years on our production results here in North America, we have very much focused on creating efficient operations, straining the value out of our manufacturing base, leveraging our leasing strength as we go to the financial markets and syndicate. We expect to be able to take those skills that we have refined in the North American market and export them to Brazil and to Europe as we grow our bases there.

And of course this as a strategic thrust internationally, we don’t expect sequentially everything to be homogeneous. We have a lot of execution that we have to do, that’s our job. So it’s subject to the usual execution risk that – and upside that can come from the system leaders, which we think is a very good one.

Thank you both for that. Just kind of one follow-up to some of the comments you made earlier, and then I’ll pass it on to the next person here. But you talked about the mix shift to more kind of competitive general purpose cars. I’m just – can you kind of walk us through the – I mean, there’s a lot going on here. You got more international business. You’ve got mix shifting domestically and maybe between geographies and car types, pricing is kind of shifting in the backlog. Can you walk us through, really high level, how the mix is evolving and maybe the cadence of that for the next two or three quarters based on your production plan?

Just to demonstrate I did read your report. The – one of the things that’s going to happen with our mix is our tax rate. We’ve noticed the adjustments in the last two quarters, but – and we’ve got guidance for the tax rate this year. But as our international business grows, some of the jurisdictions that were in are – have very different and lower tax rates than the United States. We’re not getting into that kind of worms. Romania, for example, has really low marginal rates. A big chunk of the big investments we’ve been making are going to be there. So that tax rate is something that may change over time. So Lorie, why don’t you go ahead and answer the rest of the question?

Sorry, I apologize. I got – can you restate your question, Bascome?

I was just asking, I mean, there’s a lot of mix shifts going on, be it geographically or within car types. I was just – if you could kind of walk us through some of the mix shifts you’re highlighting and kind of, high level, what’s happening and kind of the cadence of how that moves through the deliveries from the backlog just as we think about basing this year. Thank you.

Sure. Thank you. Thank you for restating that. So yes, in North America, kind of even as you’ve seen in the fourth quarter, we are transitioning to more general purpose tank cars. Overall, not really changing production rates if you think about it in total, but it’s a different kind of mix. So going from maybe building the boxcars – as we transition through the year, going from building boxcars that are maybe at a lower rate per day to maybe more covered hoppers that are just slightly higher rate. As Bill mentioned, we are seeing some green shoots in tank car activity. So I think as we progress through fiscal 2018 on the North American side, you’re just going to be seeing a transition to what we would consider a more normalized market, but with our ability to participate more broadly because we’ve expanded the car types that we’ve offered. And again, we would expect our margins to be somewhere in – from an overall perspective, in the mid-teens. Europe, we expect that to continue to grow as we look into 2018. It did take quite a while for that transaction to come to closure, so it didn’t actually close until June 1. So we just have one quarter of their operations in our fiscal 2017. We do expect that to step up as we move through the balance of 2018. We are seeing increased inquiries and negotiations on order activity, which should benefit as we transition into the latter part of fiscal 2018. Similar activities are being seen in Brazil. There’s a lot of political activity going on in Brazil that impact the timing of orders. But as I was saying earlier, I think with our focus from our manufacturing and commercial operations here in North America, we expect to have that results in Brazil on more efficient operations and the continuation of a very high market share down in Brazil. Thinking further about, as you march down the income statement, as I indicated, we do expect gain on sale to be higher in fiscal 2018 than fiscal 2017. This is going to be in relation to our expanded relationship with MUL. It also gives us the opportunity to refresh equipment on operating lease on our balance sheet. So where we’ve had a fleet of railcars on our balance sheet, we can refresh that fleet with more tax-efficient assets. So that will, in turn, benefit the tax rate as we go forward. And the last item I would mention is our unconsolidated subsidiaries, so this is where you’re going to have Brazil showing up as well as GBW. And as we mentioned, GBW had a tough 2017. We do expect that under the current operation, they are going to have improved operations in 2018, and we’re kind of looking at that as more of a breakeven situation. Hopefully, that’s a more fulsome response.

