Greenbrier Companies Inc (GBX) 2016 Q2 法說會逐字稿

Welcome, hello, and welcome to the Greenbrier Company's second 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 call over to Ms. Lorie Tekorius, Senior Vice President, Chief Financial Officer, and Treasurer. Ms. Tekorius, you may begin.

Thank you, and good morning, everyone, and welcome to Greenbrier's second quarter FY16 conference call. On today's call, I'm joined by our Chairman and CEO, Bill Furman. We'll discuss our results for the quarter ended February 29, 2016, and comment on our outlook for 2016. After that, we'll 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. 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'll 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.

We posted solid results for our fiscal Q2. Highlights included adjusted EBITDA of $108.2 million, and earnings of $44.9 million, or $1.41 per diluted share on revenue of $669.1 million and deliveries of 4,500 units. We also completed the profitable syndication of a significant portion of the 4,000 railcar portfolio acquired in our fiscal Q1, generating revenue of $100 million, and gross margin of [$6 million], which is reported in our leasing and services segment.

There was an additional $24 million of revenue deferred in conjunction with the transaction. The decline in deliveries, compared to Q1 is the result of lost production time due to major line changeovers, and a lower volume of new railcar syndications. Just to clarify, none of the units syndicated as part of the acquired portfolio transaction are included in deliveries.

Our lease fleet utilization declined during the quarter, primarily driven by the sale of railcars on lease. As a reminder, our owned fleet is fairly small, 9,400 units, and a small number of units off lease can significantly move the dial on utilization. The number of off lease units actually declined modestly from the first quarter.

Orders totaled 3,000 new railcars during the quarter, and included automotive carrying cars, box cars, intermodal cars, tank cars and covered hoppers. Total orders were valued at nearly $310 million, or an average price of approximately $103,000 per railcar. As market conditions moderate, we expect the timing of orders to continue to be lumpy. Our diversified backlog of 34,100 units with an estimated value of nearly $4 billion continues to provide good visibility.

Aggregate gross margin, excluding the acquired railcar portfolio syndication was 20%. The syndication generated high rates of return for such a short-term hold period, however, the margin percentage had a dilutive impact, resulting in aggregate gross margins of 17.9%.

Looking at our manufacturing segment, our gross margin was 20.4% reflecting continued strong operating performance, partially offset by production inefficiencies due to line changeovers and marine production, as well as lower syndication volume. Wheels and parts margin increased to 10% from 7.3% in the first quarter, primarily due to seasonally higher wheel and component volumes. Leasing and services gross margin dollars were up, Q2 compared to Q1, driven by the syndication of the acquired portfolio which was dilutive to the margin percentage. We continue to demonstrate the strength of our balance sheet and diversified business model with past initiatives implemented to streamline operations, translating into solid gross margins.

I'd like to now take a few minutes to discuss the various ways we monetize railcars through our lease syndication model, and how it impacts our financial statements. We have intentionally been driving more volume through our model of originating leases from new railcars, which once built are carried short-term on the balance sheet and leased railcars for syndication. Upon sale, these transactions are reflected in manufacturing revenue and gross margins, as well as deliveries.

We also opportunistically sell railcars out of equipment on an operating lease. The results of these transactions are reflected in gain on sale. As we've refined our syndication pipeline, we've had the opportunity to acquire groups or portfolios of railcars that we can blend in with our newly built railcars, to give our syndication customers a more diversified portfolio. The results of the sale of the acquired railcars is reported in leasing revenue and gross margins.

While the various ways these transactions impact our financials can be difficult to model from a segment perspective, our focus has been to drive value through our integrated model and provide products that satisfy our syndication customers needs, while providing a positive return to our shareholders. Satisfying customers' needs and solving problems are an integral part of Greenbrier's DNA, and will always be a part of our business model.

We ended February with over $580 million of liquidity from cash balances and available borrowings on our revolving credit facility. We generated cash flow from operations of $212.8 million during the quarter. Our balance sheet is strong, with net funded debt of just $114 million, and a net funded debt to LTM EBITDA of just 0.2 times. This compares to 2.7 times just three years ago.

We remain committed to our balanced approach to capital deployment and enhancing long-term shareholder value, while continuing to seek and identify opportunities to grow the business. In today's release, we announced our quarterly dividend of $0.20 per share. We will be issuing another release tomorrow, correcting the reported record date for the dividend.

We repurchased over 533,000 shares of common stock at a cost of $13.3 million during the quarter. Over 3.2 million shares have been repurchased at a cost of $137 million since the inception of the share repurchase program in October 2013, representing about 10% of our diluted share count. We have $88 million available under our share repurchase program.

Looking forward, the second half of 2016 will be impacted by line changeovers, product mix changes, and lower production rates on certain lines. We also expect some minor headwinds to our aggregate gross margin percentage, as we syndicate the rest of the acquired railcar portfolio over the second half of 2016. With the strong start to the year, and our current outlook, we remain confident in our ability to achieve our 2016 guidance.

Based on current business trends and production schedules for FY16, we have narrowed our previously disclosed guidance for deliveries to be approximately 20,000 to 22,000 units, revenue to exceed $2.8 billion, and diluted EPS in the range of $5.70 to $6.10. And now, I'll turn it over to Bill.

