The Greenbrier Companies, Inc. (GBX) Q4 2019 Earnings Report, Transcript and Summary

Hello, and welcome to The Greenbrier Companies Fourth Quarter of Fiscal Year 2019 Earnings Conference Call. [Operator Instructions]. At the request of Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I turn the call over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin, sir.

Thank you, Shirley. Good morning, everyone, and welcome to our fourth quarter of fiscal 2019 conference call. On today's call, I'm joined by Greenbrier's Chairman and CEO, Bill Furman; Lorie Tekorius, President and Chief Operating Officer; and Adrian Downes, Senior Vice President and Chief Financial Officer. They will discuss the results for fourth quarter, the full year 2019, and then provide an outlook for Greenbrier's fiscal 2020. Following our introductory 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 key metrics can be found in a slide presentation posted on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2020 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. And now since the lawyers are happy, Bill, would you please take it away?

Sure, Justin. Good morning, everybody. Today we're pleased to report that Greenbrier ended its fiscal 2019 with positive momentum, and we entered 2020 with a solid increase in backlog and railcar order activity. I will do the numbers just a little later, but fourth quarter deliveries and earnings met the expectations we've provided last quarter. The ARI investment is progressing well, and we are very happy to join with our new colleagues -- with facilities in Arkansas, Missouri and Texas, which gives us geographic striking distance throughout the Eastern United States and Canada. The completion of the ARI acquisition continues Greenbrier's pursuit of growth at scale. This really does matter. The ARI acquisition added more than 10,000 railcars to our backlog. Our new railcar backlog of 30,300 units today leads the U.S. North American industry. Backlog also reflects our proactive response to market conditions. For example, we removed all small cube hovered -- covered hoppers for sand service from our backlog. We did that voluntarily, 3500 railcars. These are not order cancellations. The truth is the market does not need these cars right now. Our customers know that, and we have taken the initiative with our customers to help with this problem in a win-win mode. It will benefit them, and it will benefit us. So our backlog is quite solid, and we have a very good visibility to our fiscal 2020. Scale's brought new strategic customer relationships in North America and worldwide. We're delighted to welcome important new customers from ARI, prominent among those, is GATX Corporation, a leader in railcar leasing, not only North America, but in Europe as well as India and Russia. We will work hard to serve them and all of our customers. ARI also brings us a diverse mix of talent along with increased engineering designs and capabilities. As a result of increased scale, we are the dominant provider of railcars in our core North American market, while we also enjoyed better than a 50% market share in Europe and market share exceeding 70% in Brazil. The most obvious results of greater scale is the Greenbrier's surpassed the $3 billion threshold of total revenue for the first time in 2019, before adding the ARIs. So we're in a trajectory normalized at $3.5 billion. Only 5 years ago in 2014, and in 2012, the numbers hovered under and at $2 billion, so a $1.5 billion revenue increase on a top line. It doesn't take long to do the math without the synergies to realize that, that scale and their books are right about -- written about it, will be effective for Greenbrier's growth and substance in the future. Greenbrier's advancing on a four part strategy as we have earlier announced. First, reinforcing our North American market, a strong rebound within our core North American manufacturing operation during the second half of the fiscal 2019 demonstrates execution here. Although performance will continue to be volatile quarter-to-quarter given the industry conditions we are currently in. Next, we are leveraging our international operations for greater stability in 2020 with recent leadership changes and so on. The third and fourth elements are robust development of the talent pipeline and continue to -- continuing to grow the business at the largest scale. Talent investment is manifest across our entire organization, including the two of the people here with me now in this room, actually three. Adrian Downes was appointed Chief Financial Officer in June. Lorie Tekorius was promoted to President and CEO -- COO, I'm sorry, COO in August. And she is running operating units including our repair business, which is greatly improved under her leadership even since she was appointed to that task. Additionally, we've completed a range of key promotions in manufacturing, our largest and most profitable