Greenbrier Companies Inc (GBX) 2016 Q1 法說會逐字稿

Hello and welcome to the Greenbrier Companies first-quarter of FY16 earnings conference call.

(Operator Instructions)

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, and good morning, everyone, and welcome to Greenbrier's first-quarter FY16 conference call. On today's call, I'm joined by our Chairman and CEO, Bill Furman, and CFO, Mark Rittenbaum.

We will discuss our results for the quarter ended November 30, 2015 and comment on our outlook for 2016. After that, we will open up the call for questions. In addition to the press release issued this morning, which includes supplemental data, more financial information and key metrics can be found in a presentation posted today on the IR section of our website.

Also our annual meeting scheduled for 2 pm Pacific today will be webcast. 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.

The strong results in Q1 demonstrate the strength of our diversified business model. Initiatives we've implemented to enhance operations are translating into greater financial results. The first quarter represents the fourth consecutive quarter of record-breaking financial performance.

Highlights for the quarter include adjusted EBITDA of $161.8 million and earnings of $69.4 million, or $2.15 per diluted share, on revenue of $802.4 million. First-quarter aggregate gross margins reached an all-time high of 23% compared to 22.8% in the fourth quarter, driven by efficiencies in our manufacturing segment, favorable product mix and pricing, as well as strong lease indication activities.

Our gross margin in the manufacturing segment increased this quarter to a record 23.7%. Our wheels and parts business was impacted by lower volumes due to declines in rail loadings and falling scrap steel prices during the quarter.

Our lease fleet utilization declined during the quarter due to two factors. First, the portfolio of about 4,000 railcars acquired during the quarter has an 87% utilization rate related to off-lease coal cars, and we have approximately 500 tank cars off lease. Excluding these two items, our fleet utilization is a strong 97%.

Orders totaled 500 new railcars during the first quarter, and year-to-date we've received orders for 2,600 railcars, with an aggregate value of nearly $250 million, or an average price of about $96,000 per railcar. The orders were for a variety of car types, including various types of box cars, medium and large cube covered hoppers, intermodal cars, automotive carrying cars, and tank cars. The fact that we received 500 units in three months and an additional 2,100 units in a little over a month demonstrates the lumpy nature of orders in our industry.

Our November 30 diversified and high quality backlog of 36,000 units valued at $4.1 billion continues to be a key positive for Greenbrier, giving us good visibility into FY17 and beyond. This backlog contains favorable pricing and margins with less than 30% being energy related. Based on current production schedules, approximately 10,000 to 11,000 of these cars will be built in FY17. Of course we expect additional orders for delivery during this period.

And now, I'll turn it over to Mr. Furman.

Thank you, Lorie. Good morning. Well obviously, we posted a strong quarter, and we expect to be able to continue our momentum, even though circumstances in the industry are a little more cloudy as far as visibility in terms of orders and outlook. Record revenue and adjusted EBITDA in the first fiscal quarter, and this is possible only because we've had a strategically transformed Greenbrier with an integrated business model, diversified product offerings, operating across multiple geographies.

The latter part is very important. Greenbrier's efficient because we're nimble and we utilize flexible manufacturing capacity in low cost facilities. I'm very proud of the results of this transformation thus far during a business cycle marked by dynamic changes in energy prices.

Let me address directly the concerns of many analysts that follow our stock, and many of you who are reacting to the Chinese economy's issues. The industry is going through a period of adjustment, and industry forecasts have been revised, reflecting that the railcar market is expected to approach more normalized levels. I think it's very important in historic terms to look at the drivers of this, and it's also important not to over react to it.

We do not intend to over react to what I personally see as a form of mild hysteria. Fracking activity has slowed, and as a result, demand for tank cars carrying crude and small covered hoppers has also slowed. We've spent the last nine months to a year balancing our production, negotiating with customers, reaching win-win solutions, and we feel very comfortable about our backlog and run rate through the balance of 2016, and indeed, through 2017 in terms of our fiscal years. That gives Greenbrier a great deal of time to maneuver.

So we don't see, as a matter of fact, the softness in order intake as a cliff event in any way, but rather a step down to more normalized environment. We see a normalized environment in our industry in the 60,000 car replacement range dipping to 50,000 in terms of economic adjustments if things were to get worse.

Tank cars for crude and sand cars, hydraulic fracking, our overall energy exposure represent approximately 27% of our backlog. Specifically, tank cars for crude transportation make up less than 11% of our current backlog, and yet, people seem to connect our Company with the energy phenomenon. And yet that is yesterday's news; in fact, it's news from two years ago, as opposed to a profile of what we are doing with our business today.

