The Greenbrier Companies, Inc. (GBX) Q1 2023 Earnings Report, Transcript and Summary

Hello, and welcome to The Greenbrier Companies First Quarter of Fiscal 2023 Earnings Conference Call. Following today's presentation, we will conduct a question-and-answer session. Each analyst should limit themselves to only two questions. Until that time, all lines will be in a 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, MJ. Good morning, everyone, and welcome to our first quarter of fiscal 2023 conference call. Today, I'm joined by Lorie Tekorius, Greenbrier's CEO and President; Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer; and Adrian Downes, Senior Vice President, and CFO. Following our update on Greenbrier's performance in Q1 and our outlook for the rest of the fiscal year, we will open up the call for questions. In addition to the press release issued this morning, additional financial information and key metrics can be found in a slide presentation posted today on the IR section of our website. I'd like to remind you that 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 2023 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. Good morning, Lorie.

Thank you, Justin, and good morning, everyone. I hope everyone had a good holiday season. Our first quarter results showed areas of continued strength and identifiable opportunities to improve our operations. We produced 6,800 units in the quarter, a 10% sequential increase. Of these 2,300 units are investments held on our balance sheet to be syndicated our capitalized into Greenbrier's long-term lease fleet in a future period. Remaining customer deliveries totaled 4,800 units. Revenue was in line with expectations. However, the efficiencies expected from higher production levels have not yet been fully realized. Aggregate gross margin was impacted by higher cost of outsourced components driven by inflation, transportation expense, and other logistics challenges. Material shortages and delays and other lingering supply chain issues including rail congestion in Mexico, created production disruptions primarily at our manufacturing operations in Mexico. We remain focused on managing our cost and supply chain. We're optimizing our internal fabrication capacity, which will improve profitability by having more control over vital supply chain and address supply chain inefficiencies. Additionally, as disclosed in our earnings release, we will seize new railcar production at our Portland, Oregon facility in May following the delivery of existing commitments. This is not a decision we've taken lightly, given our history of manufacturing railcars in Portland. However, it's an action that reflects our commitment to optimize the efficiency of our manufacturing footprint and deliver stronger margin. We're undertaking a strategic evaluation of our marine business, which operates at the same facility. We're currently engaged in a range of discussions to determine both the future of marine operations and the overall use of the Portland facility. I remain confident we'll attain a good outcome for all of our stakeholders, which include employees, customers, and shareholders. Our Maintenance Services Group continued their positive momentum and started 2023 with a strongest Q1 performance in five years as initiatives focused on increasing efficiency translated to results. Our Wheel business unfortunately was negatively impacted by increased labor and transportation costs. We're currently working with our customers to modify contracts to address the current cost environment. Turning to the U.S. economy, while it continues to its resilience rising interest rates and inflation now weigh on growth. The labor market has remained strong, and we're cautiously optimistic about the industrial sector of consumer spending soften. The economy appears to be normalizing after years of unprecedented demand caused by lockdowns and subsequent government stimulus. As a result, economic activity will slow with an estimated annual U.S. GDP growth rate of only 0.2% in 2023. The lower outlook projects an economic soft landing that will be characterized by a strong labor market, but with elevated inflation and interest rates throughout the year. Consumer spending, which makes up two-thirds of economic activity, will likely determine the timing and depth of the slowdown. We continue to believe the North American rail freight segment will be resilient through a mild recession. Rail labor negotiations in the latter months of calendar 2022 drew broad public awareness to the integral role the rail industry plays in our economy. The near term threat of a railroad workers strike ended on December 2 with President Biden signing preventative legislation. However, challenging railroad service conditions now follow us into this new year. We're optimistic the railroads will make steady progress on their service models over the course of the year and increased hiring is an early positive step in this direction. Turning to our European business. Despite an energy crisis caused by the Ukrainian war, high inflation and the rising interest rates, the European economy appears to be holding up well. Energy prices are down from their peaks due to a mild winter and gas storage facilities at full capacity. German industrial output grew in the last quarter, surprising most analysts. And rail traffic levels in Europe are high and fleet utilization is nearly 100% for most wagon types. The one exception is international container traffic where volumes are down due to the sluggish Chinese economy, which continues to struggle with COVID. Our European business performed well despite the war and lingering effects of the pandemic. And now turning to some other milestones in Q1. On November 1, we released the fourth annual edition of our ESG report On Track Together. I'm pleased to report, the Group have been identified on the list of the most responsible companies in America, according to Newsweek and the global research and data firm, Statista. The third-party recognition validates Greenbrier's commitment to our values and our pursuit of responsible corporate citizenship. On a company level, we continue to review and optimize our portfolio to create a stronger, more sustainable Greenbrier. As announced earlier this week, we've acquired the minority interest in GBX leasing from the Longwood Group. This action bolsters Greenbrier's leasing platform, simplifies our business structure and promises long-term value to our shareholders. Growing our leasing business provides us a broader, more holistic view of the railcar equipment market than not solely an OEM builder. It also discourages the prospect of overbuilding since an asset can be on our books for over 30 years. Despite the short-term operating challenges, momentum is good entering calendar 2023. With strong railcar order activity and elevated lease rates, we're confident in Greenbrier's long-term strategy and our team's execution. On our last quarterly call, we mentioned we discussed the strategy further at our upcoming Investor Day. We're currently planning to hold that event in April and look forward to sharing additional details soon. And now I'll turn it over to Brian to discuss the railcar demand environment and our leasing activity.