business unit in September. And of course, the ARI deal has brought us excellent talent and greater scale in our core markets. Our Treasurer, Justin Roberts, is also advancing and has done a very job. The ARI acquisition aligns with three of our four pillars within the Greenbrier's strategy. It's great to acquire a company with a history and pedigree of ARI. Jim Unger built a great company. We currently employed two of his CEOs successors in our company, including John O'Bryan, who was most recently CEO before the acquisition. We have been energized by meeting with and being with our new colleagues. There are many major advantages of this deal, which we've talked about before. And I won't go into them today, but the complementary effects of these operations through integration, geographic reach, parallel capabilities that enhance our own capabilities in Mexico and a broader product mix are among them. Previously, we identified the challenges in our Brazilian and European and other operations, the remedial actions we deployed in Europe and Brazil are taking hold and are reversing as are the other areas that we identified last year. We expect a significant swing in the effects in our bottom line from those changes, and we are getting traction in those markets as we expected. Scale cannot be achieved simply on a piece of paper. It has to be done through the sweat and hard work of those in the field. And naturally, there are missteps along the way, but we're not dismayed by those when they occur, we simply fix them. Our repair operations include a very large and good business in parts and wheels operations, and this unit has improved dramatically over the past year due to Lorie's leadership along with Rick Turner. The economy and the economic conditions in which we're operating are sound in America. I think it's possible for us to continue to talk ourselves into [indiscernible] seemed to be inclined to do. But the basic domestic economy is south, barring stochastic shocks even though the effects of PSR and trade have affected -- have been manifest in loadings on the rail network and improved velocity, much can be changed if the trade uncertainties are removed. Year-over-year, industry loadings have declined and the projections for orders this coming year and deliveries are below trailing years. However, they are still strong. And in this type of environment, Greenbrier, as always, succeeded because of its many techniques that it uses and its integrated business model that offers value to customers. I like to stress that the fundamentals of our business are strong and improving. 2020 will be a year of execution for Greenbrier. And we're up to the task. Greenbrier has been entirely transformed as an enterprise over the past decade and in the past five years, since the last time the economy fell into a recession, a much worse one that can be -- than probably can be imagined today. We are more nimble and adaptable. We've moved aggressively on compensation policies to ensure higher -- high shareholder alignment. Greenbrier's executive compensation practices includes stock ownership, retention or stock guidelines along with a significant portion, a major portion of pay being well defined in pay for performance metrics. 2020, we will focus on digesting our growth and on improving shareholder value. We will focus on operating cash flow, capital allocation and execution and integration of our growing business. Finally, I'd like to shift gears for just a moment, and I'd like to take a moment to recognize a fine competitor, Trinity Industries. But more importantly, I'd like to recognize the Wallace family. Trinity's founder, Ray Wallace, who was an inspiration for so many of us in railcar manufacturing, including me, my partner, Alan James, in Greenbrier's early history. And who along with his son and the current CEO, Tim Wallace, who will be, I understand, departing soon. And other recent leaders such as Steve Menzies through the company's history, led Trinity to greatness. Under the influence of this family are talented, passionate and powered executives. Trinity grew to be the railcar leader and industry leader in many areas. Now it has been split up, and we are watching the vagaries of activist intervention in the pursuit of shareholder value in the short run by outsiders unknowing and insensitive to the demand of such a business. We hope well for those other constituents of share -- of Trinity and including its shareholders, its customers, its employees, its franchise, we have always responded aggressively and competitively, so have they. I want to leave you with this thought that this industry is a part of a total transportation network. It cannot be run for quarter-to-quarter or month-to-month profits. Something has to remain that will allow the freight network, the transportation network to move goods. I wish Trinity well, and I wish the Wallace family well, in closing. Thank you.

