Greenbrier Companies Inc (GBX) 2018 Q2 法說會逐字稿

Hello, and welcome to The Greenbrier Companies Second 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 call -- the conference over to Mr. Justin Roberts, Vice President and Treasurer.

Mr. Roberts, you may begin.

Thank you, Angelica.

Good morning, everyone, and welcome to our second 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, 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.

Before the call, Bill challenged me to identify 3 key messages for you to take from today's call, because I'm always up for a challenge, I've identified 4. First, Greenbrier had strong operating performance in all business units for the quarter, driven by the creativity and focus of our employees.

Secondly, we are going to meet or exceed our guidance for the year, setting aside the tax noise.

Next, our international expansion is gaining traction with nearly 50% of Greenbrier's year-to-date orders, originating from outside of North America.

Finally, growth and respect for capital.

We are going to continue to grow the company in a capital efficient manner over the long term.

Bill, with that, the call is yours.

Thank you, Justin.

That's a good job, framing some of the big things moving this quarter.

We might be hearing more from you.

In fact, I should just be able to deliver my commentary pretty soon.

Well, good morning, everyone.

Greenbrier did sustain positive momentum in the second quarter of our fiscal 2018.

Our strategy of protecting and enhancing Greenbrier's core markets in North America, while expanding internationally for diversification, has led to growth and strong performance.

As mentioned in today's news release, almost half of all orders in fiscal 2018 have come thus far from international customers.

And about 20% of Greenbrier's total backlog originates from outside North America.

Similar to the North American market, international activity will expand over time, but will not be linear.

Revenues and deliveries are on track to achieve full year targets and combined with a lower tax rate, Greenbrier is on a trajectory to report annual earnings of approximately $5 per share.

Leading indicators remain positive.

Railcar utilization increased, railcar loadings continued at high levels and the global economy has sustained its momentum.

Industry forecasters and analysts have recently published upward revisions to their 2018 North American annual railcar-delivery forecast.

Within ranges between 49,000 and 52,000 railcars, and even some a bit more.

Although continued pressures on new and used railcar lease rates remain, these are headed in the right direction, and this lends credence to a more optimistic view of the market.

Additionally, current railcar loading activity supports the view that the industrial economic -- industrial growth produced by the 2017 tax act is working in a federal infrastructure program, if it comes to pass, will also produce an uptick in industrial railcar demand.

Competition does remain robust particularly in North America.

Greenbrier's strong balance sheet and liquidity enables us to take a disciplined approach to the new and used railcar market and truly provides a solid platform for growth.

This long-term approach enables powerful business performance and simply -- not simply over the balance of this fiscal year, but also well into the future.

Through our international joint ventures, Greenbrier's participating in the earlier stages of the railcar renewal cycles in Brazil and parts of Europe and Eurasia.

Greenbrier-Astra Rail is progressing well in Europe on integration activities since its June formation, and as the largest freight car builder in Western Europe is well positioned to address a resurgent railcar market in Europe in the coming years.

It is also a very solid platform for export there coupled with our factories in Brazil and United States, and our growing factory presence probably soon in Eurasia.

Greenbrier-Maxion in Brazil will be enjoying a strengthening Brazilian economy, a renewal of railroad concessions that are forecasted to produce USD 11 billion of infrastructure investment during the next decade.

Raised -- recent political events in Brazil also signals stability for upcoming elections.

Greenbrier is also encouraged by the long-term prospects of markets in the gulf cooperation countries.

We expect several nations in the region to expand rail freight infrastructure over the next several years, but also Turkey and Eurasia.

We recently sent a team to Dubai for the regional tradeshow there and throughout the region, and including Africa, there is considerable interest in U.S. technology and U.S. export programs from a network of facilities as Greenbrier currently enjoys.

The strength in the global economy is a positive driver for Greenbrier.

The U.S. has been more active on trade policy in recent months than it has been in recent years, and this includes an extended NAFTA renegotiation and recent tariff activity.

I'd like to just make our position very clear on those 2 things.

First, NAFTA.

A successful NAFTA renegotiation supporting -- that supports Greenbrier's business model is a likely outcome.

However, the company is prepared to adapt as needed to changes in trade law.

We along with many other in the industrial sector and agriculture and throughout the United States are following the progress on NAFTA, and we are actively engaged in free-trade advocacy with similarly impacted parties like the Class 1 railroads, including aggressive stances by KCS, Kansas City Southern railroad, which has been a leader given its north-south platform and also Union Pacific, which recently had a very long article in the New York Times, clearly stating its position on NAFTA.