Thank you, Lorie, and good morning. I, as those of you who followed us, and follow us closely know, we've made some significant bench-building management changes recently. And I'm thrilled that Lorie has taken on her larger role now as CFO at Greenbrier, as well as the new responsibility Mark Rittenbaum has been given as Executive Vice President for Commercial Leasing and Finance. We thank both of these officers for their many contributions over the years, and look forward to many more.

Just in the context of the numbers, I'm happy with the results for this quarter, and as Lorie has indicated, we're going to have a year that will be within the range of expectations that have been set. So what I'm going to try to do today, is to provide some context on our markets, and more importantly just to remind you of our business plan, offer some perspective on how Greenbrier is a much different and stronger Company today, compared to five years ago.

Today Greenbrier is much more capable than it was of successfully navigating, and in fact, thriving in shifting market conditions. Our management team, as well as the Board of Directors and our employees at Greenbrier have all played important parts in navigating through this five year transformation. Indeed, we're experienced at operating through business cycles. And I might remind all of those who follow us, that there is an essential cyclicality to the railcar business. Today, my perspective is that much of railcar demand will be specific to the US dollar, and the strength of the US economy. And the US economy, to me, continues to look to have strong legs, particularly in some areas of industry. And while we focus often on those industries that are weaker, there are many businesses in America which we build cars for, such as box cars, automotive, and intermodal that have prospective outlooks that are strong.

From 2011 to 2015 as everyone knows, our entire industry benefited from a dramatic increase in railcar deliveries, primarily driven by a significant demand for energy-related railcars. In 2015 industry deliveries, for example, had ballooned to over 80,000 units, and industry backlog far in excess of 100,000 cars, driven largely by the energy renaissance in America and high oil prices. Oil prices are now lower. It is up to you to decide, if and when they will rise again. I believe they will, and I believe that the most significant thing that has occurred in the last decade is this new energy independence in the United States, and in North America.

However, back to our industry, this growth was unprecedented, and at Greenbrier, we successfully stepped up our output to meet demand. But we continue to focus to diversify and balance in all of the various meaning of those words, including the word diversity, and we prepared for less prosperous times, knowing that the circle in our industry goes round and round. Sometimes our customers need us, and sometimes we need our customers. And again, our experience in operating through such times will be very, very useful in the coming cycle.

And I shouldn't characterize it as a cycle in that sense. We see it as a return or normalized level of demand. In 2015, we reported record deliveries, while still growing a record backlog that provides us great visibility over the next two years, with the benefit of the experience that comes again, from operating our business through numerous cycles.

Our management and Board of Directors have always been focused on the fact that shifts in demand, sometimes significant, are a normal part of the business, so that the breadth of product range, the diversification that we have done in our products, efficiency, quality and service are the keys to success. So our investments in new products, expanded services, efficiencies, and entirely new industrial markets have indeed transformed Greenbrier, and now position us for continued success and diversity, including in international markets which have strong legs, and in a continued normalized, reasonable demand for railcars in North America.

So let's try to recap just what Greenbrier looks like, and our business looks like today. While we all know, we manufacture railcars in North America and Europe. We also now have an investment in Brazil, and a growing presence in the Middle East. We have nine wheel services locations, four railcar parts assembly and reconditioning locations in our wholly-owned GRS business unit.

Beyond that, we partnered with Watco Companies, a leading shortline and port terminal operator, on GBW Railcar Services, a 50/50 JV that provides repair services at more than 30 strategic rail locations across America. Within those areas, we're specializing in car types, and we are engaged in services design that will reduce transportation costs to our customers and enhance profitability, and GBW is looking very strong. And we've energized our railcar leasing and services platform, where we continue to have about 9,500 owned railcars, and a capital-light model with 250,000 cars or units under management. In 2015 alone, we originated $700 million in lease transactions which feeds our system of repair, manage railcars, and creates multiple value picks for our shareholders, and stability for our workforce and for our supply chain.

We're also making important strides in our wheels and parts business. Just today, we announced GBSummit, a 50/50 joint venture with Sumitomo Corporation of America to establish an axle machining facility located in San Bernardino in the West Coast. This creates a new West Coast alternative for axle service near major intermodal rail operations that serve America's two busiest container ports, with a long time supplier and trusted supplier. And when it opens, in early 2017, GBSummit will be the prominent location on the US for machining new axles of all kinds, and transportation costs, and advantages to Greenbrier and its shareholders, and to our customers will be great.

Geographically, however, we are expanding far beyond our traditional North America markets, as we continue to see strong opportunity abroad. We launched a highly successful and earlier referenced award winning railcar manufacturing joint venture in Brazil. And Greenbrier's manufacturing teams have improved the efficiency of that entity through our global supply chain partner, another strong partner, Amsted Rail.

And as early reported, we were awarded a contract to build over 1,200 railcars for Saudi Arabia Railway, which are being built under AAR standards at our Greenbrier Europe facility in Poland under US, in collaboration with our Polish colleagues by a US team, and these are being built now. I recently led a Greenbrier delegation to the Middle East Rail Expo in Dubai, the largest convention of its type, the rail market participants in the Gulf, and in northern Africa, and the Middle East, and Greenbrier was the only American-based railcar manufacturer to significantly exhibit at that Expo, which was attended by more than 9,000 people.

