Greenbrier Companies Inc (GBX) 2017 Q1 法說會逐字稿

Hello and welcome to The Greenbrier Companies' first quarter of fiscal 2017 earnings conference call.

(Operator Instructions).

At the request of The Greenbrier Companies, this conference call is being recorded for instant replay purposes.

At this time, I would like to turn the conference over to Ms. Lorie Tekorius, Senior Vice President, Chief Financial Officer, and Treasurer.

Ms. Tekorius, you may begin.

Thank you, Vince.

Good morning, everyone, and welcome to Greenbrier's first quarter of 2017 conference call.

On today's call, I'm joined by our Chairman and CEO, Bill Furman, as well as this frog that's taken up residence in my throat.

We will discuss our results for the quarter as well as provide outlook for the rest of fiscal 2017.

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 on the IR section of our website.

Matters discussed on today's call will 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 2017 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

We kicked off the year with strong results, given the continued pressures from a challenging industry environment.

Financial highlights for the quarter include adjusted EBITDA of $85.7 million and earnings of $25 million, or $0.79 per diluted share, on first-quarter revenue of $552.3 million.

Aggregate gross margins during the quarter were robust at 20.4%.

Operationally, we delivered 4,000 railcars, including syndication of 500 units, through our leasing platform.

Just to clarify one point, there were no units delivered during this quarter under our Saudi contract.

We continue to expect these deliveries to begin in 2Q.

Orders for the quarter totaled 2,400 new railcars valued at over $230 million and included a diverse set of railcar types such as automotive carrying units, covered hoppers for various uses, and nonenergy tank cars.

We expect moderate market conditions to continue with lumpy order activity across a variety of car types.

Our diversified backlog as of November 30 was 25,800 units with an estimated value of nearly $3 billion.

As we've stated on previous earnings calls, our orders are noncancelable, but, given shifting market conditions, we continue to work with our customers to best accommodate their current and long-term needs as well as find solutions that are mutually beneficial.

As I mentioned last quarter, in our fiscal Q1, we received a payment as part of a renegotiation of an order.

Under the terms of that agreement, we can't disclose the precise dollar amount.

However, I can confirm that, while meaningful in its own right, it's minor in the scope of our overall manufacturing segment operating results.

Based on current production rates, our backlog gives us clear visibility through 2017 into 2018 and beyond.

With this visibility, combined with our strong balance sheet, we are well-positioned to further advance our strategy as geographic diversification and building cars where our customers need them.

In fact, because of our healthy backlog levels and unlike many think, if the railcar and macro environment were to continue at levels that we are seeing today, we would not expect our fiscal 2018 earnings to decline at a similar rate as 2017 stepped down from 2016.

Now, moving on to our business segments, quarterly gross margin in our manufacturing business was 21.5% on lower deliveries, driven primarily by a shift in product mix and continued production efficiencies.

Wheels and parts quarterly margin was 6.7%, reflecting the continued challenging operating environment.

Our aftermarkets business management teams remain focused on rightsizing the network to meet the current demand environment.

Leasing and services gross margin was up 160 basis points to 37.1% in Q1, driven by higher margins on externally sourced syndication units.

We had a loss from unconsolidated affiliates in the quarter, reflecting the challenging repair market for GBW as well as high financing costs of our Brazilian operations.

We expect this loss to gradually improve into the second half of fiscal 2017, as we are starting to see modest improvement in the North American repair business and as our additional investments in Brazil are finalized, resulting in lower debt costs.

General and administrative expense for the quarter was $41.2 million, driven by higher legal and travel costs and employee-related expenses.

A portion of incentive compensation is tied directly to stock performance, which has been very strong over the last few months.

We are focused on managing core G&A costs while continuing to invest in international growth initiatives as well as progressing on our large IT implementation projects.

Although our industry's business cycle has entered a lower period of demand, Greenbrier is in a strong financial position with ample liquidity and very low debt levels.

We ended the first quarter with over $565 million of liquidity from cash balances and available borrowings on our revolving credit facility.

We have lowered our net funded debt by nearly $13 million to $68.4 million as of quarter end.

Importantly, we continue to believe we can generate positive cash flow for the foreseeable future.

Despite a challenging industry environment, our capital management strategy remains focused on cash flow, return on invested capital, and positioning the Company to create long-term shareholder value.

Returning capital to shareholders continues to be a key component of our overall strategy, as evidenced by the $0.21 quarterly dividend announced today, our 12th consecutive quarterly dividend.

The strategic actions we've taken, including diversification and prudent balance sheet management, position us well to successfully navigate shifting market conditions and take advantage of our opportunities to grow our presence in international markets.