Greenbrier will also successfully navigate issues that result from U.S. tariffs on steel.

We're working closely with suppliers and customers to proactive manage sourcing requirements through a global sourcing model.

It is flexible, nimble and drives a tremendous amount of resources from U.S. suppliers, most of our content, particularly in Mexico and even Brazil, comes from the United States.

Tariffs, lastly, can be an effective mechanism to reset relationships between trading partners.

The Trump administration wisely is doing this, nobody should be overly surprised as Secretary Ross recently mentioned, by these policies.

Greenbrier supports in particular the tariffs announced on Tuesday for some finished rail products from China.

The tariffs are a step in the right direction to address unfair competition by state-owned enterprises across a range of industries including our own.

Dumping practices in China and unfair subsidized investments by state-owned companies need to be controlled, and Trump administration is do that -- is doing that.

We need free-trade, but we also need fair trade, not subsidized trades, dumping materials and unfinished products into the United States to gain unfair advantage.

We commend the administration for moving aggressively in that area.

Looking ahead, Greenbrier's confident about cash generation from operations.

Greenbrier had a mandate -- has a mandate from its Board of Directors, just confirmed a few days ago, to chart a course for growth, and also a strong course for building a talent pipeline and for succession of key senior managers.

Accordingly, we expect that we will redeploy capital to maximize returns over the cycle and to pursue investments that offer good ROIC potential, but not just ROIC and strong return on investment in the short run, also in the long run.

As a measure of confidence in Greenbrier's operations and ability to generate positive cash flow, the Board of Directors has approved another increase in the quarterly dividend.

This maintains our board's focus on total shareholder return and a commitment to return capital to shareholders.

The board also recently affirmed our commitment to diversity and service to our customers and to the communities in which we operate, evidenced by strong community involvement.

The first half of our fiscal year has gone very well.

Greenbrier has good momentum, entering the second half of the year.

Assuming the global expansion continues and holding constant the potential of political or military shocks around the world in the geopolitical sphere, you can expect continued good performance from us.

Greenbrier is a different business and a better company, both operationally and financially, than it has been in previous economic cycles.

With award-winning products, unique service offerings, distinct manufacturing capabilities, dedicated workforce, combined with an excellent Board of Directors and disciplined approach to the market, Greenbrier is poised to achieve its goals in fiscal 2018 and beyond.

Lorie, I'll now turn it over to you for some financial commentary.

Thank you, Bill.

Thank you, Justin.

Good morning, everyone.

Thank you for joining us.

As Bill mentioned, we just finished the first half of our fiscal year with strong results and are positioned nicely to achieve our 2018 guidance, a testament to our strategy of enhancing our North American business while expanding internationally.

For the second quarter, we realized higher revenue gross margin and diluted earnings per share compared to the first quarter.

Operationally, we delivered 4,900 units, of which about 25% were international deliveries.

Highlights for the quarter included adjusted EBITDA of $79.1 million and earnings of $61.6 million or $1.91 per diluted share on second quarter revenue of $629.3 million.

These results include $0.89 per share related to the tax act enacted in December of 2017.

The tax benefit in the quarter consisted primarily of 2 pieces.

First, the onetime remeasurement of deferred income taxes on the balance sheet, partially offset by the transition tax on reinvested foreign earnings.

The net of these 2 items generated a $0.70 per share benefit, and then because our fiscal year ends in August -- on August 31, our U.S. tax rate for 2018 is a blended rate of approximately 26%, which is a reduction from the previous rate of 35%.

This generated an additional $0.19 per share benefit in the quarter.

We'll receive the benefit of the full year of a lower 21% U.S. tax rate in our fiscal 2019.

Second quarter orders totaled 3,400 railcar units, valued at over $265 million.

These orders comprised a broad range of railcar types, including intermodal, tank cars, hoppers and flat cars.

The order value in the quarter included a higher proportion of intermodal and other car types, which have lower average sale prices.

The North American market continues to be competitive and nonlinear.

Order activity in the quarter demonstrates the benefit of diversifying our business geographically through international expansion, with nearly half of the 6,600 units ordered year-to-date, being for markets outside of North America.

Backlog remains a key indicator of future earnings and cash flow generation.