So while we acknowledge that North American railcar deliveries will slow from where they were in 2014 and 2015, those years were aberrations in many ways, which were driven by an event that is now going back to a more normalized demand. What kind of demand do we expect? We're a little bit more optimistic, I must say, than industry forecasts, forecasters. We do expect, in our case to have strong demand in other parts of the world, where people are buying more railcars, and we see more railcars.

But we believe just, that we will see demand on an average of about 50,000 railcars over the next five years, while the customer requirements shift to different railcar types and surpluses are absorbed. It's possible, that depending on the economy, we could have something in any individual year, and is likely, in fact, out of that range. But we do not see a return to numbers consistent with historical troughs, which normally are driven, just as the recent prosperity has been driven by stochastic events that are 20 year events.

So Greenbrier believes we are prepared for these new market dynamics. We have a high percentage of business already booked in our backlog of $4 billion, 34,000 units, and we're replenishing that backlog even though it has been at a slightly lower rate than in recent past. The essential arithmetic has not changed. If we add, for example, 3,000 cars to that backlog every quarter, which is roughly what we've been doing in the last five trailing months, we should be able to maintain that backlog very nicely. And if the US economy gathers strength, which could happen and probably will continue to be strong, if the US dollar does change, as some are expecting, things will change for us as well.

As a result of our product differentiation finally, Greenbrier presently enjoys nearly 30% market share in North America on newly built railcars. So in North America, you can do the math. If 50,000 cars is what the average is, and we're trying to get 30% market share, that means 15,000 cars for demand in North America, augmented by aggressive growth in international markets, where growth is stronger. In summary, I believe that this business model, our flexibility, our adaptability will serve us very well. And I'm hopeful to moving forward to questions about these remarks, and about our numbers. Thank you.

With that, operator, we'll open it up for questions. Thank you.

Thank you.

(Operator Instructions)

This first question is from Ari Rosa of Bank of America.

Hey, good morning, Bill and Lorie. Just quickly wanted to get your sense on what is the overseas sales opportunity look like? I know Bill, you mentioned, you were spending a little bit of time in the Middle East. Obviously, we heard about the Saudi Arabia order last quarter. What does that look like kind of on a sustainable rate going forward?

We've yet to be awarded new transactions, following on that Saudi contract, but we have openings in the lines that we've dedicated to it in 2018. So we've got some runway to add to it. I would say, that in the Gulf Cooperative Council which is where we're focusing, not in Iran, we will not be entering that market. We emphatically will be looking at the countries of Oman, Qatar, Saudi Arabia, and Jordan. We will be focusing on that market, but also near Asia, where strong growth is expected.

We believe we, our platform in Europe is very valuable. And while the general demand for that is slim, we believe we can achieve higher market share because of the advantages of being a US Company with transparency, high quality, and superior engineering. Most people don't recognize that that region, although a strong British background in history has had a very strong US background, that the railroads in that region are generally AAR type US railroad specification. So I wouldn't say, that compared to US standards that it -- I'd say, it's a small market, but with greater, with significant opportunities.

The real issue there though is, that as we look at what is going to occur in markets like Brazil, where the market share for the entity we're investing in, and continuing to [investments] down there, where currencies are very attractive for present investment, and the present economic stability, given the wealth of that country, we would believe will come to an end. These are good times to invest in such opportunities, because of the renewal of the rail network that's going on. And in fact, that's what we look for is, what are the governments doing, what government to government support is being given?

So if you count the opportunities in Brazil, the Middle East, near Asia, and Eastern Europe, in the specific areas where our government has targeted strategic interest, we believe that there is a very substantial cumulative market rivalling some of the lower estimates for this year, by those who have more pessimistic views on the US North American economy. So 20,000, 30,000 cars are not out of the range of possibility for Greenbrier and its supply chain partners, to look to as a market of which we will have some share. So it is significant, but beyond that we aren't giving any numbers until we get the deliveries, actually in the Saudi contract in place, and ensure ourselves that we're done.

Okay, that's really helpful. And then, just for my second question, maybe if you guys could provide a little more color on the nature of this JV with Sumitomo, and what you guys are looking for in terms of the opportunity there? On an ongoing basis, you mentioned, early 2017, it would be operational. Is that -- without necessarily providing any specific guidance, what are you looking for in terms of the ability of that to contribute to earnings, and then to operating profit?

Well this is an integral part of our desire to provide a superior package of service design to our customers, reducing transportation, and creating differentiation of our two supply chain related businesses, GBW and GRS. It will be accretive. It will be an attractive investment. And I'm going to turn to Lorie to give any more granularity. Our partners, obviously our partner's wishes have to be respected, and she's had contact with them on what we can collectively say about that.

Right. And I would say, while we're really excited about the joint venture, probably in 2017 it will just be modestly accretive. Again, we see it more as an opportunity to solve some of our customer's issues, again having axles on the West Coast, where we have significant opportunities particularly on those large ports that Bill mentioned earlier to use downsized axles. And so, we just -- we're not going to give specific numbers. We think it will be modestly accretive in 2017, and grow from there.

