Greenbrier Companies Inc (GBX) 2016 Q3 法說會逐字稿

Hello and welcome to the Greenbrier Companies' third 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 Miss Lorie Tekorius, Senior Vice President, Chief Financial Officer and Treasurer. Thank you, you may begin.

Thank you, Carrie, and good morning, everyone, and welcome to our third quarter 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 May 31 and outlook for the rest of 2016. Following our prepared remarks, we will open up the call for questions. In addition to the press release issued this morning which includes supplemental data, additional financial information and key metrics can be found in a slide presentation posted today in the IR section of our website.

As always, matters discussed on this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2016 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

Greenbrier's results for the third fiscal quarter, particularly in light of a shifting rail industry environment, were solid, both from a financial and operational perspective. Financially, gross margins were strong, and highlights include adjusted EBITDA of $99.5 million and earnings of $35.4 million or $1.12 per diluted share on revenue of $612.9 million.

Operationally, we delivered 4,300 units. Orders for the quarter totaled 1,700 new railcars, and included automotive cars in North America and Europe, non-energy tank cars and gondolas among others. In total, orders during the quarter are valued at about $150 million or an average selling price of approximately $91,000 per car.

The lower average selling price was driven by a mix shift to smaller units in Europe. Our diversified backlog of 31,200 units valued at $3.6 billion continues to provide visibility in these changing times. In our marine business, we received orders for two articulated ocean-going barges during the quarter and three ocean-going deck barges in June, bringing our marine backlog to over $120 million.

Aggregate gross margin, excluding syndication activity in the quarter associated with the railcar portfolio acquired in the first quarter, was 22.5%. We continue to be pleased with the syndication returns on this portfolio, even though the mathematics have a dilutive impact, resulting in aggregate gross margins of 20.7%.

Looking at our Manufacturing segment, our gross margin was 23.1%, up 270 basis points due to improved efficiencies, favorable product mix, and favorable pricing. Wheels and Parts margin increased to 11% from 10% the second quarter, primarily due to higher scrap pricing and a more favorable product mix. Although we are still seeing headwinds on this business segment due to decreased railcar traffic.

Leasing and services gross margin was up in Q3 compared to Q2, driven by lower volume syndication activity from the portfolio acquired in a prior quarter. We ended the fiscal third quarter with significant liquidity of nearly $570 million from cash balances and available borrowings on our revolving credit facility.

During the quarter, we redeemed $14 million of our convertible bond, and repaid $75 million on our credit facility. Our balance sheet is very strong, with net funded debt to last 12 months EBITDA still at 0.2 times with lower LTM EBITDA.

From a capital perspective, we remain committed to our balanced approach to capital deployment and best positioning the Company towards enhancing long term shareholder value, while continuing to seek and identify opportunities to profitably grow the business within our core set of competencies. In today's release, we announced a 5% increase in our quarterly dividend to $0.21 per share.

We did not buy back any shares during quarter under our repurchase program. Since the inception of this program in October of 2013, we've cumulatively repurchased over 3.2 million shares for a total cost of approximately $137 million, representing about 10% of shares outstanding. And we have $88 million remaining under our current share repurchase program, which will be utilized opportunistically.

Based on current business trends and production schedules, our refined guidance for the full fiscal year is deliveries to be approximately 20,000 to 21,000 units, revenue of approximately $2.8 billion, and diluted EPS in the range of $5.70 to $5.90. Looking forward, we expect a continued challenging railcar environment into FY17. The strategic actions we've made, including diversification and prudent balance sheet management, position us well to navigate shifting market conditions.

And now I'll turn it over to Bill.

Thank you, Lorie, good morning, everyone. Thanks for joining us this morning.

Well during the quarter, we delivered strong revenue and profitability, both net earnings and EPS, and we're on track to deliver on the expectations we set for the full fiscal year and into 2017. We continue to deliver above the 20% gross margin target set over a year ago, and additionally, our ROIC extraordinarily high, 29% for the quarter, continues above our target of 25% again for the third consecutive quarter. These metrics demonstrate our focus on cash flow, return on capital employed, and long-term shareholder value.

G&A costs were up for the quarter, due to some one-time accruals and the timing of long-term incentive compensation grants. And we've also reduced, which was not mentioned in the press release, our North American global workforce about 8% or 800 people. We've done that in order to recognize the changing market environment in North America, and to tighten our belts in a more uncertain environment while we leverage efficiencies.

Our growth initiatives will continue on the theme of high ROIC, mainly in international and domestic improvements for efficiency. And I just want to call out that with the dividend increase that we're now running a coupon above the 3% yield, and we believe this is a sustainable thing.

So I think the big question in our industry is what to make of weaker railcar loadings in the North American market and more challenging environment. As we discussed last quarter, 2015 and 2016 were years of extraordinarily strong industry backlogs and record railcar deliveries. Exceeding what we would consider normalized industry demand.