Our quarter-end diversified backlog was 24,100 units with an estimated value of $2.3 billion.

Based on current production rates, our backlog gives us clear visibility through 2018, and into 2019 and beyond and allows us to exercise discipline in this competitive pricing environment.

Now turning to our business segment.

Greenbrier achieved aggregate gross margin of 16.7%, with all the business unit showing improved margin activity.

Quarterly gross margin in our manufacturing business was 16.2% driven by product mix shift and increased syndication activity.

Wheels & Parts quarterly margin was 9%, reflecting increased volumes and operating efficiencies.

And our Leasing & Services gross margin of 51% in the quarter was primarily attributable to higher management fees and interim rents.

In the same segment, gain on sale of equipment was $5.8 million and reflects continued lease fleet rebalancing activity.

Greenbrier's balance sheet continues to be strong.

At the end of the fiscal second quarter, cash balances and available borrowings on our credit facilities are nearly $980 million, including cash of $586 million.

Greenbrier's net funded debt is at historic lows providing ample flexibility and optionality to grow the business.

Our capital allocation strategy remains focused on cash flow generation, return on capital employed and creating long-term shareholder value.

Our confidence in Greenbrier's long-term growth and strong cash flow generation is evidenced by the 9% increase in the quarterly dividend to $0.25 per share.

This is the fifth dividend increase since we reinstated dividends in July of 2014.

As mentioned in the press release, subsequent to quarter-end, $119 million of 3.5% convertible notes converted into equity as expected.

The shares that were part of this conversion have already been included in diluted EPS calculation and in guidance.

If the conversion had occurred at quarter-end, total equity would have been $1.4 billion on an asset base of $2.4 billion, and a substantial increase from just a few short years ago.

Based on current business trends and production schedules, we are confirming our guidance on deliveries and revenue for the full fiscal 2018 as follows.

Deliveries of approximately 20,000 to 22,000 units, of which about 10% will be from Greenbrier-Maxion in Brazil, revenue will be approximately $2.4 billion to $2.6 billion, and we're increasing our full year guidance for diluted EPS to $5 per share.

The increase is primarily driven by $0.89 per share in the second quarter of which $0.70 was a one-time impact and the benefit of a lower tax rate for the second half of 2018.

As we previously have guided, the cadence of deliveries and earnings is expected to be modestly weighted to the second half of the year based on current production schedules and setting aside the onetime tax benefit from the tax act.

Further, we expect G&A to be about $185 million for the year, gains on sale will range between $35 million and $40 million as a result of our fleet rebalancing activity, gross capital expenditures continue to be estimated at $195 million with $150 million of proceeds from the sale of leased assets, again, higher volume as we rebalance our lease fleet.

Depreciation and amortization is still expected to be $75 million and earnings from unconsolidated affiliates reflect our share of the results from operations that are not consolidated, primarily GBW and our Brazilian operations.

We are encouraged by the recent results in Brazil, although challenges remain at GBW.

At this point, we're expecting earnings from unconsolidated affiliates to be close to breakeven in the second half of the year.

We expect 2018 earnings attributable to noncontrolling interest to be $25 million to $35 million.

As a reminder, we consolidate the results of 2 significant operations that are not fully owned.

GIMSA in Mexico and Greenbrier-Astra Rail in Europe.

The noncontrolling interest represents our partner's share of the results of these operations.

Our consolidated tax rate for the second half of 2018 is expected to be around 27%.

As a reminder, our rate may fluctuate due to geographic mix of earnings.

So summarizing 2018 into just a few words, increased deliveries, higher revenues and higher earnings than 2017.

And now we'll open it up for questions.

(Operator Instructions) First question comes from Matt Elkott from Cowen.

So at the end of calendar 2017, you guys had 38% of the North American backlog and as you just mentioned, thus far in this fiscal year, 60% of your orders came from international markets.

Help me understand this, does this imply that your orders thus far this year about 20% of the orders that the North American market received?

If I'm thinking about this correctly, can you help me understand why the discrepancy between your share of the backlog and orders exist, is it -- are you trying to be less aggressive in pursuing the North American market?

I'm not sure I follow the math because I think our order success while it may have fallen slightly from 2017 is higher than what you suggest.

I'd have to defer to our financial people.

We are trying to exert pricing discipline, of course.

The market is competitive and the mix of order opportunities has perhaps affected our total market share.

