Greenbrier Companies Inc (GBX) 2015 Q1 法說會逐字稿

Hello and welcome to the Greenbrier Companies first-quarter of FY15 earnings conference call.

(Operator Instructions)

At the request of Greenbrier Companies, this conference call is being recorded for instant replay purposes.

At this time, I would now like to turn the call over to Lorrie Tekorius, Senior Vice President and Treasurer.

Ms. Tekorius, they may begin.

Thank you, Melinda, and good morning, everyone.

Welcome to Greenbrier's first-quarter FY15 conference call.

On today's call I'm joined by our Chairman and CEO, Bill Furman and CFO, Mark Rittenbaum.

We'll discuss our results for the quarter ended November 30, 2014 and comment on our outlook for the rest of 2015.

After that, we will open up the call for questions.

In addition to the press release issued this morning, which include supplemental data, more financial information and key metrics can be found in the presentation posted today on the IR section of our website.

As always, matters discussed on this 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 2015 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Greenbrier.

We kicked up our fiscal year with strong results, continuing our momentum from 2014 with revenue, EBITDA and earnings exceeding our high expectations for the quarter as all of our operations performed very well.

Driven by previously enacted operational measures and mix, first-quarter aggregate gross margin reached a record 17.8%, compared to 17.2% in the fourth quarter of 2014.

Broad-based orders totaled 14,100 new railcars, valued at $1.24 billion during the period, driving backlog to a record level of 41,200 units, the highest in Greenbrier's history.

Subsequent to quarter end, we received additional orders for 3,500 units valued at approximately $400 million.

Now I will turn it over to Bill to give some more color on the quarter.

Thanks, Lorrie.

We are very pleased as our strong performance continues.

This quarter, Greenbrier has announced record earnings, grown our diversified backlog and set 2015 expectation much higher.

The reasons for this are a couple of important ones.

The tailwinds that we expected were stronger than we expected, with increased efficiencies in manufacturing improving margins in manufacturing and in wheels and parts, execution in leasing, the return of the doublestack market and strong auto and other demand, which benefits our new and efficient automotive products.

In addition, the headwinds which we expected were weaker than we were concerned about, specifically, our smoother than expected addition of new lines at our GIMSA joint venture, manufacturing operation in Mexico and a transition from a leased facility with Bombardier to a wholly owned facility in Mexico.

We had much more efficient execution then we had earlier expected and even higher margins at those locations during a time of transition and major construction and moving of plants.

These strong factors and the weaker headwinds have helped set us up for the rest of the year, which is why we've increased our guidance substantially to $5.20 to $5.50.

Finally, I think its clear that longer backlogs in our business give visibility in benefits of long production runs.

Clearly, the new product introduction and the diversification model strategy we set out to accomplish two years ago is working and we are taking market share from our competitors in very key product areas.

I'd like just to make a few simple points and we'll leave more time for questions.

The first is that no single economic variable drives our business performance because of our diversified and integrated business model.

We are well diversified among many different railcar types.

As pointed out in our press release, tank cars today represent about 25% of our total mix.

We have other high-margin car types that are contributing to the value proposition at Greenbrier.

The market clearly has reacted to the price of oil, but with our model, low oil prices benefit US economy and therefore benefit almost all of our other car types.

In fact, lower oil prices are expected to, with the strength of the US dollar, improve consumption in the United States and add about 1% to US GDP over what earlier expectations might have been.

The leading indicator for our business is the condition of the US economy.

Further, our broad-based business is well-positioned to capitalize on the opportunities for either resumption of higher oil prices or a continued period of time in transition as we see these lower oil prices take place.

Greenbrier has changed our strategy over time, and the model we are using is producing substantial results.

Over the last eight years we've transformed Greenbrier by broadening our product portfolio, modernizing and expanding our manufacturing operations in low-cost locations that are more accessible to our primary market.

We've embraced an asset-light leasing model that we are scaling up rapidly.

That's opened up a new channel for us to access growing railcar markets.

We've scaled up our repair operations with the premier joint venture partner in Watco Companies, accompanied by a strong new management of these operations in Jim Cowan.

Finally, we've streamlined and focused our operations at our wheels and parts business and we've seen considerable capital improvements and capital efficiencies and wheels and parts margins, as a result of that.

As we focused on key areas, we will seek to continue to enhance long-term shareholder value.

Our goals are to improve operational efficiencies in manufacturing on the strength of a very large backlog and great visibility, to continue to work with close customer relationships for multi-year transactions, a growing syndication volume of lease railcars that will drive increased margins and income in a leasing business and we intend to share success with shareholders.

The Board approved a quarterly dividend of $0.15 per share and this quarter we've increased the share repurchase program by $25 million to a total authorization of $75 million under the current program with a cumulative repurchase program of $125 million since we began purchasing our stock.

We continue to believe our stock is undervalued and the average purchases to date have been just under $50 per share.

We are making smart investments today for results that benefit across the cycle.