More importantly, we're still seeing healthy demand for other car types. Automotive cars, these are for us, profitable cars, because we've invested over a five-year period in improving the efficiency of these cars and demand and replacement cycle in automobiles is still strong.

Boxcars, we have been awarded recent orders in boxcars and we're running two lines of those, and we have a very high market share. And boxcars remain the work horse of the North American fleet. They are an older portion of the fleet, and not very many have been built over the last several years. In fact, the energy phenomenon in specialized tank cars and other things have driven some cars that should have been replaced long ago to the sidelines, and those cars will be replaced.

Larger cube covered hoppers for plastic pellets. Also we expect with the building of chemical companies in the United States and plastic companies that have invested in US infrastructure, coupled with low gas demand will continue to provide -- or low gas prices rather, will continue to provide demand for that type of car.

We are not seeing any order cancellations. We don't expect to have order cancellations. We continue to work with our customers to renegotiate production schedules and assist our customers, because they are our customers, and we help to fill their current needs, which proves to be beneficial for both us and for them.

History is not a good guide for Greenbrier, because we are a much different Company today than we were just a couple of years ago. We're no longer limited by a narrow project range. We have larger, more flexible backlog, which gives us time to adjust.

Our order activity over the past years gives us a very diverse and high quality backlog. We've grown our market share to 30% of the railcar industry backlog compared to 13% during the peak of the last cycle. Greenbrier has approximately two years of car building at full capacity, given the theoretical ability to produce 21,000 cars at full production annually.

And we don't expect to sit here and do nothing with the resources that we have. We have a strong balance sheet. We have the capability to employ capital at very high rates of return. And indeed, as you can see, our ROIC numbers we have been doing exactly that, and we intend, as you'll hear from Mark and Lorie, to invest those funds wisely.

Historically, Greenbrier was primarily an intermodal and forest products Company. Today, we built virtually all railcar types. In fact, we do build all railcar types other than coal cars.

And as North American markets moderate, as you track the reasons for that moderation, a high US dollar, improved velocity in the rail system, decline in coal, decline in oil, loadings. At the same time, those forces favor other countries building of railroad infrastructure. And indeed, our investments in Brazil and in the Gulf Cooperative Council with a major contract of Saudi Arabia reflects our intentions to diversify our international mix to make up for the softer markets in North America.

I think that that covers the fundamentals, and I'll turn it back to Mark next.

Thank you, Bill. We ended November with nearly $500 million of liquidity from cash balances and available borrowings under our revolving credit facilities. The continued improvement in our net funded debt to EBITDA, which is on a last 12 months basis, is 0.6 times, compares to 2.7 times just three years ago.

Our strong balance sheet and bringing down our funded debt in this manner reflects our continued focus on creating a very strong balance sheet. This balance sheet, the liquidity, and our outlook for positive operating cash flow provide us great flexibility in deploying capital.

We remain committed to enhancing shareholder value and returning capital to shareholders, while also seeking and identifying opportunities within our core competencies to generate future diversification and growth. We announced our sixth straight quarterly dividend of $0.20 a share. Also in the quarter, we repurchased 521,000 -- approximately 521,000 shares. And over the past two years, we've returned nearly $150 million to shareholders through buybacks and dividends. We have remaining Board authorization for approximately $101 million under our current share repurchase program.

We are confident about the opportunities in 2016 and plan to build upon the momentum we gain in 2015. With our strong Q1 and our current outlook for 2016, we reaffirm our previously disclosed guidance and are confident about our ability to achieve it for 2016. We expect the cadence of our financial performance to be more weighted towards the first half of the year, as the second half of 2016 will be impacted by line changeovers, product mix changes, and lower production rates in certain lines.

And just to recap our guidance, it is that we will deliver approximately 20,000 to 22,500 units, with about 55% of the deliveries in the first half of the year and 45% in the second. Revenues to exceed $2.8 billion and diluted EPS in the range of $5.65 to $6.15.

Just providing a little bit more color on some of the line items, we expect gains on sale of equipment, which includes the syndications of approximately 4,000 car lease portfolio we acquired during the first quarter, we expect these gains to be about $10 million to $15 million, with the timing of these sales to be weighted to first half of the year. Some may wonder whether any of those gains of sale from the lease portfolios were included in the first quarter results. While the purchase did the sale, there were no sales included in the first-quarter results, again, we -- since the quarter end, we've sold off about one-third of that fleet and we expect to sell the bulk of it again during Q2. Just on an accounting front, as we sell those 4,000 cars that we acquired last quarter, those are currently held in lease railcars held for syndication, and when we sell them, we will record revenue and cost of revenue on our leasing segment.