We do expect a period of lower order activities and deliveries for the industry. Average annual industry deliveries of about 50,000 railcars, and we note that FTR now has the industry at 45,000 for calendar 2017. These are always inexact estimates, but we believe that those levels are reasonable, probably driven by strong replacement demand and car types that have been squeezed out in earlier surges with energy cars.

Due to the business transformations we've made over the last five years, Greenbrier is well positioned for these transition in our markets. Today, we've deployed a lower cost flexible manufacturing footprint that was not fully available to us just five years ago. And we've made investments in our after-market businesses that have led to reliable performance, which helps stabilize cash flows during a period of lower new railcar deliveries.

We've also enhanced our Leasing and Management Services business, which enables us to capture more value through a railcar's life cycle. Our leasing fleet now includes over 260,000 cars under management in a capital light model, and in 2015, Greenbrier originated $700 million in lease transactions. Year to date for the current fiscal year, Greenbrier has originated nearly $500 million. We continue to believe there is upside in international markets, hence our continuing investments in those markets and our philosophy is to go where the orders are.

Order activity for Greenbrier, although off-record peaks, continues at a steady pace. Our backlog remains very positive and strong, and provides very good earnings and cash flow visibility for the next few years. For example, during 2017, we have much of the backlog or the production that we intend to build in 2017 already in backlog. Strategic opportunities across our business segments and geographic diversity will help us succeed in this more normalized environment.

A couple of more notes, in Manufacturing, our footprint with more automation and lower cost facilities around the world and a global network enables us to enjoy gross margins unavailable to us a few years ago. Some major changes, increased automation at Gunderson, our flagship manufacturing Company in Portland, now specializing in three high-valued car types plus ocean-going marine barges with a heavy backlog in marine, defying some of the more gloomier forecasts that had been existing in the industry. We're actually seeing quite a lot of interest in our marine model on the West Coast.

We had three modern [met] factors, of course, in Mexico, and we have diversified our car types, building every car operating in every space in the rail business other than coal cars. And lastly, we've increased our manufacturing flexibility for line changeovers and lean manufacturing.

Very importantly, we have a growing international footprint in selected markets. We have initiated a new joint venture with Sumitomo Corporation, GB Summit for finishing of axles, and we look forward at GBW, our repair network and joint venture with Watco to tens of thousands of recertifications and the recertification of tank car cycle. Plus future safety standards will be kicking in in 2018 if not sooner due to the HAZMAT cars that need to be recycled, and we're looking forward to restoration of demand for the DOT-117 car, which is six to eight times safer than the older DOT-111 car for energy service.

We have a new investment in Brazil with the option to grow in new, further in both new railcars and castings. Our presence in the Gulf Cooperation Council Nations, led by our business in Saudi Arabia, and we've opened new offices in Riyadh and [Kiev]. The Saudi Arabian order for Saudi Arabian Rail in 2017 will give us a boost as we deliver a part of the 1,200 railroad tank cars to the government-owned Saudi Railway Company from our European facility under AAR standards and US manufacturing oversight.

Opportunities also exist in other areas outside North America, both from bases in Brazil, the United States, and our factories in Poland. These would include Eastern Europe and Eurasia, and selected countries in Africa also being of long-term interest.

We have a strong balance sheet, as Lorie has noted, providing flexibility and many options during changing business cycles. Our net debt was less than $100 million at the end of the quarter.

We're focused on our shareholders and our stakeholders, our employees. We have a unique business model that spans a broad range of products and services.

It's virtually impossible for our peers to match that value proposition, and the market has not seen the new Greenbrier model operate in these softer conditions. With a larger market share and scalable dependable low-cost manufacturing operations now in three continents, enhanced after-market business activity and a strong leasing and asset management team, so stay tuned and watch us work.

Back to you, Lorie.

Thank you, Bill. Carrie, we'll go ahead and open it up for questions now.

Thank you.

(Operator Instructions)

Our first question is from Matt Elkott of Cowen and Company.

Good morning, thank you for taking my question. I have a question about the product mix, both in the quarter and going forward. So, your ASP for the quarter went down from last quarter to $91,000 from $103,000, but your backlog ASP held steady at $116,000, which means you guys delivered some higher-ASP equipment in the quarter.

Can you give us more color on that equipment? And also, what are the drivers behind the decline in ASP in the quarter from last quarter? Is it overall pricing or is it specific to a product mix shift?

Lorie, do you want to take that?

Sure. So, speaking initially to just the decline in ASP for the orders, as I intended to mention in my remarks, we had a higher proportion of orders that were in our European operation, and they were for a smaller car type which came with a smaller sales price. So, while we've seen prices -- I would say we've seen prices remain fairly stable here in North America. Obviously, the order environment is a bit tepid, so there's not a lot of activity going on there.

