Greenbrier Companies Inc (GBX) 2015 Q4 法說會逐字稿

Hello and welcome to the Greenbrier Companies' fourth quarter of fiscal year 2015 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 Ms. Lorie Tekorius, Senior Vice President and Treasurer. Ms. Tekorius, you may begin.

Thank you, Grace. Good morning, everyone. Welcome to Greenbrier's fourth quarter and full fiscal 2015 conference call. On today's call, I'm joined by our Chairman and CEO, Bill Furman; and CFO, Mark Rittenaum.

We will discuss our results for the fourth quarter and fiscal year ended August 31 as well as provide an outlook for 2016. After that we'll open up the call to the questions.

In addition to the press releases 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 2016 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

Greenbrier had a successful year. In financial terms, we had record quarter and year-end revenue, net earnings, diluted EPS and adjusted EBITDA. In operational terms, we achieved record levels of new orders, production and deliveries and we exited the year with strong backlog.

Highlights for the quarter include continued margin expansion to 22.8% with margins in each of our segments up sequentially adjusted EBITDA of $147.6 million and earnings of $66.9 million or $2.02 per diluted share on record fourth quarter revenue of $765.5 million. Orders for the quarter totaled 2,900 new railcars valued at $470 million and we ended our year with a diverse backlog of 41,300 units valued at $4.7 billion and an average unit sales price of $114,000 per unit. This backlog, a portion of which stretches into 2020 is priced with attractive margins.

We also announced the 33% increase in our quarterly dividends raising it to $0.20 per share and the board authorized $100 million increase to share repurchase program bringing cumulative authorization to $225 million. To date, we have repurchased 2.6 million shares or an 8% reduction in share count over two years. Since October 2013, we returned nearly $145 million to shareholders in dividends and share repurchases. Now I'll turn it over to Bill.

Thank you, Lorie, and good morning. Welcome to our call. This morning, I'm going to try to make five brief keypoints starting out with the essential one that Lorie just made. Today we are pleased to report the strongest quarterly and strongest annual results in our history. And I believe and our team believes we're poised for another successful year in 2016 and beyond.

So some of the positives -- our diversified product offering, our execution on our integrated business model, the past investments that we have made to strengthen and reduce our costs in our manufacturing business and our solid leasing business all have combined in this integrated model to produce the results you see today.

We have a strong platform for qrowth. We have a lower cost manufacturing. We have a strong partner base that's not apparent to the industry. But it's very, very important in the future such as our partnership with Watco, our partnership in Mexico and our partnerships with other steakholders, all of whom have sizeable financial resources more than our own.

We have a strong management team. We've increased and diversified our debt and we have considerable international momentum.

Greenbrier's results reflect the dedication and accomplishments of our employees, who worked hard and collaboratively this year, as well as suppliers and many of our investment partners. These results along with our strong balance sheet, liquidity and favorable outlook enabled us to return $130 million to shareholders since October 2013. It also led the confidence that we have in this model and then our visibility has led to 33% increase in our quarterly dividend to $0.20 per share, and a newly authorized share program.

A major tailwind in 2016 and beyond is our diverse backlog as Lorie mentioned, and you know the quantitative majors of that backlog, but I'd like to mention another feature of this backlog which is its high-quality. Qualitatively our backlog is diverse across product types, many product types and what was built with orders some of the most established names in the railcar customer base. Our backlog provides the foundation on which we will grow and diversify our business as market conditions emerge over the course of this year and into 2017. And it gives us the time to plan and to be nimble, which has been a strength of Greenbrier in the past.

Also our lease syndication and asset management model continues to grow, and is a major part of our franchise. Last year, nearly one third of our production deliveries were made through this business segment and we expect similar volumes this year.

In fact, the recent addition of Victoria McManus to our management team not only gives us depth in many staff areas, but in transaction mutation with our partners around the world. We more than doubled our base of investors in the past 12 months, and I think in the coming quarters you'll hear more news about how that investment base will strengthen our backlog and our ability to make our integrated business model work. Our marine business is also providing positive contributions. So things are going very well. We had a strong quarter.

Let's move to point number two. As we look at the year ahead, Greenbrier is positioning and is positioned for a changing market. But I do not personally understand the gloom and doom of some analysts who seem in fact to believe that for the car building segment and the leasing segment even that the Apocalypse is nearing. I am very optimistic in fact, about a return to a more normalized level of demand averaging 60,000 railcars through a period of visibility until 2019. This is a normal market. We've always done well in a normal market, and normally our market share increases in any downturn, which we're not expecting a catastrophic or a trough.

