Greenbrier Companies Inc (GBX) 2018 Q1 法說會逐字稿

Hello, and welcome to The Greenbrier Companies First Quarter of Fiscal Year 2018 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 Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin.

Thank you, Ray. Good morning, everyone, and welcome to our First Quarter 2018 Conference Call. On today's call, I'm joined by Greenbrier's Chairman and CEO, Bill Furman; and Lorie Tekorius, Executive Vice President and CFO. They will discuss the results for the quarter and will provide an outlook for the rest of fiscal 2018. 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 conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2018 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

Now I'll turn it over to Bill.

Thank you, Justin. Happy New Year, and good morning to everyone. For those of you on the East Coast, stay warm, and good luck.

Greenbrier's off to a very good start in fiscal 2018. We believe this demonstrates the benefits of our strategy to concentrate on our core North American business while expanding internationally. Today, we're reaffirming our goal of $4 per share for fiscal 2018, with weighting in the second half. When considering this guidance, keep in mind that Q1 had a negative $0.14 of unusual items as well as timing of revenues deferred to a later quarter due to syndications.

Greenbrier competes in markets, which have been softer in recent years than long-term replacement demand. But today, there is a growing demand for our products and services in North America and, equally important, internationally. Near-term prospects for the U.S. and global economies are good. Recent economic data have been trending up. Momentum in the U.S. economy will be aided by federal tax law changes enacted just 2 weeks ago. Changes in the U.S. corporate tax law are new and complex. Lorie will have more to say about that as it relates to Greenbrier in a moment, but it's fair to say that the new law will benefit Greenbrier and other U.S. manufacturing companies.

Turning to Greenbrier's business. There's a broad base of demand over a range of railcar types in both North America and internationally. In North America, steady improvement in the railroad sector is occurring, although there remains continued pressure on new and used railcar lease rates. More rail velocity and increased railcar loadings are predictably raising demand for new and used railcars. This is a positive thing. For the first 11 months of 2017, total railcar loadings were 12.48 million, up 2.9% over the same period in 2016. But this does not tell the whole story. For example, railcar loadings for industrial products, a combination of 70 commodity -- of 7 commodity categories all related to the industrial economy, were up 6.8% in November, a solid second monthly increase in a row. Of course, these trends can change quickly. But for railroad car loading activity today, we believe this supports the view that the industrial economy is doing much better now than over the past couple of years.

As an industry leader in engineering and product design, new and improved products allow Greenbrier to gain market share during this expanding yet still competitive phase of the railcar manufacturing cycle. The first quarter saw additional orders for our new open-top hoppers for use in aggregate service, a promising area of growth in Greenbrier's core market. Post quarter, we saw a significant order activity in double-stack cars, a welcome boost after a period of little activity. And there's talk of an infrastructure building out and the tax bill has been passed and enacted to follow the tax bill, and this should provide more momentum to badly needed U.S. infrastructure investments. Internationally, Greenbrier now has manufacturing operations on 3 continents and a strong presence and commercial activities on 4 continents. Approximately 15% of Greenbrier's current backlog with a value of about $400 million originates from outside North America. This will grow. Our recent acquisitions in Brazil and Europe are being successfully integrated.

In Europe and the Middle East, Greenbrier-Astra Rail is proving to be a strong platform for our growing customer base in Western Europe as well as a launchpad for new opportunities in Eurasia and the GCC.

Improvement in North America railcar markets, combined with the successful implementation of our strategy, allowed Greenbrier to receive worldwide orders for 3,200 railcars in the quarter. These spanned a broad range of geographic markets and railcar types.

Greenbrier's leasing business also strengthened over the past year. We're in the early stages of refreshing our lease fleet with more tax-advantaged assets. Some have noted increased asset sales. Those are properly being turned back for around into income-earning assets, with fresh depreciation and renewed strength to our cash flow. This activity generates higher proceeds from the sale of leased assets, which are reflected in our financial statements this quarter.

In asset management, Greenbrier's managed fleet continues to grow and has grown significant over the last 12 months, adding 17,000 railcars in the first quarter of fiscal 2018 alone. This service generates valuable fee income as well as many other benefits, including strong relationships with Class 1 railroads and other customers across the railroad network and industry and increased visibility into our markets. Greenbrier's railcar leasing warehouse facility formed late in fiscal 2017, provides increased financing functionality for commercial transactions while improving capital efficiency.

In aftermarket services, energy loadings remained challenging, with some exception in oil-related products. This continues to impact Greenbrier's Wheels & Parts unit at a GBW joint venture with Watco. The Wheels & Parts team is improving its efficiency as it improves and explores new avenues of growth for wheel sets, and we expect progress in this unit during fiscal 2018.