Thanks, Lorie, and good morning, everyone. In Q1, Greenbrier secured new railcar orders of 5,600 units worth $700 million, a 17% increase from Q4. These orders extend production into calendar 2024. We delivered 4,800 units in the quarter, resulting in a book-to-bill ratio of 1.2 times. As of November 30, Greenbrier's global backlog was 28,300 units valued at $3.4 billion, an indication of the strength of our customer relationships, and demand for Greenbrier's products and services. As a reminder, our new railcar backlog does not include 1,800 units valued at $150 million that are part of Greenbrier's railcar conversion programs. We continue to see healthy railcar inquiries and orders for a variety of railcar types despite a slowing economy. As we pursue commercial and leasing transactions, we are employing pricing discipline that considers current market dynamics and the state of the economy. Railcars and storage are at a cyclical low due to demand spikes, rail freight service challenges and retirements outpacing new railcar deliveries. From January to November of 2022, there have been approximately 50,000 railcars scrapped. This is more than delivered in all of calendar 2022. Type railcar supply provides tailwinds for new orders in a range of railcar types. Earlier this week, we announced the buyout of the minority stake in GBX Leasing, our railcar leasing joint venture. Full ownership of the fleet furthers our leasing strategy while simplifying our business structure. We are pleased with the performance of leasing and management services in the quarter. Our lease rates on renewal are increasing by double-digits, and we are extending lease terms while maintaining a high fleet utilization of 98%. Our lease fleet grew to 14,100 units at the end of the quarter. Keep in mind that a number of the units added to our lease fleet in the quarter could be syndicated over the course of the fiscal year. We intend to grow our long-term lease fleet by approximately 2,000 units this fiscal year. Fleet growth for the year is focused on railcar types that will further diversify the fleet, reducing concentration risk. We funded another $40 million of leasing term debt during the quarter and will fund the final $35 million in Q2. Additionally, we have not borrowed on the $350 million leased railcar warehouse facility, although we are evaluating financing strategy for the remaining of our lease fleet adds for fiscal '23. Our capital markets team syndicated 300 railcars in the quarter, a decrease from last quarter due to the timing of production activity. We continue to successfully navigate the compound challenges of higher debt costs and higher railcar pricing. However, we do see sufficient investor liquidity in the market for the duration of fiscal 2023. With one fiscal quarter in the books, we enter calendar 2023 energized and excited by the opportunities in front of us to grow our leasing business and successfully execute our market-leading syndication strategy. All of this supports our ultimate goal to provide our customers maximum flexibility to access Greenbrier's superior products and services. Adrian will now speak to the financial highlights in the quarter.

