Greenbrier Companies Inc (GBX) 2016 Q4 法說會逐字稿

Hello and welcome to the Greenbrier Companies' fourth quarter fiscal year 2016 Earnings Conference Call. Following today's presentation we will conduct a question-and-answer session. Each analyst should limit themselves to only two questions. Until that time all participants will be on listen-only mode. At the request of the Greenbrier Companies this conference call is being recorded for 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. Miss Tekorius, you may begin.

Thank you Vince, and good morning everyone. And welcome to our fourth quarter and full fiscal year 2016 conference call. On today's call I'm joined by our Chairman and CEO, Bill Furman. We'll discuss our results for the fourth quarter of 2016 and the year as well as provide comments on our outlook for fiscal 2017. 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. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities and 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 2017 and beyond, to materially differ from those expressed in any forward-looking statements made by or on behalf of Greenbrier. For the year Greenbrier delivered record revenue of $2.68 billion aggregate gross margin of 20.6% on deliveries of 20,300 units and record adjusted EBITDA of $474 million. Cash flow from operations exceeded $330 million for the year. This strong year was capped off with solid financial and operational performance for the fourth quarter.

Financially, aggregate gross margins for the quarter were strong at 21 -- 20.1% on revenue of $595 million. Earnings for the quarter totaled $33.6 million or $1.06 per diluted share and adjusted EBITDA totaled $104.4 million or an EBITDA margin of 17.5%. Cash flow from operations totaled $137 million for the fourth quarter. Operationally in the fourth quarter we delivered 4600 units including syndication of 600 units. Our depreciation expense increased from Q3 related to a small number of DOT-111 tank cars. As we evaluated the cost of regulatory changes and opportunities for future use we updated the estimated depreciable life resulting in higher depreciation in Q4.

Also during the quarter we transferred certain railcars out of inventory and railcars held for syndication to equipment on operating lease. With our strong balance sheet we can choose to hold certain assets while realizing substantial tax benefits and generating solid returns. And finally we received about $3 million of insurance proceeds during the quarter associated with two different fires that occurred back in 2015. The timing of these types of settlements is difficult to predict. Orders for the quarter totaled 2300 new railcars valued at over $200 million across a broad range of car types including automotive, intermodals, non-energy tank cars, cover hoppers of varying sizes as well as a number of European car types.

As uncertain market conditions continue into calendar 2017 we expect the timing of orders in the US to be best characterized as lumpy or uneven. As we have discussed on prior earnings calls the last several years had extraordinarily strong industry orders and backlog growth, as well as years with record railcar deliveries. These years exceeded what Greenbrier would typically consider a normalized level of industry demand. The backlog we built over the last couple of years serves as a key indicator of future earnings and cash flow generation and provides us with the flexibility to continue to invest in growth opportunities. We have excellent visibility with our diversified backlog of 27,500 units valued at $3.2 billion. This backlog figure includes the outcome of recent customer contract renegotiations that will yield in favorable cash and economic considerations resulted in the removal of 1,200 units from the backlog.

Moving to our manufacturing segment, our quarterly growth margin was 21%. Driven by continued strong operating performance. Looking ahead we will continue to align our manufacturing footprint with lower levels of activity and demand for more general purpose railcars. Wheels and Parts quarterly margin was 7% a sequential decline due to lower wheel set an component volumes. We continue to see headwinds in this business segment due to ongoing decreases in railcar traffic. The decline in coal traffic has had a particularly significant impact on this business. As perspective the average coal car was one wheel set replaced per year versus every five years for an intermodal unit. Finally, leasing and services gross margin was up due to lower volume of sales from the railcar portfolio acquired earlier in the year. Greenbrier is in a strong position for this point in the railcar cycle.

We have a solid balance sheet with ample liquidity and very low net debt. We ended the year with over $570 million of liquidity from cash balances and available borrowings on our revolving credit facility. Importantly, we expect to have strong cash flow from operations for 2017. Our strong cash generation allows us to pursue a capital deployment strategy balanced between investing organically and high return projects, strategically in our core competencies including International and finally returning capital to shareholders. Our dividend is an important part of this approach and the 5% increase in July reflects our confidence in the sustainability of our cash flow.