When you look at the overall backlog, and the ASPs and the ASPs in revenue, I would just remind you that this is a reason that we diversified our product mix. So, we have a wide range of products, including box cars, automotive cars that are all fairly high priced, other cars, like gondolas or sand cars, which would be a lower sales price.

So, it's all that mix. We're not going to probably get into the pluses and minuses of all of the details of what we've built during the quarter. We've given a little bit of color on the order activity, which included automotive cars, gondolas, and some non-energy tank cars. So, it's just the mathematics of that various mix, and it's part of why we diversified our product offering.

I'd just add that it probably is a bit of an anomaly for the quarter; we'll have to see what the next couple of quarters looks like.

Okay, fair enough.

And speaking of gondolas, are you guys expecting or are you seeing already an uptick in inquiries and potentially orders, driven by potentially the benefit from the highway bill that was passed last year beginning to materialize, and people prepping for a new administration that could use that as -- the infrastructure spending as one of the easier levers to pull to stimulate the economy?

Yes, we are.

Okay, fair enough. Thank you very much, guys.

Thank you, Matt.

Our next question is from Allison Poliniak of Wells Fargo.

Hello, guys, good morning.

Morning, Allison.

So, obviously, a pretty solid backlog still as you look out in the 30,000 plus units. Could you maybe help us understand the duration of that backlog? Are there a number of multi-year orders in there -- any help framing that.

Sure, we have a number of multi-year orders. Our strategy is basically comprised of three parts for our own leasing fleet, base sales to a select small number of strategic leasing partners, and shippers. So, we have backlog extending, Allison, out to 2020.

Okay, perfect. And then, on -- (multiple speakers)

Heavily concentrated in 2017, and into mid-2018 though.

Okay, so, then trailing off then.

Could you help us, Lorie -- I know you talked about the European orders being impactful in terms of the average price. But could you help us quantify how much of those orders were for Europe?

I'd say maybe 25% or so of the orders were related to Europe.

Okay, so, small. Thank you.

You bet, Allison, thank you.

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

Thanks and good morning. First question I had was just a higher-level question.

So, the railcar demand environment seems to have weakened faster than many anticipated. It doesn't seem like we're going to get energy-related railcar orders for a while. But when you combine that with rail volumes that have been declining on a year-over-year basis and train speeds that are improving, what gives you confidence that the industry can normalize at that 50,000 unit replacement level, or you mentioned FTR is now at 45,000 units versus being a more dramatic step down like we've seen in prior cycles?

Well, I don't think that prior cycles -- it's a great question. Prior cycles are a particularly good indicator. We look at things like replacement demand, the age of the fleet, and demographics among car types. Because, as we said before many times, a railcar is not a railcar is not a railcar. So, it's very specific to individual fleet components.

The additional factor that you did not mention, and you mentioned the two major drivers, but the railroads themselves have invested heavily in infrastructure, and coal traffic has been one of the big drivers of decline in the loadings. So, the loadings overall are down, but there are some selected markets such as chemicals and others that have had positive loadings.

We continue to believe that there will be strength in the longer term in intermodal, and we expect to get orders in that area. We also have had a fairly strong automotive and boxcar demand.

Okay. And maybe just to follow up on that, I wanted to ask about manufacturing margins. I think last call, Lorie, you said if we go to a replacement market of 50,000 units, you think mid-teens gross margins would be achievable.

Let's just say the market is worse than that, something around 30,000 units. What kind of margin performance do you think the Company is capable of in that environment?

And then also on margins, if you could provide some commentary on your expectations for manufacturing margins in the fourth quarter?

Let me take just a brief introductory remark, and I'll turn the rest of the question over to Lorie.

Looking at our margin expectations, we have to be precise about what we mean here. Our margin in backlog, and we have a very strong backlog, might be on average considerably higher than the margins on some new orders. So, it takes a while for any lower-margin business to work itself into and through the backlog.

You also have to keep in mind, with a long backlog as we have, if we're adding orders more slowly to the end of the queue, we're missing opportunities to build during -- early in 2017 and so on. So, it's going to be some time before this fully works through the system, and I think that the margins are sustainable in the higher end of the range in any case, due to the manufacturing footprint that we have.

Just to add on to that, Justin, as you know, we've been through a number of cycles where the market softens up. The interesting thing in this cycle is I don't think in Greenbrier's history we've ever gone into one of these softer markets that will be noted by a reduction in deliveries with the kind of backlog that we have today.

I feel like a broken record sometimes, but I think that absolutely goes back to our plan to diversify our product mix. So, it allows us to participate across a broader range of demand. And then with the footprint that we have here in North America, particularly down in Mexico where we've made some significant investments, those are very efficient plants.

So, I agree with Bill that over the next several quarters, we should see margins staying in the mid- to upper-teens. We've continued to be very proud of the manufacturing margins that we're achieving today. And as you start blending in more recent orders in with the backlog, you might see margins come down. But I would stand by what we've said before, which in a normalized market, which I would say we're still not in a normalized market, our manufacturing margins would be mid- to upper-teens.