Thank you, Bill. Good morning, everyone. Before Adrian addresses the financial details of the quarter. I'll briefly provide some details on our own operating performance. In the fourth quarter, we delivered a record 7,300 railcar units and received orders for 4,900 units valued at over $500 million. Orders for the quarter were for broad range of railcar types, but were primarily driven by North American tank car demand and activity in Europe and Brazil. Our backlog, as of our fiscal year-end, totaled 30,300 units with an estimated value of $3.3 billion. This backlog reflects 10,600 units from the ARI acquisition that Bill referred to closing in late July as well as the removal of the 3,500 small cube covered harpers for sand service. We do not have any more sand cars in our backlog. Taking proactive steps to solidify our backlog is just one example of how Greenbrier is able to respond quickly in a changing market. Our fourth quarter featured many accomplishments. Again, we closed on the ARI acquisition, the purchase price was about $418 million. We achieved record revenue, $914 million and going back to those statistics that Bill was referencing, I think there were some years that may be that was our revenue for the entire year. So quite an accomplishment and increase in scale for Greenbrier over the last several years. Our aggregate gross margins in the quarter increased by over 200 basis points, reflecting continued strong manufacturing performance and lease syndication activity. And three of the four areas challenged earlier in the year, Europe, Gunderson and Brazil saw improvement in Q4, with Europe generating a pre-tax profit. Progress on improving our repair networks profitability has been slower than we would like, but the momentum and financial results are improving, and we remain committed to continuing this trend. North American manufacturing produced another strong performance this quarter and continues to demonstrate its ability to rapidly respond to shifting demand trends. Deliveries for the quarter in 2019 set a record, driving strong margin performance. And more importantly, throughout the year, the manufacturing team successfully executed an aggressive tank car production increase across multiple lines, while safely training hundreds of new employees. The addition of the talented employees at ARI manufacturing facilities makes Greenbrier more nimble in addressing a range of customer needs. We've only owned these facilities for about 90 days, but we're pleased with the progress that has been made on the integration of the operational and commercial teams. This integration work will continue through 2020, and we're excited about the strength and talent of the team that came with the assets and expect the operations to be accretive in 2020. Our European operations continues to improve their performance under the leadership of William Glenn and Martin Graham. And these improvements are occurring across the entire business, and together, they are successfully creating culture focused on safety, quality and profitability. And while the macro global economy continues to face headwinds, the European markets is demonstrating several -- demonstrating stable demand levels and most of our production capacity is filled for 2020. The Wheels & Parts operations were positive contributors in the quarter. Seasonally, the wheels business is weaker, sequentially, after winter weather and spring restocking activities, but the management team offset lower volumes by improving operating efficiencies. And our parts business continues to perform well as current demand is advantageous to our product portfolio. Since we're gaining control of our legacy -- our 12 legacy repair locations in August 2019 -- 2018, 1/3 of these locations have been closed based on a review of the marketing observed and the ability to be profitable. As part of the network optimization, we continue to focus on the safe work environment for our employees and how we can best serve our customers and improve the profitability at the remaining locations. A more positive trend is expected as we move through 2020. Leasing activity in the quarter was at more normalized level with no externally sourced railcar syndication activity. This also meant that leasing gross margin percentage returned to its more common 45% to 50% range in the quarter. Leasing's capital market teams, which manages syndication transactions had the strongest quarter in 4 years, with syndications of 1,800 internally produced railcars. The group syndicated a total of 4,800 railcars in all of 2019, another multi-year high. Our Greenbrier Management Services, or GMS, our proprietary railcar management provider added over 6,000 railcars under management in the quarter as well as more than 23,000 railcars in all of 2019. And subsequent to the end of the quarter, we added another large customer, which will result in another 30,000 railcars under management during 2020. As a result of that recent agreement, about one in four railcars in North America will be managed by one or more of GMS's fleet of services. In Brazil, the demand environment is slowly improving as progress occurs on the concession renewal process at the governmental level. We started to build a backlog and expect improved operating performance in 2020. Beyond the operating highlights for the quarter, here's some insight into how we're approaching fiscal 2020. As you know, headwinds seemed to be gathering globally with several macroeconomic warning signs. Managing through these types of environments are part of running a cyclical company, and our wide flexibility is one of the hallmarks of the manufacturing footprints that Greenbrier's built over the last several years. One of the significant changes in our manufacturing business is a change in our overall cost structure. Not only have we decreased the overall cost structure, but we've lowered our fixed cost substantially, shifting our overhead structure to being more variable than ever before. This will allow us to reduce cost quickly and efficiently, given the moderating demand environment. Our focus, in the near term, is on rightsizing production capacity on certain general purpose freight car lines in our North American manufacturing operations, reducing CapEx and increasing cash flow. 2019 was a year with many moving parts, coupled with completing the largest acquisition in our history. We also issued Greenbrier's inaugural ESG report in August, which has been well received by investors, employees and communities in which we operate. Fiscal '20 brings a different set of opportunities and challenges. We must successfully integrate the ARI operations, respond to lower demand for railcars in North America, with all of this occurring and then global economic and geopolitical uncertainty. Our management team is confident in the long-term strategy we have developed with our Board of Directors. And as a result of the talent development activities Bill mentioned, we firmly believe we have assembled and are investing in the right team to execute on this vision. And Adrian, I'll turn it over to you.

