The Greenbrier Companies, Inc. (NYSE:GBX) Q1 2023 Earnings Call Transcript

The Greenbrier Companies, Inc. (NYSE:GBX) Q1 2023 Earnings Call Transcript January 6, 2023 (read what White Brook Capital said about The Greenbrier Companies here.)

Operator: Hello, and welcome to The Greenbrier Companies First 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, MJ. Good morning, everyone, and welcome to our first 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 Q1 and our outlook for the rest of the fiscal year, 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. I’d like to remind you that 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. Good morning, Lorie.

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Lorie Tekorius: Thank you, Justin, and good morning, everyone. I hope everyone had a good holiday season. Our first quarter results showed areas of continued strength and identifiable opportunities to improve our operations. We produced 6,800 units in the quarter, a 10% sequential increase. Of these 2,300 units are investments held on our balance sheet to be syndicated our capitalized into Greenbrier’s long-term lease fleet in a future period. Remaining customer deliveries totaled 4,800 units. Revenue was in line with expectations. However, the efficiencies expected from higher production levels have not yet been fully realized. Aggregate gross margin was impacted by higher cost of outsourced components driven by inflation, transportation expense, and other logistics challenges.

Material shortages and delays and other lingering supply chain issues including rail congestion in Mexico created production disruptions primarily at our manufacturing operations in Mexico. We remain focused on managing our cost and supply chain. We’re optimizing our internal fabrication capacity, which will improve profitability by having more control over vital supply chain and address supply chain inefficiencies. Additionally, as disclosed in our earnings release, we will seize new railcar production at our Portland, Oregon facility in May following the delivery of existing commitments. This is not a decision we’ve taken lightly, given our history of manufacturing railcars in Portland. However, it’s an action that reflects our commitment to optimize the efficiency of our manufacturing footprint and deliver stronger margin.

We’re undertaking a strategic evaluation of our marine business, which operates at the same facility. We’re currently engaged in a range of discussions to determine both the future of marine operations and the overall use of the Portland facility. I remain confident we’ll attain a good outcome for all of our stakeholders, which include employees, customers, and shareholders. Our Maintenance Services Group continued their positive momentum and started 2023 with a strongest Q1 performance in five years as initiatives focused on increasing efficiency translated to results. Our Wheel business unfortunately was negatively impacted by increased labor and transportation costs. We’re currently working with our customers to modify contracts to address the current cost environment.

Turning to the U.S. economy, while it continues to its resilience rising interest rates and inflation now weigh on growth. The labor market has remained strong, and we’re cautiously optimistic about the industrial sector of consumer spending soften. The economy appears to be normalizing after years of unprecedented demand caused by lockdowns and subsequent government stimulus. As a result, economic activity will slow with an estimated annual U.S. GDP growth rate of only 0.2% in 2023. The lower outlook projects an economic soft landing that will be characterized by a strong labor market, but with elevated inflation and interest rates throughout the year. Consumer spending, which makes up two-thirds of economic activity will likely determine the timing and depth of the slowdown.

We continue to believe the North American rail freight segment will be resilient through a mild recession. Rail labor negotiations in the latter months of calendar 2022 drew broad public awareness to the integral role the rail industry plays in our economy. The near term threat of a railroad workers strike ended on December 2 with President Biden signing preventative legislation. However, challenging railroad service conditions now follow us into this new year. We’re optimistic the railroads will make steady progress on their service models over the course of the year and increased hiring is an early positive step in this direction. Turning to our European business. Despite an energy crisis caused by the Ukrainian war, high inflation and the rising interest rates, the European economy appears to be holding up well.

Energy prices are down from their peaks due to a mild winter and gas storage facilities at full capacity. German industrial output grew in the last quarter, surprising most analysts (ph). And rail traffic levels in Europe are high and fleet utilization is nearly 100% for most wagon (ph) types. The one exception is international container traffic where volumes are down due to the sluggish Chinese economy, which continues to struggle with COVID. Our European business performed well despite the war and lingering effects of the pandemic. And now turning to some other milestones in Q1. On November 1, we released the fourth annual edition of our ESG report On Track Together. I’m pleased to report, the Group have been identified on the list of the most responsible companies in America, according to Newsweek and the global research and data firm, Statista (ph).

The third-party recognition validates Greenbrier’s commitment to our values and our pursuit of responsible corporate citizenship. On a company level, we continue to review and optimize our portfolio to create a stronger, more sustainable Greenbrier. As announced earlier this week, we’ve acquired the minority interest in GBX leasing from the Longwood Group. This action bolsters Greenbrier’s leasing platform, simplifies our business structure and promises long term value to our shareholders. Growing our leasing business provides us a broader, more holistic view of the railcar equipment market than not solely an OEM builder. It also discourages the prospect of overbuilding since an asset can be on our books for over 30 years. Despite the short-term operating challenges, momentum is good entering calendar 2023.