We now pay nearly $24 million annually in dividends and since October 2013 Greenbrier has returned over $180 million to shareholders through dividends and share repurchases. Nearly two years ago Greenbrier set financial goals of achieving aggregate gross margin of 20% and a return on invested capital of 25% by the second half of fiscal 2016. We're proud to have achieved these goals but in light of the current economic conditions we won't be issuing new financial goals other than 2017 guidance at this time. However, we do remain very focused on ROIC for capital allocations.

Looking forward to fiscal 2017 we expect a continued challenging environment in North America characterized by low overall demand across all units the strategic actions we have made, including diversification and prudent balance sheet management position us well to successfully navigate shifting market conditions and take advantage of our growth opportunities in other markets. So based on current business trends production schedules our guidance for the full fiscal 2017 is as follows; Delivery to be approximately 14,000 units to 16,000 units, revenue of $2 billion to $2.4 billion and diluted EPS of $3.25 or $3.75.

Further we expect aggregate growth margins to remain robust compared to our historical performance at similar point in the North American rail cycle, although below record levels for the last couple of years. Internally our goal for G&A expense is 6% of revenue. Our operating groups have been adjusting their cost structures to match a softer environment. We do face headwinds in 2017 due to commercial and development costs in our expanding International market as well as costs associated with a company-wide ERP system implementation.

Gross capital expenditures are expected to be about $70 million, with minimal proceeds from the sale of leased assets. Depreciation and amortization is expected to be about $60 million for the year and our tax rate is expected to be approximately 28% based on the geographic mix of earnings. We expect fiscal 2017 earnings attributable to our (inaudible) joint venture or minority interest for us older folks to be $30 million to $50 million. Now, quarter to quarter the amount will vary based on the timing of syndication of railcars sold to (inaudible). The cadence of deliveries in earnings is expected to be slightly weighted to the second half of the year based on our current production schedules and the guidance excludes the anticipated earnings accretion from Greenbrier-Astra Rail which is going through regulatory review right now and now I will turn it over to Bill.

Thank you, Lorie. Good morning everybody. We finished fiscal 2016 very well and I'm pleased with the results with our fourth quarter during a time of weaker demand. Fiscal 2016 was impacted by an industry slow down as Lorie points out closer to more normalized demand levels from recent peaks, but our low cost and flexible manufacturing footprint provided stability and strength. Additionally I'm impressed by our team's ability to execute on our strategy and I'm also very happy with our strong backlog and continued order rate which for the quarter was higher than the rate for the year as was our operating cash flow from -- cash flow from operations.

At $137 million versus $330 million for the year. Today Greenbrier serves railcars markets and the world from manufacturing operations in the US, Mexico, Europe and Brazil. Greenbrier is extending its presence in emerging railcar markets we can serve from Europe and Brazil, including growing markets in the nations of the Gulf cooperative council, Eurasia, Latin America and certain parts of Africa. Over the last two years we also grew our leasing and services platform and completed over $1.2 billion in lease syndications during that period. At the end of calendar 2012 in December Jim Sharp who has served us as head of that leasing unit will retire. I want to commend Jim for his many years of service to Greenbrier and for building a very strong leasing company. We appreciate his work and his work will be carried on with the strong team he create and by Mark Rittenbaum who will run both our commercial and leasing operations.

We believe both our GRS unit and our GBW joint venture are well-positioned for the future with each bringing strategic benefits to Greenbrier and its model. Greenbrier continues to transform and we seek opportunities to diversify and access new markets to expand the reach of our integrated model and our success comes from anticipating and solving customers challenges and issues. During our fiscal 2016 we delivered 20,300 railcars and received orders for 7,500 in the fourth quarter we received orders for 2,300 and about a third of the volume for the full year.

Our total backlog as Lorie points out gives us strong visibility into 2017. Financially, our focus on generating cash flow return on capital deployment and returning cash to shareholders through our dividend which we increased 5% earlier this year demonstrates our commitment to generate long-term shareholder value. As North American markets experience softening demand we have adopted a simple two-part strategy for this part of the cycle. Number one, we'll actively manage our core North American market. We will focus on backlog, profitability, cash flow and developing human capital for the future. We will preserve and protect our areas of competency in engineering and design, manufacturing, and services.

Number two, we will continue to diversify internationally by going to global markets where demand is stronger for railcars and where US and International government support is a strategic resource available to us. As I said earlier we have identified market in the GCC, Brazil, Eurasia, and Eastern Europe as primary targets. We spent the past year identifying opportunities in these markets and have added staff resources to pursue them.