Based on strong Q1 results, regular communications with customers and current production rates and schedules, and barring any major economic shift, we are reaffirming our fiscal 2017 guidance of deliveries to be approximately 14,000 to 16,000 units, which do not include any energy stand cars, revenue to be approximately $2 billion to $2.4 billion, diluted EPS in the range of $3.25 to $3.75.

And as a reminder, we also expect to grow capital expenditures to be about $65 million with about $25 million in proceeds from sales of leased assets.

Depreciation and amortization is expected to be about $60 million.

Our tax rate is expected to be 28% to 30%, based on the geographic mix of earnings.

And we expect fiscal 2017 earnings attributable to our GMSA joint venture for minority interest to be $40 million to $50 million for the year.

Quarter to quarter, this amount will vary based on the timing of syndication of railcars built at GMSA.

And this guidance excludes the anticipated earnings accretion from Greenbrier-Astra Rail, which we expect to close in the spring of 2017 upon completion of regulatory review.

Now I'll turn it over to Bill.

Thank you, Lorie, and I'm sorry about that frog in your throat.

It's a very good quarter.

We are off to a very positive start.

Thank you for joining us this morning.

So, on top of the good results, solid operating performance, EBITDA, and manufacturing margins exceeding expectations, EPS only a few cents under consensus, we really feel good about what was admittedly a quarter with a number of moving parts.

Today, we will try to address your questions, and already we have received a few from the field just early this morning, and we will try to be prepared to answer those of you who got up early to send us notes.

Our balance sheet, as Lorie suggests, provides us with considerable flexibility as we compete in a challenging business climate and seek global opportunities to invest in growth.

More importantly, our strong backlog and our continuing order activity, not just in North America, our core markets, but internationally, as that business builds, and we have now been at this for a couple of years, these are strong tailwinds to our manufacturing and leasing business.

I'm going to depart from usual practice for a moment just to give you some insight.

This is our annual meeting day today, and our Board goes through a regular annual economic review of activities.

We've gone through an interesting period following the US election and running up to the US election.

Sometimes, it's hard to adapt, to adjust.

Our Board is very focused on adapting to adjusting and accepting the new order of things.

Even today, as I read analysts' reports about Greenbrier and about the market in general, I wonder if we are reading the same material.

After the US election, economic forecasts are becoming much more optimistic.

We are now seeing data related to the broader economy, construction starts, automotive sales, consumer confidence, manufacturing activity, for example, that typically precedes stronger railcar loadings.

There's talk about a railcar glut.

This so-called glut is driven simply by fundamentals -- traffic, coal, and velocity.

All of those things change and they can change very rapidly.

Order momentum in the industry I continue to expect to pick up and not returning to the robust periods during the oil boom, but all of these things reflect the guidance that Lorie has indicated.

And our guidance for fiscal 2017 is reaffirmed.

We also feel good about the backlog we have booked into 2018, and things we are counting on and the things we're not counting on.

We are executing well on our two-part strategy announced at the start of the fiscal year.

Under the strategy, we've committed to actively manage and pay attention to our core North American markets, focusing on backlog, profitability, cash flow, efficient deployment of capital, and developing human capital for the future.

We also will preserve and protect our leadership in engineering and design, product development, manufacturing and services.

Moreover, as a second part of our strategy, we are diversifying internationally selectively by going to global markets where regional and global demand is in place today in those markets and is expected in the future.

Brazil and our move into strengthen our Western European position are components of that strategy, as is our Saudi and GCC emphasis.

So, again, our diversified backlog through fiscal 2017 and beyond 2018, and the fact that Greenbrier has historically outperformed its peers during industry slowdowns, we believe, give us strong momentum into the future.

Let me be very specific about something that Lorie said in her comments.

We have, from time to time, worked with customers, which is one of the things that differentiates Greenbrier.

We mentioned in our press release that we have one block of sand cars under negotiation.

As we say in the press release, we don't have guidance expectations reflecting the production of those cars, although they are scheduled in 2018.

In our minds and in the guidance we are giving for 2018, because we are negotiating with them and because others seem to be discounting and concerned about this, we are not including those in the guidance we are giving you.

And that's not to say that we don't expect to either produce those cars or negotiate a very good deal, a very good deal, to -- if we decide to delay those cars or not produce them, we will get a lot of value out of that.

Now, problem areas -- the aftermarket business, disappointing.

Wheels and parts segments and the GBW railcar repair services joint venture are facing challenges, challenging markets.

Rail velocity up considerably earlier due to rapidly falling coal loadings and significantly fewer coal car repairs among the general industry conditions have impacted the performance of both businesses.