Annual depreciation and amortization will be about $50 million. Our tax rate we continue to expect to be around 30%, minority interest or earnings attributable to our GIMSA JV to be about $85 million to $95 million, and the quarter-to-quarter amount will vary based on the timing of railcar syndications. Gross CapEx was -- we expect to be about $94 million, primarily related to North American manufacturing enhancements and investments in Europe related to our Saudi contract and proceeds from the sales of leased assets to be about $85 million, this includes $41 million that was transferred -- that was entered to in a sale leaseback. We remain committed to our financial goals that we established a little over a year-and-a-half ago and we are confident they will serve to focus management in enhancing shareholder value over the long term.

I'd now like to turn it back to the operator to please open it up for questions.

Thank you.

(Operator Instructions)

Our first question comes from Bascome Majors from Susquehanna.

Yes, good morning. First off, congratulations on the results. It does feel like a long time ago, but I think it was just 2013 we earned less in a full year you did in this first quarter so congratulations on the results and the earnings here. I want to drill down on one of your comments earlier you said about 500 off lease tank cars were partially responsible for the drop in your railcar lease fleet utilization you saw in the quarter and it was my understanding that you owned just a few tank cars in your long term lease fleet. So can you help us understand and am I wrong there or are these potentially newer cars sitting in storage without a live lease? Just help us understand what's driving that utilization from the tank car fleet there?

Sure, Bascome. You're correct in the thread there that our long term -- the line item equipment on operating lease on our balance sheet, which is our long-term ownership of assets, contains very few tank cars and at a couple of hundred cars, all of those are on lease. And we do have some newly built tank cars that are in finished goods inventory, so not railcars held for lease syndication or lease railcars held for syndication. The finished goods inventory, which is part of our line item inventory that are off lease, and that is some bridge production in there, so that's where that line item is.

Okay, so there are some newest cars on the balance sheet. It was my understanding that when you were producing, you always had a long-term lease attached. Can you just help us understand how those ended up in inventory or is that something we should be concerned about?

Sure, Bascome, and thank you for joining us this morning. We generally have a policy of not building in anticipation of orders, although that's a policy that we, across our product lines sometimes have exceptions to. In this particular case, as we've said, we haven't had order cancellations, but we've negotiated aggressively with customers who have had issues. This is a fairly small number of tank cars in storage compared to the tank cars that many in the industry now have with the oil issues and energy issues and the pricing of oil that has come down.

So we have, in our negotiations, substituted cash purchases, extensions of the relationship to broader product mix, negotiated changing pricing, and then all that we've taken some of these cars and delivered them into storage. We do have targets for those cars. There are pockets of opportunity that we are continuing to pursue, so we're not terribly concerned about it. But it isn't in any way a contradiction to the policy that we generally follow, and it isn't an indication of speculative behavior. It's really the fallout of very positive negotiations with customers and are absorbing a little bit of pain, along with some of the pain that those customers have absorbed by buying cars.

Understood, I'll let someone else follow-up there, but Bill I just had one more for you while I've got you here. As you mentioned earlier, you're coming off two of the best quarters your Company's ever had. You transformed your business into much more diverse and profitable one than it was even six or seven years ago. You've got a deeper bench than you had, and you just sold about half your stock. As the Chairman of the Board, can you shed some light on the CEO succession plan that you've got for Greenbrier? And to the extent you can, who internally is on the short list and whether or not you have external candidates in mind as well.

I wouldn't like to comment on that overly much, other than comments you've already said. Our Board is very focused on building a strong organization over the past two years, in particular, three years, we've built a very strong manufacturing organization with a very strong leasing and commercial organization. And within that bench, we have strong internal candidates. We actually are looking in this year to take action to make the steps for CEO succession, and we have been doing that over the course of the past year, although it's not been obvious. I don't want to say they are going to have to pry my cold hands off of the steering wheel or anything like that, but I don't have any immediate plans to cut back my time devoted to Greenbrier. I enjoy the job. I think we've been very successful together with this team, but over the period of time, we definitely will be doing that.