So let me give you color on what modestly accretive must be. As CFO, we have -- we discussed in great, we've discussed with CFO what's material and what's not. As our numbers have grown, our business has become more complex. The bar for material has gotten bigger. But my philosophy on this kind of thing, a few million here a year, a few million there, it all adds up. So it's certainly bigger than a bread box, not the size of a barn yet, but keep in mind that Lorie's bound by pretty rigid standards about modest and material. And I'm sure modest is what we do anything for -- just for modesty's sake. This is significant to the overall business model.

I also just want to say though, that Sumitomo has been a long-time supplier. We have other incredibly valuable suppliers in that segment of our business such as Amsted Rail, and we certainly have a balanced approach. The business is itself a balanced enterprise with people. It's not about money only, it's not about shareholder wealth only. It's about people, suppliers, communities, employees, respect for humanity. And that's what all modern manufacturing systems are built on, whether it's Toyota, Bombardier, or Greenbrier, those are the things that we have -- those are the levers we have to pull.

Okay, terrific. Thank you, guys.

Thank you.

Thank you. Our next question is from Justin Long of Stephens.

Hi, guys. This is actually Brian Colley on for Justin this morning.

Hey, Brian. Nice to see you.

Good morning, Brian.

Good morning. So my first question was just on inquiry levels that you're seeing out in the market, kind of how they progressed throughout the quarter, and what you're seeing so far in March and April?

Seasonally, normally, our pipeline of inquiries which we track carefully goes up a bit, and it's higher than [naturally] last year. There is a lot of sluggishness, as all of the very informed analysts in our industry have commented upon. However, I would say, that we have targets, and we believe we can meet our new targets. We're not sure how long the present gloominess on the part of observers will continue, but we're still working on lots of deals. However, and no doubt compared to a year ago, two years ago, which is why I gave that perspective, these are lower levels. There's pressure on opportunities, and we just have to work through this, as we have in the past.

And I'd say that's where having the backlog that we have gives us the ability to weather through the more modest demand over the next couple of years, because we do have that opportunity to keep our facilities producing on a steady base.

Exactly, except that backlog by itself can be an infliction, when you don't have open space to satisfy a customer who wants a car, and is a very -- in a much stronger negotiating position, which is why we use our lease fleet to help us supply the value proposition, so that we can give early delivery. So it is again, all a matter of balance. It's not about single point management, like our political process in the world today. It's about balancing many, many things. And our backlog is an incredibly strong, diversified backlog. We have 87%, for example, of our backlog in non-energy products at this point.

Thanks for the color there.

Thank you.

That's helpful. My second question was just, I want to know if you can provide an update on how much of the backlog is already locked in for both 2016 and 2017? And then, if you could just speak to the margin profile of your backlog, relative to your current manufacturing margins? Any color around that would be really helpful.

Sure. So at this point, being half way through the year for 2016, we're -- all of our production plans are currently set. That doesn't mean that as we progress through the year that adjustments can't be made, if there's opportunities where we can make some shifts. And as we look into 2017, and we're not prepared yet to give guidance on our expected deliveries in 2017. But based on current production plans, we've probably got 10,000 to 11,000 units booked into production. And as you think about our backlog, then that means obviously, that our backlog stretches beyond our FY17, because as we've mentioned previously, we did take down a number of multi-year orders during over the last year or so.

From a margin perspective, we're very pleased with the efforts that have been put in, in our manufacturing operations. As a matter of fact, some of us on the management team were just down in Mexico this past week, and we are really impressed with a lot of the changes that are being done there to improve efficiencies, very much focused on safety and the quality of the products being built. So we've talked about this a number of times over the last several quarters, the margins that we're reporting are not just being driven by energy-related cars and the demand that's going there.

We have really focused on our diversified product mix. That includes taking orders, that includes looking at how we build these cars, and making certain that we're investing in ways through our manufacturing operations that will generate good margins across a cycle. We also, as we've talked about, we continue to drive volume through our syndication model where we achieve additional margin improvement on the products that are being built, as well as creating that long-term revenue stream as we manage those cars for our customers.

I'd only add that, on this trip, we took our entire Board of Directors, visited two of the three plants in Mexico. And I think some of them, who have never been there, a minority of the Board, those who had been there were astonished by the progress on some of these key drivers. We're very deeply into many management techniques that will improve efficiency and enhance margins, but most importantly, improve employee productivity, reduce man hours, and our foundation of quality -- safety, quality, respect for the workforce, the fundamentals of the Toyota production system, the Bombardier production system are the foundations for the Greenbrier production systems.

We're into [4DX] in these, it's truly enlightening to see the empowerment of the workforce in that culture. We're producing some excellent cars there. And here at Gunderson, we've had a focus on the same thing, automation, reducing labor hours, and the core products that we build here. So all of that's going to contribute to margin, and we need that contribution for the shareholders in a more uncertain time.

Great. Well, I appreciate the time this morning. Thanks.

Thank you.

Thank you. Our next question is from Bascome Majors of Susquehanna.

Hey, good morning. Going back to market share, you made some comments earlier. I mean, over the last few years, you've been at 25% to 30%. That's a lot of that share gain from the new car types you've introduced. That's taking it a lot higher from, say, 10 years or so ago. And earlier, you mentioned a 30% share in maybe a 50,000 market was something you had in mind. Can you talk a little bit more about how you're approaching market share this down cycle? Was [30%] just a number that was consistent with where you've been, or will you push for further share gains in a softer market, should we get to [50,000] or below?