In terms of CapEx, we are going to deploy CapEx toward flexible manufacturing.

We don't see major expansion in CapEx in new car facilities but we do see opportunistic and highly efficient capital returns reinforcing our goal to have a 25% return on invested capital in mid 2016.

Finally, we now -- with continued transition, our Board have six independent directors including -- and including me, only two non-independent directors with the retirement of Bruce Ward after 30 years of service for this Company, who contributed greatly to the growth of our manufacturing business and has been an inspiration in terms of our manufacturing organization.

I'm going to turn it now over to Mark Rittenbaum for a few additional remarks and we will then open it up for questions.

Mark?

Thank you, Bill.

Just wrapping it up here, we ended the quarter with $410 million of liquidity from cash balances and available borrowings under our revolving credit facilities.

I'm sure many of you have noted that our cash usage during the quarter was about $100 million.

We anticipated this would be the case, with working capital usage for increased production, more volume flowing to our lease syndication model and capital expenditures, as Bill noted, as we invest in the future.

In addition to that, we also paid out dividends in a share repurchase program.

Greenbrier is hitting on all of our cylinders.

We expect this trend to reverse itself in the second half of the year, where we will generate significant cash flow.

Our integrated business model and flexibility will allow us to achieve the financial goals that Bill and Lorrie have referenced, that is, an aggregate gross margin of at least 20% by the second half of FY16 and ROIC of at least 25% by the second half of FY16.

We are confident about 2015 and beyond and plan to build upon the momentum in a continuing fashion.

We updated our guidance today for the year, significantly.

To sum that up, deliveries in FY15 will now be approximately 21,000 railcars, revenue of approximately $2.6 billion.

As a reminder, this revenue excludes our GBW repair joint venture with Watco as that is now accounted for under the equity method.

And diluted EPS in the range of $5.20 to $5.50 is similar to prior years.

We expect this to be second-half loaded as we increase production rates throughout the year.

That concludes our prepared remarks and now we'll open it up for questions.

(Operator Instructions)

Allison Poliniak, Wells Fargo.

Bill, I don't want to beat crude up to much, but you've been pretty close to it.

Any comments you can share related to your customers in terms of, just given the pressure they are experiencing from crude prices, how they are looking at equipment decisions, retro-fit potential, the new standards, et cetera?

We have a surprisingly large number of our larger customers who are interested in tank car safety, which we, frankly, we think we've been leaders in that trend.

We think that over the next few years, safety will sell.

It's required in the system.

So we have a number of very substantial customers who have embraced the tank car of the future and also retrofit programs.

The single largest issue is the uncertainty over regulations when -- we expect those will be out by the end of this quarter, but we'd expected them to be out by the year end.

I think PHMSA and US Department of Transportation and Canada need to act to bring more clarity in the market.

We do expect those regulations to create quite a lot of replacement demand and that people will respond to that.

We haven't seen what people fear.

Some people have asked us -- do you see requests for order cancellation or changes?

We haven't seen any surge or really considerable activity in that area.

We have seen a delay in action on -- due to the uncertainties on the tank car regulation, so the new tank car order book has slowed somewhat from its earlier phase, as one would expect.

Probably the first area we will hear -- see any slowing, would be in the sand car market, but we haven't seen real evidence of that.

We're still accepting orders for sand cars.

There is a very substantial volume of sand that has to get shipped, so we think that we are in pretty good shape there, too.

That's great.

That's helpful.

Thank you.

Just in terms of line changeovers and the start-ups in the transition, how far are we through that?

Is that a second quarter issue as well, potentially?

How should we be thinking about that with our numbers?

I'll just reinforce what I said earlier and than let Lorie give more granularity to that.

We are really pleased with the way it's going so far, with the things we were concerned about that might happen that would slow us down, haven't happened.

In fact, we've received a boost as the factories involved with this have really been much more efficient than reasonably could be expected, given the amount of execution they had to do.

Lorie?

Right.

I would just reinforce that.

I mean, that's one of the things that was amazing, I think, this first quarter is that transition happened much better than we had anticipated.

The line is up and running.

They've delivered cars out that line, Allison.

But we will continue to see ramping as we go into the second quarter and through this fiscal year.

I would not expect headwinds, but we would see progression, positive progression as we go through the second quarter and the rest of the year.

That's great.

Can I just -- one last question.

On the mix of the orders you received, the ASP was really high.

Is that just the effect of the tank car pricing or the lack of capacity out there driving pricing up?

Is there a mix of tankcars there?

What should we be thinking on that side?

It's a mix over all.

Certainly, it continues to be a favorable pricing environment, but it is mix when you think of average sale price.

You can also think of boxcars and automotive carrying cars, refrigerated boxcars, all of which have a high average selling price.

It's not just tank cars that have a high average selling price.

That's perfect.

Thanks, guys.

Bascome Majors, Susquehanna.

