Greenbrier Companies Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 5, 2024

There are 12 speakers on the call.

Operator

To The Greenbrier Company's First Quarter of Fiscal 20 24 Earnings Conference Call. Following today's presentation, we will conduct a question and answer session. A listen only mode. At the request of The Greenbrier Companies, this conference call is being recorded for replay purposes. A presentation.

Operator

At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin.

Speaker 1

A conference call. Thank you, Andrea. Good morning and Happy New Year to everyone. Welcome to our call today for our fiscal Q1. A presentation.

Speaker 1

Today, I'm joined on the call by Laurie Tekorius, Greenbrier's CEO and President Brian Comstock, Executive Vice Executive Vice President and Chief Commercial and Leasing Officer and Adrian Downs, Senior Vice President and CFO. Following our update on Greenbrier's performance in Q1 and an update on our outlook for the remainder of fiscal 2024, we will open up the call for questions.

Speaker 2

A presentation. In addition to

Speaker 1

the press release issued this morning, additional financial information and key metrics can be found in a slide presentation a discussion 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 a Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors a discussion that could cause Greenbrier's actual results in 2024 and beyond to differ materially from those expressed in any forward looking a payment made by or on behalf of Greenbrier. And as a reminder, I'd like to invite you to join us for our Annual Shareholder Meeting today at 12 p. M.

Speaker 1

Pacific, a conference call at 3 pm Eastern. A link is available on our website and will go live about 15 minutes before the call. With that, I'm going to hand it over to Lori.

Speaker 3

A Thank you, Justin, and good morning, everyone, and Happy New Year. I hope everyone had a great and safe holiday season. A conference call. And while Monday marked the start of a new calendar year, we're ending the 5th month of our fiscal year. And with the Q1 in the books, a strong financial performance.

Speaker 3

Our fiscal 2024 is off to a great start as we continue to execute our strategy. Our financial a detailed review of our financial results. The performance indicates early progress as we execute Greenbrier's multi year better together strategy. Three fundamental priorities drive this strategy. A discussion of our manufacturing leadership position across geographies.

Speaker 3

The second priority a Q3 of 2019. We will conduct a Q4 of 2019, which ensures we meet our customers' needs, while optimizing our industrial footprint for efficiency and margin enhancement. A 3rd and equally important, we're pursuing disciplined growth in leasing and services. We remain committed to enhancing our manufacturing performance, a quarterly dividend of approximately $1,000,000 while growing recurring revenue and generating tax efficient cash flows through investments in the lease fleet. A detailed work of facility rationalizations in manufacturing and maintenance services that began in fiscal 2023 continues.

Speaker 3

A We'll transform to be simpler and more profitable. Aggregate gross margins and gross margins in a Q1 of 2019 in our manufacturing segment specifically this quarter reflect the strategic push. And while I'm sure everyone on today's call understands this, a presentation. I think it bears repeating that we do not expect progress on our strategic initiatives to be linear. A discussion of our internal schedules and others we're laying the foundation to execute the plan.

Speaker 3

A detailed discussion of our financial results. Our goals target a multiyear completion window and there will be ups and downs, but I'm pleased with our performance at this early stage. A Turning to our results, we generated over $800,000,000 in revenue and aggregate gross margins of 15%, an increase of 250 basis points. This aligns with our target to achieve aggregate gross margin in the mid teens a Q1 of 2019 margins is an excellent start, but it would be premature to declare the mission accomplished a discussion on our multiyear strategy. 1st quarter manufacturing gross margin of 11.1% is an increase of 180 basis additional quarterly earnings per share of our additional cost savings of approximately $20,000,000 per year.

Speaker 3

Our in sourcing initiatives to bring fabrication in house a discussion of our make versus buy strategy is proceeding on schedule. A we expect to achieve our total cost savings targets of $50,000,000 to $55,000,000 from this initiative in fiscal 2025. A discussion of the business, Maintenance Services continues its positive momentum even though wheel volumes were seasonally lower heading into winter. A strong quarter. On a solid revenue base, gross margin remains strong at 14.6%.