And both, for the next few quarters, will experience some headwinds.

As Lorie mentioned, we expect that these will be mitigated and particularly the noise in the statements for the quarter that related to Brazil, which was part of that significant number, will be addressed when we recapitalize the businesses down there and grow our equity base.

In GBW, we are winning new business that will come online during the course of the year addressing some of the issues that have caused performance different than we expected and need to demand and that by required our partner, Watco, in that aftermarket business.

These businesses are important, both wheels and repair.

They're strategic contributors to our integrated business model and to that of Watco, or partner, and GBW, and we remain committed to these businesses.

Our leasing and service unit continues to be a bright spot, profitably syndicate railcars and successfully market asset management services, including its new regulatory services group, which was added during the first quarter.

Leasing and services very well integrated with our overall commercial operations, quite liquid on the balance sheet, a key component of Greenbrier's comprehensive go-to-market strategy.

I'll end up by talking just briefly about and giving a little more flavor on the two things mentioned in the press release.

The formation of Greenbrier-Astra Rail, it's a very big thing in the Western European market but, more significantly, is a big thing for access to markets adjacent to Europe.

So it isn't a domestic play except to the degree that we can work in exports out of America to support the base over there under changing trade policies, which might occur in its early days, yet to tell, in North America with the US government.

We've also already approved -- received approvals from regulators in Germany and Austria.

Poland is the only remaining authority that needs to sanction that transaction.

It's a very exciting company; it's essentially a return in some ways to our German roots and expansion of our facilities in Europe and an expansion of our engineering and technical capabilities.

While many of those facilities and much of that activity is based in Romania, part of the European Union, we are partnering with German owners and German managers who have done a very good job with that business.

They also are bringing on other product lines which are exciting in the transportation segments that are synergistic with our own.

So, we are very pleased and happy about this, and we do expect that to be a contributor not just in the tail end of 2017, but it will contribute to our backlog; it will contribute to our momentum in the growing and important Eurasian markets.

Our investments in Brazil, Brazil's railcar manufacturer, Greenbrier-Maxion, its affiliated railcar castings maker, will also help us benefit from the expected economic growth and currently realizable economic growth and infrastructure growth investment in Brazil and anchor our Latin American strategy, also providing a base for export out of Brazil and an efficient platform, potentially, for US trade.

Recently, Brazil's economic business and political conditions have improved dramatically, particularly in this sector, with almost half the fleet being older, obsolete railcars or obsolete railcars.

We think this is good timing.

It's a smaller market, but we have the capability to produce a large portion of the total market, and it's meaningful in the overall picture.

We expect that Astra will, relatively speaking, be performing in 2017, and the momentum will be bigger from our Astra Rail acquisition.

But we believe, longer-term, in 2018, that the Brazilian play will be a very solid one.

And I think it's worth considering as you look at our 2018 prospects.

Saudi Arabia making good progress with deliveries on our order there for 1,200 tank cars.

Those are high-value cars with lots of technical support, and we will expect revenue and margin contributions from this contract in our second quarter and into fiscal 2018.

So, in summary, we are far stronger today, both operationally and financially, than we have been in previous cycles.

Our transformation continues with active development of product enhancements and augmentation of our manufacturing processes with advanced technology like robotics, artificial intelligence.

Looking forward, we are going to seek and continue to seek opportunities to diversify and access new markets.

However, we are going to pay particular attention to our domestic core markets, particularly in light of the changes in domestic US public policy that may ensue.

And it is still early days, but we can see that things have changed and we intend to adapt to that change as is required and as opportunities present themselves.

At our Board meeting, there is a lot of excitement about the potential for momentum in this current market.

We have strong cash flows, a flexible balance sheet, and Greenbrier continues to have the capability and the will to deliver long-term value for its customers.

Finally, I will just say, on an interesting note, one that we discussed at our Board meeting, we are very proud to be a US company with not only headquarters in America but with global manufacturing operations based in America and almost half of our work force in American workers.

If the policy is to create jobs in America, we're certainly up to that task.

And what we want to see is a clear landscape for doing that.

We hope to support the public policy that will be coming down the road and follow the leadership of the administration.

With that, I'll turn it back to you, Lorie.

Thank you, Bill.

And with that, Vince, we'll turn it back to you for Q&A.

(Operator Instructions).

Matt Elkott, Cowen and Company.

I wanted to clarify something, start by clarifying something that you guys mentioned in the comments about the frac sand cars.

I know you are not including any frac sand cars in the 2017 guidance.

Now, the 2,500 under negotiation, those were for 2018 delivery.