As far as the stock sales that I made, I think it's only prudent when one sees the kinds of markets that we've seen and the lack of constancy in the view of our industry, which I don't share. I'm much more optimistic about this industry and about the positioning of our industry than others, but I have very few opportunities to sell stock, in terms of your comment. It's only prudent to do estate planning and who knows what the future will bring. So I did take the opportunity to sell half of my shares. I don't have any future plans to sell stock. I'm certainly committed to, if this is a cycle, to staying available to Greenbrier and working through this cycle, at least in terms of visibility. So those are the things I would say about your question. Thank you for the question.

Thank you for the time, guys.

Thank you. Our next question comes from the line of Matt Elkott from Cowen and Company.

Thank you for taking my question. Can you guys provide additional commentary regarding the types of railcars included in the 800-car order since the December 15 order? And on the plastic pellet front, it was obviously good to see that you guys received some orders in December, as you try to establish and grow presence in that market. What are the areas where you feel that this product still requires some fine-tuning, given it's a fairly new product for you guys? Is aligning -- is it the lining, is it other things? And how has it been received by customers so far?

That's a good question, and thank you for your coverage and thank you for the question, and I know you're interested in plastic pellets. That's an area where a number of orders have already been placed. But in general, we believe that that market is approximately 22,000 to 25,000 cars will have to be built to address the demand of the industry as a result of the huge investments that have been made in the Gulf and the low energy prices with gas here in North America. So we do see that as a robust market. In some ways, our entry into the market has been crowded out by other car types. The car types that are stronger today and will be stronger today, even with the good news from China is that a weaker economy there and a slight devaluation of their currency will allow intermodal and other cars to probably move eventually as consumer confidence continues to build. Although consumers aren't really spending as much, we do see that as a car that will be strong in the future.

So the other production has limited our participation in the market thus far; however, in both our GIMSA facility in Mexico and in our facility in Plant 2 in Sagahun, we've invested substantially in lining and construction of not only prototypes but assembly runs of plastic pellets. We believe we have an excellent plastic pellet car, and we believe we can be very, very competitive in the marketplace. There are several excellent participants in that market already, so we are competing with them. But we believe we can be one of three strong participants in that, and that our cost basis will be equal to any of the others or below the others and our quality will be superior.

And Matt, back to your initial question as to what was the mix of car types that were ordered since December the 15th, it is a mix. It's a mix that includes automotive-related railcars, intermodal, refrigerated box cars, and a variety of non-energy tank cars.

That's very helpful. And just one more follow-up, just wanted to make sure I understand this correctly. You guys don't think that you will have to do any major tweaks to the initial design of the 300 plastic pellets that you delivered in 2014, I believe, in the new order?

Well that's a great question. We already have done a lot of design work on the standard offering that we have in the marketplace. So there were not any issues with that, but in terms of total capacity and efficiency, we think we have a very good strong contender now. While we haven't been producing a lot of plastic pellet cars, we have line space opening up, and that's definitely an area, as I think you've observed in your analysis, that Greenbrier is intending to push.

Absolutely, and on the tank car front, have you guys shut down any capacity over the past three months to four months?

We've made some adjustments to our capacity; we've slowed some lines, which will be reflected in the guidance that Mark and Lorie have given for the second half. We have backlog, for example, we have about 11,000 cars in North America in our backlog in 2017. It won't be until 2018 that we see the necessity of closing lines; we would prefer to keep stable workforce and slow production as we see things through this cycle. By 2018, most of the analysts who are following energy expect a much different energy picture than we see today.

And indeed, through our vantage point in Saudi Arabia, we see that there is a limited amount of time that Saudis themselves and others in OPEC can handle these low oil prices. It's very effective what they're doing today. They are succeeding in their goals, but their breakeven pricing is much higher than many frac producers, in terms of their budgets, their annual budgets. They have got very, very low cost oil, so they can afford to do this now. But on longer term, they can't afford it to do it. So they're facing this in a few years. So we believe that as production is diminished and marginal producers are driven out and balance of the world, that things will come back. So right now, we're just slowing our lines to some degree, adjusting and substituting with manpower into products which have higher demand, like box cars and items like that.

Great, that's very helpful thanks, Bill, thanks Lorie.

Thank you.

Thank you our next question comes from the line of Ken Hoexter from Merrill Lynch.

Great, thank you, good morning. Maybe either Bill or Mark, can you talk about why the bigger build up front? I know you talked about some changing of lines. Can you maybe detail that a little bit in terms of what margin impact do you expect that to have or does it not, based on the current -- the build that will continue in the back half? But maybe a little bit more detail on what's shifting within those lines through the time frame of the year?