Speaker 3

Several initiatives are underway a Q1 of 2019 to continue to enhance this unit's efficiency by improving car flow, material planning and cycle times at all of our facilities. A discussion with our financial results.

Speaker 4

And then as

Speaker 3

Brian will explain shortly, our expanded leasing strategy is gaining traction. This is a critical component of our multi year plan and is expected to results in the doubling of recurring revenues within the next 5 years. The market conditions for Railcar Leasing remain positive, a discussion of our strategy, allowing us to generate compensatory lease originations and renew leases at higher rates. As we continue to grow the lease fleet a significant portion of our business and work towards

Speaker 4

achieving our recurring revenue target,

Speaker 3

we remain disciplined and focused on building a high quality balanced portfolio. A discussion of our Q1 performance maintains the health of our balance sheet, allowing us to invest in our business, while continuing to return capital to shareholders. A this has been our long standing and preferred approach to capital allocation. I'm pleased to report that our Board declared a quarterly dividend a $0.30 per share this week, representing Greenbrier's 39th consecutive quarterly dividend. The broader economy a strong financial performance in the quarter.

Speaker 3

This dynamic and geopolitical strife again commands our attention and concern. For instance, we're closely monitoring conditions at the Southern U. S. Border. While the work performed by our skilled manufacturing and logistics colleagues a so far has successfully avoided severe impacts to Greenbrier, the current migration response is unsustainable.

Speaker 3

A discussion of the company's commitment to the company's commitment to the company's commitment

Speaker 4

to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment

Speaker 3

to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment. A presentation. Collectively, we will ensure policymakers hear our concerns and address impediments to commercial activity and trade at our southern border. A Meanwhile, the economy in both North America and Europe is showing signs of resilience and our outlook remains positive. A strong quarter.

Speaker 3

We expect North America and Europe to continue to see stable demand across railcar types underpinning both new builds and lease renewals. A discussion of our financial results. We have excellent near term visibility for fiscal 2024 and are focused on maximizing our platform's potential a discussion of our multi year targets. We're confident in the long term strategy because it focuses on what we can a strong and does not rely on an optimistic or aspirational demand scenario. I look forward to sharing our progress on future calls.

Speaker 3

A and now over to you, Brian.

Speaker 5

Thanks, Lori. During Q1, Greenbrier secured new railcar orders of 5,100 units a quarterly dividend of $110,000,000 Of these orders, approximately 20% derived from lease originations. A orders continue to be broad based and diverse across most railcar types, except for intermodal, where market a conditions have been soft, but are improving and may provide some upside in future quarters. A discussion of

Speaker 4

the call. As of

Speaker 5

November 30, Greenbrier's global new railcar backlog was 29,700 units valued at 3,800,000,000 a strong and stable, providing significant revenue visibility into 2025. A discussion of the company's financial results. As a reminder, backlog excludes programmatic refurbishment and requalification work, a strong performance which will produce meaningful revenue during the fiscal year. Our commercial performance reflects our leading market position, strong lease origination capabilities and direct sales experience. International orders accounted for 30% of activity in the quarter, a presentation with our financial results.

Speaker 5

Reflecting the continuing momentum in Europe and ongoing strength in Brazil. We have been performing well in Europe and our backlog remains healthy, a Q1 of 2019. Our leasing platform is now fully operational in Europe and our ability a to originate and syndicate leases has been critical to the improved performance of our European manufacturing business. A discussion of our strategy in Europe, where the rail industry enjoys strong secular tailwinds, and we expect a significant contributor to our profitability. Likewise, Lori and I recently visited our Greenbrier Maxian a joint venture in Brazil.

Speaker 5

While unit volumes in South America will always be lower than North America and Europe, a recent stabilization in the rail sector there promises a steady stream of business activity in months to come. A Leasing and Management Services also performed well in the quarter. We are steadily advancing on our stated goal of a quarterly dividend

Speaker 4

of approximately $1,000,000 recurring

Speaker 5

revenue from leasing and management services. Recurring revenue is growing from various sources, including new railcars added to our lease a few key items in the quarter. We grew our lease fleet from about 700 units a 5.2% during the quarter as we fulfill our commitment towards disciplined fleet investment a call of up to $300,000,000 per year on a net basis. As we make this investment during the next few years to expand recurring revenue, a we are focused on railcar types that keep our fleet profile balanced and reduce concentration risk. A I want to emphasize that we will only invest in the right assets with the right lease terms and counterparties.