And if not improved operations, at least from our perspective, an improved consolidated result for us, we intend to address this. And again, it’s one of the hot topics for us right now is the financial performance of GBW. Everything else is clicking pretty well, we think. And we are optimistic about 2018. We think that that’s – we think we clearly have 20178 representative of the trough period for Greenbrier’s overall financial performance. But of course, we do have a somewhat different strategy than others in the space But I’d still be – I’m still optimistic about the space unless we have a recession.

Thank you, both for the comprehensive answers there.

Thank you. Next question will be coming from Allison Poliniak of Wells Fargo. Your line is open.

Hi, guys. Good morning. Bill, you talked about the international, particularly Europe, being – there seems like a lot of opportunity there. But it sounded to me like you were a little bit more cautious on the profitability as you start that business. With the opportunity with Astra, I think you talked about $0.15 to $0.35 earnings contribution in 2018. Are you still comfortable with that? Any way to sort of help us understand or narrow that range a little bit more now that you’re there?

We still are comfortable with the range. Always, it took a lot longer to close that deal than we thought. So when we have the time line to implementation execution has been delayed by six months from what we expected. So how much of that can be deployed immediately is really the question. But they are profitable. They – Europe is profitable. And we see a lot of synergies there, particularly in engineering, it gives us a great platform for what we’ve been doing in the GCC and elsewhere in the region. And I think that it – we got a balanced, solid growth in the future, revenue streams and the present value of those with immediate quarter-to-quarter performance. There really is a direct balancing relationship that we have do there. But I’m very optimistic. We got great partners there. And we’re very pleased to have the new focus on the – particularly in the German market, the Western European market. They brought a very attractive people mix. A lot of talent was brought to our organization. So that’s at least the picture from the beginning of – at the beginning of 2018. We’ll see how execution goes.

Great. And then, Lorie, this might be a question for you. On the balance sheet, I noticed a new line item contingently redeemable noncontrolling interest. Can you explain what that is?

Well, we can get into more detail in our follow-on calls. But as with the transaction with Greenbrier or with Astra to combine into Greenbrier-Astra Rail, there is a put option that accounting requires that it’d be somewhere on that mezzanine level between – instead of noncontrolling interest down in equity, but lives in that middle ground.

Got it, understood. Thank you.

Next question will be coming from Matt Brooklier of Buckingham Research. Your line is open.

Hey, thanks and good morning. I think you did give a little bit of color. But the total of the 5,000 international deliveries anticipated this year, what’s the breakout between Brazil and Astra?

It was actually three established markets right now, the GCC, Astra the GCC, Astra Rail, Greenbrier-Astra Rail, which is the largest business unit. We served GCC from Europe contingently. We’re building an international platform where we can serve that market from – also from the Southern Hemisphere. And we have, of course, Brazil. So there are actually three of them. We’re not going to, at this stage in the disclosure and the forward-looking thinking as – our forward-looking disclosures and guidance break those markets out for competitive reasons.

I would just give just a little bit of color. I’m sure as you think about it, Matt, the Brazil market is a much smaller market than the total European market, which would encompass Western Europe as well as the GCC.

Right. Okay. That’s helpful. And then what were the total number of international deliveries for fiscal 2017? I’m just trying to kind of measure the change here.

That’s a great question. Let us back to you in a few minutes on – we’ll just work that into as a tailwind and one of the other questions if we have more.

Okay. Fair enough. And then just last question. Bill, you’ve talked about green shoots within the tank car market. One of your leasing competitors, I think, indicated they saw improved rates on tank cars. I’m just curious to hear – I was curious to hear your thoughts, but I wanted to hear if there’s any particular end markets or commodities that are potentially driving some momentum in the U.S. tank car market. And how should we think about the timing if there is improved demand for a potential pickup in terms of orders actually coming through?