So does this imply that the 1,300 were intended for 2017 delivery?

No.

No, I missed the last tag of that, but I --

Well, because there's a total of 3,800 sand cars in that --

Ah, yes, the second (multiple speakers) --

And we were just trying to clarify on the 2,500 that we were pointing out, the remainder -- the difference between the 3,800 and the 2,500 are spread between 2018 and a little beyond that.

Yes.

Let me just speak --

Got it.

-- directly to the disconnect on energy cars and sand cars.

If we have them in our schedule, we can discount them, as the Street seems to be discounting them.

Very smart people out there who follow our stock.

We are very grateful they follow our stock.

But we are on top of this issue.

We like to work with our customers.

We like our customers.

They are the source of all value.

And we are working with some of these customers as time goes by.

We think most of this is all behind us.

We have one significant block of 2,500, but I am not concerned particularly about sand cars.

I think the outlook for that market, from all the work we are doing in the Middle East, I think that market is going to come back.

All you've got to do is read the numbers with the -- BofA information has got the range for oil prices in the $50 to $70 range.

If the policies and supply conditions and demand conditions continue on the trend they are on, I'm a little more bullish than some others on the higher end of that range.

I think sand is coming back.

We've got amazing technology in America.

We've got the capacity to participate, particularly in the $60 range.

So, I think that this is not a bad thing, to have a position in sand cars.

But we don't count it in our thinking.

I don't want you guys to worry about it.

It is not in our guidance.

And when we give this guidance, you can count on that.

Perfect.

Thank you, Bill and Lorie.

And also, another thing Lorie mentioned was about 2018 EPS potentially not declining as much as 2017 EPS if market conditions continue the same way they are now.

I believe, based on your guidance for 2017 and the current expectations for 2018, 2018 consensus expectations imply a 43% decline in 2018.

And you had -- and based on 2017 guidance, that would be a 39% decline from 2016.

So, can you give us a bit more clarity?

I mean instead of 39% in 2017, we could see that cut in half in 2018, the decline, or is there even a chance for potentially flat earnings in 2018?

Thank you for the question and I thank you for picking up that comment.

We have noticed that the expectations out there for 2018 for Greenbrier are a significant step down from 2017.

Based on what we're seeing right now with our healthy backlog, where our production schedules are, we see 2018 as being more -- it might be slightly down from 2017, but it's not going to be the nearly 40% drop that you saw from 2016 to 2017.

So, again, maybe a slight dip, but not the kind of significant step down that the analysts are expecting right now.

And I guess, with a potentially slight positive surprise, it could even be flat from 2017?

That's fair enough, because if you look at what -- we've got 25,000 cars in backlog.

We are going to deliver those in fiscal 2017.

And then if you look to 2018, we probably have 8,000 to 10,000 cars in backlog today.

January of 2017, 8,000 to 10,000 cars in backlog for delivery in our fiscal 2018, which doesn't start until nine months from now.

So, we feel like they're -- again, assuming that we are continuing to see order activity like we saw this last quarter, it will be lumpy.

It won't be the same quarter to quarter.

But we don't see that kind of drop off in 2018.

And as Bill was talking about, with the administration and there are so many moving parts right now in our economy, it's really hard to say where this is going to go.

We do think -- we feel very strongly, if things were to stay just as they are today, it would be a slight decline to flattish, 2018 to 2017.

Got it.

And we've heard recently from some channel checks that there has been somewhat of an uptick in inquiries for railcars since the election.

Have you guys seen that?

We have a strong pipeline.

I think, since the election, there is a lot more activity and positioning by major customers who might have been on the sidelines.

Other analysts have observed that, the ones that put out the weekly reports.

And so, yes, I think that that is something that is happening because, if you are a value player and you are looking for the best price, you don't want to wait until the market turns.

This market typically turns pretty rapidly, as you have seen.

And the building blocks are all in place for it to turn with economic recovery in America, especially if there's a major infrastructure spend, a major tax bill that delivers some of the promises, and the other stimulus that's going to occur with deregulation.

Right.

So the increased level of activities and inquiries by customers is stemming more from the hopeful sentiment associated with what some perceive as a more pro-business administration.

It's not tied to a specific shift in demand?

It isn't politics at all.

It's economics, and it is the result of the probable policies that are likely to be adopted that will be stimulative at a time when we have a fairly low unemployment rate.

So, all you've got to do is look at the economic forecasts and the shift.

The demand curve has shifted and it's affecting everyone's mental view of how to protect their own supply chain.

Got it.

That's how I would answer that question.

But it's not politics.

It's policy and it's economics.

