The Greenbrier Companies, Inc. (NYSE:GBX) Q3 2023 Earnings Call Transcript

The Greenbrier Companies, Inc. (NYSE:GBX) Q3 2023 Earnings Call Transcript June 29, 2023

The Greenbrier Companies, Inc. misses on earnings expectations. Reported EPS is $0.09 EPS, expectations were $0.6.

Operator: Hello, and welcome to The Greenbrier Companies Third 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.

Justin Roberts: Thank you, Anthony. Good morning, everyone, and welcome to our third 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 Q3 and our outlook for fiscal 2023, 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 2023 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. And with that I’ll hand the call over to Lorie.

Lorie Tekorius: Thank you, Justin, and good morning, everyone. I hope everyone’s enjoying the start to summer. Yesterday, hopefully you saw that we announced that Pat Ottensmeyer will join the Greenbrier Board of Directors. I’d like to publicly welcome Pat to our Board and look forward to working with Pat to get his perspectives on the freight rail market, as well as his insight into the U.S. Mexico activity. As many of you know, Greenbrier hosted our inaugural Investor Day on April 12. For those of you who are unable to attend in person, or via webcast, the replay will be available on our website for a short period of time. And the full presentation will be available forever at the SEC website. And during the three-hour event, we touched on four areas.

First, our leadership position in our markets. Second, our diverse manufacturing capabilities and long track record of innovation. Third, our strong lease origination capabilities and differentiated syndication model. And lastly, the consistent improvement in our financial performance across economic cycles. We also laid out Greenbrier strategy to increase margins in our manufacturing segments, grow our recurring revenue base through lease fleet investments, and follow a capital allocation strategy focused on returning value to shareholders. And while it’s only been two months, since that investor day, I’m pleased to share the progress we’ve made in each of these areas. In some cases, we’re ahead of our own internal schedules and in others, we’re laying the foundation to execute our strategic plan.

And as I briefly recap results for this quarter, I’ll highlight some achievements towards these goals, with the important caveat that we do not expect our progress to be linear, and our strategic plan and targets contemplate a five-year time horizon. Returning to the quarter, we generated revenue of a $1 billion. Our deliveries totaled 6600 units, down from Q2 due to the timing of syndication activity. And while revenue dip slightly compared with the prior quarter aggregate gross margin improved by 190 basis points to 12.3%. Increasing our aggregate gross margin to the mid-teens by fiscal 2026 is one of the targets we provided during the investor day. And we’re pleased to report the progress on that front. Gross margins of manufacturing of 9.6% increased 260 basis points compared with the prior quarter.

And some of the efficiencies we discussed during the investor day materialized more quickly than expected. And while there will be unforeseen issues that occurred during some quarters, we’re confident that many of the efficiencies achieved thus far will continue. In particular, supply chain issues that have been a recent headwinds seem to be largely in the rearview mirror. And as we’ve discussed previously, we’re bringing fabrication in-house for basic primary parts and sub-assemblies, as part of our make versus buy strategy. The first phase of this work will be completed in the fourth quarter that we’re in today. And we expect to achieve our full cost savings targets of $50 million to $55 million in fiscal 2025. Additionally, in the quarter we completed the sale of Gunderson Marine Portland, as part of our capacity rationalization plan that’s expected to result in annual savings of $15 million to $20 million.

These are costs that are getting taken out of the system permanently. Gunderson rail completed its last railcar on May 18, after shipping over 110,000 units since 1985. I’m extremely pleased to share that Gunderson’s new owner will retain many of the hard working production workforce of that facility. Now moving across the business, maintenance services continue the positive momentum seen since the start of the year, despite ongoing labor challenges. Their margins continue to improve sequentially on improved pricing volume and the operating efficiencies we’ve been focused on establishing over the last two years, expecting a strong end to the year from this segment. And as Brian will discuss shortly, we’ve laid the foundation for expanded leasing strategy.

This is an important component of our multiyear plan and is expected to result in the doubling of recurring revenues within the next five years. The market backdrop for leasing remains very positive, and we’re in a great position to execute our plan. Now returning capital to shareholders is an integral part of our capital allocation strategy. I’m pleased to report that our Board increased our quarterly dividend by 11% to $0.30 per share yesterday. Our dividend has doubled since its reinstatement in 2014 and illustrates the importance the Board places on this activity. The broader economic background is somewhat mixed, with several factors creating economic crosscurrents. Despite the ongoing economic murkiness, our outlook in North America remains unchanged, with railcar deliveries to be at or near replacement levels for the next few years.

In Europe, their softness in demand for intermodal wagons. But this has been more than offset by the bulk rail freight sector, where we continue to see strong demand across widened times. Backdrop aside, at the company level, we continue to take actions to create a stronger, more sustainable Greenbrier. We’re confident in the long term strategy we set forth during our investor day and our team’s ability to execute on that strategy, which is focused on the things we can control and not reliant on an overly optimistic demand scenario. I look forward to sharing our progress towards these targets on future calls. And now I’ll turn it over to Brian to discuss the rail car demand environment and our leasing activity.