Sure I'll let Lorie talk to that. Margins are always an issue in a market that's adjusting downward; however, we have made some real momentum in cost improvements, so our margins have been improving. And despite what people may think the outlook for margins, particularly the cars and backlog is very, very strong. So Lorie, why don't you take that question.

Thank you, Bill, and thank you, Ken. Yes, as we look out towards the back half of the year, we are making some production line changeovers. And the impact of that as well as some of the adjustments that we've made to some production rates will be a bit of a headwind to our financial results, but we still expect margins to be robust. And you guys have been following us for quite some time, so you're aware that when we're going through those line changeovers, like starting up boxcars, we tend to be potentially a bit on the conservative side as to our expectations. So we'll see how our manufacturing group, who has done an outstanding job over the last two years, as they're get a little closer to the start up, how they're feeling about things.

Just to understand that then, is this a line change over -- you threw in the adjustment to production rates. Are you slowing production so you don't burn the backlog too fast and are customers requesting delays to deliveries? Or is this, hey, we've built all the tank cars we're going to build now, so one of those lines we've committed we're now shifting to box and auto cars. I just want to understand -- again, that's what I was asking in terms of the timing of the build.

So it's more the second category, not necessarily tank cars, but there are two types of energy cars, tank cars, where we have a robust demand. Remember, we have a tank car of the future. We've got good solid orders for those. We do expect to deliver those, and we'll also do a lot of retrofits as the clock ticks down for the mandatory change to a stronger tank car. But with respect to sand cars, we have changed the production rates in those cars, and in some cases, moved out of covered hoppers and into boxcars. We've been changing our auto lines and increasing production in that area, so it's really in the second category of line changeovers related to different emphasis on different products.

Again, our whole strategy in the last five years has been and is today to continue to diversify and improve the cost efficiency of our designs, our tooling, and our ability to quickly, nimbly move from one car type to another. However, whenever we have a changeover, as we're having with boxcars and auto cars today, and in the second half of the year, we will have the effect of having some down time or dead time that has to be absorbed into the financial results.

So I know you mentioned, Bill, before -- I know the first question was, hey, great profits in the first quarter versus multiple years ago, what you earned in a whole year. But when you think about what's going on in the rail sector right now in terms of the pace of car load declines, and really we only -- I think we've only seen this a couple times in the last 30 years. What does that indicate for you in terms of your customers' needs and demands in terms of keeping that backlog robust enough to live through what may be a downturn versus what we've seen on the car manufacturing side over the last couple of cycles? Obviously, your diversity and increasing presence in Europe and South America, you've shifted a little bit to keep that going. But maybe just from your perspective having seen this industry for so many years, your thoughts as we enter what looks like another one of these many downturns.

To be specific about the last part of what you said, we expect to be building backlog in the Gulf region with the members of the GCC. We expect to build backlog in Latin America, and specifically in Brazil. That investment is going quite well. We anticipate increasing our investment in Brazil. The issues that cause exports to decline here, that stronger dollar, and specifically in weak currency markets like you have elsewhere, cause exports to rise. So the replacement cycle for the freight fleet is -- the timing is much better in other countries that are exporting when the United States commodity exports are diminished by the stronger dollar. But I think, Mark, you want to take a shot at the first part of the question?

Well Ken, I'd just say coming back full circle to Bill's comments about what we expect to be more normalized demand, and indeed, the industry forecast of the 60,000 cars, and then dropping to 50,000 cars, that we subscribe to those forecasts with the underlying assumptions. And we believe that in that type of environment, given our diversified product offerings and our low-cost footprint that we will compete very well in that and be able to deliver a solid base of earnings off of that.

More specifically in terms of backlog, I'm pretty sanguine about the backlog. It is rather remarkable to have $4 billion for backlog. In our entire history, we've never really seen the spikes in orders and demand that we saw during this energy boom. I think that boom is yesterday's news. What we have been used to doing is operating with a much smaller backlog, and in as many ways, it's easier to operate with a smaller backlog when you're competing against people who aren't as successful and have open space. And you can certainly see -- look around the industry and see some producers that do not have the margins we have but that are getting some market share. Why is that? Because they've got open space and we don't. We've got to offer deliveries in 2018.