Thank you, Brian, and good morning, everyone. Before moving into the highlights of the quarter, I would like to remind everyone that quarterly financial information is available in the press release and supplemental slides, which can be found on our website. Our performance in Q1 was mixed with strong commercial, leasing and maintenance services performance, offset by headwinds in the manufacturing business, particularly in North America. A few items I want to speak to for the first quarter included revenue of $767 million, which decreased sequentially primarily from the production of 2,300 leased railcars on to the balance sheet. As a reminder, we do not recognize manufacturing revenue or margin until the railcar leaves our balance sheet. However, we do recognize lease income for railcars on our balance sheet. This activity is more of a timing variance since these railcars will either be syndicated or capitalized into our long-term leased late later in the year. Deliveries of 4,800 units include 300 units from our unconsolidated joint venture in Brazil. Aggregate gross margins of 9.1% reflect higher costs for outsourced components, material shortages and lingering supply chain issues, including rail congestion in Mexico. We are investing in internal fabrication capacity to improve our control over this aspect of our supply chain while the rail congestion continues to slowly improve. Selling and administrative expense of $53 million is 22% lower from Q4, primarily as a result of lower employee related costs, including incentive compensation and consulting expense. The pretax impairment charge of $24.2 million was related to long-lived assets at our Portland and Oregon manufacturing facility. This was triggered by the decision to end new railcar production at the facility after an evaluation of our production capacity requirements. Excluding the impact of this impairment, adjusted net earnings attributable to Greenbrier of $1.6 million generated adjusted EPS of $0.05 per share. Adjusted EBITDA was $48.7 million or 6.4% of revenue. Greenbrier's liquidity was $477 million at the end of Q1, consisting of cash of $263 million and available borrowings of $214 million. Our liquidity remains ample, the primary use of our cash during the recent quarter included a continuing investment into our lease fleets and the expenditure of working capital related to the manufacturing supply chain issues we have already mentioned. As a result of the strength and flexibility of our balance sheet, we continue to be well positioned to navigate these market dynamics. During fiscal 2023, we expect liquidity levels to increase from improvements in operating results and working capital efficiencies as well as increased borrowing capacity resulting from more railcars placed on our balance sheet. As a result, the remaining tax -- as a reminder, the remaining tax refund associated with the CARES Act of roughly $30 million is anticipated to be collected this fiscal year and will be additive to Greenbrier's available cash and borrowing capacity. Greenbrier has $100 million authorized under our share repurchase program, which was just extended by our Board of Directors through January 2025. Our Board and management team remain committed to a balanced deployment of capital designed to create long-term shareholder value. We will continue to use this capacity opportunistically based on fluctuations in the price of Greenbrier shares and within the framework of our broader capital allocation plan. Subsequent to the end of the quarter, we have repurchased nearly 100,000 shares. Finally, on January 5, Greenbrier's Board of Directors declared a dividend of $0.27 per share, our 35th consecutive dividend. Since reinstating the dividend in 2014, Greenbrier has returned over $400 million of capital to shareholders through dividends and share repurchases. Based on yesterday's closing price, our annual dividend represents a dividend yield of approximately 3.1%. Turning to our guidance and business outlook. Based on current trends and production schedules, we are maintaining Greenbrier's fiscal 2023 guidance, which includes deliveries of 22,000 to 24,000 units, including approximately 1,000 units from Greenbrier-Maxion in Brazil. Revenue between $3.2 billion and $3.6 billion. Selling and administrative expenses of approximately $220 million to $230 million. Gross capital expenditures of approximately $240 million in leasing and management services, $80 million in manufacturing and $10 million in maintenance services. Proceeds of equipment sales are expected to be approximately $110 million. Our now wholly-owned lease, lease will increase by at least 2,000 units in fiscal 2023. We will see how the leasing market evolves throughout the year, and we'll be flexible and opportunistic in our growth strategy for the fleet. Gross margins, we expect full year consolidated margins will be in the low double-digits. Our bottom line results in Q1 do not fully characterize the improvements and positive momentum occurring in our business. We expect our performance to improve in the coming quarters as we hit our stride, and we see the benefits of tough decisions taken in Q1. Our management team is experienced with a demonstrated track record of success. Our robust backlog provides strong visibility and stability over the coming years, and we look forward to improved results as we progress through the year. And now, we will open it up for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Justin Long with Stephens. Please go ahead.