Thank you, Lorie. And good morning, everyone. Quarterly and fiscal year financials are available in the press release and supplemental slides on our website. I'll hit the high points and speak to fiscal year 2020 guidance. Highlights for the fourth quarter include revenue growth of 7% sequentially to $914 million, a second successive record quarter, driven by record deliveries of 7,300 units. At the same time, we improved aggregate gross margin by 220 basis points to 14.6%, helped by these deliveries and strong syndication activity. Manufacturing gross margin grew 120 basis points sequentially. Net earnings attributable to Greenbrier of $35 million or $1.06 per share include approximately $8 million net of tax or $0.25 per share of costs related to the ARI acquisition. Excluding these costs, adjusted net earnings attributable to Greenbrier are $43 million or $1.31 per share in line with our guidance. Adjusted EBITDA in Q4 was $109 million or 12% of revenue. New railcar backlog of 30,300 units valued at $3.3 billion. Internationally, management in Europe returned the business to pretax profitability, delivering nearly 1,000 units in Q4. For fiscal year 2019, revenue exceeded $3 billion, a new milestone. Greenbrier had a strong second half of 2019, generating $125 million of operating cash flow, while completing the acquisition of ARI's manufacturing business that Bill and Lorie spoke to. Adjusted EBITDA totaled $291 million, representing 9.6% of revenue, excluding a noncash goodwill impairment in Q3 and ARI acquisition expenses. Ending 2019, our balance sheet remains strong with $330 million in cash and $640 million in available liquidity, even after the acquisition providing a solid foundation for continued growth in the business over the long term. We expect to generate strong cash flow of between a $150 million and $200 million in 2020 and to continue to de-lever from last year's acquisition. Our use of capital is based on patient execution of strategies designed to yield long-term shareholder value. Today, we announced the $0.25 per share quarterly dividend, our 22nd consecutive quarterly dividend. Currently, our annual dividend yield is 3.1%. Moving to guidance. Based on current business trends and the macroeconomic backdrop that Bill spoke to, we expect Greenbrier's fiscal year 2022 to reflect deliveries of 26,000 to 28,000 units, which include approximately 2,000 units from Greenbrier-Maxion in Brazil. Revenue to be approximately $3.5 billion, diluted EPS of $2.60 to $3 per share, excluding approximately $20 million to $25 million of integration and acquisition-related expenses from the ARI acquisition. Included in our guidance for the assets we acquired, our synergies of approximately $15 million primarily driven by procurement savings and vertical integration. We still expect to generate approximately $30 million of synergies on a run-rate basis by year two. Earnings accretion of up to 20% on deliveries between 4,000 and 4,500 units in fiscal '20 and around $500 million of revenue. We won't regularly provide updates on the business activity of the acquired manufacturing assets, except for synergies and integration and acquisition-related costs. These assets are being integrated into our North American business and would be treated like any other facility from a disclosure perspective. Further for 2020, we expect strong operating cash flow, as I mentioned before, of between $150 million and $200 million. Depreciation and amortization is expected to be $110 million, reflecting the full year impact of the acquisition. We expect G&A to be between $230 million and $235 million, excluding any integration or acquisition-related costs. Although as a percent of revenue, it's flat with 2019. While the majority of the increase is driven by the acquisition, Greenbrier continues to invest to strengthen and develop the next generation of leaders. Gains on sale will moderate to $15 million to $20 million on proceeds of $95 million, and that's expected as we finish rebalancing our lease fleet. Interest expense is expected to be approximately $45 million. Our consolidated tax rate for 2020 is expected to be 27%. Our rate atypically fluctuates due to geographic diversity of earnings and other discrete items. We expect unconsolidated affiliates to break even with potential to contribute modestly. Earnings attributable to noncontrolling interest is expected to be approximately $55 million to $60 million. Capital expenditures are expected to total approximately a $140 million, as we continue investing in the lease fleet and enhancing our facility. Combined with sales out of our lease fleet, net capital expenditures are expected to be approximately $45 million, down from $73 million in 2019. These amounts include approximately $30 million of investments in the ARI assets. As we disclosed in the original transaction announcement back in April of 2019, about $30 million of the anticipated $430 million purchase price included reimbursement for capital projects underway. Since we were able to close the transition quickly, about $20 million of those products will now occur on the Greenbrier ownership in FY 2020, rather than being paid as part of the purchase price. I'm proud of our continuing pursuit of generating long-term shareholder returns regardless of macroeconomic conditions outside of our control. We look forward to 2020, and we will now open it up for questions. Operator?