We've been able to maintain, over the past couple of years, very high margins and very high ROIC, and given that we expect the market to strengthen, we prefer not to allocate our -- really margin orders to our factories and fill them up because we expect opportunities for -- we expect margins to -- margin opportunities to grow in the second half.

We can get back to you though on specific market share, and if you want to call in maybe a more specific description of our market share and our strategy.

Absolutely, that's very helpful, Bill.

And staying on the margin front, are you suggesting that the gross margin outlook for the second half of the year could actually be better than the first half of the year.

I don't think I'd care to comment.

I think that if you look at the total production capacity in United States and a prospect for a 52,000 car year, the issue there is that's about a replacement demand average market, and we have capacity in North America in the car building side between all of the competitors that exceeds that.

Regrettably, some competitors are having to drive pricing to get orders to keep their factories running.

In many cases, one particular competitor is pricing below contribution margin and actually losing on trends -- each transaction they book.

This is not a sustainable long-term situation, and we're just trying to avoid following that kind of a threat.

So I think that this is part of the cycle where you see this kind of behavior and as things strengthen, given a stronger economy all over the world, we really would prefer to book orders and pay attention to those markets where the capacity issues have been addressed and not chase pricing that is not attractive.

Many customers will recognize that over time they need the builders in the market who have most of the capacity, I think that time is coming.

Got it.

And just one final question, Bill.

Given your discipline on the margin front and the pricing front and -- what's going on in the North American freight market?

And what you're seeing internationally?

And now that we're more than halfway into your fiscal year 2018, when you look out to 2019, is -- earnings and revenue growth is it a plausible target?

Yes.

It may be a little premature for us in our cycle to talk about 2019.

If you can tell the future, and I do read Cowen's reports.

I just read the recent one, which I found was quite accurate and a little more bullish than some of the other folks.

You guys are watching the market, probably know as much as we do it as far as the elements of blocking and tackling it.

All of us have to worry about secular shock to the global economy.

But the global economy is very strong in Europe.

Other parts of the world, Latin America, South America, as we see the trade issues sort out, currencies will adjust.

So I continue to be optimistic, but of course, I've been accused of being optimistic before.

I will remind you, however, we exceeded the expectations of many of the skeptics who were probably listening into this call, when we said we would get -- make a $4 per share target this year, we're pretty firm about it.

And as you can also see, we are on track to exceed that even if you take out the noise on the tax bills and goodness, we will certainly take the benefit of the tax rate.

So I'd say it's a very positive environment -- basic economic environment, therefore, I'm optimistic that you -- probably you guys know all the geopolitical issues that have to be taken into account.

So barring any major changes to the current pace of how North American freight markets and international markets are advancing, do you see anything that could get into the way of potentially improving on 2018, on fiscal '18?

Well, I tell you what, it's hard to tell the future.

We see many things that could get in the way but we see more positives and negatives.

We got great momentum in international, we've got many opportunities in many continents at this point.

We've been working at this for several years.

We got an established base, and it's time to really get some play from those investments.

They're working out very well and North America -- it looks to me like the North American market, we should be able to see for variety of reasons, a stronger pricing, more orders and those of us who fill up our plans with cheap products and respond to that will be regretting it if we look out and see big orders coming in and there is not as much competition for them.

So this is just basic card building 101, and I'm very optimistic about the future for Greenbrier.

We couldn't be in a better shape to play a leading role in whatever opportunities present themselves, 2019, 2020, '23.

My goal -- my job is to leave this company on a very sound foundation, and it is -- has got a very sound foundation with a very good Board of Directors and a very good management team.

Next is Justin Long from Stephens.

Maybe to start with pricing and following up on some of that commentary.

I know new railcar pricing can vary a lot by car type, but if you just look at the blended average in the industry, how would you say that pricing in North America today compares to what you were seeing a quarter ago.

I don't think it's that different.

It's mix, mix, mix.

We have to constantly remind, even our board members, that a railcar is not a railcar, is not a railcar.

Our tactics and strategy on blocking space is very relevant to all this but in terms of general market, I'd say things are strengthening not getting worse.

So they are better this quarter than they were last quarter.

So if you read that Cowen report and I think you'll see that, that takes a temperature of an entire cross-section, and I agree basically with that report.

It just came out a couple of days ago.

And then maybe shifting to the international piece.

You mentioned that's becoming a bigger piece of the order book.