You've built more railcars then you sold for, it looks like, four straight quarters and the cumulative working capital investment in leased railcars held for syndication has roughly tripled over that period.

I know you've been very vocal about the financial benefits of growing the leases syndication activity next year.

As far as our modeling, when should we see that net working capital investment in finished railcars shift from investment to monetization?

Perhaps a follow-up, what are we looking for to drive that shift?

Let me just make a quick remark and I am going to turn that question over to Mark and Lorie.

At a Board meeting yesterday, we discussed our leasing company.

Our leasing company is literally knocking the cover off of the ball.

But it is reflecting in a higher balance of assets held for sale because the model is working.

We're trying to drive more revenue through that model and we're successful in doing it.

In fact, we're ahead of the five-year plan with some of these major relationships that we've established.

We are continuing to work very closely with our customers.

We are one of the companies that did not turn away from the conventional car market.

We continued to embrace our customers for both sale and lease.

It's very important to remember that as that model is successful, it will have more assets on its books by the very nature of doubling the revenue.

That revenue isn't -- doesn't show up in our income statement because its a syndication revenue.

So I think we need more transparency and more work to explain our leasing company, which is highly profitable to the street and we are going to work the next quarter to do that.

Lorie?

Bascome, back to your point as to when do we expect to see that trend of working capital and railcars held for syndication to come down?

That would the more back half of the year.

As you've probably noted in looking through some of the supplemental data, it's not that, that balance is just absolutely only growing by additions, it is because there are cars that are cycling through railcars held for syndication.

Cars are going in and other cars are being delivered out of that.

I think there was about 1,800 units this quarter that were syndicated.

I will just wrap up on this by reiterating what we've said, that all of these railcars are under lease and all of these railcars we have firm take-outs with investors.

The reason they are on the balance sheet for short periods of time and were constantly cycling cars through, is we bundled them in packages to investors.

While they are on our balance sheet, we are earning and a run rate of about 8% to 10% per annum the rent that we are collecting, and of course, today, we are either sitting on cash or borrowing in our lines of credit at very low rates of interest.

I appreciate the clarity there.

One more on the energy exposure then I'll pass it on to the next guy.

I appreciate the disclosure.

You said the tankcars are roughly 25% of your November backlog.

How much of the backlog is in the small cube covered hoppers?

What's your sense of the proportion of those that are going to frac sand service?

As you know, we don't disclose granularity but it would be under or about 20% of the total backlog.

We have had most of the order activity in doublestacks, boxcars, continuing strength in sand and I think that it is going to be very interesting to see how the sand market plays out.

The technology is driving the use of a lot more sand for fewer and fewer wells.

It's very complicated math and so far we haven't seen a weakness in the activity that is really substantial as some people have expected.

I appreciate the time this morning.

Thanks.

Matt Brooklier, Longbow Research.

First question, wanted a little bit more color in terms of where we are with adding incremental tank car manufacturing capacity.

Then I had a regulation follow-up question.

We're sizing our tank car capacity to maintain the higher market share that we've obtained over the past two years.

We're sizing it for a normalized market so that we continue to be dedicated to building out the tank car capacity we announced earlier, which would have been doubling our tank car capacity from a relatively low base.

Having said that, we expect that the replacement demand will drive for -- driven by safety, will continue to create a much stronger tank car capacity than many people seem to be fearing.

So I think that we are on station to complete our plans as announced and we are not going to shrink from that.

On the other hand, I want to point out that this capacity we are adding is designed to be state of the art and flexible capacity and a simple matter of jigs and fixturing to convert to other car types.

We have a flexible capital-light model.

We have a very good position in our Mexican operations with the strength of the dollar and it's -- these are facilities that can be converted quickly to other uses.

Okay.

You talked to it a little bit earlier, but maybe the market slowing a little bit on the tank car side given the pending regulations and I guess the expectations are that we could have a final PHMSA rule on tank cars by the end of this quarter.

I just wanted to kind of get your pulse on your expectations for a replacement of potential demand, if your thoughts on that have changed with the correction in crude oil prices.

Then maybe you could talk a little bit about GBW and being positioned into what's likely a substantial amount of retrofits, if there has been any update in terms of that part of your business.

Thanks.

Well just briefly, as you know, the tank car of the future, the car that we've designed, parallels what we expect the government to require.

These will be mandated changes in, certainly, crude by rail and probably over time, ethanol.

We don't see any change in that fundamental thing.

We have a car that eight times safer.

We're building the tank car of the future today.

We have a backlog of over 3,000 cars and we are retrofitting cars today to an expected safer standard.

So I think that the replacement and technical side of tank car demand is one that is -- we are all just waiting for Godot here.

We're hoping that the government one day will come up with a solution and finally reach a conclusion.

We believe they will and we believe it will happen in this quarter.

And we continue to believe when that does happen, notwithstanding the price of oil that people will do this, because as Bill talked about earlier, safety matters and many of our customers, many customers out there, safety is just -- cannot be denied.

