The Greenbrier Companies, Inc. (NYSE:GBX) Q2 2024 Earnings Call Transcript

The Greenbrier Companies, Inc. (NYSE:GBX) Q2 2024 Earnings Call Transcript April 5, 2024

The Greenbrier Companies, Inc. beats earnings expectations. Reported EPS is $1.03, expectations were $0.86. GBX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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.

Justin Roberts: 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.

Lorie Tekorius: 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 to 15,000 pounds. We also successfully constructed and tested a new 89-foot slab tilt flat car built for heavy industrial applications as well as a new high-strength [boxed car door]. Our focus on innovation, manufacturing excellence and sustainability is earning Greenbrier favorable notices. Recently, CN recognized us for our efforts and commitment to sustainability as part of its Echo Connections partnership program.

This is the first year CN included suppliers to its recognition program, and Greenbrier was one of only seven supply chain partners to receive the award. While accolades are always nice to receive, most importantly, our emphasis on innovating and elevating our manufacturing expertise supports our leadership position across the markets we serve. This performance continued in Q2 with Greenbrier receiving a nice balance of orders across our geographies. Market conditions for railcar leasing remain positive. Our expanded leasing strategy is gaining traction in both North America and Europe. This is a critical element of our multi-year plan and is expected to result in the doubling of recurring revenues within the next five years. Importantly, our balance sheet remains very healthy, allowing us to invest in our business while continuing to return capital to shareholders.

This has been our long-standing and preferred approach to capital allocation. I’m pleased to report our Board declared a quarterly dividend of $0.30 per share this week, representing our 40th consecutive quarterly dividend. In the meantime, the economy in North America has been resilient. The probability of a soft landing is increasing, and the Fed has signaled it will likely make three interest rate cuts by the end of 2024. Of course, this year is also a U.S. presidential election year, not to mention national elections in the EU and Mexico. Our current disciplined approach in our core North American railcar market has attracted new capital to asset-based investing in railcars, which is encouraging. In Europe, while the economy is still lagging the U.S., the growth projections have been trend once again by the European Central Bank, but we are building momentum.

Stable demand across railcar types in both North America and Europe underpin new builds and lease renewals. The southern border remains a focus as we address developments that could impact deliveries from our suppliers or to our customers in real time. Border crossing issues impacted us at various times during the quarter, but the work performed for our skilled manufacturing and logistics colleagues have successfully avoided severe impacts on Greenbrier. Sustained high performance across our business is in view. Our commercial team with its powerful lease origination capabilities continues to outperform, giving us excellent near-term and longer-term visibility into manufacturing and steadily building our stream of lease revenues. We are confident in the long-term strategy and multi-year targets and look forward to sharing our progress on future calls.

Now before I conclude my remarks, I’d like to acknowledge the contributions of Adrian Downes, who has been at Greenbrier since 2013. As we announced earlier this year, Adrian will be stepping down from his role as CFO. Adrian service to Greenbrier during challenging times, including the pandemic has been essential. During his time here, Greenbrier strengthened its balance sheet and expanded its global operations platform, integrate accounting and finance functions as we grow. We are incredibly grateful for his contributions to Greenbrier over the years and wish him all the best in his future endeavors. Thank you, Adrian. And with that, let me turn the call over to Brian Comstock, who will discuss our activities for the quarter in greater detail and review market conditions.

Brian Comstock: 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 are steadily progressing to our stated goal of doubling recurring revenue from leasing and management services. Recurring revenue is growing from various sources, including new railcars added to our lease fleet and lease renewals at more favorable terms. We grew our lease fleet by about 500 units or 3.5% during the quarter. As a reminder, we have committed to invest up to $300 million per year on a net basis over the next several years to expand our recurring revenue as long as we do so in a manner that meets our financial criteria.

I want to reemphasize that we will only invest in the right assets with the right lease terms and counterparties, and we are focused on railcar types that keep our fleet portfolio balance. We regularly evaluate our financing strategies and are taking a prudent approach to financing growth of our lease fleet. Our average interest rate of 4.5% on our non-recourse leasing debt is significantly lower than current market interest rates. At the end of Q2, our fleet leverage was 77% in line with our targeted fleet leverage framework. We leveraged railcar assets and 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 have successfully renewed lease terms while maintaining a consistently high fleet utilization of nearly 99% in Q2.

The leasing market remains healthy, characterized by a scarcity of in-demand railcar types and high fleet utilization among lessors. Moving in sequence with higher interest rates, our lease rates remain compensatory resulting in elevated rates for both new originations and renewals. We have strategically staggered lease durations to lessen the impact of cyclicality and create opportunities for favorable renewals. We have already renewed more than half of our expiring leases this year at more favorable rates. Our team is working on the remaining lease renewals, and we are confident we will finish the year successfully. Fundamentally, the backdrop of North American railcar market remains solid with demand approaching replacement levels. While overall traffic is projected to remain steady, there is potential for inter-modal growth due to the current challenges at the Suez and Panama Canals.