Early this quarter we announced the appointment of Jim Cowan to President of Greenbrier International in addition to his duty as CEO of GBW, our joint venture with Watco. Cowan is well known in the railcar industry with decades of experience and senior leadership positions. In his new position he will support Greenbrier's rapidly growing International operations. Along with Martin Graham and Alejandro Centurion in our manufacturing organization. Our core North American market Greenbrier is actively communicating with our customers to ensure we are meeting the current and long-term needs as well as finding solutions that are mutually beneficial. We're also enhancing our designs and product value propositions while developing next-generation of Greenbrier managers.

On October 13 we announced plans to form Greenbrier-Astra Rail. After the closing of this transaction which we expect to occur in 2017, in early 2017 this new calendar 2017 we expect this new company to immediately become a premiere end to end European railcar builder and engineering company. It will also feature the continents broadest product lines for freight railcars repair and other integrated services.

In August we acquired ownership position in the Brazil railcar castings maker Amsted-Maxion Cruzeiro our second castings investment including Ohio castings in the US. Including our previous investments in Brazil this transaction takes our direct and indirect holdings in Brazilian railcar maker Greenbrier-Maxion to 35% with an option through 2017 to increase our total direct ownership in Greenbrier-Maxion to 60%. Year-to-date in 2016 Greenbrier-Maxion, has received orders for more than 2,300 railcars not contained in our backlog because we don't consolidate that company.

These orders amount to about 50% or more of market share of all orders placed so far in 2016 for that local market in Brazil. The potential for this platform is promising when combined with our global supply chain and our network of customers globally. We're stronger today by far both operationally and financially, than we have been in previous cycles. We have three major assets that will serve us well in the current environment. Our backlog. Number one. Number two, our balance sheet and number three, our most important asset our people.

With our backlog providing visibility into 2017 and 2018 we have a runway to further advance transformation through geographic diversification manufacturing efficiencies led by technology and the generation of positive operating cash flow and free cash flow. Our balance sheet is strong with significant liquidity regarding our people during fiscal 2016 we reorganized major functional areas in the company such as commercial finance and engineering with a goal to be more collaborative internally and more responsive externally.

I am committed over the course of the current fiscal year and beyond to invest in the development of our internal leadership team as we expand the capability of Greenbrier's management. Our success to-date is due to the incredible capabilities and expertise of dedicated team members and also to our values, respect for our workforce and for our customers and a dedication to engineering product design. This is the foundation for Greenbrier's ability to respond nimbly and quickly to shifts in customer demand and our commitment to provide high-quality products and services to our customers which produce value for our shareholders. With manufacturing -- with manufacturing operations on three continents stable cash flows, a strong leasing an asset management business and a robust balance sheet we believe Greenbrier's well-positioned to continue to serve customers, shareholders and employees. Thank you, Lorie. Back to you.

Thank you, Bill. And, Vince, we will go ahead and open it up for questions.

Thank you, Lorie. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Matt Elkott with Cowen and Company. Matt, your line is now open.

Thank you. Thanks, guys. Before I ask my questions I wanted to clarify something that you guys said. Your current guidance for fiscal year 2017 does not include any help from Astra Rail, correct?

That is correct.

And have you guys gained any more clarity on what the closing date for that deal might be?

Matt, no. Unfortunately we haven't. It's a regulatory process and we have just recent -- we only recently signed documents and filed the application. So it's a little bit difficult to predict the time of these regulatory changes although we are encouraged that it will happen in the early part of calendar 2017.

Got it. And on the 1,200 cars that were taken out of the backlog can you talk more about the favorable economics you described in the release associated with the settlements on those cars? You know, and are those cars part of the 5,000 frac sand cars that you talked about last quarter and last .

The easy part of that is yes, those 1,200 cars are part of the 5,000 that we called out last year. So we have 3,800 remaining sand cars in our existing backlog.

Okay. And how -- how many (Multiple Speakers).

Yes. We received considerable cash compensation and then a number of favorable concessions in the nature of the relationship with regard to the cars that were renegotiated. We see in general that the frac sand market is poised to improve depending on what occurs in -- in the oil industry and particularly with oil pricing. If oil pricing moves up, we see a lot more demand. So we have been focused on our frac sand exposure and in overall terms we're focused on continuing to improve and maintain good customer relationships, but we see this as a win-win where we got quite a bit of value and our customers got value as well.