Speaker 5

A we take this capital deployment very seriously. We will not chase an arbitrary fleet size or value if the underlying assets a detailed review of our financial results. Our discerning approach to fleet composition resulted in a AA credit rating for our most recent ABS offering completed in November. We understand these are the highest ratings ever received in the railcar ABS phase. We issued an aggregate principal amount of $178,500,000 in notes a blended interest rate of 6.5 percent and a 2.5 year call feature.

Speaker 5

The call feature gives us a forward flexibility to respond to lower interest rate environment. Our average interest rate a 4.4% on our non recourse leasing debt is significantly lower than current market interest rates. A We continue to evaluate our financing strategies as we grow our lease fleet to achieve the goal of more than doubling recurring revenue in the next 5 years. At the end of Q1, our fleet leverage was 80%. A detailed review of our financial results.

Speaker 5

We leverage railcar assets at an appraised fair market value, which results in borrowing ratios that are higher on a net book value basis. Our lease renewal rates continue to grow at double digits and we successfully extended lease terms while maintaining a consistently high fleet utilization of 98% in Q1. The leasing market remains robust, characterized by a shortage of the in demand railcar types a high fleet utilization among lessors. Moving in sequence with higher interest rates, our lease rates remain compensatory, a resulting in elevated rates for both new originations and renewals. We have strategically staggered lease durations a significant portion of the financial results to lessen the impact of cyclicality and create opportunities for favorable renewals.

Speaker 5

In Q1, a we syndicated a total of 1300 railcars and transactions with a variety of investors, generating strong liquidity and margins. A the syndication market remains liquid and a strong appetite for the asset class as we are confident in our team and our offering both in North America a discussion of the North American railcar market remains solid. A We expect railcar deliveries to be around industry replacement levels for the next few years with retirements keeping pace. A the supply of available railcars is still near trough levels, which has led to strong lease rate growth, renewals and term length. A We are confident we have the right strategy in place to execute our plan in this environment successfully.

Speaker 5

Now, a discussion of the call over to Adrian, who will speak to the financial highlights for the quarter.

Speaker 6

Thank you, Brian. Good morning, everyone, and Happy New Year to you all. A 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 on our website. A As highlighted by Laurie and Brian, Greenbrier's Q1 performance was strong across all operating segments. A Q1 of 2019.

Speaker 6

The quarter was marked by improved profitability due to the sequential increase in aggregate gross margin percent and operating margin. A discussion of the highlights from the quarter, I will also affirm our fiscal year 2024 revenue and deliveries guidance and provide an update to our gross margin and capital expenditure guidance. Notable highlights for the Q1 a detailed discussion of the company's financial results. We will now begin the presentation of our earnings call. We will now begin the presentation of our earnings call.

Speaker 6

We will now begin the presentation of our earnings call. We will now begin the presentation of our earnings call. We will now begin the presentation

Speaker 4

of our earnings call. We will now begin the presentation of our earnings call. We will now begin the presentation of our earnings call. We will now begin the presentation of our earnings call. We will now begin the presentation of our earnings call.

Speaker 6

We will now begin the presentation of our earnings call. $139,000 per unit. This does not include a few 1,000 orders in the quarter related to programmatic railcar refurbishments, a replay of the call to questions. Deliveries of 5,700 units include 500 units a discussion from our unconsolidated joint venture in Brazil. Consolidated revenue in the Q1 was $809,000,000 a new Q1 record going back to Q1 of 2016.

Speaker 6

Aggregate gross margins increased by 2 50 basis points a strong quarter to 15% and have consistently increased over the past 5 quarters. The margin enhancement can be attributed a broad based improvement across all segments, including improved operating efficiencies, market conditions and syndication activity. A Selling and administrative expense of approximately $56,000,000 declined sequentially, primarily due to lower employee related costs. A quarterly tax rate of 24% was lower than the 4th quarter and benefited from net favorable adjustments related to our foreign subsidiaries. A net earnings attributable to Greenbrier of $31,000,000 generated diluted EPS of $0.96 per share.