We definitely expect that this will take place.

There is definitely an environmental backlash that is tagged on to the crude by rail and ethanol products, the more flammable products.

There's 150,000 DOT-111 cars in hazmat service.

Many of the cars that have not been focused on or very dangerous in rivers or watersheds.

So we expect, over time, that if you can create a car that eight times safer, just the General Counsel's of these huge shippers will require them to consider the risks they are taking if they don't improve the safety of the car.

Moreover, in retrofitting there are many, many ways that, with cheaper amounts of money, you can make cars safer with inshields and top and bottom protection so that cars can be made incrementally more safe through retrofits.

So in general, we think the strategy of positioning ourselves in both the retrofit market and increasing our capacity to new tank cars will be a successful one.

Our fallback position would be that we've paralleled all of that with a very, very strong effort to diversify our product mix.

And, I might remind you, we received quite a lot of criticism for that as we were ramping up because at the time, we were entering those various market and improving the designs.

That experience was costly and our margins weren't as great is our competitors who were going for the cream on the top of the cake.

Justin Long, Stephens.

I wanted to ask, first, about the EPS guidance.

Obviously, a pretty substantial increase to the outlook and it seems like most of that was margin driven.

Could you just give some more color on the key drivers to this margin upside?

What gives you the confidence to be more positive with the outlook?

Certainly, Justin, one of the things that gives us this confidence level, two things.

One is the performance in the first quarter here.

As we noted, many of the things that we were concerned about happening didn't happen.

We'd initially guided people that we could anticipate that we would see some fall off in margin in the first half of this year and then build up momentum throughout the year as a result of the moving pieces, moving out of our Plant One facility in Mexico into a new facility.

Also bringing on tank car capacity and capital expansion at our GIMSA facility, as well.

Today, we are at where we thought we would be at in the second half of the year and I think that if you performed the math on 21,000 railcars and you look at the margins we are realizing today and that the momentum that we would have here, or that we currently have here, that you would easily get to the numbers that we have.

Taken a simple -- and then with the backlog that we have, that become simple math, of if 4,000 cars were generating roughly $1 a share, then at 21,000 cars, if you divide 4 into 21, that will get you in the range that were guiding alone.

But that's not why we came up with, or how we came up with this number in and of itself.

It is the backlog and, as you reference correctly, the momentum that we have in margins.

Okay.

Great.

It sounds like, just to clarify, the upward revision in margins is mainly on the manufacturing side.

That's what I wanted to clarify.

Do you have a more bullish outlook for the wheels and parts segment margins, as well?

Well, certainly all of our operations performed very well this quarter.

Manufacturing and leasing continued to drive the bulk of it but that's just the mix of the revenues.

If you look at the margin expansion in our wheel and parts business, we certainly expect that to continue.

Our repair operations are focused on integration and meeting demand that is out there, so to date is not a big contributor to earnings.

But that, as well, we would expect to improve in the second half of the year.

We're quite positive on all the businesses.

It's just the pure math that today with the bulk of our revenues being through manufacturing and I'm sure, as you are aware, as you know and as a reminder to all, that our lease indications flow through manufacturing, as well.

So it's the combination of the manufacturing and our leasing volume that's driving the bulk of it.

To give you of vivid of sample of how a stronger US economy helps us, the resurgence in intermodal and some specialized box cars and the marine business has given our Gunderson facility in Portland a real tailwind, pushing it into the high [30s] and maybe low [40s] in EBITDA compared to only $5 million last year.

So, that is a big push.

It's just an example of how a stronger, diversified economy will help really firm our strategy of having a diversified product mix and increasing our market share in targeted product types where we're creating a better value proposition through excellent design engineering.

Great.

That's all really helpful.

Just as a second question, if I look at your tank car backlog today, and tank car delivery rate, could you just talk about the magnitude of crude tank cars in the backlog and that you are delivering today versus non-crude tank cars?

Just thinking about that non-crude tank car fleet or opportunity going forward, what are your expectations on how orders could trend for that car?

We believe after the earnings, after the regulatory issues are resolved and we have more strength, that the crude by rail cars will be very much like the car of the future, if not, in fact, the design that we've put forward.

As I said, we already have 3,000 cars in our backlog for that type of car.

We're also targeting pressure vessels of other types because we believe there will be replacement demand.

We actually have a significant number of orders for pressure vessels in other categories of hazardous materials.

We have had a very long history in our European operation of producing all kinds of tank cars.

So we have more diversity.

We don't publish the breakdown, specifically.

Maybe Mark and Lorie can give a little more color on it.

Justin, I would just say that obviously in today's environment, the current backlog is weighted a bit towards crude.

But as we've seen across many cycles, when you have long backlog, as demands change, we can make adjustments to that backlog working with our customers if they want to general-purpose, more general-purpose type of tank car.

Okay.

Great.

That makes sense.

I will leave it at that.

Thanks for the time.

Ken Hoexter, Bank of America, Merrill Lynch.