Thanks, and good morning.

Good morning, Justin.

I wanted to start with a question on the supply chain. Just given the trends there seem to be a little bit disappointing relative to expectations. Any updated thoughts on the supply chain recovery going forward? And for the ceasing of railcar manufacturing operations at Portland and the increased capacity internally as it relates to fabrication. Is there any way to put a number around the cost impact that could have going forward?

So I would just say on taking and parsing through some of that.

It was like three questions in one, Justin.

Starting with the supply chain, I think as we have ramped up our activities as well as other industrial manufacturers that has put more pressure on the supply chain that we rely on, particularly in Mexico, which we recognized and have taken the action to start in-sourcing initially the vital components that we need for building railcars and making certain that we are achieving the kind of cost that we need to. So we're not happy with what happened in the first quarter, but we are taking action and we expect that new fabrication facility to be online early in our fourth fiscal quarter. So things are changing and moving. I think as we talked about it, we would expect this to be probably a couple of hundred basis points of margin impact as we move through the fiscal year associated with supply chain. With the Portland, Oregon facility, not sure that we would quantify a facility-by-facility financial results. You do see the asset impairment that we took that's associated with the railcar piece of our business, evaluating the assets that are dedicated to railcar production and adjusting those to an appraised value and we are still in the process of evaluating our Marine business to determine what comes of that. And then the last question, no, I don't remember. We're not going to be using the Gunderson facility for any of the sub-components. This is in-sourcing that will happen near our facilities in Mexico.

Got it. I think you tackled everything. And just to clarify one point, when you mentioned a couple of hundred basis points of improvement in gross margins from the supply chain. Is that manufacturing gross margins? And is that just solely related to the supply chain getting better or is that incorporating what you're doing on the fabrication side?

So Justin, that is on manufacturing, and that is solely related to what we're doing on the internal fabrication piece. The improvement or, I guess, I would say, lack of disruption on the supply chain going forward is a little harder to quantify, but I would say that, that's a similar, if not maybe even larger number ultimately.

Okay. That's helpful. And then last thing I wanted to ask about was just the railcar order environment. Could you break down orders in the quarter between North America and international? And maybe, Brian, you could chime in on the sustainability of this kind of 5,000 to 6,000 orders per quarter flow going forward?

Yeah, Justin, it's Brian. About 95% of the orders in the Q were for North America. So substantially in North America, we're already -- December was a stronger month than what we typically see because of the holidays. So we're already off to a good start. I would say the cadence continues to be very similar to what we've seen in the last three, four quarters in North America. We're not seeing any falloff at all at this stage.

Great. Very helpful. I appreciate the time.

The next question comes from Ken Hoexter with Bank of America. Please go ahead.

Great. Good morning. Maybe you could talk a little bit about the manufacturing margins. Typically, we see a falloff in second quarter. I don't know if given the closing of Portland, it sounds like that doesn't occur until May or some of the other moves you're making -- are there going to be increased costs given the fabrication moves as well as still getting the supply chain online until that's up and running in the fourth quarter? So do we see and even extended dip in 2Q on margins. Maybe just walk us through, Adrian, your thoughts or Lorie, on kind of seasonality and impact from the moves you're making?