Speaker 6

A and finally, adjusted EBITDA for the quarter was $93,000,000 or 11.5 percent of revenue. Greenbrier's Q1 liquidity remains solid at $663,000,000 consisting of cash of $307,000,000 and available borrowings of $356,000,000 which we believe to be an ample level as we conduct our day to day operations. A Although our cash flow from operations reflected cash usage of approximately $45,000,000 our cash balance increased by nearly $20,000,000 in the quarter. A the increase was primarily attributed to proceeds from the issuance of debt, net of repayments. A Greenbrier's balance sheet continues to be strong and we will remain prudent with how we manage our capital structure and balance sheet.

Speaker 6

A reconciliation of our 10 Q a discussion of the financial statements under notes payable and revolving notes. In February, we will retire the remaining portion of our senior convertible note a issued in 2017 of approximately $48,000,000 This is expected to be retired using cash. A as Brian mentioned in his commentary, we successfully issued our 2nd ABS offering with a AA credit rating. A as a reminder, leasing debt is non recourse to Greenbrier and we expect this to fuel the growth of our lease fleet over the next few years. A We are focused on reducing and retiring our recourse debt as cash flow has improved.

Speaker 6

A discussion of the company's commentary, Greenbrier's Board of Directors declared a dividend of $0.30 per share. Based on yesterday's closing price, our annual dividend yield a presentation of approximately 2.7%. Additionally, we repurchased nearly 38,000 shares a cash flow for just over $1,000,000 in the quarter, leaving $45,000,000 remaining of authorization under the current share repurchase program, a discussion of the company's financial results, which extends through January of 2025. Including activity from the Q1, Greenbrier has returned over $500,000,000 of capital to shareholders a dividend and share repurchases, something our Board and management team remain committed to. We believe this is a great way to create a strong quarter of fiscal 2020, and we'll continue to periodically evaluate increases to our quarterly dividend and we'll opportunistically repurchase shares.

Speaker 6

Turning to our guidance and business outlook and based on current trends and production schedules, we are affirming Greenbrier's fiscal 2024 revenue and delivery guidance, but updating our gross margin and capital expenditure guidance. A discussion of our guidance includes deliveries of 22,500 to 25,000 units, which includes approximately 1,000 units from Greenbrier Maxion in Brazil revenues between $3,400,000,000 $3,700,000,000 selling and administrative expense is expected to be a reconciliation of $220,000,000 to $230,000,000 Capital expenditures has been updated. Gross investment of a $350,000,000 in leasing and management services includes fiscal 2024 capital expenditures and transfers of railcars into the lease fleet, a which were produced and held on the balance sheet in 2023. Proceeds of equipment sales are expected to be approximately CAD 85,000,000 a And capital expenditures in our Manufacturing segment are expected to be around $165,000,000 which is primarily for our in sourcing initiatives, a consolidated gross margin percent outlook a discussion of the financial results and expect full year consolidated gross margin percent to increase to the low to mid teens. I'm very pleased with the performance of our Q1 results.

Speaker 4

A discussion of our outlook for

Speaker 6

fiscal 2024 is positive with earnings expected to grow. And now we will open it up for questions.

Operator

A question and answer session.

Speaker 4

A question and

Operator

answer session. And our first question will come from Justin Long of Stephens. A please go ahead.

Speaker 7

Thanks and good morning. So maybe to start with the a question on manufacturing gross margin. It was encouraging to see the sequential improvement, but I was wondering if you could share any thoughts about a question and answer session. Where we go from here sequentially over the remainder of the year and you addressed Eagle Pass for a moment earlier, but any thoughts on the potential impact we could see from the activity across the border here in the fiscal second quarter?