[Operator Instructions]. Our first question comes from Justin Long with Stephens.

So maybe to start with the guidance and some of the numbers you just walked through. I was wondering if you could give us some color on the quarterly cadence of production that you're expecting in fiscal '20, and maybe the cadence of EPS as well. And then one other question on the guidance, I was wondering what you're assuming for production in Europe this year?

Justin, this is -- well. Justin, this is Justin. And I would say that from a cadence perspective where we are moving back to a little bit more of a normalized area for Greenbrier, where we are going to be back-half weighted, but it's probably more weighted towards 40% in the first half of the year and 60% in the back half of the year. Deliveries are probably weighted similarly at this point. And with regards to your question regarding Europe, it's probably around 4,500 to 5,000 cars are delivered in fiscal 2020 is the expectation. And we can kind of get into a little more granularity later, if you need to.

Okay. Great. And maybe the follow-up on the ARI commentary. I just want to be clear on the accretion expectations there. I know you talked about 20% plus accretion. Is that something that you're expecting to see in fiscal '20? I'm just wondering like looking at the map, it looks about like $0.50 to $0.60 of EPS accretion, just curious if that's the right ballpark we should be thinking about?

Justin, this is Lorie. Yes, I do think that is about the right ballpark. We are talking about up to 20% accretion off of 2019 EPS of $2.87.

And next question comes from Matt Elkott with Cowen.

Can you guys talk about some of the underlying assumptions now in guidance as far as rail traffic in North America, some macro-assumptions both in North America and international markets?

Yes. So kind of big picture. So we have about roughly 70% of our expected deliveries that are in backlog at this point. And so from that perspective, we aren't assuming, necessarily, a heavy lift in the back half of the year. I would say Europe is in a much -- they actually have, effectively, all of their deliveries are in backlog at this point. So some of our open spaces down in Brazil and in certain car types and so -- and that's primarily in the back half of the year. So we are not expecting a significant improvement in the overall traffic environment. We are not expecting a significant uptick in orders. We expect orders are going to kind of be in that replacement level area, and we will take kind of a, what we would say, is our fair share of that activity.

And I would just add maybe to the replacement comment. We do continue to see strong demand for tank cars as well as plastic pallets, which is possibly more growth-oriented than just replacement. But yes, I would say, overall, the market has more so replacement.

I'd say, we're much more bullish than others on that, and there are other isolated pockets, just pick one, box cars, an aging box car fleet, something has to give there -- and especially, in some of these international markets, quite a lot of replacement demand. And that would be true in North America as well. We've also had a history of achieving stronger market shares in this type of climate. And we have with 30,000 railcars and 27,000 orders we've improved our market share post-acquisition. So we feel fairly confident that we'll have adequate stability in the demand flow to Greenbrier.

Great. That's very helpful color. And Adrian, I know you gave some more line-item guidance just now. But maybe you can help me understand this without having -- have the time to go through all the numbers. Your delivery guidance for 2020 is higher than 2019. The revenue guidance is higher, but EPS is lower if you go by the midpoint of the guidance versus the $2.96 in 2019. I'm going with the $2.96 because you had an item in the second quarter. So it's $2.96 rather than $2.87. Did I miss any margin guidance -- gross margin guidance that you gave?

Yes. I think one way of looking at it is, we have a tailwind with the acquisition of ARI. And we pick up from that. We also had a tailwind from the improved performance in Europe, Brazil repair and some of the other issues that we had in 2019, where we are in a much better trend. Then we have some headwinds in our guidance around interests. We've got higher interest as a result of the debt from the acquisition. We have got moderation of the gains on sales. We had a pretty high level of those in 2019, over $40 million. And our expectation for 2020 is more in the $15 million to $20 million range. And noncontrolling interest is significantly higher as we are -- we've got a much higher proportion of tanks in our mix, and that's at our 50-50 joint ventures. So only 50% of those earnings falls to bottom line. So I think when you put all those lease parts together, it'll make a lot more sense in terms of our results for '19 versus our guidance for 2020.