Got it. And how many more settlement negotiations are you guys in right now? Is it the remaining 3,800 cars or is it more or less?

I would say that with this renegotiation it takes care of most of the sand cars that we have. We continue to have conversations with the customers on a regular basis whether it's sands cars or other cars as our customers timing of demand changes and things like that. This is a normal part of being a railcar builder that you're shifting around a little bit. So but overall I would say of the 3,800 units that are remaining in backlog for sand we feel quite comfortable that those cars will be delivered. They are not part of our 2017 guidance, though.

Got it. And just one last question. The ASP of your third quarter order was 91,000. This quarter it was 87,000. So 91,000 the third quarter, 87,000 the fourth quarter. Can you help us understand how much of this is attributable to mix an how much to overall pricing pressure across rail types? Also, the -- the backlog ASP remained flat at the end of the fourth quarter despite the decline in the order ASP in the quarter. Does this have something to do with the cancellations?

So regarding the ASP on orders for the fourth quarter, it is mixed and as you're aware from following the industry for quite some time orders and the timing of those orders can be lumpy or uneven at times. This fourth quarter for us I would say we had a slightly higher mix of both intermodal units which have a slightly lower ASP as well as a number of European units which while very complicated have -- tends to be-- have a slightly lower ASP. As to the ASP for backlog, I think that's just quite honestly the backlog is such a large number it takes a lot of units to really make a change in that overall ASP and the high ASP and the high backlog units is what gives us the confidence as we look into 2017 to have good visibility and expected strong cash flow.

Got it. Thank you very much, guys.

Thank you. Our next question comes from Allison Poliniak with Wells Fargo. Allison, Your line is now open.

Hi, guys. Good morning.

Morning.

Lorie, I think you had mentioned that some of the orders were for your European operations. Can you quantify that and then just also is there any notable margin difference between those deliveries and say the US?

We don't tend to quantify or get into the detail of backlog between North America and Europe. We may have to reevaluate that as we expand more into International markets to give a little bit better color, but I would say that it was ,probably a quarter to a third of orders for the fourth quarter related to Europe. And margins in Europe while they didn't-- they haven't quite had the come back that we had here in North America that has now softened, they have stayed steady I would say in the low to mid-teens. So I don't know if there's anything else you want to add with some of our European operation activity.

No. I think you said it. We need to evaluate as we grow International business providing more color on our International backlog and our International activities. We have not done that historically. But the percentage of our backlog is -- has increased in terms of reacting to the -- as a reaction to the issues we have created.

Great. Thanks. And then just looking at financial goals, obviously we see your target particularly in the gross margin in 2016. Is there a way to quantify what I guess contribution mix had to reaching that goal?

What contribution the mix had to achieving the margins that we--

The margin goal, yes.

Oh, my goodness. I don't know off the top of my head. That's a pretty tough one. I guess it's kind of one of the depending on your view point it's one of the upside or the downside from the fact that we have diversified our product mix so substantially that it's really hard to pinpoint any one particular car type that's driving the overall business. Which again lets us be able to be more responsive as the market shifts.

Great. And then just last on GBW. Obviously challenged, one of the things you had called out is an opportunity outside of crude sort of the restructuring of those cars is the tank car recertification. Any thoughts on how that could proceed with most of them sitting in storage today? I mean are you at risk of maybe getting a bubble of these things if and when they come out of storage at this point?

I think actually it's upside in that the industry has been slow to react to dealing with the 2018 and early 2020 regulatory guidelines. It's interesting to observe how regulation happens triggered by events. We have been fortunate in the industry. We haven't had serious incidents. We have had a few that came close to capturing a huge headlines, but didn't get there and we're certainly not wishing for that, but the railroad -- railroads continue to carry crude by rail, they carry ethanol, they carry other products that are worthy of having safer tank cars and we're completely dedicated to that safer tank cars. The safer tank car notion. And we're continuing to improve the value proposition in our tank car designs.