Speaker 3

A Thank you for those questions, Justin. We don't give quarter by quarter a strong margin guidance. As I said in the prepared remarks, I'm very pleased with the results that we had in our Q1. A discussion with the company's comments and I know that the team is working to continue to build on those results. I've been in this business for too long to a Q2 of fiscal Q2 which incorporates a discussion of the call.

Speaker 3

The holidays takes a couple of weeks out of our typical production activity. So that can be a little bit of difficulty or a little bit of a challenge, but like I said, the team is working very hard to build on the achievements in the Q1. Talking about the border, while we have been a successful and not having a material impact to our deliveries. I would say that it's absolutely because of a discussion of the men and women that we have working in our manufacturing and logistics operations who are a discussion of the railroads that are picking things up, thinking about alternatives, making certain that we get our products a position to be positioned appropriately and it's not just the outbound side of our produced railcars, it's the inventory coming in. So I am really pleased to see how a discussion of the company's press release.

Speaker 3

Others in our industry as well as broader beyond the rail freight industry are really putting the pressure on our elected officials a discussion of the discussion of the a discussion of the question and answer session. And not really giving good feedback as to when it might open or how it what it's going to take. If there were to be a prolonged shutdown. It certainly does take time to get everything moving again, whether it's a discussion of our press release and then we'll discuss our press release and then we'll discuss our press release and then we'll discuss our press release and then we'll discuss our press release

Speaker 4

and then we'll discuss our press release and then we'll discuss our press release and then we'll discuss our press release and then we'll discuss our press release and then

Speaker 3

we'll discuss our press release and then we'll discuss our press release and then we'll discuss our press release and then we'll discuss our press

Speaker 4

release and then we'll discuss

Speaker 3

our press release and then we'll discuss a How long they are as to what that impact might be. But I'm going to take again this opportunity to publicly thank the men and women that are working in our procurement and our logistics areas for the hard work that they're doing to keep our products

Speaker 4

flowing. A

Speaker 7

Okay, great. And maybe to follow-up on the margin question. Adrian, you said you're now expecting consolidated gross margin a to be in the low to mid teens for the full year. The Q1 was 15%, right at the midpoint of mid teens. A So that kind of implies that we're going to be flat to down sequentially from here.

Speaker 7

But when I look into the commentary, a it sounds like you're positive that there's the opportunity for some self help margin improvement going forward. So is there a headwind that we should be mindful of that could offset some of that, whether it's mix or something else.

Speaker 1

A I think we do have some mix. Sorry, this is Justin. I'll jump in briefly. I think we do have a little bit of mix in Q2, but ultimately, we are seeing a a positive trend on margin to the rest of the year. That's why we did increase our kind of full year guidance and a We do have very good visibility and a lot of this is this is a year of execution of blocking and tackling.

Speaker 1

So

Speaker 4

a I think part of this is, we are bullish

Speaker 1

on our performance, bullish on our margins and a but also I guess I would say if we came out and said we're going to be at 20% margins for the rest of the year, you guys might not necessarily buy that. So we're trying to a find a path that makes sense without necessarily creating too much of a leading with our channel effectively.

Speaker 3

Have balanced expectations as opposed to Being overly aggressive or overly conservative.

Speaker 1

It's a much better way to say it.

Speaker 6

You're right.

Speaker 7

Got it. Thanks so much for the time. Congrats on the quarter.

Speaker 4

A Thank you.

Operator

The next question comes from Matt Elkott of TD Cowen. Please go ahead.

Speaker 2

A Good morning. Thank you. Given the strong performance in the Q1, do you guys still see the cadence as being 45% in the first half,

Speaker 3

a Yes, I think that that is it's very close to fifty-fifty, but I think 40five-fifty 5 is still a good a glitch.

Speaker 2

Okay, good to know. And then, Laurie, maybe if you can give us some more insight on the orders in the a question and answer session. Brian, the types of cars, the types of customers, lessors versus shippers and did it include any a large multiyear contracts by lessors and also the inquiry in order activity post quarter end.

Speaker 5

Yes. No, thanks, Vince. It's Brian. The order book continues to be extremely diverse. A number of covered hopper cars, metal cars, flat cars, gondolas, auto.

