The Greenbrier Companies, Inc. (NYSE:GBX) Q4 2023 Earnings Call Transcript

The Greenbrier Companies, Inc. (NYSE:GBX) Q4 2023 Earnings Call Transcript October 25, 2023

The Greenbrier Companies, Inc. misses on earnings expectations. Reported EPS is $0.92 EPS, expectations were $1.01.

Operator: Hello, and welcome to The Greenbrier Companies Fourth 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, Sarah. Good morning, everyone, and welcome to our fourth quarter and 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 2023 and our outlook for 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 statements made by or on behalf of Greenbrier. And with that I’ll hand the call over to Lorie. Good morning.

Lorie Tekorius: Thank you, Justin, and good morning, everyone. It’s hard to believe that we’re nearly two months into our fiscal 2024, which we entered with significant momentum after a transitional period in 2023. I’m going to underscore several accomplishments beyond our strong financial performance, including record annual revenue. Execution of several key financial targets in 2023 was aided by the multi-year strategy we presented at our inaugural Investor Day in April. Internally, we’ve named our multi-year strategy Better Together. The plan sets three fundamental priorities. First is maintaining our manufacturing leadership position across geographies. Second, we will meet our customers’ needs as we optimize our industrial footprint for efficiency and margin enhancement.

And third, and of equal importance, we will grow at scale in leasing and services to reduce the impact of manufacturing cyclicality on our overall enterprise. As part of our footprint optimization, we analyzed our global production capacity. And the outcome of the analysis resulted in the sale of our Gunderson Marine operation and a small foundry in Texas, as well as our exit from a manufacturing joint venture in Turkey. Further, we acquired the minority stake of our leasing joint venture partner in North America to take full ownership of our lease fleet. Underlying these actions and others is our fundamental approach to make Green Bear simpler and more profitable. And we’re extremely pleased with our accomplishments and strategic progress in fiscal 2023, but we’re really never fully satisfied.

And in some cases, we’re ahead of our internal schedules, and others, we’re laying the foundation to execute the plan. The recap of our results comes with a caveat. We don’t expect our progress to be linear, and our goals target a five-year completion window. So now turning to our results. First, I have to commend our commercial team for their outstanding performance throughout fiscal 2023, and particularly this past quarter. In the face of muted demand for intermodal units, the breadth of our product offerings and our strong business origination abilities resulted in a very high share of North American railcar orders the last few quarters, culminating in a 40% share of the industry backlog as of June 30. This provides us with excellent visibility and confidence that we’re on the right track.

For the fourth quarter, we generated revenue of a billion dollars, unchanged from the prior quarter. As revenue remained durable, aggregate gross margins expanded to 12.5% from 12.3% in the third quarter. For the full year, aggregate gross margin was 11.2%, which is a 50 basis point improvement from the trailing 12-month aggregate gross margin as of our investor day when we established a mid-teens aggregate gross margin target by fiscal 2026. Fourth quarter manufacturing gross margin of 9.3% was relatively unchanged from the prior quarter. However, there was positive movement behind the static percentage. The negative margin impact of a strengthening peso was partially offset by achieving certain manufacturing footprint efficiencies. As I mentioned earlier, the evaluation of our manufacturing footprint resulted in the sale of Gunderson Marine and our Texas Boundary, bringing approximately $20 million of permanent annual savings as we step into the next fiscal year.

Greenbrier’s flexible manufacturing footprint allows us to create value and generate returns while solving our customers’ problems. For example, we recently adapted production lines for new railcars to accommodate large railcar refurbishment programs for multiple customers in North America. And similar to the railcar conversions we’ve previously discussed, this business activity is accretive to earnings but is not included in new railcar deliveries. Railcar refurbishments and conversions allow customers to extend the life of their railcar fleet while improving the overall operating efficiency of the North American fleet. Additionally, this work benefits the environment through the reuse or recycling of components like wheels, axles, and brakes and significantly reduce steel consumption.

For example, stretch conversions use approximately 65% less steel than newly built railcars with similar dimensions. Our in-sourcing initiative also occupies line space previously dedicated to new railcar production. The first phase of bringing fabrication in-house for basic primary parts and sub-assemblies as part of our make versus buy strategy was completed in the fourth quarter. We expect to achieve our full cost savings targets of $50 million to $55 million from this initiative in fiscal 2025. And moving across the business, maintenance services continued its positive momentum even though wheel volumes declined compared to the prior quarter due to seasonality. And while revenue and maintenance services decreased by about 23%, gross margin increased by 430 basis points resulting in earnings from operations that fully offset the reduced revenue.