Could you just provide some updated thoughts on how you're thinking about the progression of international railcar orders from here, and then also just get some updated commentary on mix?

How will a higher weighting towards these international orders affect RPU and margins going forward?

Okay.

So I'm going to not answer that question directly, I'll come back and if you want to ask and clarify, try to hold me to more clarification, I will.

But let me tell you about our international strategy.

We have seen the railcar markets in North America, particularly in United States, come and go.

Over the -- my years in the car building business, this is a very clear picture of great euphoria and then overcapacity in car building where the wheel turns to the favor of either the customer on the one hand then back to the car builder on the other.

We are taking a long-term view of our business.

We're investing in products for the future of the company, for the future of our income streams in 2019, 2020, '23 and beyond, where we are operating in the GCC, they're thinking out to 2030.

We must, in international arenas, be cognizant of the long-term play.

The short term is paying off in income and in margins, but it's really on a longer game.

What we like to do is have a very large platform around the world, presuming that over time free trade will be a fact of life, and if not -- and we won't be so dependent on the North American economy.

So that's our goal and that's the goal of the Board of Directors.

Let me -- you can just ask specific follow-on if you'd like.

Yes, and I guess, maybe just getting more into what you're anticipating in the order book over the back half of this year and then into 2019 would be helpful?

And then any commentary on the mix impact from international orders.

Well, through the balance of this fiscal year, I think it's pretty much covered under our guidance.

We're looking at 20,000 to 22,000 cars for all markets.

For competitive reasons, we don't like to break down individual countries.

We have mentioned Brazil because we are proud of the progress going on there.

But we've also had a great contribution from Europe and other parts of the world.

So our focus is on creating value and pricing is one piece of all that, but not all of it, and certainly not all of it in the short run or quarter-by-quarter.

I'm sorry, I'm not able to address your actual mix question, but I think it's consistent with the guidance that you've been given.

And I think you can calculate our pace in North American orders and what that might imply for the international orders.

Maybe I could just add, Bill, I don't think -- so what you have said before, our international expansion is the long-term play, and I don't think any of these jurisdictions that we've expanded into have any more normality to the rhythm of orders than what we see in North America.

It is nonlinear.

We've got a great backlog going into the second half of fiscal 2018.

So really, our production lines are full for 2018, it's -- now we're booking out into 2019.

We are booked out already in 2019 around the world with the exception probably of Brazil.

I think that -- don't get me wrong, I'm very excited about the profitability and the potential profitability of these operations overseas.

But given that kind of granularity, it's not good for competitive purposes in order -- it's a duplicate of North America and microcosm around the world, but the advantage of that platform is you can reach places you could never reach before and value of that platform is optionality.

Because we've seen how optionality in these international markets can be incredibly valuable, and we just want an international footprint to take advantage of that.

Next question is from Ken Hoexter from Bank of America Merrill Lynch.

Can you just maybe, Bill, dig into your dumping commentary a bit more, were you just talking about impacts to steel?

Or were you talking about China getting more into some railcar competition maybe just dig into that and then sticking on the international side, I appreciate the answer there before, but is there -- is the Saudi order, that's completely done within that number, right?

So now when you talk international, you're talking about the full holistic international business, right?

Yes, the full holistic business, not anything particular.

The Saudi order carries through our fiscal year and into our -- at least, into our first quarter, and first, we're soliciting other orders for 2019.

But let me be more clear about my comments about tariffs.

As you probably know, we've 2 people on senior levels in commerce, you might recall, who run our Board of Directors, they've been fairly transparent around the United States about what their concerns are from the Trump administration.

They're concerned about China dumping steel.

I agree with policies that we can't allow China to dump steel in the United States.

They have been, and they will continue to do so, they're not prevented from doing it.

I think these policies are targeted quite aggressively at China and for good reason.

In our sector, you have seen, we have seen, China sweep the market by establishing footprints in North America and dumping steel in the form of fabricated products and subsidized investments, and these are state-owned companies, these are nationally-owned companies.

However, we have the advantage of operating throughout the world, and we see an aggressive policy, by China, of buying markets through dumping and subsidies.

Their policies are to offer huge subsidies to a country and then secure a franchise as they build-out infrastructure, they attach a great deal of conditions to it and one of the conditions is that they get awarded physical products.

It's very hard for American companies to compete in that kind of environment, and they're attacking the United States.