And I'll start, and then Adrian or Justin can chime in. But it’s a good point, Ken, that yes, seasonally, second -- our second fiscal quarter, which includes a lot of holidays does sometimes have an impact on our margins. So there's -- it's probably a mixed bag as you think about how we step through the year. We're not going to get into quarter-by-quarter margin expectations. We do expect there to be, though, an overall improvement as we move across each of the quarters of this fiscal year. Regarding rail production at Gunderson, we had a full quarter of production in the first quarter at our Portland facility, and that will continue through May. So we will have those three quarters, which I would say is, it's neutral to a bit of a drag on margins, but that's where I would say that kind of shakes out. And any additional costs that are associated with ceasing those productions or the transition of our workforce, we will make certain to capture those separately and communicate them separately.

And Ken also the investment in bringing the fabrication in-house is something that will be capitalized, that would be something that will provide long-term benefits. So you wouldn't see necessarily a higher operating expense from that, you would see overall market -- margin improvement.

And finally, Ken, one other piece on to that as we progress through the year, we will see the increased syndication activity, which is typically beneficial to overall company margins throughout the year.

Great. Thanks for that everybody. And then I guess, in the past, you've given kind of the balance of production and what you expect, maybe it sounded like Lorie, you threw out at the end of your last answer that there was no slowdown in the orders. Maybe talk about how back-end loaded production will be and the move, I guess, away from Portland to Mexico. Is that -- obviously, we had a huge surprise on cost this quarter given all the things you mentioned. Is that just determination that it's just too costly in the U.S. and moving everything to Mexico? And does that mean anything for the U.S. assets from ARI that you acquired in the U.S. or was this Portland specific?

So this was Portland specific. We are not intending to relocate all of our manufacturing to Mexico. There's definitely a lot of benefits and value of having a U.S. manufacturing footprint. The facilities that we acquired was announced in 2019. They continue to perform well. And as you think through deliveries and the impact from ceasing the production at the Portland facility, they're running at a very, very modest pace. So I would say it's not something you're going to really notice as -- and looking at the quarterly delivery activity, particularly as in this first quarter, we had a larger number of units that we capital -- are not capitalized, but are held as investments on our balance sheet, which will be syndicated in future periods, which will then become deliveries, right. So that will offset the wrapping up of rail production at Gunderson.

Great. Thank you very much.

The next question comes from Allison Poliniak with Wells Fargo.

Hi. Good morning. Lorie, [Multiple Speakers] back to your last point, those cars on balance sheet. I know that you guys mentioned the syndication obviously be beneficial. But is there a way to estimate or how you're thinking about what you're going to hold on in your only weeks I imagine that impacts the margin -- or the profitability as we're thinking through the year? Just any thoughts there.

Well, I'll get Brian to talk to that because he's working really closely as we evaluate kind of which pieces of equipment we hold on to and which we syndicate.

Yeah, Allison, what we're -- our stated goal, just to maybe restate it is to hold about 2,000 cars a year on our balance sheet. I think in Q1, we originated about that many a little bit more. What we're doing now is we're going through the process of identifying which ones we want from a concentration and return perspective, and then we'll begin to move some of those into the syndication channel. So Q1 was heavy in lease product. That's one of the impacts, but that will start to get released throughout the year and our plan from a leasing perspective is, again, to keep about 2,000 cars throughout the year.

Got it. That’s helpful.

And just from a production perspective, there are -- we will be producing cars onto the balance sheet and then moving cars off the balance sheet through syndication throughout the year. This wasn't a one-time thing. It's just more a matter of it was more heavily weighted in this one quarter.