So that's a great question. Let me give you that color as candidly as I can. The history for Greenbrier does not indicate the future, because Greenbrier has changed remarkably. Our market share goal is for 30% of an average 50,000 car year which could, of course in an individual year vary considerably. And you know the numbers very well, because I read your material, the industry for 2017, 2018 is softer than that 50,000 car average.

But if you've got to go back and look at all of the possible drivers of that. So we're looking at 30% target on an average over the next five years. Why did we pick 30%? For some of the reasons we just spoke about, and because we have more product diversity. And all of the reasons in my earlier comments, in describing our business, the truth is that we have a unique business model that provides service across such a broad range, that it's virtually impossible to match the value proposition Greenbrier can choose to offer on targeted customers or targeted products.

There are others, big ones, which we will not mention by name, but who do a very good job of this too. But I think there is a clear separation of capabilities in the industry, and we intend to ride that wave, and our target is 30% of a normalized market. So I hope that's helpful to you, Bascome.

Would you expect that to be higher or lower, or around the same in let's call it, the down years that we may be experiencing in 2017, 2018?

So one thing that I would probably add, is typically, historically during a lower demand year, Greenbrier has significantly increased its market share. We've done that now. We've increased from the 12% to 15% that we historically have to the 30%. So I think maybe we're being a little modest, that we would expect it in a more modest year, it probably will be above 30%, depending on the car types that are in demand. But as you continue to grow, it's harder and harder to push that market share up. So that's probably where we're -- as Bill is saying, it depends on the car types that are in demand, where we have open production space and the like. But it's -- I wouldn't say that it's our -- if we hit 30%, that we're just stopping there. That's not -- (multiple speakers)

I agree with that. The historical reasons for a low market share was that our capacity would be absorbed, our efficient capacity would be absorbed, as soon as we hit a normalized year, and we'd lose market share. Whereas we would take market share with the tools that we have in down years. But since we have efficiently built out our plants, we now have done that, and we put all of that capital in, we've got incredible maneuverability to maintain a higher share.

Lastly, I'd say that we have one of the strongest balance sheets, management teams in the industry for our segment of the industry, and recognizing that this part of the industry is relatively small, compared to our customers who are more important than anything else in this equation. We have to deliver superior value to the customers. And so, I'm very optimistic about this.

The Board, and I as Chairman and CEO have been very focused on building this management team, and we're very, very proud of what this team has achieved. Lorie spoke to that in manufacturing, and I think you can hear it that we're really very happy about some of the things we've been able to achieve. So we think this is a reasonable goal. And of course, we don't mean to be challenging the others in the industry. But this is a tough business, and we all got to do the best we can to serve our shareholders and our other constituents.

Well, thank you for that color there. On a different angle, do -- if you want to dig into your syndication activity recently, can you just give us an update on that market? How are the types of buyers, maybe the numbers of bidders you're seeing, and the amount of capital chasing these railcar deals, how has that changed over the last 6 to 12 months?

I would say that we're continuing to see demand -- as a matter of fact, in talking with our leasing group, which is a management group that we haven't spoken really about today, but they've done a tremendous job over the last several years of moving the sheer volume of product that they've done through our syndication model. They continue to see a lot of opportunities out there. That's part of why we took the trip on acquiring that fleet during the fourth quarter, is because as we were looking at the railcars that we're building versus the needs for diversification, as well as just sheer volume, we saw that opportunity to acquire a used portfolio, and blend it in with our newly built products, as well as some other assets off our balance sheet and syndicate it out there. So I think that lets you know there's still a lot of cash out there looking to be put to work, a number of people I don't think that I've heard really from our manufacturing, our leasing group that that's really changed, continuing to see great demand.

So if I could just interrupt for a moment, just say that in the flow of product in 2017 and 2018 will be key to continuing the pace that we've been growing that business. Jim Sharp, as the head of that leasing company has done an outstanding job of growing the business, not just in the lease syndication area, but in management services, fee income from a variety of very complex and sophisticated software programs, and reducing our transaction value, our transaction processing costs to something comparable to the business.

It's a great tool and it's done a great job. So the Wilbur Ross fleet was a very good example, this was -- it helped us to diversify our exposure to energy. We blended a lot of energy products into the final syndication of that fleet, and that's been one of leasing's priorities over the last year or two, have continued to build the strength of this engine. I would say, that if we're in a soft market, soft lease rate market, the contribution from leasing will continue to be very, very strong. But we're focused on, how do we develop new product to feed that leasing engine with the machine that they have built, and it's a fantastic machine.

Thank you for that. And maybe I can just ask one more on, I guess, this one is for Lorie here. The deferred revenue was a lot higher this quarter, about $84 million. That's roughly a double quarter-over-quarter. What's driving this cash coming in, before you can recognize the revenues? And maybe just for modeling purposes, when would this normalize or reverse?

Sure, Bascome. And so, part of that increase, maybe about $25 million of the increase was associated with the 4,000 unit railcar fleet that we were syndicating. So while we recognized about $100 million of revenue, there's about $25 million that was deferred, just based on our -- the situation on some of the leases that those railcars are on. They were going through a renewal process. So as that gets changed, that deferred revenue will be freed up, and come off the balance sheet, and be recognized in revenue.