Before I jump in the my question, Mark, can I just clarify something you said earlier?

Did you say all of the leased assets are committed to be sold so if business dries up you're not stuck holding on to those increased leased assets?

Yes.

Specifically, the line item on the balance sheet, railcars for syndication, that market, indeed, all those cars are under lease and all of those cars have a firm takeout with third-party investors.

That end of the market remains very robust in today's environment, while the demand with users of railcars is very strong, the interest by investors in investing in railcars that we manage is even stronger.

Okay.

Thanks.

We don't have any material exposure in that area.

The road to hell is paved with car builders who build without firm takeouts, so we don't do that.

(Multiple speakers) I wanted to clarify that statement earlier.

Your GIMSA payments, or your blow-the-line income, went down.

The minority interest payouts got cut in half despite cars kind of going up.

Just wondering what we should look for?

I know you've now de-consolidated the Watco joint venture, but that was, I think, only $300,000 of income.

Why would that have gone down more than thought if building is improving?

Sure, Ken, this is Lorie.

One of the things that happened, as we've talked about on some of the prior Q&As, is the volume that we're putting through the leasing model or the syndication.

As cars are built at our GIMSA facilities that are going into railcars held for syndication, those cars are eliminated upon our accounting consolidation are therefore not in revenue and gross margin during the period.

Therefore, you have less gross margin that needs to be shown as our partner share or that minority interest.

So that activity relates to more so how much volume is going through the syndication activity.

We would expect, as we are talking about earlier, with that capital expecting to trend down towards the back half of this year, that you with the that minority interest line item increase, reflecting the period in time when we actually sell those cars to a third party and recognize the revenue and gross margin.

Despite it going from $12.5 million to $13 million in each of the back half quarters last year and almost $8 million in the first quarter, dropping all the way down means that GIMSA was producing solely or mostly for the leasing and then that can ramp up as those assets get sold in the back half of this year?

Absolutely.

We would say that it would ramp up considerably in the back half of this year, more toward what you were seeing or even beyond what you were seeing in 2014.

Okay.

That's one of the reasons we need to give you guys more transparency on the leasing business, because we see that leasing inventory as virtually money good or cash, cash equivalents because we have firm takeouts and we have long-term leases and there's very little execution risk.

If we want to cash it in, we could, but we have manufacturing margins as well as leasing and servicing margins locked up in that inventory.

Yes, I can't speak for the street but for us, that was the biggest differential, was that minority interest, just such a big swing aiding the EPS.

It would be helpful to understand how much GIMSA and what is tied to that distributed leasing side.

Lastly, can you detail how much of the transition impacted the manufacturing volumes?

Just trying to understand what is seasonal in volume versus what is impact from the transition in Mexico?

And then, did you quantify what marine revenues were in the quarter, or can you?

On the first part of the question, Ken, on the manufacturing volumes, it's about 1,000 units.

It impacted it to the negative.

If you just look at the production in Q4 versus Q1, Q4 of last year versus Q1 of this year, that is about of 1,000 units, it pretty much is attributable to moving out of Plant One into Plant Three.

Again, similar to prior years, and I say years because it's almost every year, that will ramp up throughout the year, the volumes in production, because we'll not only be increasing production in our [Conquorile] facility, we will be increasing in all of our facilities, both in the US and Mexico and that's how we get to the 21,000 units.

To the marine piece of this, I will let Lorie speak to it.

Sure.

Q1 marine revenue was very similar to Q4, so kind of in the upper teens, millions.

We would expect that to ramp as we progress through this year.

They're doing a really good job over there ramping up on that first curvy barge, the articulated tug barge and we expect that, that activity will continue as they progress on that barge and then start up on the second barge.

We believe the revenue there and outlook there is very, very solid and disconnected from any issues on oil pricing.

We're still seeing solid demand and, in fact, are concerned about capacity constraints if we continue to take new orders over there.

So you're still seeing that demand despite the oil decline?

It seems like that the, I guess, general consensus --

Other types of service and still some energy-related products, as well.

Specialty chemicals and other kinds of things that are driven by cheaper energy pricing.

Wonderful.

Appreciate the time.

Gas prices -- not only gasoline prices, but natural gas prices have fallen.

The dynamics -- I know the market is very fearful about falling oil and the volatility that caused by it.

Boy, there's a lot of positives going on.

There is a really -- there's a real colorful rainbow in all of this for the US economy and for global stability.

I think that it's a much more complicated issue than the press seems to be making it out.

Thank you, guys.

Appreciate it.

JB Groh of DA Davidson.

Mark, I wanted to ask another cash flow question on the inventory build in the quarter.

Was that all related to future growth?

Is there any impact from the move on that number that we saw in the quarter?

Which number are you referring to, JB?

The inventory build.

The inventory number in the cash flow.

Yes.

So, indeed, inventory balances increased.

That is separate from the line item lease railcars for syndication.