I think the administration is very wise to be concerned about this, it's quite complex, of course, but in general, we've seen establishment of a company here in the United States and it's not fully transparent.

And -- so if we didn't stop it and if we allow that to happen, you can -- you are going to see a lot of domestic industries very much threatened.

So that would be my commentary on your question.

All right.

I truly appreciate that.

And I guess, Bill, just a follow-up on a completely different subject, we heard a lot of discussion about rail congestion particularly the auto sector and the need for more auto cars, and obviously, the rebound in crude by rail and the rails fearing overly expanding capital on tank cars and getting into the business again, if it may disappear.

So can you throw maybe some thoughts on car types and given how important mix is to that yield and not necessarily profitability but shifting pricing dynamics.

Your thoughts on focus for railcars now, demand on the auto side and tank side.

Yes, and our pipeline it'd be -- a surprising amount of our forward-looking pipeline for potential orders, there's a surprising number of tank cars, in particular, not all of them, however, oil by rail.

I think that oil by rail given the times and the strength of the oil industry in America and increasing oil prices over the levels of a year ago are all positive.

So we think, we agree with commentators who are reporting strength in those 2 areas.

Autos are a little more complex, quite a lot more complex because they're affected by service policies, pricing policies, acquisition policies and what kinds of cars they will allow on their railroads, I just attended a NFTA, National Freight Conference between railroads and shippers, it was really interesting to talk to both railroads and shippers on this subject, some railroads -- and some of the bigger railroads are being very aggressive about safety and the types of cars that they will allow on -- in service.

And they are putting on a pressure on shippers to provide those kinds of cars, they're going to pay a lot for it or they won't even provide the service.

So there's a lot of turmoil going on around that and it's not just oil, it's ethanol, it's other kinds of hazardous cargo.

We were active early on in the safety -- safe railcar movement for tanks, and we think that's finally going to bear fruit.

We also believe the shippers are very strong, will find accommodations with the railroads.

Velocity and service design, we all know that when the trains run slower, that more equipment is needed, so that's certainly going on.

Next question is from Willard Milby from Seaport Securities -- Global Securities.

I wanted to ask about scrap pricing and if you all could, kind of, parse out the benefit you're seeing, maybe, on the Wheels & Parts business from higher scrap pricing and any other benefits you might be seeing in other areas?

Sure.

We -- first of all, we have a natural hedge as you just suggested in scrap pricing for materials increases.

This is always an exciting type -- time in the market, and of course, downside of tariffs is it drives up, at least temporarily, the pricing in the United States.

We just had a special report to our Board of Directors meeting by Owen Whitehall, our global sourcing guru, who has received a recent promotion in operations to add to this global sourcing role.

We believe we're on top of the supply chain, we're passing on pricing.

It's quite tricky in a climate like this where there's still pressure on margins because customers will ask for fixed pricing.

When we can do back-to-back trades so we know that we can protect that fixed pricing even if it's higher than a flexible pricing, we'll do it.

But we are going to get caught in a trap and there's a clear trap that exists here and some builders are falling for it, of fixed pricing where steel prices are somewhat volatile.

And having said all of that, the wheel margins that are reflected in a good quarter for our division, show the natural hedging opportunity and this amazing amount of scrap that we generate throughout our network even in the manufacturing business as well as wheels.

And I would just add onto to that, that our wheel group actually saw an increase in volume of activity this year, so it's not just higher scrap pricing that was benefiting that segment, but also higher volumes, and they've been very focused on their efficiencies driving improvements in gross margin as well.

Okay.

When I look at scrap pricing versus volume increases, is there a -- kind of a good split to think about like what -- what's driving that margin 50-50, 75-25, any kind of help there?

No, I would say it's just a combination of the two, we don't get down into the specifics or splitting it out like that.

I think that unit has done a remarkable job, allocating capital, modernizing its factories with a respect for capital and they -- some of the efficiencies they're getting out of that are also reflected in their margin strengthening.

That's pretty good margin, 9%, 10% for that business and the ROICs have also gone up to respectable levels for that business.

And if I could kind of shift back to manufacturing and gross margin again.

If I look back to last call, you all made a couple of comments surrounding fiscal year '19, thinking that deliveries could be somewhat similar to '18 and that margin was sustainable in this, call it, mid-teen range.

I was wondering if those thoughts were still similar, if there's been some changes in that arena.