Greenbrier and Watco at GBW are implementing an improvement program with the GBW management team. Achieving progress on that initiative to improve GBW's financial performance is an imperative for Greenbrier during its fiscal 2018 is in part -- and is part of our 2018 plan.

Greenbrier's strong balance sheet provides significant flexibility. Greenbrier continues to enjoy robust cash flow, which contributes to our current cash balance of $590 million, with only $12 million of net debt. Greenbrier's dividend payments also are on the rise. Continuing the dividend this quarter at $0.23 per share represents a 10% increase compared to Greenbrier's dividend for the same quarter last year. Additionally, share purchase reauthorizations have been extended to March 2019. These policy decisions demonstrate our board's confidence in Greenbrier's cash flow generation capacity and its liquidity. In fiscal 2018, Greenbrier will achieve its capital efficiency goals while investing to position the business for growth and profitability over the cycle.

In summary, our strategy diversified across geographies and railroad car types has enhanced Greenbrier's competitive position and cash flow in the current cycle, boosting total shareholder return or TSR. Our disciplined attention to the balance sheet and focused capital allocation strategy are key factors in our success.

Lorie, with that, over to you.

Thank you, Bill. Good morning, everyone. As Bill mentioned, we started fiscal 2018 with strong results, a testament to our ability to execute on our strategy of enhancing our core North American business while simultaneously expanding our international presence.

Revenue of $559.5 million was driven by new railcar deliveries and higher volumes in our Wheels & Parts and Leasing & Services business units. Healthy aggregate gross margin for the quarter of 16% and gains on sale of $19.2 million generated adjusted EBITDA of $76.9 million and earnings of $26.3 million or $0.83 per diluted share. Our deliveries, revenue and earnings set are up nicely to achieve our 2018 guidance.

Orders in the quarter were strong at 3,200 railcar units valued over $209 million. These orders were diverse and comprised a broad range of railcar types, including covered hoppers, tank cars, automotive carrying units and our first order for open-top hoppers. Our order strength demonstrates the benefits of diversifying our product mix and business geographically with international expansion.

We continue to believe backlog is a key indicator of future earnings and cash flow generation. At November 30, the backlog was 26,500 units with an estimated value of $2.56 billion. Based on current production rates, our backlog visibility through 2018 and into 2019. This visibility, combined with our strong balance sheet, gives us the flexibility we need to build railcars when and where our customers need them.

Selling and administrative expense for the quarter included $3.4 million of expense related to resolution of litigation in a foreign jurisdiction. This equates to $2.3 million net of tax or $0.07 per share. Additionally, the tax rate for the quarter was 33.3% versus the prior annual guidance of 29%, the impact of which was $0.07 per share. The higher-than-anticipated tax rate was primarily attributable to discrete items and the geographic mix of earnings. We expect the new tax act, particularly in the long term, to be beneficial. We're evaluating the effect of the onetime tax on unrepatriated foreign earnings and the revaluation of deferred tax assets and liabilities. Further, with our fiscal year, we'll have a blended lower rate in fiscal 2018, which will drop further in our fiscal 2019.

Turning our focus to our business segments. Quarterly gross margin in our manufacturing business was 15.6%, down modestly from the fourth quarter, reflecting product mix shift and timing of syndication activity. Our manufacturing business continues to perform very well. Wheels & Parts quarterly margin was 7.1% compared to 7% last quarter, with the increase primarily a result of higher wheel set and component volumes due to an increase in demand and an increase in scrap metal pricing.

Leasing & Services' gross margin increased to 43.9% in Q1, a sequential improvement compared to Q4. This increase reflects higher interim rent on railcars held for syndication. Below the gross margin line, we had $19 million in gains on sale of leased equipment. As mentioned on our last earnings call, we're in the midst of rebalancing our leased fleet portfolio. We continue to be in a strong financial position, and our balance sheet provides us with significant optionality and flexibility. We ended the first quarter with nearly $1 billion from cash balances and available borrowings on our revolving credit facility. As of November 30, our cash balance was over $590 million.

Our capital allocation strategy is balanced and disciplined, focusing on cash flow generation, return on capital employed and creating long-term shareholder value. This approach enables us to invest through the cycles, both organically and through bolt-on acquisitions, to profitably grow our business while at the same time enhancing shareholder returns. The benefits to shareholders of this approach are evidenced by 15 consecutive quarterly dividends or the cumulative $2.88 per share.