So we see -- we see that this is a pent-up demand that will result at some point in replacement by the tank car of the future or hazardous materials there's a huge pool of those cars out there that need to get replaced but just like we saw in OPA 90 on the -- in the oil industry people wait to the last minute before they address the -- the dragon. If oil prices do come back in the $50 to $60 range, with that you will see more fracking. With the use of more sand it won't affect the oil side so much, but it's inevitable that the safest tank cars available and especially those are surplus are going to get used and the older cars are going to get phased out. We ourselves as Lorie addressed in other remarks took some depreciation -- recast our depreciation on the small numbers of DOT-111 cars we have and essentially writing those off a lot faster than we had previously. Offsetting some gains in other areas. So I think that this is a real thing to watch, Allison, and you're smart to keep an eye on it.

Okay. Just last I know you didn't call out the economic benefits from the cancellation but was it material to Q4 results? Can you help us understand that?

Oh, thank you for asking that question, Allison. Actually this adjustment the renegotiation actually occurred subsequent to our year-ends so no, there's no benefit in our fourth quarter results financially associated with that renegotiation, but we did decide it would be better to go ahead and reflect that with our backlog number as of 08/31/2016

Okay. Great. Thank you.

So the benefit of the cash in particular doesn't come in this -- in the fourth quarter.

Correct. It's part of the 2017.

Is it meaningful to you, in Q1 or is it included is guidance at this point?

It's reflected in our guidance, yes.

Okay. Thank you.

Thank you. Our next question comes from Brian coal three with Stephens. Brian, your line is open.

Good morning and thanks for taking my question. Could you give us a sense for how much of your fiscal 2017 delivery guidance is locked in and then maybe just talk about how you expect mix to trend over the course of next year just based on the visibility you have today?

Sure. Of the delivery guidance that we gave for 2017 about 12,000 of those 14,000 units to 16,000 units are currently in backlog. Now, I know that we have been saying 12,000 for the last several quarters so I'll just anticipate the question how can we keep saying the same number if we're taking in orders and delivering cars. As I'm certain all of you can appreciate during less softer markets we're making regular adjustments to our production lines and making shifts so that's why it's just a coincidence that it rounds to 12,000 the last few quarters, but that's -- actually it's quite a healthy place to be going into a fiscal year compared to you think back three or four years ago and kind of the operating environment. As for mix in 2017, I know we're shifting more to general purpose railcars, Bill what are your thoughts on the market for 2017 particularly here in North America?

Well, I have been a little more optimistic than others with regard to the space. We know how to operate in this kind of market and historically our market share has increased in a reduced market. Looking at the industry forecasts they're below the -- what I consider the normalized replacement demand of 50,000 cars in the next year or two in general -- just in general kind of a dark cloud out there that I don't believe is warranted. Just doing the math if you look at needing to replace a couple thousand cars, you look at the burn rate and you look at the order rates for 2017, if we have a couple thousand cars to replace and we have a deficit of a couple thousand, we've got to add essentially 5,000 to 6,000 cars before the next year or two to make the ledger balance. So I think that's easily within our range to do. I feel optimistic about it. One of the reasons I feel optimistic is as Lorie says we have cut reduction rates reflected in our guidance and we have furloughed as many as -- by the time these rates are fully effective we will have furloughed about 2,000 employees in our manufacturing operations and some of our repair and other units. So we are sizing the company's costs to the new realities, but just in this quarter we received orders for 2300. We're going to get a boost from international volumes that really matters. It's a augmentation of the -- we have been at it for well over a year now so we have got a pipeline as we do in North America. I'm generally pretty optimistic that we can keep the engine running as -- as we have been doing. Meanwhile, one of our most challenging things to do is allocate capital because we're kind of free cash flow and operating cash flow we have we have to be sure that we can play that wisely because we have at this part of the cycle quite a lot of it coming our way.

That was really helpful. Thank you. Bill and Lorie. Just secondly on , revenue guidance for 2017 is there any detail you could provide just on your topline expectations by segment?

We do not get into that level of detail. As you can reflect on over even fiscal 2016 there are times that we have opportunities that come up and that might be part of our expectations that may or may not come to pass that impact a particular segment or another. So at this point in time we'll just stick with consolidated revenue guidance.

Fair enough. Well, I appreciate the time.

Thank you, Brian.

Thank you. Our next question comes from Ken Hoexter with Merrill Lynch. Ken, your line is open.