The other big driver was that we received -- and I had forgotten the timing on this, but we received the advanced payment on our contract to build railcars for Saudi Arabia. So because that was just the way that contract works, you get a 10% advance payment. So that's a big piece of that increase in deferred revenue as well. So that will come down, as we deliver those cars which will start in our FY17, the Saudi contract will start delivering in FY17.

Thank you for all of the time.

We are building those cars now, and we have had a successful sample car, though just over the weekend. Okay.

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

Hey, thanks, good morning. I wanted to dig in a little bit on guidance. Your railcar deliveries, what's left to deliver in the second half of this fiscal year; how should we think about that? What's the cadence of let's say, 10,000, 11,000 cars that you expect to deliver, how does that break out per quarter? If you could provide some color, it'd be helpful.

Sure. So it's a little bit more heavily weighted I think to the fourth quarter than the third quarter. In the third quarter that we're in right now, similar to what happened in the second quarter, we've got a couple of line changeovers that are going on, where we are starting up -- I think we've talked a couple times about the fact that we're very pleased that we've got some fairly significant sized orders for box cars that we're starting up down in Mexico.

We started one of those lines in the second quarter, starting the other line here in the third quarter, and then we're transitioning another line at our Plant 3 in [Tlaxcala], Mexico. So I would say deliveries are -- as you look at the annual guidance, the mid point of that compared to what we delivered for the first half of 2016, you can see that it's a little back half weighted. And I would say the bulk of that weighting will be more to the fourth quarter than the third quarter.

Okay, that's helpful. And then, if we look at again what's left to deliver, it would suggest that deliveries are going to be up versus what you did in fiscal Q2. And I think we're still talking about a target of a 20% consolidated gross profit margin, yet I guess earnings are expected to be down from where they were in the first half of 2016? So is there some disconnect, is there some incremental cost that I'm missing, given the fact you're probably going to do more deliveries, in the second half, and we still think that a 20% gross profit margin on a consolidated basis is a fair number as a goal?

I think a bit of that has to do with our -- the minority interest, so the number of railcars that are being delivered, that are coming out of our northern Mexico, our GIMSA facility. So as those cars get syndicated -- so we had a lower number of cars in the second quarter that actually went through our newly built syndication model. We expect that to pick up in the fourth quarter, which will impact -- while we'll get to recognize the gross margin, it will help us to achieve our goals on the gross margin side, only 50% of that flows through to the bottom line in net earnings. So as you're aware, there's a lot of moving pieces in that.

Right. That makes --

And as you saw, that kind of picked up in the second quarter. And probably it will stay at that level for the back half of this year, primarily associated with some of the development sorts of activities that we've been doing as we're exploring these new market areas internationally.

Okay, that makes sense. And then, just one quick additional question if I may. The lease fleet utilization, the reported numbers for the quarter at 86%. Do you have that number excluding some of the noise that you -- that was incurred during the quarter, I guess, that the sale of syndicated cars, because I think you gave an adjusted number for last quarter. I'm trying to compare the two if you will.

That's a really good question, and Lorie and Justin I think should answer that. So we have a very small owned lease fleet, so I'll let you guys address that question.

Sure. So the number is, if you were to exclude some of that noise, similar to what we did last quarter, it would be kind of in the mid 90%s of utilization. As Bill says, in having such a small fleet, it only takes a small number of cars to move the utilization by 10%, so it's not necessarily as indicative. And as indicated in the press release, the number of units that are off lease actually declined modestly from the first quarter.

Okay, that's helpful. Thank you.

You bet.

Thank you. Our next question is from Thom Albrecht of BB&T.

Hi, good morning, everybody. Bill I wanted to ask you a couple questions about your Mideast comments earlier, and some of this reflects my lack of knowledge about that part of the world. But how much of what's going on over there is kind of the build out of freight rail systems for the first time, or is it -- it's just time for new cars? I mean, I don't even know how developed the network is, yet alone the demand side. And then tied into that, what's the motivation for companies in the Mideast, companies and countries to want to deal with a US railcar company? It would seem like Russia or China, and other places would have had more of a natural built-in advantage?

The answer to the question is, for reasons that are historical and strategic in the nature of Saudi Arabia and its special relationship with the United States, they adopted US AAR standards, rather than the European standards. Having said that, there are many European ex-Pat executives who helped to run the railroads, and they do it well. And there's a lot more harmonization between the US and Europe, in terms of the people who run these large companies.

For example, our good customer Freightliner, is now owned by Genesee & Wyoming. So but the real answer to that is, the base question is, there's always been special relationship between Saudi Arabia and America. And while it may appear that the US has pivoted to Iran, that's not really true. We have to support Saudi Arabia, and they prefer US products in this particular area. They also acquire perfectly fine equipment and services in other areas of their economy.

The second driver for Saudi, is simply the development of the third pillar of their economic platform, which is mining. They have oil, of course, and gas, but they have petrochemicals, and now they are really working on the mining, and looking at construction of new railroads. So this is a very thin market, and there are many participants in there, and there are other car suppliers, notably China, that have supplied that market in the past. We have a geographic advantage we believe under our model, but it's not just Saudi Arabia. It's the other Gulf Cooperative countries, which is essentially a Sunni-based market, and the countries of near Asia that are strategic allies of Saudi Arabia and the West.