Okay.

And just one last question.

Bill, you did address potential policy changes earlier in your remarks.

I have a twofold question on Mexico.

It's a big part of your manufacturing infrastructure for the North American market in Mexico.

What are your concerns that a potentially protectionist policy in the US could pressure your margins?

And is there anything you can do to prepare for that scenario?

That's my question.

And secondly, we saw recently an example of a major automaker scrapping plans for a Mexico manufacturing plant.

If we see more of this happen, how would it affect demand for auto recs for you guys?

So, I'll take the easier part first, which is the auto rec business.

Yes, that's creating a little bit of effect, particularly with the major North-South railroad and some of the automakers.

It benefits some of the foreign makers under the current trade arrangements with Mexico, and it is not so good for the US producers, but that's actually happening.

The bully pulpit does work.

And there was an auto plant, a new auto plant, that was going to be built down there, moved back to the United States.

So, it will have an unknown effect.

However, the opposite to that, the contrary part to that, is that consumers are spending and the auto fleet in America, in North America, is still 11 years old.

So, we think that autos -- often people pronounce autos as not going to grow.

It just hit a big peak, and there's still a lot of pent-up demand for automobiles and new technology especially in that segment.

On the broader picture, we are aligned with similarly situated manufacturers and other multinational businesses to protect key provisions of NAFTA.

And I would just say that this new administration, these people are smart.

They are not going to hurt jobs in America.

There's a lot of jobs in America that are supported by international trade with Mexico.

So, I think there's a big difference between locating a new plant in Mexico and sensibly crafting a tax policy or other policy that supports US jobs that have assembly operations in Mexico.

There's lots of manufacturers, lots of supply chain organizations, lots of jobs, lots of jobs, tons of jobs, particularly in steel, other components that go into railcars, that are supported by operations in Mexico.

So, it's quite complex.

I think you have to have some confidence that this administration is going to sort through it.

And in the details, we'll provide adequate effort to not make the problem worse.

One of the major issues in America will be the labor pool.

If we create more jobs in America, where will the labor come from?

Because many factories in America today are having trouble filling slots for workers.

So, I think part of this is just going to have to evolve.

But we are preparing for this.

We are discussing it robustly.

And if the policy is to bring jobs back to America, with our network of factories and shops and land in the United States, we could certainly do that.

We don't really predict at this point it will be necessary.

About 50%, for example, of value that goes into a car built in Mexico comes from US labor, US material.

And those jobs need to be protected, too.

So, you don't want to shoot a hole in the bottom of the boat as you are trying to get the boat to sail a little bit better.

And I'm sure this administration will not do that.

Certainly, Congress will not do it.

Thank you very much for the commentary, Bill and Lorie.

I appreciate it.

(Operator Instructions).

Allison Poliniak, Wells Fargo.

Just following on that, this whole cross-border thing is interesting, obviously, for the broader industrials.

I guess I'm just trying to clarify what your thoughts are, that you wouldn't necessarily get a negative impact.

But if you decide to increase your investment in Mexico, then it would hit you more?

Is that how I should think about it?

I know it's really uncertain right now.

I think it's very uncertain right now.

I think six more months will clear things up quite a bit.

We are watching tax legislation in Congress, as most of our manufacturing peers, those international companies.

There's tons and tons of companies that are affected by this kind of policy.

Nike, for example, right here in Oregon, is greatly affected by policy on trade, not necessarily in Mexico, although, surprisingly, many people don't realize that a lot of shoes are made in Mexico, not necessarily for Nike.

But my point is that there are many, many companies that have complex supply chains, and we are all very interested in supporting US policy.

But first, we have to understand what the rules are going to be in US policy.

Some of the things that have been talked about are pretty exciting in terms of the combination of tax and incentives for exports.

So, you could just turn the whole supply chain around and it could be a big win for some companies that have experience in international trade.

Consider, for example, some of the policies that are being considered right now on taxation because, if we really do want to favor exports and we want those jobs in the United States and we make it very attractive to build export products in the United States, and if you've got markets elsewhere, what kind of strategy does that suggest?

It suggests a strategy of building components and parts and turning the supply chain around and moving it the other way -- very interesting, as long as other countries don't slap tariffs on us.

And this is only one out of many things that are just being debated right now, beginning to be debated.

And we don't even have the President sworn in yet.

So it's going to be an exciting time, and I think it's all good.

Just look at what the stock market thinks so far.

Maybe it's wrong, but there's a reason.

Look at the economic forecast.

We should be at least ready for the ride because it's going to be a ride.

Let's hope!

My next question -- obviously, international is becoming a big part of your railcar business.