The economy is strong. It is not appearing to dip toward the apocalyptic scenes that some analysts and some pundits wish to prefer. Regardless though, to what point in the railcar manufacturing cycle we're in today, we at Greenbrier are confident that we will perform well. We are not the same company we were just five years ago or even two years ago. Our strategy to diversify our offerings create efficient flexible manufacturing capacity in low cost facilities, drive more value through our lease syndication model and increase revenue diversity in international markets, so along with our strong balance sheet positions us well for market shifts. As a high-quality builder with a broad product line, we have a history of adding market share and nimbleness when order activity cools. We are poised to do that again if necessary.

We have about a 30% market share in railcar industry backlog, compared to 13% during the peak of the last cycle in 2008. And again, we tend to grow our share as markets moderate. A significant advantage we're carrying in the current fiscal year is our recently completed capital investments that have brought production efficiencies to scale to our manufacturing operations and reduced our costs in those operations. And we will continue to have a relentless view of cost reduction appropriate to scale.

With customers now on four continents, we will continue our plan to aggressively grow revenue from customers outside North America and diverse our offerings - and diversify our offerings away from our historical base in North America. Our recent transaction with Saudi Railway Company is an example of our commitment to global markets. Global sourcing, global scale and international manufacturing including South American and European operation are increasing advantage for Greenbrier.

Two of our directors, Admiral Tom Fargo, Ambassador Butch Swindells, along with Dan O'Neal a longtime director bring us considerable strength and dexterity as we address the challenges in international markets.

Point number three, Greenbrier's prospects are not dictated by the current or future condition of energy markets. I'm not sure why I we seem to be identified as an energy oil driven company; we are not. Early on we anticipated volatility in the global energy industry. We are happy about our positioning in the past in that industry and our future strength for positioning in that industry, but we took action both to not be overexposed, but also to effectively and proactively manage downside risk. For example, we recently confirmed production schedules with major customers in the energy sector. In select cases we worked with customers to change product mix or reschedule a portion of production in return for attractive and future substantial benefits for Greenbrier. These are not order cancellations, in fact we have had no order cancellations. We work closely with our customers and we create value for our customers and we create value for ourselves.

These moves are advantageous for our business, by freeing production space that we now are marketing for railcars in current areas of high demand like automotive, medium and large cube covered hopper cars and intermodal. Since the beginning of our fiscal year 2015, 80% of our new railcar orders that have been for non-energy related applications like automotive transportation and intermodal. Only three years ago, three years ago we were being criticized by analysts because our lower peer margins because we did not have a concentration in energy. But our plan to diversify is now demonstrating resiliency and strength. The mix in our backlog has grown much more diverse eachquarter.

Tank cars for crude and sand cars for hydraulic fracing comprise only 30% of our current backlog and tank cars for crude transportation make up less than 10% of our current backlog. Please know also that a Greenbrier tank car is not always a tank car destined for crude by rail. There are many types of tank cars, and we're returning to a normalized tank car market. And in fact, today we're building pressure vessels for transportation of propane, this is a longtime capability of Greenbrier and our European operation, pressure vessels for many, many types of diverse uses and it is a strong place for us to be.

The industry's implementation of the new HM-251 tank car regulation is still in its very early stages. The DOT-117 tank car standard is the tank car design Greenbrier was advocating to the Department of Transportation and transport candidate to adopt and it was adopted. So we're now ready when - we were ready with the rule issued and we're building this car today. Tank car regulations are relatively recent and are being - remain being interpreted. They have created retrofit opportunities for GBW and will create more in the future.

More importantly and separate from retrofit work the HM-201 recertification process, inspection and maintenance regime established by the AAR for tank cars and required over 10 year i intervals is accelerating and is expected to double in the next few years. GBW is forecasting significant tank car recertification work in 2016 and GBW will be a tailwind for us in 2016.

Number four; consistent with our regular business practices, we will continue to watch market developments closely. And if we see persistent moderation in our markets, we will act quickly and accordingly on contingency plans to address capital expenditures, G&A costs, production rates and we will use other standard mechanisms, which we've used in a cyclical business to help us curtail the impact of revenue shortfalls. We hope this will not be necessary in any scale, but if it becomes necessary, if the battering naybobs of negativity are all correct, we will be prepared.

One more personal item just to briefly mention, as you've seen in our disclosures today, our plan to execute some sales of my holdings in Greenbrier common stock, I really regret having to do this, particularly given the timing of the market. But I only intend to sell a portion of my holdings and I'm not selling now because I believe Greenbrier is at peak value. The reality is there are just a few times that I am able to sell and I have to do this for a safe planning and other charitable giving programs that were put in place long ago. I have a very keen commitment to Greenbrier. I believe Greenbrier has a great future. And again, we're a much different company than we have been before and I believe we have a great future. It concludes my remarks and I will turn it over to you Mark.

Thank you, Bill. I will make a few comments forward looking and then we'll open it up for questions.