Now based on current business trends, production schedules and excluding the expected benefits of the recent tax reform act, we're confirming guidance for the full fiscal 2018 to be deliveries of 20,000 to 22,000, which includes Greenbrier-Maxion in Brazil, which account for about 10% of deliveries; revenues to be $2.4 billion to $2.6 billion; and diluted earnings per share of $4. Further, we expect G&A to range between $180 million to $185 million, including the previously mentioned legal resolution as well as a full year of larger European operation. Gains on sale will range between $30 million and $35 million as a result of our fleet rebalancing. Our growth capital expenditures are estimated at about $190 million, with $150 million of proceeds from the sale of leased assets, again, higher volume as we rebalance our leased fleet. Depreciation and amortization is expected to be $75 million. Earnings from unconsolidated affiliates reflect our share results from operations that are not consolidated. So that's primarily GBW and our Brazilian operations. As Bill mentioned, we're actively engaged to improve GBW's performance in 2018.

We expect fiscal 2018 earnings attributable to noncontrolling interest to be $25 million to $35 million. As a reminder, our financial statements consolidate the results of 2 significant operations, GIMSA and Greenbrier-Astra Rail, that are not fully owned. So the noncontrolling interest represents our partner share as a result of these operations. There will be quarterly fluctuations in these numbers resulting from the timing of syndication activities at our GIMSA facilities.

For now, we're leaving our expected 2018 annual tax rate of 29% while we evaluate the new tax reform bill. As mentioned last quarter, the pace of deliveries and earnings is expected to be modestly weighted to the second half of the year based on current production schedules, but as you heard today, we're on track to achieve our 2018 guidance.

And now, we'll open it up for questions.

(Operator Instructions) Our first question comes from Ken Hoexter from Merrill Lynch.

I guess, Bill, let me start off with, last quarter, you were very bullish. You were talking about more than $4 of earnings, more than 22,000 of deliveries in your discussion. Now we're kind of reaffirming the original guidance, starting off with a bit of a shortfall. Maybe you could address that, I guess, address you had a big stock sale in the quarter. I just want to make sure I understand where -- if your confidence is still as high in terms of beating those original targets or how we should read this shortfall to start this first quarter.

Well, I'm sorry if I don't sound as optimistic as last quarter, all right? We're coming off of the holiday season, and I've been traveling quite a bit. But no, I'm equally optimistic. We are targeting, for public purposes, of $4 per share. I think we can beat it. And I think, if anything, our planning process, which is pretty robust, indicates that we might do better than we thought last quarter. That's not reflected in the cadence of this first quarter. As you've heard, there's some noise in the quarter, taxes, a settlement on a lawsuit and a deferral of some production that originally we thought would be in the quarter. But as we said before many times, our business is not linear, and I think we have to sort all of those bits of noise out. So...

And I would just add on to that, Bill, is even with the noise, the $0.14 of negative noise during the quarter, and we're still reaffirming our guidance of a minimum of $4 a share.

Appreciate that take then. Let me follow up with your thoughts on the backlog, right? So if you -- when do you start to restore what you build each quarter, right? So if we're kind of coming in at 3,300, you build 4,400, we're still shrinking the backlog. I guess, given the tax laws, given the, I guess, the increase in rail demand, at what point should we start to see that flip and see the backlog outpacing the delivery? Is that something you anticipate in this year and '19? I just want to understand your kind of -- or is that something you want to work off the backlog first and get to more a spot type of replacement?

Well, as we said before, backlog is good, except when it's not good. And when it's not good is when you have a production that is scheduled and you don't have space for a customer, which wants cars then you have a problem and you lose orders. So it is somewhat self-regulating when you have a long backlog with big production space commitments. Others have the opportunity to come in, in front of you and take that space. As far as the market is concerned, part of your question that goes to the market, in my own personal opinion, and this is my opinion from the feel of the market, that the tax law should make a significant difference. The economy continues to show a lot of strength, and somewhere in calendar 2018, I expect to see more demand domestically than we're seeing today and stronger lease rates, a stronger environment. But that's my personal opinion, and it doesn't necessarily track some industry analysts. Replacement demand is an important feature, and there's also some technological obsolescence. So as I said in my remarks, it's very encouraging. You see the double stack market begin to show signs of life, and some significant orders came out this quarter post our close. So -- and I think that, that's kind of the picture as I see it.

And Lorie, just to clarify, you did not mention the new tax rate. Is there -- do you have an idea where you think it goes post new law?

Well, post new law, and again, as I've tried to refer in my comments, the February fiscal year, that ends August 31, will kind of have a blended rate for our fiscal 2018. Domestic earnings, it'll probably be somewhere in the mid-25 -- 20% range on domestic earnings. But we're still sorting through all of that, as Bill indicated. And it just came out a couple weeks ago, and we're not quite (inaudible) through all the details of the 1,100 pages.

And our next question comes from Matt Elkott from Cowen.

I want to make sure I understand this. You reaffirmed your guidance on the equipment sales for $30 million to $35 million. That's the number that includes the $19 million you did in the first fiscal quarter?

That is correct.

