Hello, and welcome to the Greenbrier Companies Second Quarter of Fiscal 2024 Earnings Conference Call. Following today's presentation, we will conduct a question-and-answer session. [Operator Instructions] At the request of the Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin.

Thank you, Gary. Good morning, everyone, and welcome to our second quarter of fiscal 2024 conference call. Today, I'm joined by Lorie Tekorius, Greenbrier's CEO and President; Brian Comstock, Executive Vice President and President of The Americas; and Adrian Downes, Senior Vice President and CFO. Following our update on Greenbrier's Q2 performance and an update on our outlook for the remainder of fiscal 2024, 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. 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 2024 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. You will also notice that today, we will refer to the word recurrent revenue throughout our presentation and comments today. Recurring revenue is defined as leasing and management services revenue that excludes the impact of syndication activity. And with that, I will turn it over to Lorie.

Thank you, Justin, and good morning, everyone. Greenbrier once again delivered strong performance as we move through our fiscal year. We are seeing operating efficiencies continue to improve, and we are progressing on our organization-wide initiatives. We have good momentum as we head into the second half of our year and beyond. We remain confident in Greenbrier's multi-year Better Together strategy and the three fundamental priorities underlying it. As a reminder, first is maintaining our manufacturing leadership position across our geographies. Second is meeting our customers' needs while optimizing our industrial footprint for efficiency and margin enhancement. And third is the pursuit of sustained, disciplined growth in leasing and services. Through Better Together, we are committed to enhancing our manufacturing performance while growing recurring revenue and cash flow by investing in the lease fleet. Turning to our results. We generated over $860 million in revenue and earnings per share of $1.03. A consolidated gross margin of 14% represents our second consecutive quarter of mid-teens margins. It reflects solid operating performance in manufacturing and leasing and management services, partially offset by lower wheelset volumes in maintenance services due to a milder winter. Last quarter, we said that one quarter of mid-teens margin was a great start towards our long-term strategic goal. It is still not a trend. We are continuing to work on facility rationalizations in manufacturing and maintenance services that commenced in fiscal 2023, advancing our make versus buy strategy and remaining focused on enhancing margins. We also continue our long track record of product innovation while incorporating sustainability into our designs. As you might recall in 2021, we introduced our high-strength steel gondola. In Q2, we successfully launched our ultra high-strength gondola. The gondolas used an innovative formula for high-strength, lighter-weight steel, reducing each gondolas unloaded weight by up…

Thanks, Lorie, and good morning, everyone. During Q2, Greenbrier secured new railcar orders of 5,900 units worth nearly $690 million. Demand continues to be broad-based and diverse across most railcar types. As of February 29, Greenbrier's global new railcar backlog was 29,200 units, valued at an estimated $3.6 billion. Backlog continues to be stable, providing significant revenue visibility well into 2025. Our commercial performance reflects our leading market position, strong lease origination capabilities and direct sales experience. International orders accounted for about 40% of the activity in the quarter, reflecting the continuing momentum in Europe and Brazil. We have been performing well despite a challenging backdrop in Europe, and our backlog remains very healthy, thanks to a broad portfolio mix. In Europe, volumes through our leasing distribution channel continue to grow. Our ability to originate and syndicate leases is critical to the long-term performance of our European manufacturing business. We remain excited about our opportunity in Europe, where the rail industry enjoys compelling secular tailwinds. We delivered 5,600 railcars to customers in Q2, roughly the same as last quarter. We increased the midpoint of our delivery and revenue guidance, indicating that deliveries will be weighted to the second half of the year. Second quarter gross margins of 10.8% declined slightly from Q1, but still improved by 380 basis points compared to the second quarter of last year. While we are working on numerous activities to optimize manufacturing efficiency, several efficiency gains we have made over the last 12 months are being sustained. Expansion of in-house fabrication for basic primary parts and subassemblies as part of our make versus buy strategy remains on track with the full benefit from in-sourcing expected to be realized by the middle of fiscal 2025. Leasing and Management Services also performed well in the quarter. We…