Okay. And then, on the 3,000 new railcar orders that you received, I don't know if I didn't catch it but, or maybe you didn't say, I'm assuming that virtually none of those were tank or frac sand cars. It's all of the other diversified cars?

I think, actually there were a few tank cars that were ordered during the quarter. They were not for energy. And I do, while again, there was some cover hoppers that were ordered, they were not the small cube sand covered hoppers.

Okay. And then, just want to kind of get a sense of the marketplace. I know you and others have talked about how orders are non-cancelable, but I've got to imagine there's a lot of swapping going on. Can you talk about that, because when I look at -- let me just -- just bear with me a second here. I was -- when I kind of look at what your backlog was like a quarter ago in your earnings call, and what it's like today, last quarter you said, that crude tank and sand hoppers were like 27% of the backlog. Today, it's about 17%.

So that sort of implies -- and you gave some tank figures as well, that you would have produced just under 4,000 tanks in the quarter, leaving you with about 682. I can't imagine that of the 4,500 that you delivered, that 3,960 would have been tanks. So that's a long-winded way to say, can you talk about what sort of swapping activities are going on? And of the 4,500 approximately, how many might have been tanks?

Right. And so, Thom, definitely when we do our follow-up calls, after this call, we can talk through some of that math.

Okay.

But on the backlog and the [go forward], we can dig into that a little more deeply. But there is, we do have customers who are making adjustments. I mean, oftentimes, and that's why if you look at some of our disclosure in our 10-Q, we say that our backlog is indicative of what we believe is going to be ordered, because as we've talked about several times, we're very focused on helping our customers solve their problems, as long as it's a win-win for both the customer and (multiple speakers).

Well, they are orders. We've said that they will be ordered, so just to correct that technical misstatement. They are orders, but there is --

Right (multiple speakers).

Some of those orders is what you're saying, right?

Yes.

So we like managing that very actively. We have a risk committee that meets, I think once a week now on the portfolio. And there are -- they're asking for some of the secret sauce I suppose, but I doubt any of us in this business would want to give you, but we'll give as much granularity as we can. Maybe we should post something, just to be fair on that, from what we want to say about that mix, and how we brought it down.

One of the things that everybody has got to understand though, is there are different qualities of customers. Customers have specific operating needs. There are two types of energy cars, oil by rail, and other energy cars that are tank cars, and then there is sand cars. So one of the real motivations for us to do the WLR deal was to mix, have other product we can mix with sand cars, and make a balanced portfolio. So we are doing a lot to manage that exposure. And I don't know if that's helpful or not.

Well, a little bit, yes. Let me just ask it in a -- because I gave a lot of numbers, and it might be more than you want to reveal. But last quarter, you also said that crude was about 11% of the backlog. Your slides today I think say they are at 2%. I'm guessing, that going from 11% to 2% was not just producing 3,960 tank cars, but there had to be some reshuffling. Is that a fair assessment that, or the clients took other car types instead of tank?

I think possibly, Thom, the difference is in last quarter, we were including along with crude, we were also including ethanol as part of those energy cars.

Okay.

So I think that is probably the mathematical difference.

So --

And we are more refined in our disclosure this quarter to focus on the truly crude part.

Right.

Yes, ethanol is not one of the difficult areas. The two difficult areas would be crude by rail, where customers are taking big hits and storing some cars, and buying cars and leasing cars, and sand cars that they will probably come back faster than crude. It's very revealing to look at when these dates are, that these older cars though, are going to have to be phased out between now and 2025, you're looking at 154,000 cars, all flammables that are going to have some serious issues. So these are 40 year assets.

It's really premature to be terribly concerned about this, but Greenbrier is, and we've been maneuvering aggressively to reduce our exposure in the near-term to the higher risk energy car. So now with 17%, let's suppose we have 5% of that fleet, 5% of the total fleet. We even talked about, just so people will stop asking about, is why don't we just write that out of our backlog? But it's in our backlog, and that would be the story. So we think we've got this under control. We think that we know what we're doing, and but we maybe we should just publish more granular numbers, so that we can explain. It's a very good question. It's pretty granular, but we probably need to publish it for everybody, if we're going to -- (multiple speakers).

Right, right.

Okay.

Okay. Thank you.

Thank you, Thom.

Thank you. Our next question is from Matt Elkott of Cowen and Company.

Thank you. Most of my questions have been answered. I just have a quick one here. You guys talked about the international opportunities in the Middle East, Eastern Europe, and Brazil. I wanted to ask you about Mexico. Are there any potential long-term opportunities associated with energy reform in Mexico? I know Watco just announced a new facility down there on the Kansas City Southern line, but have you thought about this at all?

Yes, in fact, in earlier conference calls, we've explicitly stated we have an Americas strategy that looks to expand on the strength of our two relationships, that are primary, Watco and GIMSA, which is our joint venture in one of our three facilities in Mexico. Both of whom have significant history and expertise in the energy business.

There are several large customers there. In addition to that, there's a heavy demand for refined products. Watco is particularly well-suited to be a partner in that type of service -- and I'm not sure how much they've disclosed about what they are specifically doing, but it's quite significant. So that whole area is an exciting area, if not only for supply companies in the United States, railroads like Southern -- or Kansas City Southern, but for companies like Greenbrier who have been -- grow with the footprint we have down there.