Got it. And just one final question. The lease legalization decreased by 400 basis points; can you give any color behind that?

I think it is just symptoms, certain cars came back, some of it is a timing piece. And then, I think, as we've talked about before, it did not take much to move the needle ultimately on that part of it. So it's more -- we don't necessarily see anything ultimately concerning but is there definitely some pressure in that area.

Next question comes from Bascome Majors with Susquehanna.

This is Ann Marie Ott on for Bascome. You guys have grown your manufacturing platform considerably since the last real downturn in the North American railcar market adding scale and diversity across both geographies and car types. Along with what feels like a pretty big structural improvement to your manufacturing margins, but at the same time, you've also added quite a bit of overheads to support that larger footprint. So is the downturn in your core North American railcar market is deeper than you're expecting or even it's [indiscernible] than it's expected? How should we think about your ability to rationalize cost? Any comments really on breakeven railcar production levels or margins or just a high level of view of how you guys think your current book of business would perform in a full-on North American railcar's recession, it would be helpful?

And that's a quite fulsome question. Yes, we are pleased with the expansion that we have made in our footprint. But we've also, at the same time that we have been expanding our footprint, we really have been focusing on our costs. And shifting more of our manufacturing cost structure away from fixed cost to variable. So we've got a very experienced management team here at Greenbrier. We've been through some ups and downs. And we believe that we understand how to pull the levers that we need to as we need to possibly rationalize production lines and reduce those costs in line with the overall demand. So I think for most of the railcar builders in the North American industry, this is something that we're quite used to on a regular basis. It doesn't seem that we ever quite kick and stay at that perfectly sweet spot, where you can just run your production lines steadily throughout several quarters, much less a couple of years. So our commercial team does a great job of making certain that we've got sufficient orders. We've got a fantastic backlog, but we also look beyond, where that backlog is and think about what are the right production rates to be sustaining a good headcount level at our production facilities and to be efficient when it comes to cost.

Just another element I'd add on cost. Don't overlook the degree to which compensation across the board is based on performance. Our budgets, our targets, when can comes, if it's negative, we have a major reduction capability in automatically, in overhead costs, just relating to compensation with thousands of employees. And they recognize this. We recognize it. It's a big reserve and cushion against an economic downturn. Naturally we don't hope for a huge economic downturn. We see no reason for it other than to talk ourselves into it for some major war or something, which can't occur, of course.

Next question comes from Allison Poliniak with Wells Fargo.

Can we talk about intermodal, and obviously, Greenbrier has very strengthened in that specific market? Just your thoughts, international, domestic the impact of PSR, and obviously, you've been at marketplaces in near-term challenges. I just want to understand how you guys are looking at that?

Just simply on PSR, we see most of it, that effect, being over I think the railroads recognizing it have to be very careful or they are going to get reregulated. Shippers agree and happy they might lose shippers. But the effects of that have not been as great as the effects of trade. Frankly speaking, election year, if the trade situation doesn't improve, many people would be very surprised. However, who knows about that. But that's dampening, industry loading is a lot more. And in case of intermodal, it goes right to the heart of international imports, it drives a lot of intermodal in addition to domestic and containerization. So that market isn't looking as great, but we've been gravitating away from all of that. We still are strong with a strong market share in intermodal. But that's not where we're expecting demand to be in the next year and all that's baked in our numbers.

That's great. And just turning to Europe. You obviously said production spilled for this upcoming fiscal '20. You've obviously made some preliminary operations. Can we assume that they should be running at sort of their peak operational performance by the end of the year? Or is there still significant work to be done there, just any thoughts?

Well, I wouldn't want to set a peak for them. I think that, that management team continues to strive the ways they can improve and -- improve their efficiencies and effectiveness across the Romanian and Polish operations. So I do expect the cadence to improve as we course over our fiscal '20. But I think that they would say that they're going to grab continued growth opportunities assuming that the market supports this into 2021 and beyond.