Great. Good morning. Hey Bill. Lorie, you mentioned an unexpected pullback in margins given as you roll-forward. Maybe could you delve into that a little bit thoughts on the first half operating margin do you expect it to go back below 20.

On gross margins so my comments were around gross margin and yes, we would -- while on one hand we would love for aggregate gross margins to stay above 20%, the realities of reducing production rates and while these are flexible manufacturing facilities and as Bill indicated we have sized our operations to take costs out, you do have inefficiencies that are associated with running at lower production rates. The other thing that you'll see as we go through fiscal 2017 is we're shifting to more general purpose railcars so box cars and the like which don't have some of the -- have a nice ASP and they have solid, good margins, not quite the same as some of the tank cars that we were enjoying over the last couple of years.

So we watched the economies of scale as you ramped up production and really -- I think when you first said it, it was down in the low teens in your outlook. Can we see the economies of scale kick in where it starts to maybe impact the margins a little bit faster or -- or have some of the costs changes been more structural and more permanent? Just want to understand on the manufacturing side.

On the gross margin embedded in transactions we have really held the line on -- as we said before, on renegotiations. We only do this if we -- if it's good for both parties. So our margins embedded in the backlog remain at about what they were. We have the -- the change in realities in the marketplace for orders that are being added to that -- that backlog. So we continue to see some real leverage in the actual pricing. As to the operating costs, we don't -- we're a little in unchartered territory here. Because of the way we invested in those facilities particularly in Mexico but also in Europe, we had a more efficient network and it's also scalable, much better than we ever were equipped to do before. So it's a little difficult for us to actually see how much erosion there can come, that can't be overcome by the efficiencies that were embedded in those modern facilities. Particularly some of the changes in robotics and smart technology that has enabled us to do more with less. So I think that it is hard to answer that question. I don't think we're going to see the rapid decline through 2017 or even into 2018, but we're going to be fighting a natural erosion from discontinuous production functions. Lower interchange overs is what I mean by that where you're moving from one car type to another and by -- which we can do very rapidly and then just the over -- under absorption of overhead when you're running at lower volumes. Those are the principles involved, but the actual application we have had manufacturing operation continues to outperform our plan expectations so that's why I'm saying it's a little hard even for us to see how much that might come down, but it should drift down and that does not mean our goals for ROIC and for margin attainment in any way have been abandoned. We're just subject to the marketplace itself.

Bill, I appreciate that insight. Thank you. Again, Lorie, I think you mentioned earlier minority interest. I think you said something like $40 million to $50 million for the full year. I just want to understand because you ran at $26 million the last few quarters. Is that outside of now just what's produced the minority that Gimsa, that on payout losses at Watco joint venture, European joint venture. Is there anything else in there that is keeping it at that level or maybe you could just talk about the run-rate on that minority interest.

Certainly. And, again, the guidance was between $30 million and $50 million over the course of the full year with quarter to quarter it shifting. As Bill was talking about one of the things as we have invested in all of our manufacturing facilities Gimsa is no different. They have been generating some amazing margins. So the higher the margin the higher the minority interest because that represents our 50% partner's share. At this point in time there is no other minority interest. So once we close on Greenbrier-Astra Rail that will make things just a little bit more complicated for you guys who are running models. I'm sure you're excited for that, because at that point in time our partner in Greenbrier-Astra will have a 25% minority interest on those operations.

Okay. And then the -- the G&A was that fully the residual value shift for the DOT-111 cars was that fully reflected in this quarter or did you-- I just want to understand the kind of run-rate for your cash flow kind of going forwards. Or is that -- will that keep climbing as you accelerate some of the other cars?

So we expect that depreciation amortize in 2017 will be about $60 million and that will be evenly spread and that does reflect. So we made an adjustment to the estimated life of those -- that small number of DOT-111s. So that's blended in and you shouldn't see a continued spike up.

If I could just squeeze one more in then. On the leasing size your margins really kind of moved around so you mentioned this quarter up to 35% but down from your historical 50%, 60%. Is that just related to kind of the market what you have got to do on pricing? Can you just run through on the expectations for that segment?