So your -- so the rest of the year will be a lot more modest than the first quarter as far as equipment sales?

That is -- that's a good conclusion, yes.

Okay. And then another clarification on the guidance. Your guidance is based on $0.83 in the first fiscal quarter, not adjusted for the items that you noted in the press release?

Again, correct. This is fun.

Good. All right. Now up to my more (inaudible) question. The ASPs of the order in the quarter were up nicely. What drove that? And what does it mean for gross margin going forward? Keeping in mind also the fact that there's -- I'm assuming there's a certain percentage of your deliveries for 2018, maybe close to half even, that were orders taken during the previous industry expansion. So I would imagine there would be some pressure from those kind of getting out of the backlog. But then it's encouraging to see that the ASP of orders in the quarter were actually up. So any kind of gross margin guidance for 2018 and beyond would be helpful.

Again, and I'm sure Bill will have some commentary on the current part of the market that we're in and the orders that we're taking and margin expectations on those orders, it is a bit more of a competitive environment today. But you're right that we have a bit of backlog that relates to orders taken during a more robust time in the cycle. As we've indicated in the past and it's demonstrated this quarter with very strong gross margins in our manufacturing unit, we still expect our manufacturing units across this fiscal year to have gross margins in the mid-teens. So maybe, say, somewhere between 14% and 16% across the quarter. But we believe that, that is a healthy gross margin expectation for our manufacturing operations. And assuming that market conditions continue, as we look out again, just assuming a normalized market, we would expect our manufacturing margins to stay in that range.

Yes, I don't have a lot to add to that. I think we got to continue to look at the top line revenue. I think you might also recall that we expect revenue to be greater this year. We had a slow start in the first quarter, but again, that's driven by the interaction between our syndication and the investment leasing business and our manufacturing business. As far as the sale prices are concerned, that's mixed. The market's still competitive. We're in a highly competitive part of a cycle, but all of that ought to improve as we go through the balance of the calendar year. I wouldn't underestimate, those of you who are observing the industry, the effect of that tax bill. I think it will be very positive on buying patterns and it will also be part of the tapestry where short of any kind of sarcastic shock. We should have a fairly healthy economy through the balance of 2018 and into 2019, not only in North America, but around the world.

Got it. That's very helpful. And just one quick follow-up. The mid-teen gross margin that we should expect for the remainder of fiscal '18, do you guys think that's sustainable beyond fiscal '18? Or how should we think about margins after August?

Matt, I think that, that is a safe assumption. Again, somewhere in the mid-teens, with exactly 15% or maybe 16%. It's going to depend on the mix of cars that are being in demand in the marketplace. We're going to see, I think, a pickup in some of our international activities with our expanded production in Europe. But I think mid-teens is still a good place to model in a normalized market. Again, those things, setting aside any sort of huge economic shift globally or there could be some pocket of pop in demand like we saw with the energy activity a couple of years ago, it could really drive margins up.

Perfect. And did you guys receive any orders past November 30?

Yes, we did.

Our next question comes from Mike Baudendistel from Stifel.

Great. Just wanted to ask you. I mean, one of the things that stands out in the quarter to me is this just lower volume of railcar delivery due to the timing of syndication. You produced 900 more units than you sold. Can you just talk a little bit about how you expect that to trend through the rest of the year? I mean, would you expect that to sell more than you produced? And has that become a tailwind in the last 3 quarters of the year?

Well, so what I would say, and you're probably seeing this, Michael, versus the year, we do can have fluctuations in the volume of syndication activity during the quarter. We expect, again, to achieve our guidance of 20,000 to 22,000 car deliveries, so that's direct sales and wallet syndication activity. While we did have a drop off in syndication activity in the first quarter, we expect that to turn around over the course of the next 3 quarters.

Okay -- go ahead.

So -- go ahead, Michael. Well, I think it is useful to look at the balance sheet also when you're trying to parse out the timing effects on revenue. Our model adds close collaboration between manufacturing and leasing. We lease cars. Then we either place orders or we have orders. We have cars that are delivering on leases. And if we own those cars, we receive interim rent on them. We bought them up and sell them into the market and manage them over their lifetime. So that is one of the primary reasons for the timing difference in revenue quarter-to-quarter. We recognize that the company requires a little bit more analysis from the outside looking in. And I can assure you, it requires the same kind of attention inside looking out. So I just think it's important to -- when you're looking at these quarterly shifts, to take a look at the balance sheet, look at leased cars held for syndication. It's very important to understand that those are leased cars held for syndication. They are money good in the sense that they are producing a revenue stream.

Got it. That makes sense. I just also want to ask you, I mean, the guidance of $30 million to $35 million for gains on sale this year, how do you view that in the context of sort of beyond 2018? Do you view that as being an elevated level at all? Or do you view that as being consistent with the new sort of business mix that includes MUL, et cetera?