As Bill and Lorie mentioned, we believe Greenbrier is well positioned entering into fiscal 2016. We ended August with over $440 million of liquidity from cash balances and available borrowings on our revolving credit facilities. The improvement in our net debt to EBITDA ratio of 0.5 times, along with our enhanced liquidity with the recently completed refinancing of our North American revolving credit facility with the new five-year $550 million facility gives us tremendous flexibility and liquidity. As well, this facility reduces our borrowing cost by 0.5% per annum and has attractive terms and I want to congratulate Lorie on the excellent job she did in completing this facility in a very short time frame. And then I thank our financial partners who continue to remain in the facility and the new partners in the facility.

We're confident about the opportunities in our 2016 and plan to build upon the operating momentum we achieved in fiscal 2015 including the strength of our integrated model, the execution against this model and our backlog which again has attractive margins. Based on current business and industry trends and our current production plans, we expect deliveries in fiscal 2016 will be approximately 20,000 to 22,500 units. At the midpoint of that range over 90% of these deliveries are in our firm backlog or in lease railcars held for syndication which are on our balance sheet. And as a reminder with these railcars all the numbers look constant from quarter to quarter, similar to our manufacturing inventories they're constantly turning and they turn three to four times a year. And while we are holding those railcars we receive rent that far exceeds the interest that we can earn on our cash balances or our borrowing costs under our revolving credit facilities.

We expect revenue will exceed $2.8 billion, diluted EPS will be in the range of $5.65 to $6.15. Further we expect gross CapEx of about $90 million primarily related to efficiency products -- projects with high rates of return and investments in our facilities in Poland related to the recently announced order with the Saudi Arabian railway that we will commence building later this year.

Proceeds from the sale of leased assets are expected to be $14 million resulting in net CapEx of about $75 million to $76 million. And as a reminder, our annual depreciation and amortization runs about $47 million.

Our tax rate is, again, expected to be approximately 30%. It will depend on the geographic mix of earnings and the portion of those earnings that come from our joint ventures, specifically and principally our Mexican joint venture GIMSA.

And speaking at GIMSA, we expect that the earnings attributable to GIMSA will be in the range of $85 million to $95 million for the year and the quarter-to-quarter -- the amount will vary based on the timing of syndications and obviously based on production rates and line changeovers.

The cadence of deliveries in earnings is expected to be a little bit more weighted to the first half of the year about 55% to 45% in the second half, based on the mix of car types and again on the changeovers.

As a reminder many -- when they think of the capital goods industry -- think of the strong US dollar as a significant head wind. Well, for Greenbrier, it's a significant tail wind with the tail wind and the weakening of the peso against the US dollar by over 30% in the last 12 far outweighing the head wind of a 16% to 18% strengthening of the dollar against the Zloty and the Euro since most of our production comes out of our Mexican facilities.

We remain focused on our goals of aggregate gross margin of at least 20%, an ROIC of at least 25% for the second half of fiscal 2016. These metrics will serve to deliver shareholder returns that are enhanced over the long-term. As Bill and Lorie mentioned we raised our dividend this quarter, indicating our confidence in the continuation of free cash flow and we believe we'll sustain that going forward and revisit potential adjustments as appropriate given the outlook that we -- the favorable outlook we have.

We will maintain our balanced approach to investing either in high rates of return projects in our core businesses and CapEx projects, acquisitions that are core to our areas of focus and competency and returning capital to shareholders.

With that, I'll turn it back over to the operator and we will open it up for questions.

(Operator Instructions) Your first question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Hi guys, good morning.

Good morning, Allison.

So solid obviously gross margins this cycle surpassing what your intended goal is. How should we think about, or what's your guidance implying for 2016? Is there more room higher here? Are we sort of maintaining this level? How should we think about that?

You're referring to aggregate margin Allison?

Yes. The aggregate gross margin obviously surpassed your goal. You didn't set a new one out there today. So just trying to figure out how we should be thinking about that in 2016?

We are anticipating that we would operate in a similar range in 2016 than in 2015. And reminder that one effect that would work a little bit, to put a slight pressure on that is the acquisition of the WLR-GBX fleet that we announced after the quarter end with our intent to syndicate that fleet to institutional investors.

We expect that we'll record that when we sell those in revenue and cost of revenue and we're not forecasting 20% plus margins on that sale, very high rates of return but when you do the math on that, that would be the only real headwind that we'd see to it.

But that should be a profitable upside, and it would be baked into our outlook.

Great. That's helpful. The order this quarter for the industry were somewhat disappointing, but not surprising, just given the general industrial environment that we're hearing about these days.

Obviously since we're close to the end of your quarter, what's the cadence of the orders that we've had this quarter, and any thoughts as we enter into next year? I know you talked about a positive outlook, but you're sitting on the industrial side and it seems pretty dire these days.

Well, we know that many people think it's dire. I hope they take their medication and survive it all. As Mark said, for us it's a different environment. Currencies are not hammering our earnings, they're helping our earnings.