This was accomplished through improved pricing and the impact of the operating efficiencies we’ve been driving over the last two years in this business. And now as Brian will explain shortly, we have a solid foundation in place for expanded leasing strategy and are advancing it thoughtfully. This is a critical component of our multi-year plan and is expected to result in the doubling of recurring revenue within the next five years. The market conditions for railcar leasing remain very positive and we’re in a great position to execute our plan. Returning capital to shareholders is integral to our approach to capital allocation. I’m pleased to report that our board declared a quarterly dividend of $0.30 per share last week. And you may recall that the dividend increased 11% in Q3.

Our dividend has doubled since its reinstatement in 2014 and the Q4 dividend represents Greenbrier’s 38th consecutive quarterly dividend. We also repurchased shares during June at attractive levels. For the full year, we repurchased 1.9 million shares for $57 million at an average price of approximately $29 per share. And the broader economy is dynamic and geopolitical strife again commands our attention and our concern. However, our outlook remains positive. We expect North America and Europe to continue to see strong demand across railcar types underpinning both new bills and lease renewals. We have excellent near-term visibility for fiscal 2024 and are focused on maximizing our platform’s potential as we progress towards our multi-year targets.

We’re confident in the long-term strategy we presented at the investor day because it’s focused on the things we can control and not reliant on an overly optimistic demand scenario. I and the rest of the team look forward to sharing our progress on future calls. And now I’ll turn it over to Brian who will elaborate on railcar demand and our leasing activity.

Brian Comstock: Thank you Lori. In Q4, Greenbrier secured new railcar orders of 15,300 units worth nearly $1.9 billion, marking a strong end to the year. Orders continue to be broad-based and diverse across most railcar types except for intermodal where market conditions have been soft. As of August 31, Greenbrier’s global backlog was 30,900 units valued at $3.8 billion, our highest backlog value in nearly eight years. Our commercial performance reflects our leading market position, strong lease origination capabilities, and direct sale experience. Despite fears of recession and slowing traffic volumes, particularly in intermodal, we maintain a healthy backlog and robust deal pipeline, largely due to our diverse portfolio of railcar designs.

Our ability to originate and syndicate leases has also contributed meaningfully to our strong position in the market. Notably, international orders accounted for nearly 20% of the activity in the quarter. These orders came as we launched our leasing and syndication business in Europe. We successfully completed our first syndications in Europe, opening a new channel to the market. We’re excited about our opportunity in Europe where the rail industry enjoys strong secular tailwinds as we discussed during our investor day. Likewise, we are pleased with the performance of leasing and management services in the quarter. Our lease rates on renewals continue to increase by double digits, and we are extending lease terms while maintaining a high fleet utilization.

The market for leasing railcars continues to be strong, with tight railcar supply and high fleet utilization among lessors. Lease rates continue to be compensatory considering rising interest rates, which translates into higher lease rates on new originations and renewals. Regarding the underlying leases, the durations are staggered to mitigate the impact of cyclicality and create upside potential through favorable renewals. As we described during investor day, we intend to grow our fleet more steadily over the coming years and have committed to invest up to $300 million per year for each of the next five years. In 2023, we invested over $240 million on a net basis into our fleet after including asset sales from the fleet. As we shared in our press release this morning, we anticipate a gross investment of $335 million, which includes capital expenditures and transfers of railcars produced onto the balance sheet in 2023.

As part of our regular fleet optimization, we expect to generate proceeds of about $80 million from asset sales. We remain focused on railcar types that will maintain a balanced fleet profile and reduce concentration risk. I want to emphasize that we will only invest in the right assets with the right lease terms and counter parties. We are steadily progressing towards our stated goal of doubling recurring revenue from leasing and maintenance services. As of the end of fiscal year, our recurring revenue was about $125 million, which is a 10% increase from our investor day when we first shared our target. Recurring revenue is growing from various sources, including new railcars added to our lease fleet, lease extensions at more favorable terms, and growth in the income of the management of third-party railcars.