One other thing about the so-called normalized market and certainly North America, we're talking about principally North America here, most of the questions are implicitly North America. I want to remind you that we're well over a year into an international diversification effort, which we're serious about, and we do expect to see strength in orders in other jurisdictions with profitable business.

We are in, secondly, the summer season, which is typically not the greatest period for order activity. And I think it will be into the fall before we really see what the sustainable level is of new business activity.

But again, I have been and remain somewhat more optimistic than many of you. We'll see if my experience plays out. I've been through a lot of these cycles, and this one is certainly not as bad as it has gotten and theoretically could get. I don't see it happening, especially with our footprint and the diversification we're making in other markets where there is strong demand.

Okay, great. That's all really helpful color. Appreciate the time this morning.

Thank you.

Thanks, Justin.

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

Hey, thanks, and good morning. So, I had a question on the sand cars that you called out in your press release. I think that the number is like 5,000 sand cars currently in your backlog. What's the rough timing in terms of expected deliveries on those cars?

Lorie, go ahead.

Sure. So, on those 5,000 cars, as we indicated, and I think we indicated on the last couple of quarters, we've been in regular conversations with our customers. Greenbrier's approach to the market is to find a solution for both ourselves as well as our customers, whether it's building railcars, leasing railcars, or the like.

So, with the increase in velocity on the roads, and the decline in the oil prices, there are excess sand cars. So, we're chatting with those customers and the timing of which when those cars we built is a little bit uncertain at this point in time. But they are still absolutely orders for railcars, and we've not had customers back away from them.

Okay. And I guess the timing is a little bit uncertain. What are some of the other options that you have with those cars? Is there deconsideration that you could swap a sand car out and build another type of car for the customer? Is that also in your thought process or an option here?

Yes, at least one of our other builders in the space and lessors in the space -- we use this position as a bargaining chip for a win-win solution. We can do well with remarketing rights to the customer's fleet, asset management arrangements. We have a full arsenal of tools that we can use. We do expect to build large number of sand cars in 2017.

The last thing I'd say about the market for sand cars is that it would be the first market that would recover if oil prices in general recover. Because of the large inventory of drilled but unfracked wells that need more and more sand over the past five years, the dynamic has really dramatically shifted. So, these cars, while a little long today, could suddenly become a lot more attractive, and what we're doing is just working with our customers to sort through it.

We still have more than 80% of our backlog though in non-energy equipment. We pretty well work along in working through the solutions for the remaining energy cars.

Okay, good to hear. And then just one quick follow up -- you talked about diversifying the model. Can you also speak to -- if you look at your backlog now, and expected deliveries moving forward, what percentage is for the domestic US market? And what percentage of those cars are intended for international markets? And how does that compare to last cycle or a couple years ago?

The international segment today is probably less than 10% of our total backlog, and we would like to at least double that in a relevant time frame and possibly increase it beyond that period.

It's important to understand though that the investments we're making in Brazil and Europe and in our Mexican facilities give us more striking distance to many markets in the world that five years ago we would not have and other North American car builders do not have. So, it's a little hard to estimate the margin impact of some of these opportunities due to that factor.

I think it's a positive upside even at a 20% market share -- or backlog share, I'm sorry I misspoke -- but 20% of our backlog if we get to that point, which I think we will.

And just to tack on to anticipate the inevitable question, to date we have not been including any orders that will be built down in Brazil in our published backlog. As we go through further investments down there, we'll evaluate that at that point in time.

And oddly enough, that market is rebounding. Despite some of the things you read about Brazil, it's a very wealthy country and we're in it very economical basis, and the fleet replacement activity down there is fairly sizeable.

Okay, appreciate the time.

Thank you.

Thank you. Our next question is from Ari Rosa of Bank of America.

Hey, good morning, guys. So, starting on the 25% ROIC target, I know, Bill, you said that you're confident for 2016. What does that look like on a longer-term basis? Not necessarily asking you to provide any outlook, but what are the prospects for maintaining that as the market softens a little bit?

Well, again, the backlog helps a lot because it gives us momentum with the steady cash flow from the backlog. It depends a great deal on order rates for the next year. Obviously, our order rates are dramatically below in the industry, and for Greenbrier what we had achieved during the energy boom.

But I think that we still have a target to achieve 25% ROIC on incremental investments. And I think it's just a matter of what the pricing will be in the marketplace, what the mix will be, the quantities will be, because those are the three drivers of margin which in turn drives the ROIC.

Lorie, do you want to add anything to that?

No, I think that's -- again, we've built a strong balance sheet, we're looking to keep it strong. But that also gives us the opportunity to deploy some capital for opportunistic investments, things that are near our core competencies, ways that we see will be longer-term growth potential for Greenbrier.