Can you just help me clarify?

That backlog number you gave, is that just North America, or does that include the Europe?

I know Brazil wasn't included in the orders.

Could you try to help us frame that a little better?

Sure.

Europe is included.

I'll let Justin and Lorie address any percentages of granularity on that.

It's less than 15% of our backlog on our normal order rates at current levels.

But the aspiration is for that to be greater.

Two moving parts -- Brazil.

We just mentioned that Brazil had orders and awards just in the last quarter of a couple thousand cars.

That's not included, as you just said.

Astra Rail is not included.

They are a similar size.

So, there's a lot of noise moving around, if we were to count that stuff.

We're not counting it right now.

And between now and 2018, we've got a year to sell railcars all over the world.

These are markets that are regional markets.

They are not connected to divesting markets, necessarily, but they could be supply chain connected.

So, it's really interesting that people are so glum.

I don't mean you, Allison.

But we've got to look at the bright side.

We've got to accept reality.

Facts are facts.

We should face them.

We have a new policy, a new administration, and things are going to be changing.

If the goal is to build things in America, let's do it.

We can do it.

We could move 1,000 jobs here right away if we really need to.

But we have to wait and see.

We have to just wait and see how this is all going to turn out.

So it's too quick, too early to be reactionary or overly concerned.

It will all work out.

And just circling back a little bit, Allison, on your question, once we do complete the closing of Astra and fold that into our financials, we will wrap their backlog into the consolidated Greenbrier backlog number.

Brazil, we will see how that, with our additional investment, we will continue to highlight what their orders and their backlog will be as we go forward.

But we will try to see what's the best way to communicate transparently to the market.

Great.

Thanks so much, guys.

Justin Long, Stephens.

The question I wanted to ask about was the mix of railcar deliveries that you expect in fiscal 2017.

Could you provide a little bit more color on tank versus non-tank?

And then, as we progress into fiscal 2018 and think about mix on what's locked in the backlog today, you mentioned that 8,000 to 10,000 cars.

How do you see mix evolving over the next couple of years?

Do you want to take that?

Sure.

So, the tank car mix will probably decline a bit as we go forward.

As you know, we're building tank cars primarily at our GMSA joint venture facility.

As they transitioned away from doing the crude-related tanks, they are getting into more specialty tank cars, pressurized tank cars, which take a bit more time and run at a slower production right.

So I would say overall, from a unit perspective, tank cars will probably be a bit less of overall production, as we progress through 2017 and even into 2018 to more normalized North American tank car demand levels.

That being said, those are still high ASP cars.

And our GMSA joint venture, all of our manufacturing operations have really stepped up their game over the last couple of years.

And we are continuing to see, as we did in the first quarter, some fantastic margins, even at lower rates of delivery.

I'll just add one footnote to that, a real simple one.

Those of you who are starting to watch 2018 and 2019 -- a wise thing to do with a long-term stock investment -- I think that tank cars shouldn't be counted out of the mix.

They are still a big, very big item, in the US economy.

Plus we have two factors that are granular.

One is the necessity of recertification of the older tank car fleet.

And two is the fact that 2018 and 2020 will arrive, and when they arrive, tank cars that are stronger and safer will have to be adopted, unless there's changes in the safety regulations.

That's hard for any administration to do.

Safety is very, very important in the railroad industry, and it's the railroads themselves who are driving a lot of this through their pricing policies.

So, as we see 2018 kick in, particularly on the cars, we're today even seeing a lot more of the pipeline, then I would suggest or suspect the market would even anticipate in pipeline inquiry -- or in tank car inquiries.

Okay, great.

That's helpful, Lorie and Bill.

And then secondly, just a quick one on the tax rate -- obviously a lot of discussion about the US corporate tax rate potentially moving lower.

If we were to run the math for you guys, if we saw the US corporate tax rate go to 20%, what would the pro forma tax rate for Greenbrier be?

I know it may be a little bit tricky, given the mix of your production between Mexico and the US.

It really depends on which tax code is adopted.

There's 25 variations right now being debated and it's got to go through the Senate.

Right.

And I would say our expectation would be our tax rate would be lower.

Lower to what?

It's really hard to say because, as you point out, we're in a lot of different international markets, too, and so there's the blending of our European tax rates.

We still have Mexico.

But definitely, if the US tax rate were to be reduced, our effective tax rate would be down.

Maybe a better way to ask it is, if you look at a percentage of your pretax income, what percentage are you paying a US tax rate on today, and what percentage are you paying a Mexican tax rate on today?

I'd say it's probably a fairly sizable percentage is on US because even our production out of Mexico is US-based.