With strong railcar order activity and elevated lease rates, we’re confident in Greenbrier’s long term strategy and our team’s execution. On our last quarterly call, we mentioned we discussed the strategy further at our upcoming Investor Day. We’re currently planning to hold that event in April and look forward to sharing additional details soon. And now I’ll turn it over to Brian to discuss the railcar demand environment and our leasing activity.

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Brian Comstock: Thanks, Lorie, and good morning, everyone. In Q1, Greenbrier secured new railcar orders of 5,600 units worth $700 million, a 17% increase from Q4. These orders extend production into calendar 2024. We delivered 4,800 units in the quarter, resulting in a book-to-bill ratio of 1.2 times. As of November 30, Greenbrier’s global backlog was 28,300 units valued at $3.4 billion, an indication of the strength of our customer relationships, and demand for Greenbrier’s products and services. As a reminder, our new railcar backlog does not include 1,800 units valued at $150 million that are part of Greenbrier’s railcar conversion programs. We continue to see healthy railcar inquiries and orders for a variety of railcar types despite a slowing economy.

As we pursue commercial and leasing transactions, we are employing pricing discipline that considers current market dynamics and the state (ph) of the economy. Railcars and storage are at a cyclical low due to demand spikes, rail freight service challenges and retirements outpacing new railcar deliveries. From January to November of 2022, there have been approximately 50,000 railcars scrapped. This is more than delivered in all of calendar 2022. Type (ph) railcar supply provides tailwinds for new orders in a range of railcar types. Earlier this week, we announced the buyout of the minority stake in GBX Leasing, our railcar leasing joint venture. Full ownership of the fleet furthers our leasing strategy while simplifying our business structure.

We are pleased with the performance of leasing and management services in the quarter. Our lease rates on renewal are increasing by double-digits, and we are extending lease terms while maintaining a high fleet utilization of 98%. Our lease fleet grew to 14,100 units at the end of the quarter. Keep in mind that a number of the units added to our lease fleet in the quarter could be syndicated over the course of the fiscal year. We intend to grow our long-term lease fleet by approximately 2,000 units this fiscal year. Fleet growth for the year is focused on railcar types that will further diversify the fleet, reducing concentration risk. We funded another $40 million of leasing term debt during the quarter and will fund the final $35 million in Q2.

Additionally, we have not borrowed on the $350 million leased railcar warehouse facility, although we are evaluating financing strategy for the remaining of our lease fleet adds for fiscal ’23. Our capital markets team syndicated 300 railcars in the quarter, a decrease from last quarter due to the timing of production activity. We continue to successfully navigate the compound challenges of higher debt costs and higher railcar pricing. However, we do see sufficient investor liquidity in the market for the duration of fiscal 2023. With one fiscal quarter in the books, we enter calendar 2023 energized and excited by the opportunities in front of us to grow our leasing business and successfully execute our market-leading syndication strategy. All of this supports our ultimate goal to provide our customers maximum flexibility to access Greenbrier’s superior products and services.

Adrian 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 Q1 was mixed with strong commercial, leasing and maintenance services performance, offset by headwinds in the manufacturing business, particularly in North America. A few items I want to speak to for the first quarter included revenue of $767 million, which decreased sequentially primarily from the production of 2,300 leased railcars on to the balance sheet. As a reminder, we do not recognize manufacturing revenue or margin until the railcar leaves our balance sheet.

However, we do recognize lease income for railcars on our balance sheet. This activity is more of a timing variance since these railcars will either be syndicated or capitalized into our long-term leased late later in the year. Deliveries of 4,800 units include 300 units from our unconsolidated joint venture in Brazil. Aggregate gross margins of 9.1% reflect higher costs for outsourced components, material shortages and lingering supply chain issues, including rail congestion in Mexico. We are investing in internal fabrication capacity to improve our control over this aspect of our supply chain while the rail congestion continues to slowly improve. Selling and administrative expense of $53 million is 22% lower from Q4, primarily as a result of lower employee related costs, including incentive compensation and consulting expense.

The pretax impairment charge of $24.2 million was related to long-lived assets at our Portland and Oregon manufacturing facility. This was triggered by the decision to end new railcar production at the facility after an evaluation of our production capacity requirements. Excluding the impact of this impairment, adjusted net earnings attributable to Greenbrier of $1.6 million generated adjusted EPS of $0.05 per share. Adjusted EBITDA was $48.7 million or 6.4% of revenue. Greenbrier’s liquidity was $477 million at the end of Q1, consisting of cash of $263 million and available borrowings of $214 million. Our liquidity remains ample, the primary use of our cash during the recent quarter included a continuing investment into our lease fleets and the expenditure of working capital related to the manufacturing supply chain issues we have already mentioned.