And look, we stumbled in with the previous management. The new management has produced a substantial swing from losses to profitability. And sequentially looking very good that in itself is a big lift for 2020 numbers. But we do expect it to improve. Secondly, in Europe, one of the things that, beyond the economy, that people aren't really recognizing is lease rates are much stronger over there. Some of our U.S. customers are over there. And I think they are smart to be over there. And the green movement trying to reuse hydrocarbons has really taught -- brought momentum. So it's a lot more that the European Union’s tempting to push onto rail, plus there's a lot of older cars that have to be replaced. So having a strong position in Europe, having a strong market share and being a leading supplier there is a very powerful upside for the next two to three years and five years probably.

Our next question comes from Ken Hoexter with Bank of America.

Bill, Lorie, Adrian and Justin. Just real quick clarification. You formally did not include Brazil in deliveries, I guess, because it wasn't consolidated. There's no change to that? Or is anything changed on that?

No it's not consolidated still.

But it is part of the...

Delivery guidance. Yes.

Delivery guidance. It's about 2,000 units of that 26,000 to 28,000.

Okay. And before it wasn't part of the guidance? Either or it was?

It was included in our public guidance and reporting from -- for deliveries in backlog.

Okay. Sorry, just wanted to clarify that. The -- given the EPS guidance, Adrian, you kind of started to address this before when you hit all the different parts. But maybe you could just kind of talk about that is there anything significantly different on the margins, when you think about manufacturing as well as the other segments? That you're kind of calling out in your outlook or were you highlighting all the other things because the margin shouldn't be too different than where it were kind of these run rates?

Yes. The margins should be very much in line to slightly up in 2020 versus 2019 all in for manufacturing, including the new operations.

So we shouldn't look at the outlook, the EPS being flat to down as a call-out that margins are going to be impacted either through lower ASPs or something of that ilk?

No.

It really is, I mean one of the things that I know that at times this can be a frustration, and we do know that our model, to others, might be considered complicated. For those who actually are in Greenbrier, it's just normal. But we do have probably a significant -- a disproportionate amount of tank cars that are being built in fiscal '20 and GIMSA, our northern Mexico operations is a 50-50 joint venture. So while we expect them to continue to have good gross margin, as Adrian was saying earlier that's only 50% of that flows through the bottom line for EPS.

I fully understand. And I guess my last one. Just a different product. Is there -- now that you have merged the assets together, or I guess you've just started with 90 days, is there a different product mix that we need to get used to it at American Railcar versus what you're doing at Greenbrier? And then is there any planned facility integration or anything of that size, scale on the next stage of integrating the assets?

I would say not initially. One of the things that we're doing, as we think about integrating these operations, is we are having our engineers spend timed with the former ARI engineers, really evaluating the product design that they've built and we have built, thinking about it not only from a manufacturing perspective but also our customer's perspective. I would expect us to have some rationalization of car types as we move through the year, but clearly, we have customers who've ordered certain cars, and we wouldn't want to make adjustments to that. So we don't see any significant shift in the kinds of cars that are going to be built at those Arkansas facility. The one item, which is big base of where our synergies will come from is ARI had invested significantly in vertical integration. So really evaluating those support facilities to see what sort of capacity we can make adjustments to, to support our legacy facilities with that integration as part of our synergies and integration activities.

Just looking at a little bigger picture. The ARI portfolio and its geographic mix are really the prizes here because they have very good plastic pellet car. They have a different customer base. Their customer base is quite loyal. And we intend to fulfill every responsibility that they have made to those customers. It's a good leasing product. The pressure differential car and some of the more boutique tank cars that they have historically built all bring a lot of richness to the Greenbrier portfolio. So it's not one size fits all. And Lorie has done very good job on the integration along with our manufacturing and commercial team, not to try to just imprint Greenbrier's overlay on the ARI model. And we're not going to do that. We're going to integrate it, and we're going to get a lot of supply chain synergies just because we have larger scale or buying a lot more stuff.

Our next question comes from Matt Brooklier with Buckingham Research.

I just wanted to circle back to the commentary on tank cars. Could you talk about the tank cars that you have in backlog that are per schedule for delivery in fiscal 2020. What are the end markets? I guess what I'm getting at is I'm trying to get a sense for if you have a meaningful amount of flammable service cars in the tank side currently in the backlog?

So I would say, Matt, that we have just kind of the normal variety of commodities we use. So I wouldn't say it's disproportionate to any one thing but you do have flammable, you do have food service, you do have petrochemical. It really is a true variety across a variety of the normal commodities in the tank cars.