Thank you, Brian, and good morning, everyone. Before moving into the highlights of the quarter, I'd like to remind everyone that quarterly financial information is available in the press release and supplemental slides on our website. Greenbrier's Q2 performance was robust in our Manufacturing and Leasing segments as highlighted by Lorie and Brian in their remarks. After covering some of the highlights in the quarter, I'll provide an update to our fiscal 2024 guidance. Notable highlights for the second quarter include diverse new railcar orders of 5,900 units valued at nearly $690 million, the second highest over the past two years. Deliveries of 5,600 units include 300 units from our unconsolidated joint venture in Brazil. Consolidated revenue of $863 million grew sequentially due to a change in product mix, increasing manufacturing volumes and growth in our Leasing and Management Services segment. Aggregate gross margin percent was 14.2%, resulting primarily from product mix, growth in the lease fleet and higher lease rates. Selling and administrative expense of approximately $64 million increased sequentially primarily due to higher employee-related costs. Earnings from unconsolidated affiliates of $4 million more than doubled from the first quarter primarily due to higher earnings from our Brazilian joint venture, which are expected to moderate. Net earnings attributable to Greenbrier of $33 million generated diluted EPS of $1.03 per share. And finally, EBITDA for the quarter was $95 million or 11% of revenue. As we look to liquidity, Greenbrier generated positive operating cash flow of over $99 million in the quarter, resulting from strong earnings and a positive net change to working capital. Additionally, Greenbrier's Q2 liquidity remained solid at $581 million, consisting of $252 million of cash and available borrowings of $329 million. Other notable financing items in the quarter include the retirement of the remaining $48 million…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Justin Long with Stephens. Please go ahead.

Thanks. Good morning. And Adrian, congrats.

Thank you very much.

So maybe to start with a question on the gross margin outlook. You reiterated that outlook for the full-year, the low to mid-teens, but through the first couple of quarters, we're tracking at the high end of that range. And the guidance also implies that production levels in the second half will be higher than the first half. And I would think that would create some positive operating leverage. So is there anything that you would kind of point to that could drive a sequential moderation of margins? Or do you feel like the higher end of that gross margin outlook is most reasonable as we sit here today?

So I'll give a couple of brief comments. We're excited about the progress we've made for the first half of this year. We're excited about what we see in the second half of the year. So I think that we're going to continue the steady progress. We're mindful that we have to put one foot in front of the other every day to move forward, and that's what we're doing. And I think the last six months or two quarters are showing others that, that's what we're capable of, and I expect us to continue on a modest trajectory.

Okay. Got it. And maybe for my second question, I wanted to ask about orders and see if you could provide any additional color on how orders progressed through the quarter month-to-month. I know there can be some seasonality around year-end. And then anything you can share on the third quarter thus far and what you've seen in order and inquiry levels relative to 2Q?

Thanks, Justin. It's Brian. It's a good question because, as you know, coming out of the holidays, typically, it's a little bit slower, and the cadence is pretty much in line with your expectations. We came out of the holidays. People are now back doing their jobs. And what we saw through the quarter is a progression of increased orders, particularly in North America as the quarter progressed. I would say that this quarter is off to a very strong start as well. So pipeline is still solid. Visibility is still robust, and the car types are quite diverse.

Okay, great. That's good to hear. I appreciate it.

The next question is from Matt Elkott with TD Cowen. Please go ahead.

Thank you. Good morning. Staying on the order question, Brian. It's nice to see a solid number for the quarter and that the activity is still strong in the third quarter. The ASP declined by decent amount, I think, 16% Q2 versus 1Q. Is that a function of the international portion being higher this quarter than last quarter? Or is there anything else in there?

It's a little bit, Matt. Yes, it's a little bit of everything. At the end of the day, it's mix as usual, but also the mix of international orders has some headwinds to the average ASP as well. However, from a pricing perspective, what I can give you is that nothing has really changed in the industry. It's still very disciplined. And we're seeing – we're still seeing good pricing in the market.

Okay. That's good to hear. And then staying on kind of the mix question, but going to production, the benefit of product mix in manufacturing for revenue. Is that going to turn into a headwind going forward and thus the lack of what one would expect higher margin than you're guiding?