Sure. So if you'll recall over the course of 2016 we have had a lot of shifting going on through our leasing segment because that's where we have had opportunities to acquire these external fleets and then syndicate them in with our own manufactured products to give our syndication partners the diversity that they desire in their portfolios The accounting requires that as we sell those externally acquired fleets they run through our leasing segment so higher revenue as well as higher cost of revenue and then mathematics of that is dilutive to gross margin as you historically have seen in our leasing segment. Our historical fleet of railcars is performing very well. We have sold the most of that external fleet at this point in time. We do look for other opportunities to acquire fleets and so that's why it's really difficult to again give some of that segment by segment information and guidance that I would -- Bill, I don't know what your seeing.

I would say one thing about that. If you run anything with a single data point like gross margin, it's -- not a good thing. The work we did this year principally was directed to balance the portfolio and increase the quality of the portfolio for our syndication model. Frankly speaking too many sand cars as parts of our mix and so we, by mixing those we can create a more balanced portfolio and we did that with the fleet acquisition. However, while that deal was very, very attractive as it played out and we made a lot of money in a very high ROE on our computed equity investment in that fleet, very, very high, we didn't have a positive effect on the collective gross margin of the leasing business. So that's an anomaly that should not appear for this particular portfolio in the future, but that's an attractive reason for us to move and acquire fleets from time to time. We will continue to look opportunistically for that kind of opportunity.

Great. Appreciate the time. Thanks.

Thank you. Our next question comes from Bascome Majors with Susquehanna. Your line is now open.

Yes. Thank you for the time this morning. Just one quick clarification on the payment you're going to receive in the first quarter for the canceled sand cars. Could you quantify that or just give us some directional implication what the magnitude might be?

Millions and millions of dollars in cash.

And it's already been received.

It's already been received. Lots of cash.

On that renegotiation.

And we probably will have -- while we're not continuing to have any reductions in the future we intend to collect more cash as part of this whole initiative in future quarters. So it's a significant move. It's good for our customers, but it's good for us because we not only received a lot of cash but we're going to receive more cash, but we received solid relationship enhancements and we're able to increase the value of this -- of these franchises and these relationships for future intangible terms.

Okay. So -- so you already received several million for the first quarter. You expect more payments overtime during this agreement and that is all included is your EPS guidance as set out today.

Yes. That's correct.

All right. Thank you. You now, once again more clarification on the backlog. You had talked about 12,000 cars being in backlog for fiscal 2017 deliveries. That leaves roughly 15,000, 16,000 for 2018 and beyond. Any sense or can you share just directionally speaking what the cover looks like for 2018 at this point?

Oh, my goodness. That is a great question. I'm looking across the room at the guys who have all the answers. And he is shaking his head. I would guess it's probably somewhere you know maybe 8,000 and that's just a really rough, rough number-- 8,000 to 10,000. Again, there's --we're focused on the next 12 months at this point in time. We're really not -- we don't have solid production lines laid out in 2018 and beyond.

Well, we do actually on many of the product lines go -- they stretch through 2018 with production plans, but not all of them and so 2018 is weaker than 2017, but we have over a year to fill those slots and while we are focused on 2017 our commercial teams and leasing teams which are working in a coordinated way and have been upgraded in many respects are going to be very focused on exactly that -- that goal of continuing to meet the production requirements in 2018, 2019 and beyond.

Okay. Thank you for that. You know, I want to dig into the cadence that you talked about when describing your guidance earlier. You suggested that both deliveries and earnings would be a little back-half loaded but , just logically that seems different than a declining market, especially if you're getting some front end loaded payments for some of these cancellations that were recently made. So could you maybe just dig in a little more into the cadence, what's driving that, why you think the back half will be better than the second half and kind of the run-rate as we exit this year based on the bill plans you see today.

No way am I attempting to be nit-picky or argumentative, but there were no cancellations. We renegotiated and received considerable value for adjusting the production schedules and we're wide open to do that if it creates value for our customers and ourselves. So with that I'll let Lorie answer the rest of the question.

Sure, Bascome. So it is kind of a tough call the waiting between the quarters of this year. Right now as we're looking at those production schedules it's only slightly weighted toward the back half of the year. It's fairly even and the reason you might have a slight back half is just because of the timing of certain cars, the production of certain cars, that are then expected to be syndicated and, therefore delivered in the back half of the fiscal year. So that syndication activity is what kind of pushes it a little bit.