Brian Comstock: [Technical Difficulty] Lorie. Three Greenbrier secured new railcar orders up 4600 units worth $650 million. Subsequent to the end of the quarter, we received orders for 7900 units valued at $975 million. Orders continue to be broad based and diverse across most railcar types with the exception of intermodal. As of May 31. Greenbrier’s global backlog was 23,400 units valued at $2.9 billion. This figure excludes the 7900 units ordered after the end of the quarter. As a reminder, our new railcar backlog does not include 1000 units valued at $85 million that are part of Greenbrier’s railcar conversion program. Despite weakness in freight volumes, the railcar demand environment remains stable due to pent up replacement demand and tight supply.

And we continue to see healthy railcar inquiries and orders for a variety of rail car types. We are pleased with the performance of leasing and management services in the quarter. Our lease rates on renewals are increasing by double digits and we are extending lease terms while maintaining a high fleet utilization of nearly 99%. In terms of the underlying leases, the durations are staggered to both mitigate the impact of cyclicality and create upside potential through favorable renewals. We do have a high volume of renewals in 2024 resulting from the portfolio we purchased in September of 2021. And we are actively working to renew these leases ahead of their expiration. As we described during the investor day, we intend to grow more steadily over the coming years, and we have committed to invest $300 million per year for each of the next five years on a net basis.

We remain focused on railcar types that will maintain a balanced fleet portfolio and reduce concentration risk. I want to emphasize that we will only invest in the right assets with the right lease terms in counterparties. During Q3, we funded $54 million of debt from our nonrecourse leased railcar warehouse facility backed by 72 million of assets and have funded a total of about $120 million through the warehouse over the last two quarters. As you may have seen in our press release this morning, we recently upsize our warehouse facility to 550 million from the prior 350 million borrowing capacity to support our growth plans. The terms of the upsize facility are unchanged. Fourth quarter fleet activity in the warehouse facility will continue to be leveraged at a 75% debt to equity ratio.

We are regularly evaluating our financing strategies as we prepare to meaningfully increase the size of our lease fleet with the goal of more than doubling recurring revenue in the next five years. As you heard during the investor day from William Glenn, who had Greenbrier’s European operations, we are building a leasing capabilities in Europe. Our entry into the European leasing is well ahead of plan and the pipeline for leasing deals is robust, including finalizing our first syndication agreement. Our Capital Markets team syndicated 800 railcars in the quarter, a decrease from Q2, reflecting the timing of production schedules. This market remains liquid and a strong appetite for the asset class. And our team is preparing for another busy year in 2024.

Within management services, we continue to shift our commercial focus and business development efforts towards customers whose needs are more closely aligned with our core competencies as we seek to deepen relationships within our customer base. This is an exciting time for Greenbrier as we work to optimize our manufacturing capabilities, and grow the leasing and management business. We have been clear with our growth initiatives and I look forward to updating you on them as we execute on our strategic plan. With that said, I’ll hand the call over to Adrian, who will now speak to the financial highlights in the quarter.

Adrian Downes: 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 the quarter was strong across all business segments with improved aggregate gross margin and adjusted EPS in Q3 compared to Q2. Following the highlights of the [Technical Difficulty] for the quarter include second consecutive quarter with revenues of a $1 billion or higher, deliveries of 6600 units was the second highest quarter for deliveries since the fourth quarter of 2019 and includes 200 units from our unconsolidated joint venture in Brazil.

Aggregate gross margin of 12.3% was 190 basis points higher than the prior quarter, resulting from stronger margins in the manufacturing and maintenance services segments attributed to improved operating efficiencies in both segments at higher pricing and volumes in the maintenance services segment. We expect the operating momentum will continue as a result of the initiatives described during the Investor Day in April. Selling and administrative expense of $63 million is 7% higher from Q2 primarily attributed to an increase in employee related costs due to higher incentive compensation expense as a result of increased profitability. We had a pretax charge of $17 million related to the sale and exit of our Gunderson Marine business in Portland.

The consolidated tax rate of 12.9% was primarily a result of favorable discrete items in Mexico. Excluding the impact of the Gunderson loss on sale and exit related costs, adjusted net earnings attributable to Greenbrier of $34 million generated adjusted EPS of $1.02. Additionally, adjusted EBITDA da for the quarter was about $97 million or 9.3% of revenue. Turning to liquidity, Greenbrier’s operating cash flow turned positive on a year-to-date basis due to a strong third quarter and — sorry, due to strong third quarter results of nearly $98 million, reflecting improvements to operating performance and working capital efficiencies. Our liquidity was $665 million at the end of Q3, consisting of cash of $321 million and available borrowings of $344 million.