The pipeline of opportunities is still robust. As Mark has said many times, industry orders and even backlog is not linear. We've been operating in a period of extraordinarily high backlogs.

When you have a high backlog and you're competing with someone who has a very low backlog instant order space that's additional dynamic as well. But we certainly see strength appropriate to levels of replacement demand and forecast demand by FTR, I really just don't get it because the dollar is helping many, many things, oil is helping many, many things in the US economy. It's just shifting from one type of delivery to another. For example, automotive is helped with the consumer demand. For example intermodal and automotive were helped with consumer demand. US exports are suffering, coal has fallen, but foreign exports out of places like Brazil are becoming much easier and that is the advantage of a diversified footprint.

We just do not share the view that the industrial sector is going to continue to be gloomy. There will be adjustments in rail, but we think that this is just a period that we will be going through like we have many times before.

Great. Thanks for your thoughts.

Thank you. Your next question comes from Justin Long with Stephens. Please go ahead.

Hey good morning. This is actually Brian Colley on the line for Justin this morning. Congrats on the quarter.

Thank you.

Brian.

So just wanted to ask about your visibility for tank car builds into 2016. Do you have enough visibility to say your tank car deliveries in fiscal 2016 will be flat to up versus 2015? Or do you still need to secure some additional orders for that to happen?

You're talking about our backlog in 2016 by about 70% -- or about 9% of our backlog is what in it. So we have great visibility in 2016.

Right. I would say, Brian, just as Mark was saying that at the mid-point of the range of guidance that we gave for delivery, we've got probably 90% of that in backlog or in railcars held for syndication at the end of the year. So that's across all product type including tank cars.

To your point, on tank cars, I would say that the mix, we don't try again a specificity on mix, but I would say it will probably similar to maybe I would say about similar in 2016 compared to 2015.

Okay. Thanks.

Okay.

Cool. And then secondly I wanted to ask about GBW. Can you speak to the visibility you have in that business for 2016, given any contracts you have in place with the retrofits or certifications or any other work?

Yes. GBW has assimilated a complicated shop network and cultures. Jim Cowan is doing a great job, coupled with a team of people from Watco and Greenbrier, while the financial contribution this year was relatively modest. He's put 40x principles, lean manufacturing principles in place. We're negotiating with several major energy owners of tank cars retrofits.

A much more important and often misunderstood aspect of the tank car repair business though is the wave of recertifications that will be taking place.

For example in calendar year 2014, the tank car qualifications were about 22,000 cars; 2015, 24,000, jumping to 37,000 in 2016; 2017, 44,000; 49,000 in 2018 and stabilizing at around a 40,000 rate in 2019.

So this is a real wave of work, it's profitable work. It was the basis for the foundation without retrofits of the plant. So we're looking at healthy EBITDA margins for that business and therefore we see it as a tailwind for us, not a headwind and we're happy with the investment. I believe our partners at Watco are as well. We'll let them speak to that themselves.

Alright. Thanks for the time.

Thank you.

Thank you. Your next question comes from Ken Hoexter with Merrill Lynch. Please go ahead.

Great. Good morning. Bill and Lorie and Mark, if we could just take a step back I guess looking at your target for 20,000 to 22,000 builds. You did 21,100. So you're looking for I guess not much more in the way of efficiency gains or expansion and capacity and it sounded like Bill you were saying to Allison's question maybe no more -- maybe a little bit margin expansion on the manufacturing side, but nothing much given you have this leasing to sell contract.

And looking at your EPS outlook, I guess I'm bringing it all down to the EPS outlook here. This is basically peak as far as earnings. You're just wondering how long you can sustain that peak in terms of earnings? I'm just to trying to understand what message you're sending with the outlook.

Well, I don't know if you know Mark personally or how well you know him, but I think you probably know that he is quite a conservative and cautious fellow, all right?

So I will say a couple of things and be candid about it. Our manufacturing margins continue to exceed expectations quarter-over-quarter, and I don't think they've been sand bagging. The fact is if you put the kind of capital we put into multiple plants and executed all these things that we did to make a lower cost platform, you're going to continue to get cost reductions and margin enhancements throughout the cycle. We have a very flexible plant network as well, so we can size it very rapidly. I don't think - there is only one other company in our space that can match what we can do and we can compete head to head now with cost with anybody.

So I think it's really the issue and the future is not 2016 so much as it's 2017, and that would be affected by the obvious things of demand and margin erosion from pricing if that were to occur.

But again we're looking at a normalized freight car business of being 60,000 cars a year, and that's a fairly stable looking outlook despite the gloom and doom in the industrial segment. These things occur and there's slight adjustment because of the strong dollar and commodities and coal, and velocity in the rail system. But it's just a slight adjustment we believe.

So I don't think that side of the business is as important as the investment and the capital we've put in these businesses to get 25% rates of return on investment. Those are our goals. When we invest, we're getting that kind of rate of return.