So I think, Matt, we don't expect to see a material shift in our mix at this point. What we would say is we are – the reason we increased the bottom end of our range is we see more upside over the back half of this year. And part of this is just probably being aware that we are living in a very fluid time, fluid economy. And while we do have very good visibility in manufacturing, just trying to make sure that we have a little bit of caution in our remarks at times and in our outlook. One thing we continue to learn is that there is – this is a very fluid world, a very fluid economy. And what we see is very, very great outlook, strong orders, strong backlog, great momentum in manufacturing and production. But we – I guess we're just trying to make sure that we are not going to get too far out over skis and overpromise. But at this point, I'm looking at Lorie and Brian right now as we're almost – or effectively a month into our Q3, and we don't see any significant changes from our trajectory.

And Matt, maybe just to add, while we love having a big backlog, solid gives us the ability to plan our production lines and be very efficient. At the same time, we are investing particularly in Mexico with our in-sourcing project that we'll continue to add to efficiencies in our cost, which will enhance our margins.

Okay. Got it. And Lorie and Justin, you guys alluded and Brian alluded to Intermodal possibly starting to recover late this calendar year. Those are lower ASP cars, but can you talk about the margin effect? Would they be margin dilutive? Or are they margin neutral, even though they are lower ASP?

I would say they're either margin-neutral or their margin benefit depends on. But so you're right off the topline, but we would expect to maintain the margin. And actually, I think now that I'm quickly thinking through math in my head, a lower sales price with good margin dollars should be a benefit to margin percentage.

Got it. Great. Yes. Thank you very much.

The next question is from Harrison Bauer with Susquehanna Financial Group. Please go ahead.

Hi. This is Harrison on for Bascome Majors. Thanks for taking my questions today. Lorie and Brian both mentioned the milder winter affecting the maintenance business, but now that's been revenue dropping for three quarters sequentially and then profits have dropped the last two, could this be a broad cyclical adjustment or maybe customers – specific customers pulling back the use of their network? And then when would you expect stabilization and maybe what some of your trajectory for the maintenance business going forward?

Hey, Harrison, this is Justin. Good to hear from you today. I would say that actually this business has always had some seasonality and cyclicality, so that you see a run-up in our fiscal Q2 in the winter and then a further step up in our fiscal Q3 in the spring because the winter does drive volumes in the wheel business and then there's a spring restocking and then Q4 and our fiscal Q1 definitely have some, I would say, more normalization. So we see this as a broader – this isn't a change in the business, this is more of just the normal seasonality we see in the winter time, didn't manifest this year. So it's not a big cyclical shift in the business. It's more of just – no things did not manifest as they historically do. And we are moving into our Q3 and undertaking various remedial actions to kind of make sure that our volumes are going to manifest as expected, and that we're, I'd say, managing the cost structure and overhead as proactively as possible. I don't know if there's anything else you'd like to add, Brian, on that.

No, I think you hit it perfectly, Justin. The seasonality typically is over two, two and a half quarters. We're already seeing that moderate as we move into this next quarter, and we're not projecting any major shortfalls moving forward in that business.

Thank you for that. And for my second, now that the North American manufacturing production rate and margin profile seems to be stabilizing with solid order recovery sequentially. Can you share some updated thoughts on what your ultimate margin range you'd expect to generate manufacturing with a mid-cycle backdrop? And then from where we sit today, if orders are stable, would you expect a higher or lower margin maybe just directionally for fiscal 2025? Thank you.

Great question, Harrison. I would say that if I look out into 2025, and we have stability and the kind of visibility that we have right now, I would expect to be at the upper end of the range that we provided. I know that the men and women that are working specifically within our manufacturing organization as well as our commercial organization. We're always finding ways to improve the throughput so that we can drop more of the revenue through some margin and to the bottom line.

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

Great. Good luck to Adrian and congrats on the team on building the backlog. But maybe if I can, Lorie, unpack that margin – your multiple margin outlook a little bit better. I guess, near term, I know you just gave a long-term 2025, but given your low to mid-teens outlook, are you still expecting manufacturing margins to stay at double digits here for the second half? And then do you expect to see maintenance margins. I didn't quite get the answer there. Are you expecting them to return to double digits? Or maybe you can give your thoughts on that.

Thank you, Ken. I hope I didn't misspeak, but we are not expecting low to mid-teen margins. We're expecting mid-teens margins with the expectation that we will continue marching through this fiscal year on a solid trajectory.