Inventory balances increased, as we are ramping up production for the second half of the year, as well as in this environment, supply chain is very important, and key is the entire industry, of course, is operating at high production levels.

So we are making some strategic purchases, as well, to ensure a smooth production.

You also have rail velocity issues that catch our production in Mexico.

Sometimes we have delivery at the border, so we will have a in-transit delivery hung up on the balance sheet and as US rail congestion has occurred, that factor has influenced it.

There is definitely an effect of the line changes as we fine tune the production of the new plant and the extrication from the leased plant and so on.

Again, that will reverse itself.

We anticipate that will reverse itself in the second half of the year.

Okay.

Good.

I don't think you've talked much about the other announcement today, the Brazilian investment.

Could you kind of give us the strategic thinking behind that?

I guess this will be rolled up in on the consolidated until you exercise the option?

Yes.

Maybe two or three important points with a little more color from the press release.

First of all, Amsted Industries has been out good strategic supply chain partner not only to Greenbrier, to many other companies.

They are a very sophisticated company.

They have been in Brazil for 20 years.

Maxion itself, Iochpe-Maxion is a premier auto parts company that has a substantial investment and a lot of employment in the Monclova area where we have our GIMSA facility.

In other words, these are people we know and people we trust and Amsted's been in Brazil for 20 years and it's castings as part of Maxion.

So we have a base of about 7,000 employees in Mexico, today.

About 65% of our revenue is international, counting Europe and Mexico.

We believe that in the future, that South America will be an important trading partner and as part of an Americas strategy, we want to leverage the base in Mexico, the base that we have a collaboration with Iochpe-Maxion and Amsted.

While the total market in Brazil is relatively small, it's an important exporter to the rest of South America and coupled with the trade agreements between Mexico and Brazil, the opportunities for diversification out of that base are very, very attractive.

The fleet is aging.

There is a significant fleet, there's a real move toward transportation infrastructure in Brazil.

While it is not going to be a home run in terms of 2015 and 2016, it will be a good long-term earner and a building block for an America strategy which we expect will allow us further diversification from vulnerability to US car building cycle.

Great.

Thanks for the detail.

Mike Baudendistel of Stifel.

I just had a follow-up on that last question on Brazil.

Under what circumstances do you expect exercising the option to purchase the larger equity interest?

I think that the combination of these three companies and the experience from each, the element that they make find very beneficial is our experience in, frankly, freight car engineering and manufacturing and assembly and commercial strategies related to selling and leasing freight cars and exporting freight cars and parts.

We believe that we can add material to the value of that company, both commercially and in engineering and manufacturing efficiencies.

If that is vindicated we will have the optionality for a very modest amount of money to potentially be in a very inexpensive price in a country that is the six largest economy in the world, I believe, today, and is very rich in natural resources.

We think, longer-term, about this sort of thing, we are interested in diversification of our revenue base and we just think that the optionality we're getting here is one of the most valuable aspects of the entire deal.

If we can validate this model and create strong EBITDA growth, the Company is profitable now, we think we can materially increase its profitability together with our partners and we'll make a dream team.

If that happens then we will be certain to exercise that option.

For a very modest amount of money, we are buying the potential of a 60% interest in a really very important company.

Great.

And market.

I also wanted to ask on the wheels and repairs services business, where do you stand now as far as consolidating the underperforming services centers?

You're referring in our repair operations?

That's right.

So, really, since the time of the acquisition, as I referenced earlier, we have as much -- Jim Cowan and his team have as much focused on, indeed, bringing the two businesses together and operating under of common set of practices and principles and is making great progress in this regard.

That's where the focus has been.

Indeed, the focus this year, overall, is operationally and while we are focused on the bottom line, we're also focused on building the right, that right property here.

In the second half of the year, we'll indeed -- Jim and his team will be focused.

Today, they are focused on the underperforming businesses, as well as the businesses that are performing very well.

They expect in the second half of this year that we will be taking a closer examination and Jim's team will be taking a closer examination at either the ones that continue to underperform or where we have overlapping operations.

I think the overlapping operations is very important.

Mark and Rick Turner are our two Board representatives on this four-person Board.

There are two Watco representatives and Rick Webb and I have very close communication on that company.

We are very positive about the work that Jim Cowan is doing there.

He's a good operator.

He is very experienced in operations, both new car manufacturing and repair, and he is really going to make a difference.

We'll see most of that coming in the second half and in 2016.

Great.

Thanks very much.

Steve Barker, KeyBanc.

Mark, you gave a good walk-through on the thinking behind the guidance increase and that got me to wondering about opportunities and risks to that new forecast of 21,000 cars and $5.20 to $5.50.

Is there any way deliveries could come in higher, or will you be running at what you would consider full capacity in the back half?

The short answer to your question is yes, they could be higher.

Probably more possibility of that than on the downside.

Just thinking about that downside scenario, would it be a capacity or operating reason?

Why would they fall below that range?