Yeah. I guess I was just -- because I think it doesn't -- maybe we can talk about this offline, Justin. The impact of the cars that you're putting in your own fleet, you don't necessarily recognize the profit. So I was just thinking if there was an impact we should be thinking through as you determine what you're keeping and what you're syndicating out.

You are exactly correct, Allison. We do eliminate that revenue and margin from the manufacturing business when they are on the balance sheet and when they go into the long-term fleet, then it's just a matter of recognizing the lease income over the period of the lease. So again, we can clean up any details offline, but yeah, you are right about that.

And I would say, this is something that is unknown, right? As we are building equipment that we will capitalize on our balance sheet and hold long term. We absolutely acknowledge that we are foregoing the profit in the moment, but believe that having that repeatable revenue, cash flow, tax advantaged cash flow is good as a balance to our strong manufacturing operation.

Certainly. And then I know, Lorie, you mentioned revenue was in line with your expectations, but it sounds like production did slip a little bit to the right because of the supply chain. Is there any way to quantify what that number was in terms of production level that you guys had that kind of maybe get pushed to the right and is probably more back half weighted here, just any thoughts?

Sorry, you asked Lorie, but I was going to say a few like kind of $300 million to $500 million is probably slipped from the quarter from that perspective. The piece that was a little more punitive though, was the disruption and the inability to maintain consistency of production on certain lines throughout the quarter.

Right, which impacts overhead absorption. So you just have more of that overhead falling through not being used efficiently.

Got it. Thank you.

Thank you.

The next question comes from Bascome Majors with Susquehanna.

Thanks for taking my questions. A lot of questions on margin, given the surprise. But Lorie, you opened your comments with a look at the macro and I talk about some of the softening indicators from a top down perspective. Is that a message that we think we're kind of getting to the top of the cycle or more of the plateau type environment that you've talked about with maybe not as higher highs and lower lows of the railcar cycle, as we've known for much of the last 20 years? Can you just unpack the message here from a macro perspective and kind of your strategic views as you look out beyond a quarter or two, maybe two, three years and how you're playing the business? Thank you.

Well, happy to know your, Bascome. Yeah, I think at least everything that we are seeing both internally and from looking at external forecasters, it certainly appears that we're going to be in more of a plateau when it comes to new railcar production. While that might disappoint some who like roller coasters, we're kind of excited that we didn't actually have the huge run-up that some other sectors did. So therefore, I don't believe we're going to have quite that accelerated downfall either. It will be more modest I think there is a lot of pent-up demand when it comes to rail freight movements. A lot of shippers have had to move their product in different ways. The railroads continue to embargo and not provide the kind of service that their customers need. So as they're able to add workforce, those of us who support the railroads and the rail freight industry, believe that, that -- those loadings are going to go up, the performance is going to improve and that will make for good demand. The thing that's difficult is, is there a particular movement or car type change that can sometimes create those spikes in demand that you -- is more behind some of those run-ups. Again, we don't -- I don't see that in my crystal ball right now. And I think that having the steady and diversified activity that we're seeing on manufacturing is good both for us, for a manufacturing -- well, maybe it's a little bit more difficult for our colleagues in manufacturing because it's a lot easier to just build one or two car types as opposed to eight different car types, but it does provide us a lot of benefits in the lease fleet that we're building to make certain that we've got good diversity, good quality customers, and it's good for our operating lessor customers and our syndication partners who are also looking for diversity in the equipment that they buy from us.

Thank you for that. Can you talk a little bit about cash flow? Maybe this is one for Adrian. I know it's a little bit different now that you're investing more and more in the way that you account for your lease fleet. But do you have some thoughts on operating cash flow maybe before that lease (ph) investment -- lease sorry, lease investment this year? And if there will be a working capital releases get through some of these supply chain disruptions that have been sporadic but in material multiple times in the last few quarters? Thank you.