So I am a strong believer that the cost reductions that will come from margin enhancement and investment if we can keep stable production runs, keep our backlog intact. There is a lot of concern that we can't, well we can and we've been doing it, we may have a single cancellation. In fact we're making money on anything we renegotiate.

So I'm pretty optimistic about it, and I think the answer will be in the cars. But Mark will only say what he'll say. Why don't you say whatever it is you were going to say about it, Mark?

Well, this is Lorie and I'll just -- it's kind of hard to follow that, Bill. But the one thing that I would add, Ken, as you're aware we do have a diversifying backlog. So this year, particularly in the second half, we're making some adjustments, so switching over and starting up boxcars, which run at a slightly lower production rate, so that's where you have to sometimes dig into a little bit of detail and I know we can get into this on our follow up calls after this call. But that's part of what blends into delivery, talent and guidance as well as margins.

Was Mark jumping in there too or can I jump in with the second question? I guess just really a follow-on is maybe Bill or Mark what is, kind of where do you see best in class or peak margins at the manufacturing side? What do you think is technically feasible?

Yes. So there's always the question of mix, change over, length of production runs and all of the standard things that drive -- that in addition to pricing and execution and production efficiencies that drive margins. But this last quarter, we reported margins over 22% and we believe that there's a -- if we were to continue to run that same kind of mix going forward here, if you were just to keep apples to apples and continue on, that we would be grow margins by, I don't -- several hundred basis points from there.

But all this is really kind of a -- going kind of a hypothetical that depends on a lot of factors in manufacturing. But certainly the manufacturing group is not resting on their laurels and we're not declaring that the journey of a thousand steps that we started several years ago is over here.

Wonderful. I appreciate the insight. Thank you.

Thank you. Our next question is from Matt Brooklier of Longbow Research. Please go ahead.

Hey thanks good morning. I know it's a smaller part of your business, but on the marine side, what's baked in, in terms of marine revenue for fiscal 2016?

All right. I'm going to let Mark address that. We still have a strong marine backlog. We're delivering two barges for one of the best companies in this space, Kirby, and we have a good pipeline of opportunities. We see that as a stabilizing influence at Gunderson. The Gunder's plant is running refrigerated cars. Got a good backlog there and we're running double stack and intermodal looks strong over time. So Mark, why don't you talk about marine? Or Lorie?

This is Lorie. And I would say for 2016 we expect marine will probably be a bit better in 2016 than 2017, so not quite a peak of $100 million, somewhere around $75 million, between $75 million and $100 million on the top line. As you're aware, we launched the largest barge that Gunderson has ever built, which the Kirby1. They're building their second Kirby barge in fiscal 2016 and then have several other opportunities lined up.

I think I'll add just -- I think Lorie said 2016 compared to 2017, saying that 2016 would be better, and I'd correct that, to say than 2015. We don't think 2016 is -- so we're comparing 2016 to 2015 and saying we think it will be upside and we do not think that's as good as it gets for marine.

Okay. Understood. And then my second question, I think someone just tried to take a stab at it, but I'm trying to get a sense for how many retrofits are potentially baked into your 2016 guidance. I'm not sure if you're comfortable about talking to a number given you're in the process of negotiating with customers or maybe you could talk to -- you've previously stated that your retrofit capacity is about 2,500, 3,000 cars, how utilized it will be next year. I'm just trying to get a better feel for the retrofit contribution to 2016.

Right. So this is Mark. And as a reminder the retrofits of course would we show up in GBW, which we account for on the equity method. We do not consolidate it. Bill referred to sometimes I'm a bit conservative.

And we'll just say that while we are very busy in our tank shops and doing a fair amount of qualifications on the retrofit sides, I view that as upside, the orders that we're working on there. So, we just haven't baked much into this guidance; that doesn't mean that we're writing it off. It's just we just don't have much of it baked into our guidance here.

Okay. Fair enough. Thank you for the time.

Thank you. Your next question comes from Mike Baudendistel with Stifel. Please go ahead.

Thanks and good morning. Bill your frustrations with the analyst community is palpable. So I'll try to be polite with my questions and then thanks for reminding to take my Zoloft this morning.

I guess at a high level, could you talk a bit about your strategy for international diversification? Do you have a target in terms of what percentage of revenue you'd like to have outside of North America -- was such a pretty compelled with the orders to the Saudi area?

Sure. I'll address that to the degree that we're prepared to give specific targets. We have targets. I'm not sure that our board is prepared to share them yet.

The foundation of our international strategy is a workforce of about 7,500 employees in Mexico. We have a substantial core of highly trained engineers. We have a cultural diversity program. We speak in Greenbrier already at least is 10 different languages in Gunderson facility alone. We have Russians, Cambodians, Laotians, [Monks] so we have a great foundation for cultural transfer.