The primary use of our cash during the recent quarter included the repayment of $95 million of short term borrowings on our domestic revolving credit facility, as well as $32 million of share repurchases. As we finish 2023, we expect Q4 liquidity levels to remain strong as operating momentum and working capital efficiencies continued to improve. As highlighted during our investor day in April, one of Greenbrier strategic initiatives is a balanced approach to capital allocation. An integral part of this strategy is to return capital to our shareholders through dividends and share repurchases. During the third quarter Greenbrier repurchased 1.2 million shares for $32 million. Between the second and third quarter Greenbrier repurchased a total of 1.7 million shares for $49 million, of which 3 million was part of the prior authorization program.

Under the current share repurchase program, we have $54 million remaining of the 100 million authorization that extends through January of 2025. In addition to significant share repurchase activity, the Board increased the dividend by 11% to $0.30 per share, representing our 37th consecutive dividend. Based on yesterday’s closing price or annual dividend represents a yield of approximately 3.7%. Since 2014, Greenbrier has returned over $470 million of capital to shareholders, through dividends and share repurchases. Our Board and management team remain committed to a balanced deployment of capital designed to create long term shareholder value. Turning to our guidance and business outlook, based on current trends and production schedules, we are raising Greenbrier’s fiscal 2023 guidance, which includes the following: our fiscal ’23 deliveries guidance is increased to 25,000 to 26,000 units, including approximately 1000 units from Greenbrier-Maxion and Brazil.

We’re also increasing our fiscal year 2023 revenue guidance to be between $3.8 billion and $3.9 billion. Selling and administrative expenses at approximately $230 million to $235 million. And gross capital expenditures of approximately $280 million and leasing and management services, $90 million in manufacturing and $15 million in maintenance services. And proceeds of equipment sales are expected to be approximately $76 million. Consolidated gross margin is unchanged, and we expect full year consolidated margin percent to be in the low double digits. In closing, I’d like to reiterate a few points. We are confident in our long term strategy as highlighted at our investor day, I believe the best is yet to come. Our management team is incredibly experienced with a demonstrated track record of success.

We are supported by a robust backlog, which provides strong visibility and stability over the coming years. Our liquidity and balance sheet strength allows for opportunistic growth. And as we look to strongly finish our year, we’re well positioned to drive shareholder value into in 2024. Now we will open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question will come from Matt Elkott TD Cowen. You may now go ahead.

Matt Elkott : Good morning. Thank you. Lorie, can you maybe first quick clarification, what was it specifically that made it possible to achieve those manufacturing efficiencies ahead of plan?

Lorie Tekorius: A great question, Matt. I would say it’s tremendous hard work and focus by the men and women in our manufacturing operations. As you’ll recall, last quarter, we talked about — second quarter we talked about the headwinds that we were struggling with supply chain and our focus on how to reverse that trend. This is one of the areas where we’re seeing improvement ahead of what we thought internally we would be able to achieve. As not just Greenbrier but as many companies have seen over the last several years supply chain can be one of those things that can be a persistent headwind, or it can pop up. So I’m just pleased with the focus and attention and execution in our manufacturing group.

Matt Elkott: Got it. Thank you for that. And then were there any big orders from a single customer in either the 4600 in the quarter or the 7900 after?

Lorie Tekorius: I’ll let Brian to chime in in a minute if he’d like. But actually, yes, we had several large orders, but nothing that was really a multiyear or something that drove it that was strong diverse demand across a number of customers, car types, commodities, and a nice healthy combination of lease originations, as well as direct sales. Brian, is there anything you’d like to add?

Brian Comstock: No, I think you hit it, Lorie. Matt, basically, it’s kind of the normal blocking and tackling, we had several large orders, not just one or two. But also we had kind of the diversity of what we see every day. Some of it was pent up from earlier in the quarter, which we thought would come in Q3 and as are in the previous quarter is now coming in now. But it’s just kind of the run of the mill, no multiyear orders, just your kind of standard fare, as far as the order came in order diversity.

Matt Elkott: That’s good to know, Brian. And there was a 10%, sequential step up in the ASP, how much of this was mixed versus other factors, because after the — for the 7900, after Q3, I think the ASP goes back down to being 4% below 2Q.

Brian Comstock: Yes, I think the mix is it’s a better mix, we’re starting to see a little bit more automotive product, as well as tank cars into the mix. As you know, one of the focuses of I think the industry has been continued to do pricing into a better place as well. And so I think you’re seeing a combination of a better mix as well as continued uplift in pricing.

Matt Elkott: Okay, and just one last one, if I may. More often than not your first fiscal half is the lower for everything basically deliveries margins earnings, do you expect this to be the case for fiscal ’24, even as this really is a highly anomalous cycle?