Speaker 5

A it's really very broad based. There are no multiyear orders in our really in our backlog a discussion of the company's presentation. And so it truly is shippers that have slots a discussion that we are going to deliver to. As far as the leasing origination mix, it's about 20%. A And how was post quarter earnings activity or order activity?

Speaker 5

Very good. Yes, stronger than normal. Usually, you have a quite a bit of a quiet cycle during the holidays. And quite frankly, we're off to a pretty good start in Q2 as well.

Speaker 2

That's good to hear. And then the ASP of the orders went up pretty nicely, I think 12% or so, if you compare this quarter to the last quarter. Can you talk about that?

Speaker 6

A lot of that's mix.

Speaker 5

Honestly, that's really what drives it.

Speaker 7

Okay.

Speaker 2

Great. Thank you very much. We appreciate it.

Speaker 4

Thanks, Matt. Thanks, Matt.

Operator

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

Speaker 8

A Hi, this is Nathan dialing in for Ken. Congrats on the quarter. I guess, I'd like to just maybe start a little bit a discussion on Adrian's comment about that continued strength in the syndication market and how the team is seeing that opportunity trend a Q2 and also maybe what you're assuming in terms of syndication activity for the rest of the year when you're talking about low to mid teens margin target?

Speaker 4

A I was going to

Speaker 1

say, so I think thinking about the syndication market, it continues to be strong. We continue to take a leasing lease, we continue to have liquidity in the market and work with our syndication partners. A we see a relatively stable cadence throughout this year, kind of quarter to quarter to quarter and are just a discussion

Speaker 4

of the company's commitment to the company's commitment to

Speaker 1

the company's commitment to the company's commitment

Speaker 4

to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment to the company's commitment

Speaker 1

to the company's commitment to the company's commitment to And what was your second question, Nathan?

Speaker 8

Yes, just what you're assuming in terms of I think you just answered that, a What you're assuming regarding syndication in that low to mid teens margin target? And would I be right in assuming that's going to be an equal cadence over the year?

Speaker 1

Well, what I would say right now is we do see it being relatively stable throughout the rest of the year. It's a Things change and that's the biggest thing is we will continue to make decisions that benefit the business and ultimately our customers and shareholders. And Sometimes that may mean things move around a little bit, but you're getting our latest greatest snapshot.

Speaker 8

A Got it. Thanks, Justin. And maybe just a quick follow-up on the cash return side of the equation. I understand that a The team has some pretty ambitious targets regarding lowering leverage as well as a capital plan. A Maybe just could you kind of remind us again on what the cash priorities would be when you're thinking about investing in early fleet, a leverage target and shareholder returns?

Speaker 1

Yes. So we're going to start with the basics of a discussion of our manufacturing business and maintenance business, with the in sourcing initiatives and other activity in maintenance. A we are continuing to invest in Europe as well. And then you have our leasing business, which is a large number from an optics a But again, bear in mind that we do leverage and so it's a much smaller equity piece. And then you think about a safeguarding our dividend, we do look at periodic increases to that.

Speaker 1

We did increase it last July. So, it is not a on or off the table explicitly, but we do look at that pretty consistently. And then I would say that we do look at share repurchases, opportunistically, given the ongoing volatility in our share price and kind of what we see going forward. I think a Growth in the business is not necessarily off the table. It's just that we are focusing on making the most of the current platform we have before we a kind of move back into some type of an expansion mode.

Speaker 1

And I don't know if

Speaker 3

One I would say is the one thing that I'd emphasize at least on the investments that we're making, particularly a significant restructuring here in North America is those are generating, we expect a return of $50,000,000 to $55,000,000 on an annual savings.

Speaker 1

Understood, yes. Yes.

Speaker 3

So I think that's a pretty darn nice return.

Speaker 6

And then we're also focused on reducing our recourse stash.

Speaker 5

Thank you. That's perfect. Yes.

Speaker 8

A Great. Thank you so much.

Speaker 4

Thanks, Nathan.

Operator

The next question comes from Allison Poliniak of Wells Fargo. Please go ahead.