Okay, fair enough. So, second, I wanted to ask you on -- you took down the higher end of your outlook range, and I don't think anyone has asked on that yet. Is that just a timing issue or is there something else going on there?

I think you're absolutely right; it's a timing issue. We only have two more months left in this year.

As we said last quarter, we have adjusted some production rates, being cognizant of the softer market. And with that, just as we get closer to the end of the year, just looking at it coming towards the lower end of that prior guidance.

We mentioned that we furloughed 800 workers out of a workforce around 10,000. Obviously that reflects mostly factory personnel and some overhead, which doesn't show up in the G&A.

So, we are cutting our costs. And as we do that, we adjusted the upper range down just a bit for 2016. So that's probably a linkage that I should have made.

Great, that's helpful. And just two really quick ones -- I'll just combine it into one question. So, to confirm on the previous question, the Saudi orders are going to be delivered in 2017, not this fiscal year. Is that correct?

So, it's correct that it's not this fiscal year, but they will be spread between 2017 and into 2018. But probably, I think, maybe two-thirds in 2017 and a third in 2018.

Okay. And so, Lorie, you mentioned the balance sheet shoring up and some of the improvements you guys have been making and paying down debt. What are the options that you guys are looking at? Can you talk about whether that would be more M&A focused or is it increasing the dividend like you are doing currently? Could that get more aggressive or what are some of the options you're considering?

I'm sure Bill will chime in here, but you're absolutely right, and I appreciate you noting that the dividend increased. So, a 5% dividend -- Bill and the Board take looking at our balance sheet very seriously, and we take increases in dividends very seriously. So, it's a statement to our belief that's something that can be sustained long term because we know that it's not helpful to investors to have volatility in your dividend activity.

Other than that, I think, as Bill was saying earlier, we're looking at areas outside of North America, quite honestly, at this point in time, where we see stronger markets for rail transportation, where we can use -- deploy our engineering, our manufacturing capabilities, maybe our leasing opportunities in other areas around the world. But we're going to be prudent about looking at these investments, and making certain that it will generate the kind of return that we think is acceptable.

We really think that there are strong opportunities in the Gulf Cooperative Council region in selected parts of Africa and in Eurasia, so that we're beefing up our investment in our European operation, which is a good staging area for some of that. The Brazilian operation could be very useful, especially if currencies remain attractive, as they are today in Brazil, as a platform for Latin America and for parts of -- the good parts of the attractive areas in Africa where there are some activities that we believe we can reach into those markets.

So, deployment of capital -- will continue to have very strong discipline. We've noted it's interesting to Google dividend stocks because as you see interest rates so low and returns so low, more and more capital is seeking higher yields. And we think a 3% yield is an attractive yield in today's market; we believe we can sustain that kind of yield.

Okay, great, thank you.

Thank you. Our next question comes from Steve Barger of KeyBanc Capital Markets.

Hello, good morning.

Morning, Steve.

Were those sand cars in backlog ordered by lessors, so there could be a potential to convert those to other car types? Or did those come from operating companies, and realistically, this is more of an indefinite deferral?

It's a mixture of both.

It's about 50/50, you think, or something like that. But again, we're maneuvering very aggressively on that. We think we're about halfway through the cycle of dealing with these things; first was oil by railcars. We see light at the end of the tunnel there. I hope it's not a train.

We also are more bullish on oil prices, even though oil is down today. Spending some time in Saudi Arabia helps get a global perspective, and we continue to see evidence that supply and demand will be equalizing in this area, and the policy of OPEC is certainly subject to change.

Thanks for that. Your implied 4Q EPS guidance has a similar result to 3Q. And when I think about your comment on the backlog being more weighted towards 2017, and also your comments on margins, is it reasonable to think that FY17 will look like the back half of this year from a run-rate standpoint? Or are there some big negative swing factors out there that I should be thinking about that will drive results below that run rate?

That's a great question to try to lead us into talking about 2017, Steve.

Good job. You're like one of our Board members, Steve. This is a great question.

Well, what did you tell them?

Well, they told us -- we don't like guidance, generally. They don't; we do. So, we're debating it with them.

I guess the thing, Steve, that I would point out that isn't taken into consideration in the theory of using the back half of 2016 as kind of a run rate for 2017, again, would be the delivery of those cars into Saudi Arabia. So, again, that's something that you are not seeing in the back half of this year that should be quite beneficial for 2017 and 2018.

The other thing that I would point out is GBW, the joint venture. So, while it doesn't hit revenue and gross margin on the upper part of the income statement, I'm certain that you've noticed that it's been improving operationally as we've moved throughout the quarter. Bill mentioned earlier, and we continue to hear from Jim Cowan, that there are a lot of recertifications that are going on out there where they have been picking up more of those kinds of orders, so we would expect that to continue as well.

So, it sounds like the swing factors you're talking about are more positive than negative, in your view, as it stands now?