As a result of the strength and flexibility of our balance sheet, we continue to be well positioned to navigate these market dynamics. During fiscal 2023, we expect liquidity levels to increase from improvements in operating results and working capital efficiencies as well as increased borrowing capacity resulting from more railcars placed on our balance sheet. As a result, the remaining tax — as a reminder, the remaining tax refund associated with the CARES Act of roughly $30 million is anticipated to be collected this fiscal year and will be additive to Greenbrier’s available cash and borrowing capacity. Greenbrier has $100 million authorized under our share repurchase program, which was just extended by our Board of Directors through January 2025.

Our Board and management team remain committed to a balanced deployment of capital designed to create long-term shareholder value. We will continue to use this capacity opportunistically based on fluctuations in the price of Greenbrier shares and within the framework of our broader capital allocation plan. Subsequent to the end of the quarter, we have repurchased nearly 100,000 shares. Finally, on January 5, Greenbrier’s Board of Directors declared a dividend of $0.27 per share, our 35th consecutive dividend. Since reinstating the dividend in 2014, Greenbrier has returned over $400 million of capital to shareholders through dividends and share repurchases. Based on yesterday’s closing price, our annual dividend represents a dividend yield of approximately 3.1%.

Turning to our guidance and business outlook. Based on current trends and production schedules, we are maintaining Greenbrier’s fiscal 2023 guidance, which includes deliveries of 22,000 to 24,000 units, including approximately 1,000 units from Greenbrier-Maxion in Brazil. Revenue between $3.2 billion and $3.6 billion. Selling and administrative expenses of approximately $220 million to $230 million. Gross capital expenditures of approximately $240 million in leasing and management services, $80 million in manufacturing and $10 million in maintenance services. Proceeds of equipment sales are expected to be approximately $110 million. Our now wholly-owned lease, lease will increase by at least 2,000 units in fiscal 2023. We will see how the leasing market evolves throughout the year, and we’ll be flexible and opportunistic in our growth strategy for the fleet.

Gross margins, we expect full year consolidated margins will be in the low double-digits. Our bottom line results in Q1 do not fully characterize the improvements and positive momentum occurring in our business. We expect our performance to improve in the coming quarters as we hit our stride, and we see the benefits of tough decisions taken in Q1. Our management team is experienced with a demonstrated track record of success. Our robust backlog provides strong visibility and stability over the coming years, and we look forward to improved results as we progress through the year. And now, we will open it up for questions.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Today’s first question comes from Justin Long with Stephens. Please go ahead.

Justin Long: Thanks and good morning.

Lorie Tekorius: Good morning, Justin.

Justin Long: I wanted to start with a question on the supply chain. Just given the trends there seem to be a little bit disappointing relative to expectations. Any updated thoughts on the supply chain recovery going forward? And for the ceasing of railcar manufacturing operations at Portland and the increased capacity internally as it relates to fabrication. Is there any way to put a number around the cost impact that could have going forward?

Lorie Leeson: So I would just say on taking and parsing through some of that.

Adrian Downes: It was like three questions in one, Justin.

Lorie Leeson: Starting with the supply chain, I think as we have ramped up our activities as well as other industrial manufacturers that has put more pressure on the supply chain that we rely on, particularly in Mexico, which we recognized and have taken the action to start in-sourcing initially the vital components that we need for building railcars and making certain that we are achieving the kind of cost that we need to. We’re not happy with what happened in the first quarter, but we are taking action and we expect that new fabrication facility to be online early in our fourth fiscal quarter. So things are changing and moving. I think as we talked about it, we would expect this to be probably a couple of hundred basis points of margin impact as we move through the fiscal year associated with supply chain.

With the Portland, Oregon facility, not sure that we would quantify a facility-by-facility financial results. You do see the asset impairment that we took that’s associated with the railcar piece of our business, evaluating the assets that are dedicated to railcar production and adjusting those to an appraised value and we are still in the process of evaluating our Marine business to determine what comes of that. And then the last question, no, I don’t remember. We’re not going to be using the Gunderson facility for any of the sub-components. This is in-sourcing that will happen near our facilities in Mexico.

Justin Long: Got it. I think you tackled everything. And just to clarify one point, when you mentioned a couple of hundred basis points of improvement in gross margins from the supply chain. Is that manufacturing gross margins and is that just solely related to the supply chain getting better or is that incorporating what you’re doing on the fabrication side?

Justin Roberts: So Justin, that is on manufacturing, and that is solely related to what we’re doing on the internal fabrication piece. The improvement or, I guess, I would say, lack of disruption on the supply chain going forward is a little harder to quantify, but I would say that, that’s a similar, if not maybe even larger number ultimately.