We continue to fix rates on our non-recourse leasing debt, and our average interest rate of 4.2% is significantly lower than current market interest rates. Given ongoing interest rate instability, we are regularly evaluating our financing strategies as we grow our lease fleet. At the end of Q4, our fleet leverage was 78% , in line with our targeted fleet leverage framework. As a reminder, railcars on the balance sheet are shown at net book value, while we leverage at an appraised fair market value. This results in leverage ratios appearing to be higher than they are in reality. In fiscal 2023, our capital markets team syndicated 4,200 railcars, generating strong liquidity and margins. This includes 900 railcars syndicated in the quarter, a modest increase from Q3.

This market remains liquid with a strong appetite for this asset class, and our team is preparing for another busy year in 2024. We expect railcar deliveries to be around industry replacement levels for the next few years, with retirements keeping pace and driving better overall fleet utilization. We are confident we have the right strategy in place to execute against this backdrop. Entering the new fiscal year, we remain focused on optimizing our manufacturing capabilities and growing the leasing and management business. With that said, I’ll hand the call over to Adrian, who will speak to the financial highlights in the quarter and here.

Adrian Downes: Thank you, Brian, and good morning, everyone. As a reminder, quarterly and full-year financial information is available in the press release and supplemental slides on our website. Greenbrier Q4 performance continued to the momentum from the third quarter, with improved aggregate gross margin percent and higher operating margin. Following some highlights from the quarter and full year, I will also provide a general overview of our fiscal 2024 guidance. Notable highlights for the fourth quarter include new railcar orders of 15,300 units, valued at $1.9 billion with a book-to-bill of 2.2 times, highest in many years. Third quarter, third consecutive quarter, with revenues $1 billion or higher, primarily driven by the continued strength in our manufacturing segment and solid performance in our other business units.

Aggregate gross margins of 12.5% reflect sequential margin enhancement from improved operating efficiencies as a result of stronger pricing and profitability in wheel sets and components at maintenance services. We also estimate the peso strengthening in the quarter negatively impacted manufacturing gross margin by 100 basis points. Selling and administrative expense of approximately $60 million is lower sequentially reflecting a reduction to employee-related costs attributable to lower incentive compensation and consulting expenses. Quarterly tax rate of 30.9% was higher than the third quarter due to the mix of foreign and domestic pre-tax earnings and discrete items. Adjusted net earnings attributable to Greenbrier of $30 million generated diluted EPS of $0.92 per share.

Adjusted EBITDA of $97 million or 9.5% of revenue. Notable highlights for the full year include deliveries of 26,000 units and increase of over 30% from the prior year. Adjusted net earnings attributable to Greenbrier of $99 million are $2.97 per diluted share on record revenue of $3.9 billion. This represents a year-over-year increase of over 110%. Adjusted EBITDA was $340 million or 8.6% of revenue and compared to fiscal year 2022, adjusted EBITDA increased by 47%. We had solid operating cash flow of $71 million. Shifting our focus to liquidity, Greenbrier generated $70 million of operating cash flow in the fourth quarter due to strong operating momentum. Full year results of over $71 million represents the first year since 2020 that operating cash flow ended the year positive.

This was primarily due to an increase in net earnings and more efficient working capital usage. Greenbrier’s Q4 liquidity remained solid at $646 million consisting of cash of $282 million and available borrowings of $364 million. Throughout fiscal year 2023, there were a number of strategic steps we undertook as part of our disciplined approach to capital deployment and announced at our inaugural investor day in April. The first was maintaining a strong balance sheet with healthy liquidity and structuring our debts to align with the business. During the year ended, August 31, 2023, we repaid the North American credit facility borrowing of $160 million. We drew down the remaining $75 million on our leasing term loan facility and we upsized our non-recourse leasing debt warehouse in June from $350 million to $550 million.

We continued to mitigate risk by fixing interest rates on our non-recourse debt positioning us to continue investing in our long-term lease slate and to drive through cycle earnings. Another integral part of this strategy is our commitment to returning capital to shareholders through dividends and share repurchases. Over the course of the year, we repurchased $1.9 million shares to stock for $57 million, leaving $46 million remaining of the authorization under our current share repurchase program, which extends through January of 2025. As highlighted by Lori, on October 18, Greenbrier’s board of directors declared a dividend of $0.30 per share. Based on yesterday’s closing price, our annual dividend represents a dividend yield of approximately 2.9%.