That is correct. Obviously, we can probably all come up with about 20 things that are negative about the North American market. But again, we feel really good going into the softer market in North America with the backlog that we have. It allows us to plan our production lines a bit better, to consolidate production where we need to, to keep steady lines going. So, I do think, if you're thinking about the back half of 2016 into 2017, I think there's upside that you are not seeing in the back half of 2016 that will show up in 2017.

I think we're really focused on getting to 2018 and beyond. In most of our planning, we should have a fairly stable year. But again, I think you're dragging us into guidance.

Good job, Steve.

Thank you. Good job, yes.

Thanks.

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

Yes, thanks. Just to quickly piggyback on Steve's question there, I think last quarter you said that you had [10,000] to [11,000] cars in backlog for delivery next fiscal year. Can you just let us know if that's still the same or if that's changed at any point?

In general, it's about the same.

Has there been some mix shift? I guess the same cars could have been pushed out and some other stuff put into its place. I'm just curious how the backlog churn has looked over the last quarter or two as you've been negotiating?

Sure. And again, in this order and delivery environment, it's bumping along a little bit. I would say we have had some mix shift as we look at 2017, and what makes up that 10,000 to 11,000 units out of backlog that we expect to deliver into 2017.

I think as we continue some of these conversations on the sand covered hoppers, that might play into what is that mix. But right now, it's just more lining up some of the other activities outside of energy -- so, box cars, automotive, things like that, some of the covered hoppers that we're slotting in that production.

Okay. And shifting gears, I noticed that the value of the syndicated cars that you carry on your balance sheet came down pretty significantly quarter over quarter. But the number that you put in there appeared to go up, if you built 1,100 and sold about 800 based on the disclosure.

I'm just curious, what's driving that different dynamic there? Can you just give a sense of, A, what's happening in the syndication market broadly, and what's driving the numbers to diverge a little bit on those two?

So, one of the things that's going on is the value of some of the used equipment that's working its way through there. So, as we look at the railcars held for syndication, that includes the fleet that we acquired during the first quarter. So, you see a little bit of a mix shift going on there with how many of those cars are new cars versus the acquired fleet, so I think that's what you're picking up there.

We're continuing to move cars through. We did have a number of larger syndications during the third quarter. These are things where, again, we'll aggregate cars on our balance sheet to get the right mix to go to our financial investors.

And it creates a little bit of -- it's not as smooth across the fiscal year as maybe some analysts would like. But we are continuing to see strong demand in that area, and looking at the cars that we've put in and blend in to give our financial investors the diversity in their portfolios that they prefer.

Understood. And just related, and this will be my last question -- earlier this year you had some spec cars which you were unable to lease. I think it was 500 or so, and it sounded like that had righted itself last quarter.

Can you just update us on how many cars or what the value of cars are on the balance sheet that may have been ordered on spec by your leasing company and still unable to lease? And any commitments that may still exist between your leasing company and you, where you don't have a lessor over the next couple of quarters?

Well, first of all, Bascome, we do not order deliberately on speculation. We do order forward for our leasing company, which all leasing companies throughout North America also do in copious amounts, much more than we do. So, we don't believe we do that. Occasionally we will end up with cars on our balance sheet, and it ebbs and flows, as Lorie says.

I don't mean to be humorous about it, but it's not something that we think of ourselves as doing. We have a very robust leasing company, and we, like all of the other leasing companies, have to replenish our stock. Without any inventory, even your grocery store can't sell you a can of soup.

Lorie, do you want to add to that?

Sure.

You've got to cheer up, Bascome.

I think Bascome is pretty cheerful.

I know he is.

You will see when the 10-Q gets filed later today, Bascome, that finished goods inventory is probably up about $20 million.

To Bill's point, and definitely as we were in the more up part of the cycle, as you're aware, we've been driving a lot more volume through our lease syndication model. In order to syndicate those cars, sometimes when the order activity that was going on over the last couple of years, our leasing company needed to get in line, just like other companies.

So, you will see an increase either not energy -- they're not sand cars that we've added, they're not tank cars, they are other freight cars, covered hoppers for the general purpose market. We feel with the size of our balance sheet, and with our leasing operations and origination expertise, we will not have an issue getting those placed into the market.

I appreciate it. That's helpful. I guess I was just trying to understand that there had been cars which have been accumulating of a specific car type or something of that where there just isn't really a market right now.

Great question, and the short answer is no.

We've got a robust risk assessment committee that meets at least every month and very regularly, and we look at the mix very closely, Bascome. But we appreciate your studying the balance sheet. It's helpful to have these kind of comments.

All right. Hey, guys, thank you for the time. I appreciate it.

Thank you.

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

Hey, good morning, everyone. I wanted to get a little bit of clarification on the backlog and mix influences. I know this has been kind of covered, but not the way I want to ask it.