So when you have a lower backlog, and we have a chart on that. We should publish it, we use different techniques than we do and our market share is always double. Always, without exception, double during periods of low market demand. We've been used to operating with four or five months backlog in the past. So it's just we manage the Company differently. We're experienced. We have a team that knows exactly what to do, and I think that it's not something that troubles me whatsoever. In fact, I'm elated to have the backlog we've got and virtually two years to maneuver. And with a strong balance sheet, if we can't figure out a way to sell cars and make investments in a climate like this, well then my succession plan ought to be accelerated, but the rest of the team ought to be accelerated faster, so I'll go after them.

Thank you very much for that. Just a real quick one. Do you break out the marine revenues within the sector, or can you give us an update on how marine revenues did? And that's it for me. Thanks a lot for the time.

Thank you, Ken. You're always very attentive, although you're sometimes pessimistic. The marine, let me just quickly, once you get that in a minute, Lorie, but the marine area is important to Gunderson. Our Gunderson facility had trailing EBITDA in the $50-million range. It's a Company that we're -- it's our primary intermodal car builder. It's the only marine builder. You might notice that our marine backlog has declined from the $100 million or so that we had. That market has also been affected by [a wall], but we do have visibility in a pipeline. So we expect to be able to continue that marine business. Margins, I will let Mark and Lorie address that as far as what we're doing on the margins.

On revenue this quarter, Ken, was similar to the last several quarters, they are right in the $20-million range. So our activity in marine has been fairly consistent for probably at least the last five quarters.

I would say that the two major barges that we've taken on, the Kirby barges have really good features, because Kirby is an excellent company and we want to make them very, very happy. Obviously, when you're doing one of the largest vessels you've ever done, we probably had a little drag on our margins at Gunderson from -- more than a little drag from the marine side. Because Kirby is a very efficient company that negotiates hard and we really wanted those contracts. It really establishes us in a different level of the game and margins in those barges have not turned out to be as much as we anticipated. And that would be an upside, not a downside, because as we transition to other customers, we would expect more traditional margins, and actually our margins are improving on the second barge.

Bill, Mark, Lorie, thanks a lot for the time again. Appreciate the insight.

Thank you. Our next question comes from the line of Justin Long from Stephens.

Thank you and congratulations on the quarter. I think for my first question, I had one on the guidance. Could you just talk about the quarterly cadence of EPS that's assumed in the guidance over the remainder of the year? And within that, you've talked about the delivery guidance and you talked about some of the changeovers that are occurring in the second half. But could you provide some more commentary on what you're assuming for your non-manufacturing segments, some of those key assumptions for the remainder of the year?

Yes, I'll make one comment and Lorie can also chime in. One of the comments we made, Justin, was on the gains on sale, either out of our lease fleet or from the acquisition of the former WLR GBX fleet. We expect that -- and we had very little gain in Q1. We expect for the year that to be in the range of $10 million to $15 million, and that the majority of that we expect to be in Q2. On the other hand, we said that deliveries would be weighted about 55% to the first half of the year and 45% to the second half. So you can back into our Q2 deliveries from that given that you know what Q1 is and our outlook for the year. So that means in terms of deliveries, our Q2 would be the lowest quarter in terms of deliveries, really driven by the timing of lease syndications. So, Lorie --

I would just clarify when you say the timing of lease syndications and how that impacts our deliveries, that's when we're syndicating our own newly built cars, because that's what goes into delivery. The syndication of the 4,000-unit portfolio is not included in backlog, nor is it included in delivery. But as you've stated, we expect the bulk of that to occur in the second quarter which will drive that.

The only addition I would make to that is that we have both risk factors and possible tailwinds or upsides in our plan. Our finance folks have very strong opinions that we will make our plan. The Board has tested those opinions. I agree with their conclusions. We think that we may have some assumptions in the plan, which is really directed to your point, that could not come to pass, but we have others that are not in the plan that probably will come to pass. So on balance, we're a nimble Company, and every month, we meet in a management session for a day and we go through each operating unit.

Some of the upsides would be GBW, recovery in the wheel margins, which are inventory-related transactions that would allow us to run at higher rates that are in the plan. Some of the downsides would not be able to executing on some of the syndications that are in the plan. And if we had margin erosion through some [stochastic] event, which we don't anticipate. But those are just examples of kinds of things that are swirling around in the quarter-to-quarter management of the Company like this right now.

And I would just add one more thing, Justin, is that as I mentioned earlier, we do have some line changeovers that are occurring that will be likely in our fourth quarter. So that would be -- if you look at the back half and you're thinking about weighting across the quarters, I think Mark's already talked a little bit about the second quarter, and so then the fourth quarter would be a bit of potentially a lighter quarter, depending on how those changeovers go.