And on a consolidated basis.

And on a consolidated basis, yes, thank you, Justin. From the Maintenance Services business perspective, we do – as Brian said, we're taking a number of actions to think about how we're running that business, how we're thinking about, how we schedule equipment into those shops to strain efficiency. That's part of the reorganization of some of our activities and combine some of our operating resources around engineering, quality and things like that, so that we can take the strengths that we have in our manufacturing operations and share those more broadly with our rail services group and vice versa, take some of the strengths of what we been able to do in those repair shops and share those with our manufacturing facilities. So I would say we do expect in the third quarter, the [indiscernible] margin and we expect to continue on the overall path for consolidated margins to improve.

And if I could just draw a firm line under your manufacturing question, Ken, we do not anticipate manufacturing margins going backwards much less dropping back into the single digits at this point on a gross margin basis, just to be very clear about that.

Thank you, Justin.

Very helpful. And then Lorie, if I can revisit – I think it was maybe Matt's first question on the ASP decline. I guess if I just look at the backlog, total revenue per ASP per car, right, in terms of your total backlog, it fell, as you mentioned. Is that – I just want to revisit, is that just a mix issue in terms of what you're selling versus anything going on in the industry? I just want to clarify that one answer there.

So it's – sorry, you were asking, Lorie, but I have a hard time not talking. So it's a combination of mix. And then there is some as you're well aware, we do have the ability to escalate and deescalate raw input costs on our backlog. And so as there is some moderation on our input costs, primarily steel, steel surcharge and whatnot, that pricing comes down a little bit, too. The piece to really reiterate is that on a core pricing basis, the pricing that drives profitability and on lease rates, that is being disciplined, that is stable to up kind of across the various car types.

All right. That's helpful. Oh, go ahead.

I said, well said, Justin.

Great. I appreciate your time and thoughts. Thanks guys.

The next question is from Steven Barger with KeyBanc Capital Markets. Please go ahead.

Hey guys, good morning. Looking at Slide 12, with the fleet levered to 77% of book value, do you expect incremental debt from here to primarily just fund additions to the lease fleet at that ratio plus or minus?

Yes.

And is lease fleet leverage the primary metric that you're focused on going forward? Or is there a net debt-to-EBITDA target for the company. I'm just trying to think how you're changing your mindset to think about the balance sheet.

Well, so I would say that as we think about our lease fleet and the leverage associated with that, as Brian had talked about, we're very disciplined about what we're putting on our balance sheet and then we want to leverage it appropriately locking in interest rates, thinking about the term, thinking about the conditions. I think the team has done a really of – being in the market at the right time and having the right sort of flexibility in the type of debt that we put on our balance sheet. We'll take into consideration the market as to what's going on at that point in time as to what's the right debt. I think with the cash flow that we'll be generating from the leasing business as well as the margins in our other businesses, we would expect to be paying down some of our corporate recourse debt over time.

Okay. A couple of more leasing questions. The Slide 10, I think, says average term is 4.2 years. What is that for recent renewals?

So most of the renewals are coming in substantially longer. We're seeing five to seven years on average. That's what's bringing up. As you look quarter-over-quarter, you'll notice that it brings it up. But it takes a lot of renewals to move it incrementally beyond the 4.2 years. So – but most of the renewals are kind of coming in at the five to seven-year range.

Got it. Thanks. And I know the lease fleet is still relatively small but growing, it is obviously a focus initiative for you. Do you anticipate putting out a lease renewal index similar to the LPI or the FLRD?

We were just talking about that the other day and trying to figure out what acronym we would come up with. Yes, [indiscernible] that, but we don't have anything to unveil today.

Okay. Great. Thank you.

Steve, this is Justin real quick. To answer the question, I know you usually ask is we do expect the back half of the year to be stronger from an operating cash flow perspective, and then that will also generate some free cash flow that we can deploy into delevering and other aspects of our business.

I appreciate you anticipating that for me. Well, and that's good to hear. I look forward to seeing that positive free cash flow. Thanks.

Definitely.

Thanks Steve.

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

Thanks, sir. I appreciate everyone's time and attention. I know Justin will be speaking with some of you later today. Thank you and we look forward to sharing progress in the future.

Thanks, everyone.

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