So, first of all, you mentioned that the non-energy cars are over 80% of the backlog. So, if I do 5,000 for the frac cars over the 31,200, that's about 16%. Can we pretty much conclude that tank cars are now at about zero in the backlog?

Energy-related tank cars. We have a lot of other tank cars that are being (multiple speakers).

Sure. How many tank cars, non-energy, roughly are in that 31,200?

I appreciate the question, Thom, but we don't like to get into that level of detail, disclosing what's in our backlog.

Okay. And then secondly, when I look at the quarter, and it was an amazing quarter in some respects, sequentially you delivered 200 fewer cars, yet your margin was higher. Was that really the last -- I'm trying to figure out the biggest influence on the margin. Was that the last push of the energy-related tank cars that favorably impacted the margins, or was it more because the cost of materials, particularly scrap steel, was down so much? What impacted those margins so favorably?

Well, again, our manufacturing folks are doing a fantastic job of having efficient operations. I would point out that in the second quarter, we were actually going through a little bit of a changeover where we were switching from, I believe, some covered hoppers over to starting up our box car line. So, I would say what you're seeing in the third quarter margins are us hitting our stride now that we've got that changeover behind us.

But were there energy tank cars in that 4,300 delivery number?

If there were, there weren't very many.

Okay. So, hitting your stride, manufacturing efficiencies, but cost of materials is pretty low. I know they've begun to go up in some markets around the world, but there's been a huge tailwind in the first six months of the calendar year for many companies. Can you comment about the cost of materials?

Well, I do agree that the cost varies. But when you're running at the kind of production rates that we're running, I don't think that you end up seeing those. When we read different articles about what's going on with pricing, those sometimes don't flow through to cost of revenue within one quarter.

You have a bit of lead time, probably six months, before you start seeing some of that blend in. So I don't think there was any specific component or steel that would be the major driver to margins being what they were for the quarter, because it gets blended in with all the other purchasing activity.

Bill, do you have a comment on -- ?

We are seeing in North America a little strengthening in steel pricing, but so far it hasn't been a material factor either way. You're right, in general, there's been a tailwind for manufacturing through lower input costs.

In this kind of a market for our segment, we don't see a squeezing out that could occur though. And we think it's more the reflection of capacity adjustments that steel companies have made, given they're somewhat successful effort at protecting themselves from Chinese steel dumping.

And, Lorie, on the margin comment you made earlier, I think you were just talking about big picture over many quarters you would expect manufacturing margins to at least remain in the mid- to upper-teens. I assume though, in the near term, the next 1 to 3 quarters, the step down from the 23% you just had -- it's going to be a little bit more gradual. It's not going to be a huge 23%, and now you're 16.5% or 17%, right? There's a gradual element to that.

Absolutely. And as you're aware, we've been through several of these cycles. I'd certainly hope each time we have to go through one of these cycles we improve on our abilities to manage production rates, manage production lines, continue to maintain the efficiencies that we've achieved.

Right. Okay, thank you.

Thank you.

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

Hey, morning. Thanks for taking the time -- just a couple questions.

On the parts business, it came in a little bit lighter than we had anticipated. And I was wondering, and I know it's a function of what we see in traffic, but I was also wondering, given some of the oversupply in some of the markets, if you've seen or heard of any parts cannibalization going on in existing fleets?

It's a really great question. I am not personally aware of it, just on the parts in the wheel business. That is one area that's been hammered very hard by coal declines.

So, our wheel business, the margins are less than we would like. The ROIC is less than we would like. We've got a good management team there, but there's only so much that they can do with the cards that are dealt to them.

So, that's the biggest factor that's going on in that business segment is that the coal loadings have been so much affecting the policies of the railroads and shippers and replacing wheels.

That's very helpful, and I think that does explain it.

The other question, and you had talked about letting go some factory workers, and working hard on that cost of goods line, and doing a good job there, and obviously that shows in the margin. The question I want to ask is about SG&A. As revenue has declined the last couple quarters sequentially, and obviously year over year, that number seems to continue to go up. I'm wondering if there was anything specific to the near term or when you can start meaningfully being able to pull the levers on SG&A as you see revenue decline as you go through the cycle?

Yes, another great question. SG&A is really very much on our minds. We're in the middle of our budget and planning cycle, which is an 18-month strategic planning and budget cycle, and partly tactical.

We monitor G&A as a percentage of sales, and we recognize, and particularly in this last quarter because of some accruals and other adjustments, it was a little higher than what ought to be normalized. So we are -- as we go through this planning cycle, we expect to be able to talk more, probably next quarter about our G&A expectations.

I will point out that we are in the midst of, again, an international diversification. We're investing in markets that we have not been in before. We're opening offices and adding commercial people.

We expect that to pay off, and pay off handsomely at the same ROIC targets that we have advertised. And that ROIC target, along with G&A as a percentage of revenues, are things that are watched by our Board very, very closely.

Great. Thanks for the time this morning.

Thank you.

Thanks, Art; good luck.