Sure. Well, I think everybody notices that – has noticed that the oil prices have come up a little bit more and the fundamentals look a little bit better in oil. We have seen some interest across the board, including in oil, although we don’t see that going back to boom times and I’m – or I want to urgently state that it’s – I think that period has passed. There are the issues, both in ethanol and other products, of safety, rail safety. We designed and built a car. Others have also provided such a car that’s six to eight times safer than other cars in the higher risk category. Across the range of our car types, we are emphasizing safety and ease-of-use. So there are a lot of products. It goes across the board, and there are all the other things. I’d say that there’s certainly green shoots. Are they leads? They could be leads, don’t know. But it’s not like a huge thing. I think the tailwind for us, though, can – in connection with our 2018 plan. I’m going to try to be – we are going to try to be more operationally responsive to your questions in the future, but try and link it to numbers. So it seems to me that that’s a plus for us potentially and for our peers that are in that market. The other side of that would be on the supply side. Is there too much supply? We don’t think so. We think there’s been some destructive we’ve mentioned. But we think in general the overall supply demand equation will be addressed by many things, including velocity and higher traffic demand.

Okay. Good to hear. Appreciate your time.

Thank you. Appreciate your questions.

Thank you. Our last question will be coming from Steve Barger of KeyBanc Capital Markets. Your line is open.

Thank you, good morning.

Good morning Steve

Just got a house keeping things, first, you’ve talked about deliveries being backup weighted. So thinking about EPS, does that suggest the 40% front half, 60 half? Or more balanced, more like a 45-55? Just trying to get sense of how that’s going to flow?

I would say it’s more of the latter, like 45-55. It’s fairly even, just slightly more towards the back half.

Okay. And FY2017 very strong free cash flow year. It’s been a couple of years now, we think. Just thinking forward, would increasing deliveries, syndicated activity, bigger international footprint, can you manage working capital expense to match or exceed free cash flow in 2018 you think?

No, I don’t know that we would want to give an explicit goal like that whether we match it. It is going to be an interesting year in 2018. We do expect to continue to have positive cash flow from operations even as we expand into these other areas. And we have some additional CapEx associated with the growth in our international footprint. So I would say that we are very, very focused on the balance sheet. We’re focused on cash flow. We’re focused on liquidity. I think you can take the board’s decision to increase our dividend and to extend our share repurchase program as an indicator that we have confidence in our cash flow generation and our liquidity into the future.

One of the performance metrics in pay-for-performance at Greenbrier in the – across the board, but in the – basically manufacturing, is return on investment, invested capital and management of working capital, inventory turns and so on. But we’re very heavily focused on that. And particularly Lead Director is highly focused on that, having been a former CFO himself and a CEO of a very large company. So we manage that closely. And I think our goals are to see that controlled. Our net CapEx itself is actually declining a little bit on our plan. So I think we are going to have – continue to have a strong cash flow, even though we’re investing meaningfully in the international footprint.

Well, and I guess to that point, I mean, the balance sheet, very impressive, strong as it’s ever been, and a track record of effective capital deployment over the years. Any broad thoughts on what the board sees for next steps?

Yes. Integration of the changes we’re making, execution on the plan over – let’s see. I’ll choose my words closely. I pinpoint execution on the plan instead of being so cautious. And under – over – underpromising and overperforming. Again, three years in a row, they have reminded us that we have set targets with ranges that we come in at the top or over. And they would like us to see be – us be more precise in our goals and state them so people understand them, and then see if we can achieve them. And we’re going to work very hard, as we always do, to do that. But I think we’ll try to be a bit more transparent in how this operates. So that’s part of the change that you’ve observed in our approach this morning, and we’ll see how it goes. We don’t want to overpromise and underdeliver. That is even worse. So we will see how we do it. And you guys can give us a report card at the end of the year.

All right. Very good, Bill. Thanks for the time.

All right. Thank you. Appreciated.

Thank you, speakers. I see no questions at this time. I’d like to hand the call back to you.

Thank you very much, Amber. And thank you everyone who has listened to our call this morning. Great questions, and we look forward to additional follow-up later this afternoon. Thanks again. Bye, bye.

Thank you, speakers. And that concludes today’s conference. Thank you all for joining. You may now disconnect.