Yeah. We would expect cash flow to be positive for the balance of the year on an overall basis. So a few of the major drivers, syndication activity should generate cash. And you can see we invested in putting a lot on our balance sheet in Q1. That cadence would be different to rest of the year. We would have improved operating results that will also help. And as you mentioned, we would expect to see some working capital efficiencies as we navigate these issues that we had in Q1, which are more short term. We have invested a lot compared to historical periods in working capital as we ramped up and we should start to see some efficiencies just from normal course as well as from resolving some of these sporadic issues that impacted Q1.

Thank you, both.

The next question comes from Matt Elkott with Cowen.

Good morning. Thank you and sorry if my question has been asked as I had some connection issues on my end here. I want to go back to Gunderson. Lorie and Justin and the team, how much of the decision to close the facility has to do with maybe chronic access to labor issues even before COVID? And if that was one of the considerations, can you talk about your access to labor in the Northwest versus in other parts of the country in the Midwest and the South.

Sure, Matt. Thank you for that. I don't think that we are unique in talking about having workforce attraction and retention issues. The Northwest is a little bit different as well. It's not a heavy industrial area. So it's a tough area to attract and retain a workforce. I will say that we do have a very solid and dedicated workforce that many of which have been with us for a very long time. So as I said in my prepared remarks, this was not a decision that we took lightly. We know that Gunderson is something that we've had for all of our existence, right? So this is tough. Our facilities in Arkansas, again, similar to other businesses struggle to attract and retain folks within a very difficult working environment. And so we're thinking about how we make adjustments to where we source folks, how we pay, what our conditions are thinking through the hours in a day that someone works or the fact that more people today want to work part time as opposed to -- sorry, that was -- I'm sure that came through in my voice. I'm old, and it's confusing for me that people have a hard time working a full day. But -- so we're looking at all the different things that we can do, the levers that we can pull to attract and retain a workforce that I think are great family wage jobs. Now I've got some worked up over workforce. I forgot what the rest of your question was.

I just was hoping to get some comparison between access to labor between the different regions. I mean, I think you answered that the Northwest may be a bit more challenging, I guess, than the rest of the country. But I also want to kind of ask you about what’s your -- I know it's difficult to say -- to put a number of capacity -- annual capacity numbers because the cycles differ and the types of equipment produced affects that number. But after the closure of Gunderson, how much annual capacity would you say you would have in the U.S.?

I don't -- I think as we've talked about our capacity numbers, and I don't -- Jeff will have to correct me if I'm wrong, but I don't think that as we've thrown out what I would a theoretic capacity for the North American market, we've probably not been for the last several years, assuming large numbers when it comes to the Portland facility just because we have been operating at a more modest rate. There was one other thing that I thought about in your -- the earlier part of your question and thinking about our decision for ceasing railcar production in Portland. Part of it is also where our customers are and where our competition is. And as we need to be able to be competitive in the broader market, cost-wise for our customers, there has been kind of this transition to the middle part of the country and south which is also very good from a logistics and transportation perspective to get our equipment to the customers that want to use it. So that also weighed into the decision that a location in the Pacific Northwest does have some difficulties as you've seen more and more freight moving to East Coast ports and the like.

Yeah. Makes sense. And then I know most industries are having supply chain issues, but it seems a bit more pronounced in the case of the railcar industry, Lorie. Do you -- I mean, first of all, is that the case? And second, why is that? I mean we've heard that maybe because of a more limited pool of suppliers on the component side. But are there any other factors that are specific to the railcar industry that are making the supply chain issues subside at a slower rate than maybe some other industrial areas?

It is a little bit head scratching. I would say that it's likely because we and some of the others in the rail space have been ramping up production. So we are putting some pressure on that supply chain that they didn't have over the last two years. I think, quite honestly, in the rail freight OEM space, we've been -- overall, I'm sure that my procurement folks are going to kick me after this. But I would say compared to the rest of the country, we haven't had the big disruptions. So I think it's as we and others in the industrial space ramped up over the last four to six months. It's really putting that pressure on that supply chain to be able to be responsive.