Thank you. Our next question is from Kristine Kubacki of Avondale Partners.

Good morning. I just have a question on the remaining guidance for the full year. I know it's been asked probably in 20 different questions, but just trying to summarize what you just said about the SG&A. It's pretty wide guidance going into the fourth quarter. Can you talk about the puts and takes that would put us at either end of that guidance?

That is a great question. A lot of it is just going to be the timing of -- the deliveries that we have to our direct sale customers is -- that's pretty well known and set at this point in time. But as we put things through our syndication models, and as we're developing those portfolios, while we have a good idea, we don't always have the specifics of exactly which cars might get syndicated in the particular quarter. So, that would be one area.

I would expect SG&A to come back down from what we saw in the third quarter; as Bill mentioned, there were a couple of accruals, one of which, just to point out, is the timing of when our Board grants long-term incentive compensations, and the way that pattern happens over the course of the year. The third quarter ends up getting an extra dose in the third quarter. So, I think that would be the area.

And part of the reason we have the guidance and the range that we do are there are things that are going on, particularly as Bill was talking about, in our Wheels & Parts business that it's hard to be really specific, and to predict how railcar loadings and velocity and the reduction in coal activity is really going to impact that business and what might happen with the margins there.

We did adjust the range slightly downward, and obviously we're always shooting for the upper end if we can.

Okay, that's [helpful] (multiple speakers).

So, we're doing what we can do.

That's really helpful, I appreciate that.

And just a bigger question, Bill, maybe -- I was looking at your market share, the industry backlog chart on page 3, and really, obviously it's almost consolidated down to you and Trinity. Versus it was much different in the last cycle, you had other players were very big. Could you maybe talk about how you expect industry consolidation, if at all, to play out, especially as we maybe, and as I think about it, I'm more obviously pessimistic on the cycle, but how you see that playing out here?

Well, it's true you're more pessimistic on the cycle, but maybe I'm just optimistic, it's hard to say.

The industry consolidation is like the weather; everybody talks about it, nobody does anything about it. So, I don't know what compelling case would be for consolidation. You still are looking at net cash $100 million, $200 million outlay to acquire something that seems to be, according to many analysts, in plentiful supply. So, it would have to be an interesting play.

If you can build a factory today for $50 million in a low-cost jurisdiction, the return on investment is dramatically greater. But you do have the competitive factors.

I think both Trinity and we have expanded the distance between some of the other participants in the market. We wouldn't say never; we have tried before, but it takes a lot of energy and effort. We're very focused now on our executing on our plan, trying to hit the best possible metrics we can, adding to our backlog, and continuing to have a sustainable market share. So, we're very focused on international agenda and executing in North America, not likely to take on a lot of new things.

Okay, that's very helpful. I appreciate you taking my questions. Thank you.

Thank you.

Thanks, Kristine.

Thank you. Our next question is from Mike Baudendistel of Stifel.

Thank you. You talked a lot about the international opportunities, and just a lot of these are in the nascent stage. And I was just wondering if you can look out a few years, what percentage of revenue, or do you expect Greenbrier to have outside of North America?

Well, as I just mentioned, and thank you for your question, we're in the middle of our budget cycle for next year. And probably will be giving forward-looking guidance for next year, at which point we might want to set some targets, which our Board certainly would like us to do, for a percentage of our revenues and activities in other jurisdictions. So, I don't think we're prepared to do that today, other than the color I already gave.

Okay, that's fine. And I just wanted to ask you -- the marine backlog was positive development in the quarter. And just wanted to see how quickly do you expect to deliver that $120 million in marine backlog?

And when I look at it historically, it tends to get up to $100 million to $120 million, then you deliver that equipment. Is there any opportunity for that to be a larger portion of the Business and have the backlog larger than that?

Yes, there is. We are still seeing surprising strength here in the west coast markets, which is primarily where our marine ocean-going barge business has been directed. We're seeing a lot more integrated tug/barge combinations as the technology in that area becomes much more competitive with smaller vessels. Finally, we have been able to participate in the Gulf markets, effectively for the first time, due to lean manufacturing in some of the robotics and automation that we've put into our Gunderson facility.

Lastly, I guess really lastly I would say that marine is very important to the core business at our flagship facility, Gunderson. We have railcars that we build there. It's primarily a railcar plant. But the marine business not only has decent margins on it, but it absorbs a lot of overhead.

And right now, I think one of the positive things about our Business is that Gunderson is building freight cars of a type we expect to be sustainable, albeit at slightly lower production rates than at our peak. So, the real benefit of that marine backlog is that it's likely to be sustainable, but it's really going to be good into 2018 for Gunderson's core business.

Great. That's all I had, thank you.

Thank you.

Thank you.

Thank you. There are no further questions at this time, speakers.

Thank you very much for everyone joining us, and have a great rest of the summer.

Thanks, everyone. Bye-bye.

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