Throughout the year, we’ve returned $36 million to shareholders through dividends and since reinstating the dividend in 2014, Greenbrier has returned over $488 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. As we look to fiscal 2024, our outlook remains positive. Forecasted liquidity levels are expected to increase from improvements and operating results and from working capital efficiencies. In turn into our fiscal year 2024 guidance, based on current business trends and production schedules, our outlook reflects the following. Deliveries of 22,500 to 25,000 units, which includes approximately 1,000 units from Greenbrier-Maxion and Brazil .

We have devoted a portion of our flexible manufacturing footprint to large railcar refurbishment programs for multiple customers that are recreated to earnings but are not included in new railcar deliveries. Additionally, our insourcing initiative utilizes space previously used for new railcar production capacity. Revenues between $3.4 billion and $3.7 billion, selling and administrative expenses are expected to be approximately $220 million to $230 million, gross investment of approximately $335 million in leasing and management services, which includes capital expenditures, and transfers of railcars produced onto the balance sheet during 2023 [enter the lease fleets]. Capital expenditures of $190 million in manufacturing and $15 million in maintenance services.

Proceeds of equipment sales are expected to be approximately $80 million. We expect full-year consolidated gross margin to increase to the low teens. And taking all of this together, we expect to grow earnings this year from fiscal 2023. We’re encouraged by robust backlog, the largest value in almost eight years, which provides us with strong visibility and stability over the coming years. Supported by a talented management team that has experienced with a demonstrated track record of success, we’re excited about fiscal 2024 as we continue to execute our strategic plan. Because of the strength and flexibility of our employees and business model, we are better together and continue to be well positioned to drive shareholder value in 2024. And now we will open it up for questions.

Operator: Thank you. We will now begin the question and answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Our first question comes from Justin Long with Stephens. Please go ahead.

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Q&A Session

Justin Long: Thanks and good morning. I wanted to start with a question on manufacturing margins. It was helpful to get the impact from the peso in the quarter, but I was wondering if you could help us think through the cadence of manufacturing margins going forward as we move into fiscal ’24. And then maybe you could address the Eagle Pass disruption that we saw in September and what type of impact that might have?

Brian Comstock: Yes. So good morning, Justin. I think I will get started with the margins and then we can kind of speak to the impact of Eagle Pass. We would expect based on our current backlog production schedules, all the usual caveats that we would expect to see margin expansion in manufacturing kind of in Q1 and into kind of intermittently throughout the year. So I think the way to think about this is we do see expansion in Q1, but then also given the volatility of some of our production timing when cars are going onto the balance sheet. Overall, we do see expansion throughout the full year compared to fiscal 2023, but it’s not going to be a stair step progression, if that makes sense.

Justin Long: Got it. That made sense. And on the Eagle Pass component?

Adrian Downes: Yes.

Lorie Tekorius: And I would say, yes, the Eagle Pass situation is something that we’re watching very closely. We’re very engaged at our various facilities as we’re making certain that we’re getting the inbound material that we need to produce railcars as well as outbound. We have been working very closely with the rail roads that service our facilities and at this point in time, we have not had significant disruptions or issues in getting railcars picked up from our facilities or getting them across the border. That being said, we are not resting on our laurels. Every day we’re coming up with different ways that we can think about how we might mitigate any sort of disruption that we might encounter, including, whether it’s different border crossings or different ways to move railcars into the United States.

Justin Long: Okay, that’s helpful. And then second question, I wanted to touch on the revenue guidance. I think it was a bit surprising to see the pressure that you’re anticipating in fiscal ’24. I think it’s about 10% at the midpoint on a year-over-year basis, just given the recent order flow. So can you provide a little bit more color on why you expect to see the delivery pressure? I know you’re reallocating some capacity for refurbishments, etc. But is there any opportunity to maybe produce at a level that’s above this guidance you’ve provided? And when you take a step back and look at street estimates that have kind of been hovering in that [370] range for this year for EPS, is that something that seems reasonable when you balance the revenue pressure with the margin expansion you’re forecasting?

Lorie Tekorius: That was a lot, Justin. Thank you. So we did think long and hard as we were giving our guidance around deliveries and revenue, acknowledging that there might be a little bit of a, swallowing hard on what’s going on. We are — we and others in this space are being very disciplined about how we think about production, not just dialing up production so that we can put a big flash number out there and then see 12 or 18 months from now production needing to be dialed back. I think that the industry is responding in a very disciplined way. I think the fact that we’re dedicating some of our new car space into some of these other activities, this large program work, which is critical in our industry, particularly in the North American market, allows us to keep lines running as opposed to, again, ramping up it’s going to be a creative to earnings, but it doesn’t show up in the delivery numbers and the revenue associated with that activity is going to be less.