Speaker 9

Hi, good morning. I a Q and A session. I want to get your thoughts on the latest storage data. I know 1 month doesn't make a trend, but we did start to see some cars moving back into storage a little bit more than seasonality. Are those just specific card types that you are less worried about or you're not seeing the orders or just any how you're thinking about that number?

Speaker 5

Yes. Allison, this is Brian. A lot of that is seasonal when you start to look at some of the trends. A And also keep in mind that as the plastic pellet car fleet expands, a lot of those cars are storage vessels that are used And as that grows, the ARCI continues to count those as stored vessels that they're beyond 30 days. A So a lot of that number is a little bit skewed by that as well.

Speaker 5

But it's really seasonality And the influx of pellet cars is driving that number artificially up a little bit.

Speaker 9

That's helpful. Thank you. A And then can you maybe talk about the absolute lease trends? I know the lease rate trends, the renewal rates are certainly high. But is are you seeing some stability there?

Speaker 9

Is the lease rate absolute lease rates still going up in specific car types? Just any color around that.

Speaker 5

Yes. We're still seeing lease rates continuing to go up fairly a sizable amount of our lease renewals. Keep in mind, some of those leases were done a couple of years ago, and so they're catching up to today's rates. A We're still seeing deep into the 20%, 25% increases on cars across the board. As as far as if you were to look at point to point, maybe the last few months, we're continuing to see increases even on some of those as well.

Speaker 5

So The trajectory is still lease rates are still appreciating.

Speaker 4

Great. Thank you. A discussion with you.

Operator

The next question comes from Bascome Majors of Susquehanna. Please go ahead.

Speaker 10

A To follow-up on the leasing question, can you talk a little bit more about the secondary market? How you feel about valuation? John, any comments on the depth and types of buyers that you're seeing, whether or not you're participating in the deals? Thank you.

Speaker 5

So we are participating on a very selective basis in the secondary market. A We believe that a lot of the portfolios are overvalued, continue to be overvalued. So we're very selective in which transactions a that we engage in. And we continue to see a lot of transactions in the marketplace. So there's still a lot of trading going on, but yes, we're being very, very selective Bascome in that arena.

Speaker 3

A And I would say one of the nice things about this being such a broad based demand market right now is with the deals that we're originating that we can build, a We've got that diversity that we don't we're going to pay attention to what's going on in the secondary market, but it's got to be

Speaker 10

Can you talk a little bit about the CapEx reduction in maintenance and whether that's deferral or a change in some of the views On investment there?

Speaker 3

I think it's just timing, the timing of actual a discussion of the

Speaker 2

company's discussion. And some of

Speaker 3

it is reviewing where do we need to make the investments and other is just the timing of when is sometimes when we go into a Q and A session. To the beginning of the fiscal year, we are bright eyed and bushy tailed and we think we can get 101 things done in 20

Speaker 10

And lastly, you have a The remaining piece on one of your convertibles is due pretty soon here. Can you talk about your intent on the balance sheet? A Will you use convertibles in the future? Should we expect you to shift more and more to a secured funding model given the success you've had there? Thank you.

Speaker 6

I would say as for leasing, we will continue to look at our options a as they present themselves and as we need funding sources to continue to grow the portfolio. In terms of our recourse debt, Our focus right now is repaying. Again, whenever we would look to refinance, we would look at our options. I would say a For me personally, the convertible market has been a good one for us over additional cash flow from the year. We do have this stub coming up shortly that we're expecting to repay in cash.

Speaker 6

So I don't know if that gives you enough color.

Speaker 10

Do you feel like you need more recourse funding to take care of capital and buyback needs or do you think that's something we just pay down and wait to a more opportunistic need for capital there?

Speaker 3

A I think it will wait. I mean, I think we're going to pay down this convert and the focus is on reducing some of the recourse debt. A the non recourse will adjust depending on our investments in the lease fleet. And then if there's an opportunity that comes up that needs a

Speaker 4

To be a

Speaker 1

specific transaction or something, we'll deal with that one across that.

Speaker 6

Yes. And we've got a very nice ladder a maturities if you go through our various outstanding debt facilities.