But there's a lot of complexity when it comes to the tax regulations that are being discussed of exactly how that will work and how -- would we get to take advantage of all of that, depending on where the manufacturing of our cars is.

So it's a very complicated question.

I guess I'd just have to jump to saying we don't have a specific answer for that right now.

That's fine.

I can definitely appreciate that, and some of the color you gave was helpful.

So I'll leave it at that, and thanks again for the time.

Ken Hoexter, Bank of America Merrill Lynch.

Lorie, you mentioned -- it was great feedback on 2018 earlier.

Thanks for the thoughts on your declines or potentially even to be flat.

In the past, you mentioned kind of midteens margins at manufacturing.

Is that still your thoughts on where this declines to, given the production levels that you are looking at and maybe your thoughts on the trough there at manufacturing?

Yes, I do still stick -- when I give that guidance, I believe that, over the long term, in a normal market I believe our manufacturing operations should have midteens margins.

That is definitely an averaging.

We will have some car types that are generating much higher margins, some that are lower depending on probably the more commoditized car types.

But again, as we saw with the first quarter, we have improved our operations tremendously.

And we are not stopping now, and that's not just plant layout and production, but that's engineering and how we are building our railcars, robotics, all those different things that I think that gives me the comfort to say that, across the long term, midteens margins for manufacturing is a fair number.

A trough?

If we were to go to, I don't know, less than 10,000 cars being delivered, it'd definitely probably get down into single digits.

That's pretty dire straits.

Another way to answer that question is just say simply reflect that manufacturing and our leasing activities have exceeded our own internal expectations and continue to do so.

I don't think that's reflected in Lorie's -- we continue to be impressed with the performance there.

And the disappointments are the aftermarket business.

Those are the areas we have some headwinds that we didn't expect.

We didn't expect that, and that's disappointing, but we are going about fixing it.

And we are very focused on the macro policy climate as it might affect our core business model in manufacturing.

But we are very adaptable in manufacturing.

I'm pretty pleased with what's going on there.

Bill, may be just to expand on that a little bit more, so if you carry that on to -- maybe talk a little bit about the parked cars that are -- we hear about these hundreds of thousands of railcars that are sitting on the sideline and the pace that you are starting to see them come back into use as volumes maybe tick up little bit here versus the need to order.

Maybe kind of differentiate that because, in your charts, you show the eventual move back to that 50,000 annual purchasing.

But maybe talk a bit about what is holding that back with the backlog on the rails today.

All right.

So, in terms of Greenbrier, we are not the same as other car builders.

We have a stronger long-term, multi-year backlog that has been very solid.

But with that as just a base, these surplus cars -- they will go surplus.

You start with the principle that a railcar is not a railcar.

There's probably 20 different kinds of railcars.

So you have some cars that are very surplus, like coal cars.

You have other cars that are still in demand and are circulating.

So, you have to fragment it into your market segments.

Secondly, velocity, very important.

It's not just the loadings.

It's the velocity.

And coal declines have affected velocity.

Now, the outlook is more modest, at least dampening the decline in coal.

And that is pain relief.

So we have watched velocity statistics.

From our perspective, we are happy when the railroads can improve their velocity, but it works off the so-called surplus when they have -- you know, where they have more business because, as they get more business, their velocity tends to decline, and that has been happening.

And every 1 mile per hour of decline, it really affects that fleet quite a bit.

Lastly, there's something that's similar to structural unemployment.

There's a level at which freight cars are going to get stored, particularly seasonally.

If you happen to be in one of those seasons, peak cars get stored, and then weather.

Those are all factors.

So it's not that simple.

I wish it were simple, but it's not simple, like many things in life.

So, you have got to look at the whole thing and parse it out a bit.

And maybe we need to give more transparency and education to the market.

But it can rapidly change.

And particularly when you are diversified, as we and a few other car builders are, you can be nimble and move from one car type to another if you've got the right manufacturing facilities and people and skills and capability to do that.

That's helpful.

Thanks for that.

And Lorie, maybe just -- you mentioned Astra not included.

Obviously, you've talked about the accretion potential from there.

Maybe you can walk us through for 2017 and 2018 again what to expect out of Astra and then the same for Brazil.

Obviously, if you are thinking maybe we are closer to trough than expectations, maybe what are some of the potential upsides we can get from as you move forward and close these increased investments or acquisitions?

Sure.

And so, for Astra, and we are not giving specific EPS accretion numbers, but the Astra operations, to just give you a little flavor, is a bit bigger than our existing European operation.