These disruptions will likely redirect traffic to the West Coast ports, which benefits rail transport demand. Additionally, near-shoring trends support long-term growth in traffic across the southern border. The supply of available railcars is still near trough levels, which has led to robust lease rate growth, renewals and term length. We are confident we have the right strategy in place to successfully execute our plan in this environment. In Q2, we syndicated 1,400 railcars with multiple investors, generating strong liquidity and margins. The syndication market remains liquid with a solid appetite for the asset class. The rail sector has proven to perform well over economic cycles and we are continuing to see increased syndication interest from new investors motivated [Technical Difficulty].

Finally, Maintenance Services performance was impacted by lower wheelset and component volumes resulting from an unusually mild winter. We have several initiatives underway to improve this unit’s efficiency by improving car flow, material planning and cycle time at all facilities. The backdrop for Maintenance Services remains constructive over interim to longer term, driven in part by the last two peak tanker build cycles that will require repairs and requalification over the next several years. Now I’ll hand the call over to Adrian, who will speak to our financial highlights for the quarter.

Adrian Downes: 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 of our 2017 senior convertible notes with cash. As mentioned in our first quarter remarks, we are providing a breakout between recourse and non-recourse task in the footnote section of our 10-Q under notes payable and revolving notes. Greenbrier’s debt composition is now composed of more non-recourse debts than recourse.

This emphasizes our commitment towards reducing and retiring our recourse task as cash flows improve and underscores our prudence with how we manage our capital structure and balance sheet. As Lorie mentioned, Greenbrier’s Board of Directors declared a quarterly dividend of $0.30 per share. Based on yesterday’s closing price, our annual dividend represents a yield of approximately 2.3%. Including activity from the second quarter, Greenbrier has returned nearly $510 million of capital to shareholders through dividends and share repurchases since reinstating our dividend program back in 2014 and these are actions that our Board and management team remain committed to. We believe this is a great way to create long-term shareholder value, and we will periodically evaluate increases to our quarterly dividend and look to repurchase shares opportunistically.

Finally, shifting focus to our guidance and business outlook. Based on current trends and production schedules, we are raising the bottom end of our 2024 revenue and delivery guidance, updating our capital expenditure forecast and reaffirming our gross margin outlook. We are raising the bottom end of our deliveries to 23,500, which includes approximately 1,400 units from Greenbrier-Maxion in Brazil. We are increasing the lower end of revenues to $3.5 billion. Selling and administrative expense is expected to be approximately $230 million to $235 million. Capital expenditures have also been updated, forecasted expenditures in our Manufacturing segment are expected to be around $140 million, which includes spend related to in-sourcing activities followed by $15 million in our Maintenance Services segment.

Gross investment of approximately $350 million in Leasing and Management Services is unchanged and includes current year capital expenditures as well as transfers of railcars into the lease fleet that are manufactured and subsequently held on the balance sheet in 2023. Proceeds of equipment sales have been adjusted to approximately $75 million. And aggregate gross margin percent for the full-year is expected to be in the low to mid-teens. Overall, I am pleased with the performance in the second quarter and throughout the first half of the year, which has put Greenbrier on solid footing for a strong finish to the year. As we head into the second half, we are supported by a robust backlog, ample liquidity and a strong balance sheet. We are confident our outlook for fiscal 2024 is positive with earnings expected to grow.

And now this will be my final earnings call at Greenbrier, I would like to take this opportunity to say thank you. I am privileged to have spent 11 years at Greenbrier, both as a Chief Financial Officer, and prior to that, Chief Accounting Officer. As Lorie mentioned, a lot has been accomplished over this time period and Greenbrier has a great leadership team reinforced by a strong balance sheet and improving results. I would like to thank our Board of Directors, shareholders and Lorie, for the opportunities and support during this time. This has been a great place to work. And although I will be leaving this role, I will still be involved as a strategic adviser to help with the transition process and other projects. Thank you. And with that, we will open up for questions.

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

Justin Long: Thanks. Good morning. And Adrian, congrats.

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Q&A Session

Adrian Downes: Thank you very much.

Justin Long: 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?

Lorie Tekorius: 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.

Justin Long: 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?

Brian Comstock: 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.

Justin Long: Okay, great. That’s good to hear. I appreciate it.

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

Matthew Elkott: 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?

Brian Comstock: 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.

Matthew Elkott: 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?

Justin Roberts: 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.

Lorie Tekorius: 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.

Matthew Elkott: 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?

Lorie Tekorius: 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.

Matthew Elkott: Got it. Great. Yes. Thank you very much.

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