Thank you, that's all really helpful. And I'll just add in one more. So Bill, you talked about your ability to adjust to the changes we've seen in the demand environment. And clearly, there have been a lot of improvements in Greenbrier over the last several years. So with that context, if we see the industry transition to building around replacement levels, how should we think about the gross margin profile of the business in that environment?

Well it took you guys a long time to get around to that one. So I think that I'm going to let Mark and Lorie address that. There's positive things and there's negative things. Certainly with lower demand, people are going to become more aggressive on pricing if necessary, and we're seeing pricing behavior. The mix also addresses -- the mix is very important to margins, but what would you like to say about that? They muzzle me in some questions and I'm not allowed to address that question.

You see how that's working out.

But Bill, I think you touched on some of the difficulties in trying to quantify something like that, because it's very dependent on what's going on in the market. As we look across the broad base of demand that might be happening in a more normalized year of say 50,000 to 60,000 units of delivery in North America, thinking about our broader product mix, which -- so Greenbrier is a different Company today than we were the last time we were in that environment. And trying to do our best guessing of what does normalized pricing look like and how that might play out when you think about gross margins, particularly where we've invested quite a bit of money to be very efficient in our manufacturing. We're thinking that margins are going to be strong in that sort of an environment, likely over 15%. I don't -- I'm not -- I don't know if I'd be so bold as to say 20%, which is a bit lower than where we are today, but definitely not falling back to the levels that you've seen Greenbrier in the past.

The other couple of things that I would point out, because sometimes in reading everyone's report it seems like people have kind of thinking about 2016 as we have 2016 in the bag and looking forward to 2017 as maybe the more normalized market. And I would just want to point out a couple of things that make that not so much the case for Greenbrier. Number one, we do have a very strong backlog with good pricing and excellent margins going into 2017. So as I said in my comments, we've got about 10,000 to 11,000 cars in current backlog that will be built in 2017 based on current production plans. The other thing that's happening for us in 2017 is we'll be delivering those Saudi cars out of our Polish facility, which we expect those to have very robust margins. And then as Mark was mentioning earlier, GBW continues to gain traction in what Jim Cowan and his team have been doing throughout their organization. So those are all reasons why I would say if the market is looking at Greenbrier and looking past 2016 to say so 2017 is a bit more normalized, here is a few reasons why that normalized market maybe is a little further out than what people are anticipating.

Okay great that's really helpful. I know it's a tough question. Thanks for the time.

Thank you. Our next question comes from the line of Allison Poliniak from Wells Fargo.

Just a question on that leasing and services business. With the gross margin decline, you highlighted transportation and storage costs. Was that related to the portfolio acquisition or is there something else there? I'm just trying to think about to think about that one as we go forward throughout 2016.

Well we would, Allison, it's a good question and as we discussed earlier in the call, the decline in the fleet utilization that we reported is due to the portfolio that we acquired has about an 87% on-lease utilization rate. And so since we count that in the statistics, of course that brought the number down. The other thing is that we had 500 newly built tank cars that were off lease and incurred some transportation and storage costs. So we would expect that, as Bill talked, we expect to get those cars into service. And we would, while we're all constantly managing the fleet, I would not expect that -- I would expect that those numbers would temporize going forward here and that the decline that you saw is not something that we would expect to continue.

Okay perfect. And then just on the lease syndication business, it's in the presentation and you talked about 12 times. I think that it was three months. Has that changed at all? And then also if you can give us any color in terms of backlog and what -- how much of that is related to the syndication business?

Sure, if you actually look at our supplemental slides, you will see that -- well, the first part of your question, yes, three months about an average [dwell] time. That is correct. And in fact, on the fleet that we acquired in Q1, we've already sold off one-third of that, about one-third of that fleet we would expect to complete that, that substantially completed this quarter. Similarly on the new cars, the average dwell time is about, it does average three months. And if you look at the detail of our railcar assets and lease syndication, our newly built cars that are in there have actually gone down. So we're churning those right now faster than we're replenishing that we expect that to -- that's more even out in the second half of the year. As far as the backlog that is subject to lease, we'll get that information, about 5%.

Okay, great perfect.

15% sorry, of the backlog is in the lease, and that would be in addition to the railcars that are already on the balance sheet as railcars for lease.

Allison, you ought to hang out with Barbara Wilson, Wells is now the largest leasing Company in North America, so--

Yes, a lovely compliance team puts a stab in that one, but I guess where Wells Fargo Rail is as of today.