So when everyone likes to go through their process of taking manufacturing revenues and just dividing it by deliveries, you’re going to probably start to see some headwinds to the ASP and I would liken it to back when there used to be more intermodal activity going on. Intermodal cars have a lower ASP, which was kind of that gets to that mix shift. I would hope that as we continue to present the activities that we’re doing, you and our shareholders will see that we’re looking at our footprints and where we’ve made investments in our facilities and our operations and we’re making certain to deploy those in ways that are generating a good return.

Adrian Downes: And the one thing I would add, Justin, I think before your follow up question is even at these revenue guidance numbers, it still is our second highest level of revenue ever. So not every year can be a record, not every year can be record deliveries, but this is still very strong activity, especially when you look at our past several, our overall history. And then I think you did have a question around consensus estimates. And I don’t know if you want to take that, Lori, or I don’t know, I don’t know.

Lorie Tekorius: You go right ahead, Justin, and I’ll.

Brian Comstock: So I think based on what we see, we do not have any heartburn around the consensus EPS number at this point.

Justin Long: Thanks. I know that was a loaded question. Appreciate the time.

Operator: Our next question comes from Bascome Majors with Susquehanna. Please go ahead.

Bascome Majors: Back to the delivery schedule. Can you talk about how much open space you have on your North American lines for this year still if orders were to be placed near term?

Brian Comstock: Yes, Bascome, this is Brian Comstock. We’re looking at less than 10% of our capacity is available for the fiscal year.

Bascome Majors: So any major orders are really going to go into fiscal ’25 visibility now. Can you talk about how much visibility you have into the fiscal ’25 plan right now, whether it be thousands of cars, a percent of capacity, any way you want to frame it?

Brian Comstock: Yes, I think if you look at our total backlog of roughly 31,000 cars and then calculate what we’re anticipating to deliver, it gives you a pretty good idea of what we’re looking at today. The pipeline continues to be very strong despite some of the other rhetoric about recession. The recession really is around intermodal. If you think about it in some of the truckload conversions in box cars, but the other units are very strong. So we have really good visibility at the end of 2025 at this point.

Lorie Tekorius: Yes, and I would say I’m speaking to intermodal. I think to me, while right now there’s not a lot of demand for intermodal and our delivery guidance doesn’t include any intermodal activity, I think that could be a bright spot if as consumer activity shifts from services more back to goods, there might be a bright spot of a need for intermodal equipment.

Brian Comstock: Yes, I think the other thing we’re pointing out, and it kind of goes a little bit to Justin Long’s question and yours, Bascome, is when you think about our delivery, about 15% of our capacity is now dedicated to sustainable conversions and or other large programs, which to Lorie’s point do have a lower ASP, but they typically have a higher margin associated. So maybe that might be helpful as you guys think it through.

Bascome Majors: Thank you for that. And maybe just to call back to Justin’s question one more time. I mean, it seems like you’ve been kind of flirting with this dollar per quarter run rate of earnings pretty closely for the last few quarters. And certainly you’ve been demonstrated in a much stronger margin market that you can do that consistently in a better part of the cycle, although this is a very different cycle than that one. We write to think that that’s on the horizon as your production rate gets stable and your margins get to where you think they can be sustainably. And some of this your rationalization is behind you versus in front of you; just trying to understand what the underlying P&L of the business can look like when you get the business to where you want it to be. Thank you.

Lorie Tekorius: Sure, Bascome. Thank you. And I do think that that is achievable right now. One of the things that maybe we haven’t highlighted as consistently is as we’re building our own fleet. That means that we’re taking some of the production that would typically be sold or syndicated and keeping it on our balance sheet. And it takes a little time for the earnings associated with that recurring revenue to build up to offset that immediate recognition of margin right away. So I absolutely see as we are continuing to focus on efficiency in our operating activities, so manufacturing as well as our maintenance services and aftermarket parts, I see that revenue and margin build when it comes to leasing. So I would be great if we could just kind of say, yes, dollar a quarter. And then where do we go?