I would expect the gains on sale will probably revert back to more of our recent historical levels. Again, we're going through this rebalancing activity in this fiscal year, which is getting a turnover in that. And we're in a wonderful position that we've got some tied up value in those assets that are on our balance sheet, which are generating these gains. But once we get the fleet refreshed in 2018, I would expect that we'll probably revert back to more historical norm.

It's really with the new tax bill, particularly a windfall to us to have that fleet. Keep in mind, our used fleet has been a lot of legacy cars in there. They're older cars. They're good cars and they're on lease and they're earning money. However, from our perspective as an owner with a new tax bill, the cash flow from liquefying those assets and acquiring new equipment and putting those on money good leases is a very stunning effect. So we're very conscious of our balance sheet, cash flow, and this is essentially a very positive thing for our cash-generation capability and our tax bill.

And our next question comes from Justin Long from Stephens.

So Bill, I wanted to start with a question on double-stack cars. You mentioned earlier that there was a pickup late in the year in terms of order flow, and there's clearly a lot more optimism building in the intermodal market as a whole. Could you just talk about how much upside we could potentially see that some of the industry build forecasts for that car type in 2018?

Okay, it's a mixed -- it sends signals coming from the industry on double-stack cars. The order activity this last -- during post quarter, our post quarter, was significant. There were 2 builders who were awarded significant sized orders. I think, in total, it's about split, not exactly equally, but very, very significant continuations of our production lines. That is really relevant to us because we were -- the rate of which we run double-stacks and keeping the double-stack car, and the gain is very, very important. Looking out in the future, we still see strength in intermodal. It is hard to predict the future with respect to intermodal, but all of the signs indicate that there's considerably more to come. So if you look at a couple of thousand, 2,000 and 2,500 units awarded post our quarter and our share must save approximately 1,000 cars, we are positive that it gives us a good base, and we should be able to keep those lines running.

Great. That's helpful. And maybe as a quick follow-up on that. When you look at the backlog today, would you be able to share how much production you have locked in for fiscal 2018 at this point? And how much is locked in for fiscal 2019 as well?

I'm going to let Lorie get into the granular side of this, but there are 2 things to keep in mind. Back in answering that question, the first thing is the actual sales and orders. The other is how we fill the obligations on multi-year transactions, which don't necessarily run through the order book. We have materially improved the situation on 2018 since our last conference call.

And absolutely, I mean, as we look at 2018, and here we sit in early January with 8 more months to go in our fiscal year, we probably got about 90% of our production booked for 2018. And as we look forward into 2019, based on the current production schedules and production rates, probably somewhere in the 45% to 50% of our production is booked.

And what did that look like last quarter? That was...

Less.

A lot less. That's right. So I think, we have -- I guess, for our fiscal 2018, we have 10%. Our plan past the -- late into our financial plan weighs into the guidance we've given. So fill -- that should be fairly easy because there are 2 places to fill it. One would be new orders in the marketplace, and you're seeing that our order rate is pretty consistent now. We're getting a boost from international sales, of course, but our domestic order rate is very solid. And secondly, as we fill the multi-year orders from Mitsubishi, Wells Fargo and other customers, CIT, Sumitomo, the effect on our plan is equally valuable as it added then a new order. And of course, we don't report it as a new order. We have it in our backlog, and then if it was an order, and we can't count it twice.

And our next question comes from Matt Brooklier from Buckingham Research.

So my first question, of the 3,200 orders that you took in the quarter, did you break out how many of those orders were domestic versus international?

No, we did not, and we typically have not done so. We're going to evaluate that policy moving forward. But a significant number came from international sources. As we said, something like the -- about 15% of our backlog is international today.

Okay. Yes, just given international is a bigger part of, obviously, the GBX story here, was trying to get and drill down a little bit on the demand activity there. Is the open-top hopper car order that you talked to in the release, is that a new product for GBX? Or we just haven't seen orders materialize until this year for that car type?

I can say new and -- it's an enhancement of an older product that is truly a new product competing directly in that aggregate space. And it's one which we think, reading the tea leaves in the next 4 to 5 years, will be important to have in the arsenal.

Okay, that's good to hear. And I guess, more of the conversation has been around the freight car market. Maybe you could provide a little bit of color or your opinion on the potential direction of the tank car market over the next 12 months. One of your lease competitors was a little bit more constructive during their third quarter earnings call regarding lease rates there. But I wanted to get your take on that market all-in. And then I also wanted to add on and ask if there's been any potential momentum in the crude tank market, given: a, obviously, global prices are moving up; and then b, there's a potential story of pipeline shortages in the Canadian market.