They've done a great job of growing their business and they're a great customer of ours.

She's had good things to say too. Thank you.

Thank you. Our last question comes from the line of Matt Brooklier from Longbow Research.

Thanks, good morning. So first question, try to get a sense for ASP progression as we move through the year. Just trying to -- your guidance suggests that ASP is going to moderate throughout the year. I'm just trying to get a sense for if revenue per railcar in fiscal 2Q looks similar to what it was in fiscal 1Q and then there's a big step function in the second half, or is there -- are expectations for just linear ASP moderation as we move through the year?

So that's a great question, Matt. In general terms, I would say the ASP is going to be probably fairly linear, and I would bring that back though to what Mark was saying earlier, since we have indicated that about 55% of our deliveries are going to happen in the first half, 45% in the second half, and since we had a really great first quarter, that will lead you, if you're thinking about the pace of manufacturing revenue, second quarter is going to be a lighter quarter than the first quarter.

Okay.

From a revenue perspective for manufacturing.

To get a little color, as we change our production mix, we would move away from a higher value tank car. If we were to increase our backlog and double stack cars, that would tend to reduce the ASP. On the other hand, boxcars and the auto cars have a higher ASP, so that was more the background of the reason of why we expect it to stay rather linear in the next year's time frame.

Okay, that's helpful, and also realize tough question. Second question with respect to tank car regulations, the market doesn't really seem to be in any hurry to replace cars or retrofit cars, at least in my opinion. Could you talk to the potential magnitude and cadence of retrofits this year? I don't think you have much retrofit revenue baked into your FY16 guidance, but I'm trying to get a sense for if tank retrofits do eventually start to happen, does it happen in a meaningful fashion this year, or is it -- do we think it's more of a next year event?

We are doing retrofits now and we're seeing order activity in terms of the pipeline increase at GBW. The driver of the recovery of margins in GBW will be operational improvements and homogenization of the network. The modest amount of retrofits in our budget for this year, a couple hundred cars and then more importantly, on tank cars, what was the HM201, there's a new name for it, designation for it. But each year, every 10 years, tank cars and hazard service have to go through a fairly rigorous inspection, and that involves an upgrading and repair. And the demand for that is sufficient to really create a base load in the repair network that we have for tank cars.

And not to duck the question, but there has been a lag in accepting or in responding to the federal regulations. Those regulations have been modified slightly, but from the perspective of implementing safety, all stronger and people are just taking the time that they have, given that there are surplus cars in the system, they're letting the clock run out. They're returning cars to lessors, and we don't have any cars like that in our fleet. And if you've got cars that you're operating with and you've got two more years to decide what to do with them or a year-and-a-half, you're probably going to turn back cars in that window and then either buy new ones or buy a car that can be retrofitted and retrofit it then.

The companies that have cars that they own, these are typically oil companies, are actually beginning to commit to retrofits, because there's really no way that they can duck that issue. So the [sunk] costs in those cars will be evaluated compared to the cost of a new replacement car. And in general, if the retrofit makes sense at say $60,000, then they will go ahead and do that. And so that's where we see the immediate demand is that people that have the cars and are just going to go ahead and do them.

Okay, helpful. It just seems to me like we're pushing a lot of potential retrofit work out to 2017, and 2017 could be a very busy year, especially if crude prices recover here. Appreciate the time.

Yes that's exactly what happened with the OPA90; people had 15 years to double haul the oil tankers that were used in the Alaska trade. They waited until the last three years to do it, and there was a huge rush. And we expect that phenomenon to occur if energy prices recover. But there is a glut of -- oil prices now have really declined, and that's not something we track particularly is affecting our business, but there's just a glut of the cars out there, and it makes economic sense for people to do what they're doing. But in 2017 and 2018 they are going to, there's going to be a rush to the door, and that's when we expect much more robust demand. It's not the way we thought it would play out, but we didn't anticipate the drop in oil prices that would cause demand to fall for the cars themselves.

Okay, appreciate the color. Thanks again.

Thank you. Appreciate the time.

With that, we're going to draw this call to a close. We do appreciate everyone's time and attention and interest in Greenbrier. For those of you that we weren't able to get to your questions today, we will look forward to following up with you tomorrow. And once again, we will be having our annual meeting later today on the West Coast, 2 'o clock webcast, if you're interested. Thanks again.

Thank you, speakers, and that concludes today's conference. Thank you all for participating. You may now disconnect.