I think we probably see a lot of demands that being able to get production space than what's maybe pushed aside during the heavy demand for crude cars that's coming back.

Got it. Okay. That's helpful. And then, when we think about the $15 million of targeted synergies in fiscal 2020, you kind of broke out, where those are going to come from, some is coming from the procurement side, and then I think there's some anticipated benefit from incremental vertical integration. You talked to the timing of those synergy realizations, is it more front-end loaded, is it more back-end loaded? Maybe just final little bit of more color there?

I would say that it is -- some of it is relatively stable, although it's probably weighted towards the back three quarters of the year. I mean, if you think that we're really starting with September, October, November, still working to get our feet under us from a basic blocking and tackling perspective, but there is definitely some that is actually already occurring.

And our final question comes from Steve Barger with KeyBanc Capital Markets.

Lorie, I want to make sure I understand the commentary around having lower fixed cost, and Bill used the compensation levers as an example, but you also said that ARI is more vertically integrated. So can you just talk more specifically about the big things that you have changed that reduced fixed costs and what big things you see that are opportunities for change going forward?

Sure. I would say one of the biggest changes that we've made in fixed cost is that we've stabilized some of our production lines that allows us to reduce some of our indirect labor and overhead just managing those lines. So it is labor-oriented. But it is also looking at how are we managing some of the cost that we're not associated with directly building the railcars. And then we have had other things that are more around the procurement side and being more optimizing how we're buying, who we're buying from and the timeliness of when that hits the shop floor.

Steve, this is Justin. Just a little more color on that also. With the changes we've made in the footprint over the last, call it, five years or so, we've been able to lay out our facilities because many of these are new lines at new facilities. It's allowed us to lay these out more efficiently and effectively, with quicker changeovers, more effective changeovers and versus some of our older facilities that we're not necessarily, originally built with the intention of producing railcars. And so we take all of these together, and you see a very substantial shift in kind of our overhead structure with where it used to be predominantly fixed, and now it's predominantly variable.

But I guess, I'm just looking at the income statement. Where does that really come through because the SG&A is about the same level as it was four, five years ago? Gross margins, I know move around a lot with mix. But where has that really come through in terms of the results that you see and again, what's the next step for that as you think about the integration of ARI?

I think when you see it come through it's in the gross margin lines. And again, we have been expanding our product mix within shifting car types that we're building depending on market demand across these different periods that have been able to fix it, either maintain or improve gross margin and not being driven by these cost reductions that Justin was referring to. Again, we expect that there will be further opportunities there, a lot of the vertical integration, the utilization of that within the legacy Greenbrier facility. That will flow through on the gross margin line as well. So these are the offsets to -- more of modest North American market is that we expect to be able to reduce those kinds of costs and maintainable our gross margin.

Got it. And sorry if I missed this but did you talk about the expected margins for refurb and parts in FY '20? Just given trends of what you've seen in traffic, in cars and in storage, and how you see that progressing?

We didn't give explicit guidance on our segment growth margin. We do expect improvements in those areas. So I think that will be the direction that I would lead you. We do tend to just focus on aggregate gross margins from a guidance perspective. So for 2019, we were 12.1%. We expect to be in those low to mid-teens as we go into 2020.

Okay. And then one last one. Just capital allocation in FY '20. Is the first priority debt reduction? Is the Board happy with the current dividend level? Any other acquisitions or divestures that you foresee to kind of optimize the portfolio?

Our dividend yield, of course, fluctuates with stock price but we're focused on dividends, and we have had the dividend yield as high as 4.5%. Depending on the stock price, we intend to maintain the dividend and if we have the capital to grow the dividend modestly over time. So we are strongly dedicated to a good dividend policy and a strong balance sheet. We are in a period of integration, digestion from one level of revenue to another, $2 billion to $3.5 billion is quite a bridge. We want that to be sustainable. And we want it to be profitable, and we want to produce positive operating cash flow so that we -- we'll have that capital to distribute to shareholders. So I prefer not to answer it in any other way than that. Thank you.

Thank you, everyone. Have a great rest of your Friday, and if you have any follow up, please reach out to me, Justin Roberts at gbrs.com. Have a great day.

Thank you. That does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.