Yes, those are all good points, and they definitely have a factor. They are definitely the factors in the outlook for tank cars. What we're seeing, particular to our mix of customers, and emphasis at the production level, is a renewed interest in retrofits as the life cycle of tank cars requires major shopping at the end of 10 years, near replenishment cycle. So those companies that have legacy cars, particularly the slick cars that are -- don't meet the safety tests but the standards that will be coming in the '20s, are looking at the investment in upgrades of those cars to meet federal standards. So they are looking at taking cars and upgrading them and really putting quite a bit of work into them. And we actually haven't received some momentum in that business, which could affect positively GBW, but it's -- we're also doing some of that ourselves. We're also seeing a pretty interesting demand pattern emerging in tank cars. We're not changing our schedules right now, but we're seeing a lot more activity in tank cars, an opportunity in tank cars than we have before the last, say, 2 quarters ago for the reasons you've described.

And our next question comes from Steve Barger from KeyBanc Capital Markets.

You just mentioned that you would maybe -- some of these tank car retrofits could result in some momentum for GBW. And just broadly speaking, can you give a little more detail on the improvement plan for Wheels & Parts and for GBW and talk about what you're seeing in aftermarket trends in general for the industry?

Yes, the 2 are different. I'd say, in wheels, we've had positive effects from weather. It -- I said that incidents like we've had with weather the last 6 months had a positive impact on demand for wheels, particularly in the regions where we had this heavy activity. That is not part of our plan, of course. We can't control the weather. But the thing that I would say is there's a very strong emphasis on capital employed at the wheel business and also efficiencies, investment selectively in equipment that will allow us to obtain higher margins. Our margins are increasing, and I think we might be over the hump in the wheel side of that business. The market has gotten more stable. On GBW, it's more complex. That has really been hammered much more by circumstances in freight car loadings, particularly coal and energy-related cars. Our plan is to cut costs and Rick Webb at Watco is doing a good job of pushing that agenda and to restore confidence with our customer base. It is a very high priority for this management team at Greenbrier to corroborate -- collaborate with Rick and get this turned around in one way or another.

Sure. And well, I guess, to the earlier discussion of the tax bill, you'll be increasing your own manufacturing CapEx or making incremental investments as a result of that. And as a segue, would you expect the free cash flow this year will exceed last year?

Well, I think we're going to push leasing investments a little bit more than we had in the past given the benefits of accelerated depreciation. But I would defer to Lorie on some of the details.

Yes, I don't think we're prepared to speak to operating cash flow and the impacts of the tax reform act on that. Again, lower tax rates means lower tax cash outflow. So that would be a benefit. And I agree with what Bill has said about the CapEx. I don't know if we see an increase in manufacturing CapEx due to the tax bill, but again, more on the leasing side.

Yes, it's kind of a trading when you -- and I have not ford through the 1,100 pages of the bill. It's not as simple, as I can say, as it's portrayed by the press as many things that are not. But we have a slightly phased-in rules for a company and our position would favor investment this year, particularly in leasing assets, because we would be taxed at the higher rate under the averaging provision. It might have some effect, and I'll defer to Lorie on this. We had pretty robust discussion at our board meeting yesterday about taxes. If I had a -- it might have an impact on adjusted tax rate for the balance of this year because our tax rate in the first quarter was above the rate domestically that at least we're going to be accruing in May. So I don't want to get us into a can of worms there. It is a bit more complicated than you would think it would. And I think the bottom line for us is pretty positive on investment in assets just as it will be to any railroad, shipper or leasing company with whom our industry does business.

Understood. And then last question for me. We appreciate the commitment to discipline around capital deployment. And I guess, as you talked to the board yesterday, can you -- where do you see the most attractive returns, either by segment or by geography? And where would we -- where should we expect investments, outside maybe what you've already said about the lease fleet?

Well, I think, if you pay attention as our board pays attention, and we pay very attention, we mean literally what we've said. A simple strategy for this last 12 months longer now than a year has been to pay attention to domestic business, to have discipline in operating and producing profitability in the operating units that our domestic segment and to expand internationally. We are going to continue to pursue that strategy. We are examining many opportunities so that are very intriguing internationally. And we're having real success with our international agenda. Those are the 2 areas that our strategy suggests we are going to invest in. More specifically, the core part of Greenbrier, quite clearly, we have a very good business in wheels. We have -- it's a steady, basic business. It's complementary to the rest of our business. But where the engine for most of our earnings and revenue resides is in manufacturing, our specialty in design, engineering. Manufacturing execution is well-regarded in the industry. And then secondly, our commercial and asset management businesses. These businesses have really expanded and developed, and we'll continue to do that because the synergy between the 2 functions, the 2 business units, have been very great.

And our next question comes from Bascome Majors from Susquehanna.