Great. Very helpful. Thank you very much, Bill.

Thank you. I appreciate Cowen being on the call, and we are reading your materials carefully, and appreciate your interest in the Company. Thank you for dialing in.

Right. Thank you.

Thank you. Our next question is from [Art Hatfield] of Raymond James.

Hey, good morning. This is Derek Rabe on for Art.

Hey, Derek. How are you?

Good. Just wanted to look at GBW. Congrats on the momentum there over the last year or so. Just looking at the assets under that JV, I've seen they've gone up about, I think it's $30 million over that period. Can you just discuss some of those investments that you're making in that JV? And then longer term, kind of discuss maybe some of the opportunities and goals around margins over the long run?

Sure. So I would say that, we talked a lot last year about the GBW joint venture, about how 2015 was really going to be the year that that management team spent knitting those operations together. And I think as we came out of our fourth quarter of 2015, Jim Cowan and his management team have really been successful in doing that. And I think what you're seeing for the first half of this year, is that steady improvement where they're driving performance through their operations.

They've really, they send swat teams into the various locations, where they may be having some difficulties whether it's operational difficulties, or making certain they are getting the right mix of work into the shop to match what its strengths are. So I would say that's a group where they've really kind of embraced some of those core management techniques, to be able to manage such a broad network of shops and strain the benefits out of it. Jim Cowan, I think from his prior life, still stays in touch with some of you guys, and I don't think he's been too shy about having some fairly aggressive gross margin goals.

But he should not be publishing those if, we should be publishing those. So I hope he's not doing that. But I think he's known as Mr. Margin in the industry, and he's got very positive, very strong goals. I am really high on this guy. He is actually getting a lot done, and on the team he's built.

That's all I have. Thanks for the time this morning.

You bet, Derek.

Thank you.

(Operator Instructions)

Our last question is from Kristine Kubacki of Avondale Partners.

Hi, good morning. My question is just on the changeovers. I guess, the production or deliveries was a little less than I expected in the quarter, and you have highlighted that for the next couple quarters. And I know you touched on the box, the box car run will be a lengthy run. But has something kind of changed, in terms of the length of run, since we've seen kind of deliveries that were almost 7,000 in the first quarter? But now, we're kind of now at a new run rate? Or are customers changing car types, and you just can't get those length of runs anymore?

No. I don't want to give you the impression that customers are out there willy-nilly changing car types. In fact, there's been an advantage to us in recent redeployment to -- of our concentrate -- our plans for building different kinds of cars to extend runs. So on the manufacturing side, we've a very buttoned-down plan to deal with a very large backlog of box cars, that is causing this changeover issue that Lorie addressed.

As well as we're making efficiency improvements in our automotive production capabilities, and we are also streamlining our costs. One example is we've been -- just really doing a lot more with less people. We've furloughed a number of people in some of these factories, in reducing our costs in dramatic ways.

But the basic dynamic, in an industry where everyone agrees there's going to be less demand and more difficult circumstances, will be to adjust the lines appropriate to the car type. And there's at least 20 different car types, and they're not all the same, as we often remind all of you guys. So it's not an area that I'm particularly concerned about. It's just normal in this type of market. But they'll be -- the changeovers are related specifically to box car and automotive.

And just one other thing to add Kristine, on just on the absolute number of units being delivered, that also has to do with car types. So for example, we build fewer box cars per day, than for example, we were doing sand cars earlier in the year. So some of it is, just as you get into these more complicated car types that have higher number of hours to build -- so it comes in. So from a top line and a revenue perspective, they're a higher ASP, but maybe we do fewer of them a day, because they are more complicated and take more hours.

That's really helpful. I appreciate the clarity there. And then, I guess my second question would just be -- it's a little bit bigger question, I'm probably going stumble through this, but I guess, and I appreciate your comments about the secondary market, and being able to [find] investors. It does seem like there's a lot of money chasing yield out there, I guess, and it's attracting a lot of players to the market. I guess, is it hard on the flip side of that, given that it seems like maybe at other OEMs, there's now available build space, and maybe pricing is becoming more attractive? Are you having a harder time finding lessees to attach leases to those cars before you syndicate them?

That's a great question. I don't know where you get these questions, but you obviously know something about the business. The answer is it is a more complicated and difficult market, so we have to be competitive. In some cases, our value props have to be more than competitive to address our market share goals. Doesn't mean that necessarily it's going to reduce our margins, because we have lots of weapons in past history to deploy.

But one, I would think of the things to watch, since that's such a great question would be, plant by plant to the degree, we are granular in some of that and type, car type by car type. What's the outlet for those car types? What's the outlet for intermodal, which one of our big products, historically almost half, 50% of the market, great customers in that business. What's that going to look like? And our marine backlog, what's that going to look like?

And then, what kind of pick up, are we going to get on these foreign adventures? How risky are they? Those are some of the things I worry about, and I often don't see things that I worry about in some of the questions. You've touched on one though, so I congratulate you.

Well, I -- thank you very much. I appreciate the time. Good luck, guys.

Thank you.

Thanks, everyone for spending the time with us this morning. We appreciate your interest in Greenbrier, and look forward to chatting with you over the coming quarter. Have a great day. Bye-bye.

That concludes today's conference. Thank you for your participation. You may now disconnect.