Speaker 10

Thank you for the time.

Speaker 4

Thanks, Bascome.

Speaker 3

Thanks, Bascome.

Operator

The next question comes from Steve Barger of KeyBanc Capital Markets. Please go ahead.

Speaker 4

A question and answer session.

Speaker 11

Thanks. Good morning. I know you wanted to avoid quarterly margin walk, but the press release did mention improved operating efficiency as the manufacturing gross margin driver. A What efficiency specifically were the swing factor? And I'm trying to just get to was the increase driven more by mix or one offs or some more durable factors.

Speaker 1

I would say no one offs. This was a combination of a good mix. This is a combination of continuing the momentum that we saw, primarily the last 6 months of last a fiscal year. And also part of that is, we did a discussion of our capacity in North America, and so we're seeing some of that flow through. And then we are starting to see some of the benefits of the in sourcing initiative a discussion in Mexico as well.

Speaker 1

So it's a combination of factors that falls under operating efficiencies, but a We do not expect really any of these to go away necessarily.

Speaker 11

Understood. And when you say the rationalization, That's the $15,000,000 to $20,000,000 that you're getting from the marine and the foundry sale?

Speaker 1

Correct.

Speaker 4

Got it.

Speaker 1

I think we Laurie spoke to you, but we kind of landed on about $19,000,000 to $20,000,000 of a Realized savings is what we expect going forward.

Speaker 11

Got it. And I know backlog excludes the a rebuild and refurbishment activity, but how much revenue do you have line of sight to there? Is that tens of 1,000,000 or 100 of 1,000,000? Can you frame that? A

Speaker 5

Yes, it's Brian, Steve. It's tens of millions. We've in Q1, there were several 1,000 cars that we acquired. The ASP on those are probably about half of what a new car would be just from a high level perspective, but the margin percentages are much stronger.

Speaker 11

Yes. So that's part of that mix benefit?

Speaker 5

Correct.

Speaker 11

A And Brian, really great to hear you talk about the disciplined approach to leasing deals. As I think about the 6.5% ABS a For the leasing business, what hurdle rate or weighted average cost of capital are you using in your assumption to vet deals and make decisions?

Speaker 1

A So we're using a kind of a cost of capital that is probably around kind of 9% to 10% for these activities. And so it's one of those where as our Cost of debt has been increasing over the last as everybody's cost of debt has been increasing, we are a We're seeing a compensatory increase in our lease rates to make sure that we're having this flow through appropriately and that we are generating the returns that We expected to when we first took this trip

Speaker 5

2 years ago, 2 to 3 years ago.

Speaker 11

Yes. Okay. And one quick one, final one. Which of your business units have the most open capacity and I'm just trying to think about where we could see better asset utilization or operating leverage across the portfolio. A

Speaker 1

I would say probably, ironically, Brazil has the most open space in our fiscal year at this point, and that's a 100 of units, not 1,000. Well, it's still 100. Otherwise, we do have a little bit of open space in July August. A And then at that point, I really see this as a year of execution and we're in a very good shape to be able to control our own destiny.

Speaker 3

And I would say the other thing that we're doing, I believe, is a very nice job on is being disciplined. So not only are we being disciplined in how we think about the investments we're making in the lead fleet on our balance sheet, but we're also being disciplined in our production rates and really thinking through a discussion of how the ramping up or having to slow down impacts manufacturing efficiency and to the extent that a strong commercial activities can keep that activity balanced. We're very happy to just a continue having that balance move throughout the organization.

Speaker 11

Very good. Thanks.

Speaker 4

A Thank you, Steve.

Operator

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

Speaker 3

Happy New Year again, everyone. A Thank you for participating in our call today. As Justin mentioned at the top of the call, we do have our Annual Shareholder Meeting at a conference call at noon Pacific, 3 pm Eastern Time today. So please join in. And if you are a shareholder and you haven't voted, a Please vote.

Speaker 3

We look forward to talking to you in the coming months.

Speaker 4

Thanks, everyone. A conference call.

Operator

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.

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Earnings Conference Call
Greenbrier Companies Q1 2024
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