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,…

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…

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.