Yes, I had a couple of related questions on the international front, I was hoping you -- was really one of the good news stories there. The Saudi tank cars that you built for them, I think it was about 1,200-order that you announced roughly 2 years ago. Can you help us with when that started hitting the manufacturing business revenue and profits? And right now, when do you expect that to start to wind down?

Sure. I'll take that last part first because that's -- it affects our guidance. The -- that's a significant order in many different dimensions, not just the money or the financial reporting on it, but a new market, a new region of geographic, very hard to penetrate. We got kind of lucky in this first award. We've done very well with it. The contract is proceeding smoothly. We expect that the -- we will have revenue recognition through the fourth quarter of this year on the basis of producing the last cars in the third quarter. And then, typically, the way we're paid when we accrued would hit us in the fourth quarter as well. As far as the market is concerned, it's a very high barrier to entry market. And we have now established ourselves and our credibility there. I think that there's good business to be done in the region. Part of our strategy in international is to accumulate scale regionally by picking up a series of smaller markets. It's not an easy strategy to implement, but if you look at the Eurasian markets, you look at the Eastern Europe and the GCC, we're not looking at around at this point. We're going that far -- it combines to a fairly significant size market, a bit more complex, but our base in Europe gives us the cultural basis for penetrating that market.

And just...

Oh, go ahead. I'm sorry, Lorie.

Sure. And I just to follow up on your initial question of when did we start recognizing revenue on these deliveries. It would have been in Q2 of last year, fiscal '17.

Okay. Bill, you answered most of my second question, which was sort of can you give us an update on how the marketing efforts are going and when and if we should expect to see further growth or either with this customer, other customers in the region? I mean, could you just give us kind of level set expectation with investors for how much more there could be and when we could hear more about that?

Sure. I'll give you probably a little too much color. The -- Saudi Arabia is one of the bigger customers in the GCC. There are others. That's where we're focusing our attention today, is Saudi Arabia. It is a country that is approximately, geographically, half the size of the United States. Just looking at land bridge connections or time between the Red Sea and the Gulf, which would give it some long-haul capabilities in the rail sector, that would be similar to what happens -- what happened in North America with intermodal and other things. These are longer-term views. It's clearly something that we're positioning the company for beyond today, and it takes an awful lot of patience and energy and cultural awareness to use that company -- that country as a base. We do plan to invest in Saudi Arabia with local partners. Learning curve has been very steep. We had a lot of assistance in entering the market, and it's very key to the rest of the region. The rest of the region could include Turkey, could include other parts of Eastern Europe, strengthening our Western European manufacturing base and could -- would caution extend into the Ukraine. So that's a region that has substantial replacement demand and growth demand if you look at the entire region combined. One of the advantages of early entry in the market is it is a difficult market, and you'd need engineering and manufacturing and cultural credibility. And I think our European operation, without it, we would not be in the market because we have the cultural base to understand the region and the market. I expect new momentum there. I expect we'll continue to see a solid improvement in our investment in Brazil. There's a lot of opportunity over time in Brazil. And we've taken that as a 3-step process. Number one, putting our manufacturing shop and factory, which is similar now to one of our facilities anywhere else in the world. It's very attractive facility, very efficient. We're putting that shop into place. And now we're working on leasing and market development, and we've had considerable success at getting -- growing order book down there.

And our next question comes from Allison Poliniak from Wells Fargo.

So Bill, could you touch on Astra a little more specifically in terms we're 6 months in now? How is it progressing relative to what your expectations were? And then any thoughts on -- I know the accretion guidance was pretty broad, if there's any way to narrow that a little bit more for us.

Yes. Repeat the second question for me. Well, let me answer the first and I'll come back to the second one. As far as Astra Rail is concerned and Greenbrier-Astra Rail, as we're now calling it, things were a little slower on the commercial and income side than we'd expected, but I think it's meeting our expectations. The integration's going quite well. We've picked up a young and very talented management team, who are our partners there. And the market seems to have recovered fairly significantly. We had much a longer regulatory process on that deal than we expected. So it was almost a year from the launch to the point of execution before we could really get in and begin integration. But that's going very, very well. We like our partner a lot, Thomas Manns, and it seems to be working quite well. Now could you repeat the second question for me?

Just in terms of the accretion for '18, I think you had initially talked about $0.15 to $0.35. Is there any way to narrow that outlook for us a little bit? Or is it still too early?

Lorie's scowling at me, shaking her head, saying that, "We can't narrow it." But -- so I have to defer to her. She might tell you something that she won't tell me.

All right, it's always interesting. I look forward to the day when this is actually a video conference instead of a phone call.

Me, too. She wasn't really scowling. I just made that up.