Major acts beyond our control, strikes, supply-chain interruption, fire in a crucial supply chain partner.

War, famine, pestilence.

(laughter) Got it.

What could drive upside?

The continuing operating efficiency.

We've really had an amazing first quarter.

We have a slingshot effect every year where our first quarter is always a little disappointing and we build momentum in the second half.

You know, we've been going around telling people cautiously we are going to have a weaker first quarter and the operating people just kind of really embarrassed us here and I think they continue to intend to do this.

I'm not baffled by it, I'm delighted by it.

But, we've been overly cautious in our concerns about the downside.

Sometimes, everything starts going well and it seems like this is a time that really favors Greenbrier.

It's really remarkable that we have this kind of backlog and continue to negotiate multi-year agreements with people who are very, very classy people.

We've got a product people are wanting and I'm humbled by it.

I'm humbled by the performance that we've had in the first quarter.

This is going to be a good year unless something really strange happens.

You all use the simple math of, if 4,000 cars is $1 than 21,000 should be $5.

As you look at the backlog mix and your operating plan going forward, is there any reason that we shouldn't extrapolate that simple math to next year as a base case and then assume you just get more efficient as you go?

Well, I'll just mirror back what everybody worries about.

I guess everybody's entitled to worry if they want to.

Order cancellations, labor, supply-chain interruption.

But we are continuing to have momentum in order inquiries for the product that we can offer.

We have a reputation for reliability, excellence in engineering and we keep our promises.

We are taking market share.

These are big changes and we have a diverse product mix.

We have great visibility into 2018 and beyond.

And we are booking space.

We may, on a win-win situation, if customers come to us and they want to change a product and we can make money on it and they can and we can help them, then we may do those kinds of things.

Yes.

I would say this momentum should carry us into -- through 2016.

Again, what can go wrong?

There's always something that can go wrong.

We worry about those things, too.

We worry about them sometimes too much.

Sometimes when things are going well, you just have to accept it, and it's going very well.

This quarter ought to have been -- should have been closer to what the street with estimating and we were guiding to that.

It's a little embarrassing, actually, because our operating people just really got the bit in their mouth and went.

They're going to continue to have momentum.

I will follow up.

One thing you said, you talked about order cancellations and some of the other OEMs have talked about non-cancelability of contracts for railcars.

Is there is a scenario where you could see cancellations?

Or do you expect that, that backlog gets delivered?

We expect the backlog to get delivered.

The orders are not cancelable.

But one have to appreciate that huge corporations often don't keep their agreements, so there's always conflict potential.

We don't see it happening in the marketplace.

We just don't, yet.

We understand the reason why the question is out there, because of this roller coaster with energy.

But you know, this is not the first rodeo for most of these energy people and they're used to long-term thinking.

If you look at the dynamics here, just look at what it costing.

Saudi Arabia, $180 billion.

I can't imagine as a rational strategy you want to do this forever and they said they don't want to.

I think that they are sending signals to a lot of different folk.

I think those folks are getting those signals, but we don't want to over react.

Right now, we've got some pretty tough customers who are still dedicated to carrying out their production plans.

Just to ask the question directly, has anybody approached you to talk about deferrals or cancellations?

One small customer has, but we have talked it through with them and we could -- they haven't canceled anything and we are working with them to see if we can move production around on a win-win basis, if they really want to do it.

I think there's just a lot of anxiety underlying that particular discussion.

That's not to say that we won't be approached or others won't be approached.

It's a risk factor that were watching very closely.

But we've got a great backlog, a great visibility.

If you'll recall, we had a very tough time with General Electric a few years ago when they attempted to cancel.

We don't -- we won that.

We felt we came out of it very, very well.

It's not easy to say we're not going to take a railcar.

It's a contract and people have to be accountable for their choices.

But we will work with customers if customers want to come and talk to us and we've got some flexibilities in our model, our production model in doing that.

Very good.

Thanks, gentlemen.

Thank you.

Our last question is from Sal Vitale, Sterne Agee.

Thank you for taking my question.

I appreciate it.

Bill, first a clarification on a point you made earlier.

I think you said roughly 20% of the current backlog, was that the overall small cube covered hopper piece or is that just the frac sand piece?

Counting the small cube, it could be a little higher than that for cement and other items.

We're getting some of our mix is in that category.

So, I don't think I was thinking of -- I was thinking of all of the small cube covered hoppers when I answered that.

I might be a little low on that number because I might have been confused -- might have been thinking price, or I might have said -- the number might be frac sand and I don't have that number right at hand.

The frac sand piece is probably some number smaller -- lower than 20%?

I would guess that's probably about right, Sal.

The total small cube covered hopper is probably a little bit high.

Bill was probably focused on frac sand and total small cubed covered hoppers is probably in the upper 20%.

Okay.

Thank you.

Then, the next question I have is just to drill down a little bit more on the minority interest phenomenon regarding the cars for syndications.

Was the dramatic drop-off in the minority interest, sequentially, was that the sole reason for it?