Understood. And just one last question. I appreciate the time today. It's kind of related to your answer there. It looked like the -- the permanent lease fleet balance on your balance sheet went up a bit in the quarter, perhaps you transferred some cars from the syndication to that. Could you just explain what's going on there and where you expect that to level out as far as the investment in your lease fleet?

Sure. We don't currently expect to invest a whole lot more in 2017 in our lease fleet. We did shift some cars out of other categories on our balance sheet into equipment and operating lease. We sold a number of cars during fiscal 2016. There are some significant tax benefits from having those cars on your balance sheet and you get the accelerated depreciation as well as these cars are on solid leases with economic returns so we just chose now as a time to maybe put those into our permanent lease fleet for a while but we're not , backtracking on our asset like models. It was just more of an opportunity to adjust our -- our more longer-term portfolio. And achieve tax benefits and good returns.

Thank you for all the time this morning.

You bet. Thank you, Bascome.

Thank you. Our last question on queue comes from Steve Barger with KeyBanc Capital Market. Steve, your line is open.

Thanks. Good morning.

Morning, Steve.

Morning, Steve.

I heard you say that the -- the accretion potential accretion from Astra is not included in guidance. Did you say what that accretion could be on an annualized basis?

No. Great question but no, we did not. We have not disclosed a number of when you can't predict exactly the timing. We do think it's accretive the Astra operation is similar to maybe slightly larger than our existing European operation so, it's hard to determine exactly how all of that is going to get knitted together and impact 2017 but we do expect it to be accretive.

It's an interesting acquisition because it's an end-to-end match up. We are in different railcar markets. We talked for many years about railcars are not railcars. There's many different kind of railcars. So it's a nice fit because it brings both entities a broader product line concentration and also a number of other -- for Greenbrier another couple of product lines that they're in that fit very well for our fabrication and engineering capabilities. And it's also a platform for export out of Europe into markets in which we're interested. So we think that that has strong earnings power and that it's a good deal, but we do need to get past the -- the paperwork -- the paperwork in Europe to get the engine running and we probably will be in a position over the year to give more clarity on that as -- as that falls into place.

Well, you guys have been focused on increasing gross margin and return on invested capital to really great effect. So as you think about the $60 million Euro investment does that business generally meet your gross margin goals or do you expect that you can get it into that neighborhood?

On the gross margin I think it meets our European goals and those have not been in -- in general although there's some exceptions in the double-digit range, but as far as ROIC I think the first year we -- it meets the -- our expectations and then from that platform we expect to have a very sizable growth. We're being conservative as we always are in forecasting of -- for one of these deals because a lot of things, a lot of moving parts, but we're very optimistic about the power that this will bring us to diversify our revenue and margins at a sizable value for such things as ROIC and margins.

Understood. If you exercise the option in Brazil, would you then consolidate and we would see those 2,300 cars in backlog?

Yes. That would be the case.

We are likely not to do that until the end of the option periods, which would be the end of 2017, but Brazil while it is a small market in itself with 5,000 cars to 6,000 cars a year is a -- a -- it's a growing market given the importance of food and agriculture in the future. We expect it to be a platform for export as well.

Is ASP similar for those cars just thinking about revenue contribution?

That -- that one catches me off guard. I don't have that ASP right in my --

Yes. I think it's probably in the lower end, maybe something more like we see in Europe. Just slightly lower than what we have seen here of late in North America, but we can follow up on that when we have our follow-up call.

Okay and last question then I think you already alluded to this Bill but orders for the back half of your year annualized to 8,000. Does that feel like a sustainable rate for FY17 for you?

That's our goal.

Okay.

(Inaudible) colleague is always very cautious and prefers to call orders lumpy and discontinuous and non homogeneous and not differentiable. However, I'm just looking at it really simply. We've got a good pipeline and we're going for the gold.

We have a very commercial team.

We have got a great commercial team.

Great leasing team, too and we're really pleased with the last six months of working on our organization. So we think we're ready for battle.

Very good. Thanks for the time.

Thank you.

Thank you, everyone, for you your participation in today's call. I would like to take this opportunity to tack onto Bill's remarks earlier about Jim Sharp. I'm pleased and proud to have been able to work with him over the last 20 years and I wish him a fantastic retirement and a happy birthday today. Thanks, everyone.

Thanks, everybody.

Thank you. So that concludes today's conference call. Thank you all for participating. You may now disconnect.