What I would say, Allison, is for the first year, as Bill indicated, it took him a little bit longer to get the deal closed. The European market has been a little bit slower to pick up than what we've seen in the North American market, although we are seeing some signs of life. So in 2018, I would say, our expectation is towards the lower end of that range of $0.15 to $0.35. And then as we get the operations integrated more and capitalized on some of our engineering and design and product efficiencies, it's going to actually become a little bit more difficult to specifically say how much of this is due to the addition of Astra because we are truly focused on integrating the 2 operations, moving production between the phase and optimizing both of those facilities.

The size of the business and the network in Europe cannot be underappreciated. The scale is very good, and it allows us access to a momentum and opportunity that we simply wouldn't have had before. We are in the leasing and in the manufacturing business. We're always either a victim of the market or a beneficiary of the market. And having the position gives us the chance for taking initiatives and opportunities that we never expected when we made the original deal. And this has been our pattern over the last 20 years of manufacturing investment. So I'm optimistic about Greenbrier Europe. I think it's been a very good investment. And the biggest lever it gives us is into the rest of the region, Eurasia, the Silk Road to the GCC and ultimately, the broader Gulf region, which will have rail associated with it.

That's helpful. And then also, Bill, I know, I mean, there's a lot of optimism around industrial, and you talked about that optimism, hopefully translating to orders later in the year. I guess, one, I think you talked about there were orders up to the quarter. Can you quantify that? I mean, also, I guess, just in terms of inquiry, I know it's early, but have you noticed the step up in terms of people wanting to talk to you guys?

People always want to talk to us. We're always very happy. I would say, at least -- I'll start, talking to our commercial folks, we're hearing a lot more optimism in what's going on, particularly in the North American market, as I said, the European market. We're seeing [slivers] of life there so that's great. When it comes to the orders post quarter-end, we prefer not to quantify that because we end up spending more time dissecting between what were the potential partial quarter orders in the second quarter versus first quarter. So I can say that we've had a significant amount of activity in the month of December, which is historically that's quite unusual because typically people take a lot of vacation, companies have run out of their capital spending budget, so we were quite pleased with activity that we've seen in December and believe that, that bodes well for order activity in 2018.

Yes. Allison, believe it or not, we actually vet orders very rigorously. They have to go through a process of being not only received, but it's vetted by our legal department and our accounting department. They don black robes and become priestly in their incantations about what is an order and what is barely a high-powered inquiry. This is a good thing because it keeps our books and records straight, and our board likes that. But I would say being more blunt that it was -- an unusual amount of activity given the sale, which orders have been received so far. And I would say, if I had to guess at what the incantations would come out retrospectively to be in the mid-teens as far as with a heavy mix for double-stacks.

And our last question for the day comes from Willard Milby from Seaport Global Securities.

Time's running short, so I'll keep it quick. I guess, so on the, I guess, the production booked for 2019 for either 45% to 50%, you wouldn't happen to give us a thought on what you could produce in 2019 to go along with that, would you?

No, but I think you could probably look at what we're producing in 2018. Our delivery guidance have been good. Expectations are just placeholder.

Okay, that's perfect. And on SG&A as a, I guess, a percent of revenue, can you talk about efforts being made there to bring that down and if you think you're going to be successful in that?

I think whenever we focus our efforts we're successful. But as Bill has talked a lot about today, we are exploring opportunities in international markets. It's not inexpensive to go to those international markets. And we believe that, that's prudent deployment of our resources to explore those markets and it will benefit the company longer term. So while we're focused on balancing the right mix of spending for growing the company, there are a few things, that we have the unusual item this quarter. We are in the midst of an IT project where we're implementing a new system. That always comes with a higher price tag that hits SG&A. That will probably run through our fiscal 2018 and maybe lap over a little bit into '19. But that's kind of a unique activity that will go away.

Yes, the international part of our business, as I said earlier, is an investment for the future. We have to balance the cost of an investment for the future with the pressures of the current times. Looking at it more straightforwardly, we are conscious of the high relative cost to revenue. That could be corrected by reducing the G&A costs or increasing the revenue. We believe that we're in a rising cycle of revenue. We expect revenue this year to be greater than last year. We continue to expect that, so we got to get the revenues to match some of the higher levels of G&A, and that will bring the ratio down. Not to say we're not trying and have concentrated on reducing G&A costs, we don't have a target to give you because it's a mix of those 2 elements.

And with that, we are going to wrap up our call today. We appreciate everyone's time and attention this first week of the new year. So Happy New Year, everyone. We will be doing a webcast, I believe, of our annual meeting, which will be at 2:00 p.m. Pacific, this afternoon. So we're happy to have any of you joining us and listen to that if you'd like to hear little bit more of the same.

Thank you.

Have a great day.

And that will conclude today's call. Thank you so much for your participation. You may now disconnect.