Our Saudi contract is really part of a broader Gulf co-operative council market, which then links in to Turkey and in selected cases with full US government support and transparency access into markets that US companies are being encouraged to access.

So we believe that the first step is an American strategy linking Brazil, Mexico, and Latin America. Not necessarily just in railcars, but in those areas where our manufacturing expertise and engineering expertise, and frankly our growing powerful investor expertise, and the ability to leverage our equity investments for high rates of return will pay off, so that's the broad picture.

Our Europe operation is actually under AR certification and US management manufacturing the freight cars, the wagons tank cars that will be going into the Saudi project. That's a cost advantage to us and there are many, many other areas that we believe that foundation can pay off.

There's a lot of turmoil in the CIS region, but in Poland and in even the other CIS countries, there are opportunities, particularly given the geo-political forces. One of the reasons we wanted Admiral Fargo to come on in our Board of Directors, is to bring some depth and experience, so that we can operate safely in those markets.

So I think our aspirations are big. We do want to move the dial, but it's premature to set specific targets, but we are looking at meaningful expansion in the Americas and the Americas strategy, a meaningful foundation for GCC and our Polish facility. There's an aging fleet in Western Europe and there's an aging fleet in the surrounding CIS. There's a lot of technical additions that we can contribute out of our Polish operation, which is a very, very good, well, business right now.

So one brief add on getting to the specifics of the contract that we did announce over there. I said earlier that we begin production later this year. For revenue purposes and delivery of the wagons that will occur principally in our fiscal 2017. Of course that is a very large contract and that would be absolutely a very positive factor and positive event for us as we go into our 2017.

We don't see that as a discrete event. There's quite a lot of construction, but it is a challenging market, and we're very cautious in that market. We have the highest standards of integrity and I think it's one of the reasons we were chosen for this project. And I think that will be an advantage to us in the region.

Great. That's helpful detail. And then my second question is in the past you've talked about orders subsequent to quarter end. I don't know if I've seen anywhere here. But can you talk about orders for September or is that something you're willing to share at this point?

Well, I don't want to share at this point. We've got lots of stuff going on. Mark has reminded everybody that orders are not sequential and linear. I think we'll end up with a decent quarter. But we don't want to talk about that right now.

Okay. Thank you.

Thank you. Your next question comes from J.B. Groh with D.A. Davidson. Please go ahead.

Hi, morning guys.

Morning.

I had a question on -- you mentioned that 90% of your production is already in the backlog and you gave some good statistics on what's tank and what sand in there. I'm assuming there's not a lot of tank cars in the future in that production run rate for 2016. But could you maybe talk about level of increase. I know we are only a couple of weeks into the newregs, but maybe the level of inquiries on those types of tanks and retrofit.

So, we mentioned earlier about the energy cars in our backlog and we also said that energy related tanks were about 10% of our backlog. And they're not be only types of tanks that we build and being more specific about that 10% of our backlog is non-energy tank cars to demonstrate the diversity of that had the backlog and indeed those include pressure vessels and non-pressure vessels.

It would be incorrect to say that we are delivering railcars that all the tank cars we're delivering today are non-energy related. We are building some tank cars today that are energy related. And as you expect that new order activity that we see is principally non-energy related in the near-term. And that for the longer term and particularly with the rigs in the day coming up of 2019 that we still believe that there will be activity level related to new railcars and retrofits before it's all said and done and just in the current environment, as you would expect, it's not very robust on the new cars side.

Hey, look at -- we are building tank cars of the future of that portion of the tank car backlog we announced -- that order is about 3,000 of these more robust tank cars. So we are building them.

But the two drivers would be the rigs themselves and then railroad operating behavior and pricing. I think everybody is aware there has been a hesitancy due to interpretation of the rig, should we retrofit, should we not retrofit, should we wait, what are we going to do? There is going to be a lot of cars surplused overtime.

The railroads are raising rigs selectively on oil and energy and that's complicated, because oil pricing is way down and people are shifting and they're wondering what to do. So that affects retrofits it affects new orders.

But the essential mathematics are still exactly as they were. And if railroads price these cars -- has exceeded pricing these cars, more advantageously than the older cars, including in non-oil, but in the ethanol or another products, and other hazardous products, this is going to be a boost when the regulatory triple wire gets hit. I don't blame people for waiting and trying to figure it all out. It's a fairly recent regulation. And that's just basically what's going on.

The other wildcard, of course is oil and energy. Well, we are not an energy company and I do have a -- earlier remark it kind of a resentment for getting branded that way and we've been really working hard to diversify our base, it's an upside in the future. This energy revolution in America is not ending and we continue to see our customers reducing their costs and improvising and invest American spirit. And that's truly amazing and the frac sand business is not dead. Those who called the ethanol business dead a few years ago are the same people who are going to be eating those words about frac sand.