So when you think about that from Europe being about 15% or so of our existing business and we are talking about doubling that, that can be sizable.

Now, again, it will get complicated for you guys because we will have a 75% ownership in that and our partner will have a 25%.

But we definitely see that transaction as well as activities in Europe and Eurasia being very beneficial to our financial statements as you move late into 2017, but more probably in 2018 and beyond, because we think those two operations give us a great platform into the GCC and some of those other developing countries where we are doing a lot of legwork today to develop a customer base and understanding their railcar needs.

So, I definitely see that being a really bright spot as you get out into 2018 and 2019.

The Brazilian operations, it's a smaller market.

I think the total market size down there is maybe about 6,000 railcars on an annual basis.

We are the largest railcar builder down there.

But having a strong presence in Brazil is another stepping off point to go to other areas of the world, so, for example, Africa and things like that.

And Brazil is a huge exporter, so we see opportunities there.

Maybe it's not going to be as big of an incremental benefit to our financial statements, 2018 and beyond, as the European, but it definitely rounds out what we have been trying to do here, which is we've got our focus on North America, that is our core, but we want to take our core competencies and deploy them in other parts of the world to offset some of the cyclicality of North America.

Bill, I'm sure there's things that you'd like to add.

No, I think that's very well said.

Thanks.

Thanks, Lorie.

I appreciate the time.

Mike Baudendistel, Stifel.

Thank you.

I just wanted to clarify.

I know you said that Astra is not included in 2017 guidance.

Is it also not included in 2018, the comment you made on earnings in 2018?

I would say, in general terms, it's rounded in there.

It's not a specific number, so not very (multiple speakers).

Let me just say that we tend to discount a lot of this stuff in our published remarks, which is maybe different than the way we schedule.

But again, it's a complex business.

And we try to be very conservative in how we project to the Street, and we would prefer to err on the side of safety and not surprises.

So, that may be a fault, but that's what we do.

So, we tend to discount things that haven't been concluded yet.

We haven't concluded that acquisition yet.

So, when we've concluded it, we probably won't count it as much as -- or at all -- in our minds.

So that's just the way we operate.

And it's peculiar, I know, but it us.

That's the way we are.

Okay.

Well, that's still helpful commentary for me.

And I also just wanted to ask you, I guess on GBW, which wasn't profitable in the quarter, could you just walk us through what needs to happen in order for GBW to be profitable in the coming quarters?

Is it mostly just rail traffic overall being up, or is it just that there were certain bulk commodities that drive more of that repair business that were down that would need to improve?

Its volume, volume and volume.

The coal business has really affected out wheel business, which isn't your question.

GBW is your question, but GRS is in a similar boat.

These tend to be more cyclical than we would like.

But coal has really hammered them, and we've had, in GBW, some integration service I guess and delivery issues that have been addressed.

Re-certifications are coming on strong.

We are actually getting a lot of new business.

We need to protect our current customer base and provide excellent service, reliability, which we will do.

And then we need to see volumes recover in the repair side.

So, I think we still haven't seen a retrofit program on older tank cars.

Eventually, we believe that will occur.

We think it's a good long-term play, but, right now, it's encountering unexpected headwinds, a lot of it having to do with just the general market conditions of the railroad industry and coal.

Great, thank you.

I also just want to ask quickly, the 2,000 orders you received in Brazil, how does that compare to historically?

Was that the best quarter of all time, or just to put that in some historical context would be great.

Well, business in Brazil, if you read about Brazil, you can get pretty depressed.

But you don't want to believe everything you read, just like with all of our analyst reports.

I think that the important thing to remember about Brazil is that the economy is export driven.

It's not just mining; it's agriculture.

Right now, it's agriculture, agriculture.

So, it is an unusual level of order activity, certainly.

We are embedded now in Brazil.

We are following it.

There's going to be a real strong need.

But historically, that's a fairly solid amount if you consider the whole market is, depending on the cycle, is 4,000 to 6,000, 7,000 cars.

We are going to go through a five-year period where there may be more demand.

There's adequate capacity down there, so there's competition, and that will affect margins.

But I'd say it's -- I wouldn't count that as something that is something we expect, unless we get a really strong export program going out of there and broaden our products lines, which we are intending to do.

Great.

Thanks very much.

Thank you, everyone, for your time and attention this morning and your interest in Greenbrier.

I'm sure we will be taking some follow-up calls later today.

And for those of you who are really interested, as Bill said earlier, our annual meeting is this afternoon, which will be webcast.

Thanks and happy new year.

Happy new year, everybody.

Thank you.

So, that concludes today's conference call.

Thank you all for participating.

You may now disconnect at this time.