Got it. And then just one final question on margins. This is taking a long-term view. All the changes that you're making, Gunderson and then the leasing. Does it change your outlook -- long-term outlook for what kind of gross margin you can get?

I think these are all steps that we need to take on the journey to having solid double-digit low -- in the teens, margins on a regular basis is to look through our organization and determine where we can strain more efficiencies and costs for the business to generate that sort of return. So from my perspective, I and the leadership team, we look across the organization, and we're identifying the areas where we can start to take some action, and we're taking that action. Some of it is going to take a little bit of time. But we'll do our best to be transparent with you and our shareholders about how we're -- what -- the steps that we're taking, but it's all towards that longer-term goal of having those steady margins. And I would say, truly higher highs and higher lows. So having the lease fleet will help, I believe, to take some of the trough out of the low cycles when it comes to railcar manufacturing. Potentially, we have a couple of years here of some steady demand on that side of the business, which will allow us to really look through the operations and see where we can continue to optimize them.

Great. Thank you, Lorie. Appreciate it.

The last question today comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Thanks. Good morning, everyone.

Good morning, Steve.

Hi, Steve.

Appreciate the detail on some of the actions you're taking in the near term. On the last call, you suggested earnings would have maybe a 40% first half, 60% second half weighting. As you think about it now, should we be thinking that's more 25-75, or what do you expect for an earnings cadence for the year?

I think that's more realistic given the performance in Q1.

The 25-75?

Yes.

Okay. And Lorie, you've had to deal with some tough operational conditions for a while. You're obviously taking actions to address that. For 2023, what is -- can you just talk about your priority list? Is it really fixing gross margin first? Is it driving syndication activity or market share? And then second part to that question, maybe you answered this to some degree. But longer term, what do you see as the key to driving shareholder value creation? What's that message that you're pushing to the team?

We're trying to steal our thunder from April, Steve. You all make secrets right now. I think -- I would say, yes, my number one focus is improving our gross margins getting to that steady margin that I know that we can do. And then we will look to how we're optimizing the services side of our business, which -- the biggest piece of that is leasing and figuring out how we do that at a modest pace, balancing it with our customer needs for -- on the syndication side and the operating lessor side, this is something that Greenbrier has done for years. We have been able to manage relationships with a wide variety of customers and do this in a way that I think can be beneficial for our shareholders as well as for our customers. So it's not going to be a revolution. It's going to be an evolution of how we're going to continue to build off of the foundation. Looking at some of the investments that we've made over time are where we have value tied up on the balance sheet and how we can either get that -- those investments on our balance sheet to generate better returns or to offload them and focus on the things that are our priorities.

Got it. Thanks. And I'm sure you'll talk more in April about all that. In terms -- for the near term on the gross margin, what is the biggest bucket of value creation or margin expansion? Is it optimizing the manufacturing or the internal fabrication capacity? Is it just footprint? How much does mix play into that? Like what levers are you pulling first to drive that near-term outcome?

I think definitely, it is the supply chain and in-sourcing some of those vital components that we need to make certain that we are managing those costs. Bill Krueger, who is now running our manufacturing operation has been working closely with the teams on the ground to really think through if we have certain capacity within our operations, are we utilizing our capacity to its highest potential and for the most vital components? And really thinking through that a lot more strategically, particularly as we're building a broader range of products that requires a broader ability to provide those subcomponents.

Do you think you have the manufacturing capacity, the process equipment that you need or would this require investment in machinery to be able to in-source some of that?

It will take some modest investments, but that's part of what's in our guidance right now.

That's in the CapEx right now. Okay. All right. Thanks.

Thank you, Steve.

This concludes our question-and-answer session. I would like to turn the conference back over to Justin Roberts for any closing remarks.

Thank you very much for your time and attention today. If you have any follow-up questions, please reach out to us at investorrelations@gbrx.com. Have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.