So we haven't had any real reason for customers to cancel frac sand orders. We've had customers who are trying to strengthen their advantage because they know that sand is going to be required. But try to tell the market that. We know what we know, and I think my remarks on this are consistent with some of our peers. I agree with them.

Thank you, Bill. And then just one cleanup. What's the interest expense that's embedded in the guidance number? It'd be about --

Probably about 1.5%.

$15 million.

$15 million.

Okay. Thank you.

Thank you. Your next question comes from Thom Albrecht with BB&T. Please go ahead.

Hey, Bill and everybody. Thanks for the color and I appreciate the ag new quote there in the beginning, Bill, catering (inaudible) of negativism.

So I'm little slow sometime. So obviously, 30% of the backlog is energy related, you basically said 10% energy tanks, 10% non-energy tank. So we can read the last 10% being those frac sand cars more or less, right?

All right. No, I think it'd be because -- by energy related we were including frac sand and just the energy portion of the tank. So it might inferred it a little bit of -- break it that down like this little bit over 10% of it is energy tanks, closer to 20% would be sand, and then 10% non-energy tanks.

Okay, sure. Yes, yes, okay. And then I know Lorie, I think it was you who commented a little bit on production similar to fiscal 2015, but I wanted to just make sure I'm thinking about it the right way. As you articulated throughout last year, I think you were shooting for about 7,000 tank deliveries in that 20,000 number that ultimately became 21,000 deliveries. Is that, what you're kind of saying again, maybe around 7,000 would be tank whether it's energy or not in this next year's production.

I think it would probably a little bit less as we shift to some pressurized tank cars that will run at a little production rate. So probably, I'd say maybe closer to 6,000, compared to the 7,000.

Okay. That's helpful. And then I guess you're always saying on the whole retrofit issue, I don't think this has been real well understood at least by those of us tied to Wall Street, but is it one of the issues that there's kind of a loophole for how the trains are run. Obviously we had this big explosion in unit trains for energy tank cars.

But as I look at the regs, isn't it something like if there is fewer than 20 tanks in a row, and no more than 35 on a train then those tank cars don't need to be retrofitted. Is that a correct understanding of the regulation?

Well, I think that the -- it's been -- I try to simplify it. It's bit more complicated than the way you expressed it. There are two horns of the pressure for retrofitting and replacement. The first horn is of course the regulation, and that regulation has been challenged by many constituencies are losing. And they're going to lose. But I can tell you they've challenged it and decided whether there was slowing and making them hesitant.

There is the question do we retrofit or do we replace? I think, the people in the energy business who own tank cars, those who own them and don't lease them, they're going to retrofit or replace. I don't think they're going to have a choice.

And the second horn of the pressure that's coming on that market is simply the railroads themselves. Why, in conditions aplenty, would they want to have an unsafe car? The tank car of the future or a retrofit fully compliant car is six times safer in either ethanol or energy oil service. So inevitably, there is going to be demand from this.

Countered against that side of course, is there is a plentiful supply given the production of older cars and the decline in some transportation. It's having an effect. And because there's supply for conditions today, as long as they can move the cars, they've got so many, leasing companies have simply said, we'll play out the strength. But it eventually has to happen, and then that will be something of a boost we believe.

There's a bill in Congress to address the HHFT configuration, make it apply to all cars like Canada, we support that bill, because we support safety. And we think that has a good chance of passing.

Okay. Yes. There's obviously a lot to monitor and watch. But I guess kind of going back to my original question. Is there sort of a loophole though on the way the trains are built? And until let's tightened up, is that also delaying the decision making process?

I'm going to ask Jack Isselmann who is our political and he's actually been very active in DC to address that, because he knows that regulation quite well.

So he's -- you heard the question right.

Yes, yes. Good morning, Tom. So what you are referring to is the high hazard flammable train configuration and the reason we saw the US rules and not in the Canadian rules is the United States requires an elaborate cost benefit analysis that Canada does not require. And the railroads and other shippers have come forward and said -- this arbitrary configuration of cars, that doesn't make sense, which is why choose bill in Congress that Bill just mentioned.

The reality is crude and ethanol go by unit train and those configurations of 20 and 35 cars simply aren't the way that crude and ethanol are going to move. So in terms of the large majority of these legacy DOT-111s operating in crude and ethanol, the [A8NT] configuration, while some call a loophole really has no application. So I don't think you're seeing it have, at least that particular part of rule having a meaningful impact on the marketplace and we're working to change it.

Okay. I appreciate that color. I was just thinking as crude by rail volumes have fallen so much that the shippers might try to put pressure on the train or the railroads to kind of exploit that loophole but I guess it's an ongoing developing story, so thank you. I'll jump back in the queue.