Was that also that in general, that tank cars comprised a smaller percentage of your overall manufacturing operating profit?

No.

The beautiful part, Sal, is that it is just because of those cars that were being built at that facility are not in gross margin because they are hung up on the balance sheet.

Is solely because those cars are going through our leasing syndication model at this point.

Right.

So then your current guidance for the year encompasses that ramp up in the minority interest towards the back end of the year?

Absolutely.

It will be a significant ramp up in the back half of the year.

Again, if we are guiding towards the back half revenues in margin and overall earnings are going to be much heavier than the first half, that goes along with the fact that we are going to be monetizing some of these assets that are currently on the balance sheet.

Right.

I guess a related question.

I assume -- was it fair to assume that if I look at your ASP for the quarter, I see a roughly -- call it $7,000, $8,000, $9,000 decline sequentially from 4Q.

Is that also the effect of the syndications issue?

You are not realizing that revenue, essentially?

There maybe some coming up from that.

Overall, is going to be mix because we're going to have more intermodal cars.

Again, depending on the timing of small cube covered hoppers, so that's just more mix oriented issue.

Is it fair to say that if you look at your overall deliveries in 4Q and 1Q relative to 4Q, that the tanks as a percentage of overall deliveries, that declined?

They may have been down a bit, yes.

Okay.

That's fine.

Then, the last question is really on your ASP for the December orders, thus far.

I think it's about $114,000.

You mentioned some of the car types that could be driving that.

I think you also said that you probably didn't receive too much in the way of tank car orders in December?

Is that fair?

I think that is fair.

Is going to be more heavily weighted to some of the car types Mark was talking about that also have high ASPs.

Maybe not as high as tank cars, but box cars, automotive flaps and racks, all of those have sizable ASPs.

Okay.

The last question is really on, I guess, if I look at your current -- I was about to ask about the backlog you had offline.

On the cancellations, I understand your position there.

Is it possible that rather than see an outright cancellation, that you basically negotiate with the customer so that perhaps the price on the railcar is reduced somewhat?

No.

We wouldn't probably do that.

I would emphasize, these are our customers and there have been no cancellations.

There's been one discussion, which worked out so there was no accommodation required in the orders going forward.

However, these are customers and we want to please our customers.

We want to serve our customers.

We will be happy to talk about swapping car type, swapping positions with people who need cars faster than they were able to get before.

There is ample opportunity to be very creative and this kind of environment with our total backlog the way it is.

We have many customers who would prefer to have cars earlier and that we can accommodate them and make them happier and we can defer a capital expenditure for another customer that maybe has some issue that we can address, we will be happy to do those kinds of things in a creative win-win approach.

But right now, we just haven't seen it and don't see it yet.

Okay.

That fair.

Of the remaining -- based on your guidance of, say, 21,000 cars for the year, and you did 4,000 in the first quarter.

Of the 17,000, so beyond that, just based on backlog of 41,000, that leaves about 24,000 cars beyond 2015.

How do I think about how many of those are slated for, say, 2016 delivered at this point.

We haven't broken that out, of course, and that's part of the reason that you are asking the question.

Part of that is that we don't break it out for competitive reasons of how much open space that we would have in our FY16.

Certainly, on some of our production lines the backlog goes out well beyond 2016 and then some of the lines that does not.

There's -- a quite a bit of that is for 2016, Sal, but for competitive reasons we don't want to provide that information now.

We're also working with established customers with long-term needs for multi-year orders to book space, firm space from production in 2017 and 2018.

So our strategy is to work with premiere customers, be loyal to our customers who brought us to the party and work with them on their issues and then have multi-year agreements that will continue to build the backlog in the years to come.

That last point is an important point as people have asked numbered these questions about what is going on in the industry and what are we seeing from our customers.

Bill has addressed the piece about that we haven't been -- there have been no cancellations.

They've been no significant requests by customers and only one customer has approached us discussing their order.

But in this environment, we're seeing not only did we announced very large orders of a broad based orders, but we are in a number of discussions that continue about multi-year type of arrangement.

This is in all of our business lines, today.

So the players, as Bill noted, that are to long-term players out there that have been through many of these cycles, they appreciate what's going on here.

Bills said it's not their first rodeo.

Indeed, they appreciate that space is still very prized commodity out there.

So those players continue to be very bullish on the market and we continue in this environment to talk about multi-year type of arrangements.

Okay.

Lorie, just a clarification.

Is the [17] for the rest of the year, is all of that already in the backlog?

Yes, Sal.

Most of it is in the backlog.

We will probably have to wrap this up (multiple speakers) --

Very good.

Thank you very much.

I appreciate your time.

Good question, Sal.

Thank you very much.

Thanks, everyone.

We appreciate your time this morning.

If there any further follow-up questions don't hesitate to reach out.

Thanks so much and have a great day.

Thank you.

That does conclude today's conference call.

You may disconnect at this time.

Thank you.