Just such a great question. The railroads themselves have lots of options. Why, why would they use the car that's unsafe in any unit train or any configuration. They don't have -- they are self-regulating, they have a lot of liberty about how they run their railroads and how they price this stuff. They're pricing these things out of existence. I'm sorry for those people who have those investments. We have a few of our own but not many, maybe 100 or so. We're going to retrofit those, but we, like others, have delayed it, so we get the clarity of the landscape and unfortunately, they gave us a three-year when they do it. So that's really bottom line. It's like OPA 90. Everybody waits to the last minute, and then they rush for the door.

By price them out of business you mean the premiums that they're charging when those cars are actually on the trains, right?

They're doing it now. They're being challenged in court. But they're going to make that stick in my opinion. Jack, do you disagree or agree?

I agree.

Yes.

Okay, thank you.

Thank you. And for our final questioner comes from Bascome Majors with Susquehanna. Please go ahead.

Yes, thanks for fitting me in here. I want to ask about the acquisition of the WL Rossfleet after the quarter end. Can you give us a little color on kind of what you paid, what's in that fleet and if you are going to step back just strategically in the thought process there? Because it seems like a bit of a departure from working down the lease fleet and going to more capital light model over the last several years.

Well, Bascome, we have a high respect for you. And one of my personal goals is to make your projections about our company seem conservative in a year or so, all right? Because I think you've got it, you've got it nailed pretty well, all right?

So I think we will give you some color because of our respect for the analysis you've done. So do you want to take shot at that market?

I'll take a --

You're not going to [get] conservative you know?

The conservative you'll get is that we don't want to disclose the purchase price for competitive reasons, because we're reselling those into the marketplace. And obviously it's not advantageous for us to disclose the price we paid when we sold. I can tell you that a few years ago, we did disclose the purchase price at the time of $240 million for a diversified portfolio of used rail cars that on average are about ten years old. And at the time, the purchase price was $240 million. And now we have bought it at a discount to that purchase price.

Why are we taking the trip? We do not first correct some misnomer that we may have created in our own terminology. Our goal has been to minimize the longer-term investment in rail cars and indeed the line item equipment under operating lease on our balance sheet has come down meaningfully from where it was a couple of years ago. So our long-term ownership of assets, we are not the most efficient capital to own those long-term.

We're very efficient at originating and syndicating to multiple investors and then managing those assets. And as we have said on a number of occasions, our strategy is to drive more volume through that business. As Bill mentioned earlier, we've doubled the investor base that we're operating within just this last year alone 12 new investors that we're managing, originating and managing assets for in this area.

So from a strategy viewpoint, this is a natural extension on our end to continue to provide investors, notwithstanding the third of that we said about a third of our production last year went for our syndication model. There's more appetite for investment in high quality rail car assets that we can generate through our own manufacturing arm. So we acquired cars in the secondary marketplace, that is consistent with our strategy to then sell them to investors and then manage them.

The effect, when we talk about a capital light model, and I think you've pointed this out in the past with the rail cars, held for lease indication is in the short-term, the short-term ownership those balances are meaningful, but they constantly churn. And so I hope that is helpful in explaining to you what this is all about.

So let me interpret that very simply. We have a great partner and have had a great partner Wilbur Ross, Wendy Teramoto who is a brilliant member of his senior team remains on our board. Victoria McManus worked hard to do a creative deal. It's a little bit like a good dog, bad dog thing because we've got a lot of really good cars in there, and we think we can unbundle them all and mix them with our fleet and improve our syndication margins. And it's a very good, very strategic move and the others we will sell and some of them we might even scrap.

So it's going to come out fairly - flush through the system fairly quickly under the plan. And we believe in the plan and it's going to help our syndication model -- gives us more product. And our part --

I appreciate --

Go ahead.

I appreciate the detail there. So just to be clear and make sure I understand this correctly. I mean so you're going to carry that in your syndication balance but you have visibility into taking that down and in bundling with rail cars in the near mid-term here.

I guess I'm asking do you think the syndication balance is going to be structurally higher than it was at the end of the quarter for the foreseeable future? Or is this something that could temporarily add to that and then you work account as the cycle potentially cools?

I think you can anticipate, Bascome, at the end of our first quarter in November, that the balance is going to be higher than it was in August, because we acquired these cars after quarter end. And while we expect to syndicate them in the near-term, it is likely that the bulk of that would take place in Q2 rather than Q1.

As you look at the cadence for the year as a whole, based on production plans in the mix of leased rail cars versus direct sale of rail cars, I think you'd see the balance come down in the second half of the year and by the end of the year it come down meaningfully from the first half of the year.

Got it, guys. I appreciate the time.

Thank you. Thank you very much. I appreciate your coverage.

Thanks.

Now, I'd like to turn the call back to Lorie for some closing comments.

Thank you everyone. We appreciate the time that you've taken this morning to read our release, listen to our comments and we wish everyone a safe and happy Halloween.

Ladies and gentlemen, this does conclude your conference call. Thank you for your participation. You may now disconnect.