Great question, Will, I would defer back to what Bill said earlier, we'll be giving our fiscal '19 guidance when we do our fourth quarter earnings release.

There are -- we are excited about all the growth and what we have seen within the company.

We do have a broad product mix between our manufacturing group and our Leasing & Services group, driving efficiencies and generating margin based on the hard work of our commercial group maintaining pricing discipline, we are optimistic, we're positive about the outlook for 2019, 2020.

But we don't have any specific guidance at this time.

If you're asking, is it going to be at least as good and/or better as this year?

Of course, that's our goal.

And we'll have more detail and granularity, we've got a lot of different ways to make that happen, and we have some things that we, of course, worry about, we always do, protect the downside and build the base, different platforms we're building around the world have tremendous potential for exciting things.

All right, all right.

If I could sneak one last one in.

Are you all willing to talk about...

Only because you are such a nice guy, go ahead.

Was just curious, if you all would be willing to talk about the margin profile, North America versus Europe and the -- not necessarily looking for a forward guidance on the orders, on the margin of the orders you're booking right now, but in general, the margin of the European operations or that better order book versus, in general, North America?

Well, there are like 3 ways to answer your question.

I know and I can't tell you.

I don't know, and I'll get back to you and there may be one other, but I know and I'm not going to comment further on the question.

So thank you for the question.

Next question is from Steve Barger from KeyBanc.

Bill, I understand the way you just answered that last question, but just so we can all think about our models.

I'm going to take another stab at the international mix.

If production orders skew towards more than half international in any quarter, say in 2019, would that result in average car price that's lower than what you're running right now?

And would that be accretive or too dilutive to gross margin that you've seen in the first half?

I would say, I'll jump in here and I'm sure, Bill will have some comments to add.

But since we've expanded our product base in both North America and Europe with the doubling of our European footprint, we've got a broader base.

So we have such a broad mix.

It's hard to say that, that kind of a shift in international deliveries would skew things overall.

We're very pleased with how we're operating here in North America as well as how we're operating in Europe.

So I can give you a general answer, there is a lift in the market in Europe, which should be generally positive for next year's margin anticipation, we're very pleased with the integration of Europe.

Our partners that we acquired during the acquisition are actively involved in the business.

It's a real plus.

We have a number of very attractive factories now, over 50% of the market, and we should be able to obtain pricing responsibility in that market.

Similarly in Brazil, we're constantly improving the manufacturing footprint, we're very pleased with what's going down there.

And I think the margins are good, as they are in United States?

Maybe not.

I don’t know, but it's hard to measure the future.

So we're very optimistic about the international footprint, and we just have to get solid orders for 2019 and more (inaudible) multiyears orders for 2020 and 2021.

So the revenue per car ordered this quarter was lower sequentially than last quarter.

That's not a function of lower car prices, structurally in Europe or Brazil, it's just mix?

Exactly, it is mix.

Because we have a larger proportion of intermodal orders here in the United States.

And as you know, from prior quarters, whenever that intermodal order activity spikes up, that can bring down the ASP.

Yes, and in general, in Europe, the ASP is greater than the standard over here because they are more specialized and highly engineered wagons, sometimes similar in Brazil.

And -- so the mix would affect the average sales price, all factors being equal, European orders, particularly might affect higher mix.

But we'll give more guidance at the end of year, and we'll get more granular about this kind of stuff.

We've -- this is useful to us to hear what your concerns are.

We do know you have to do modeling, just model some optimism, and then you probably -- you'll be okay.

It's worked for me.

That's great.

And one last quick one.

Operating cash flow is running below last year's first half.

Should we expect a big positive swing in the back half like we saw last year?

And would you expect higher operating cash flow this year than FY '17?

I would say that you -- we do expect it to turn a little bit in the second half.

As you notice on the balance sheet, railcars help with syndication that balance has increased the first half of the year as we built some cars onto the balance sheet that we expect to be syndicated in the second half.

I don't see anything that shows any sort of major shift in operating cash flow between '17 and '18.

We -- again, as we have improved earnings, we would expect it to be modestly accretive or beneficial to operating cash flow.

Next question comes from Matt Brooklier from Buckingham Research.

It sounds like maybe you're a little more positive on the international side of things.

Any change in terms of your expectations for Astra accretion this year.

I think you talked to a $0.15 to $0.30 range, and I think last call was maybe towards the lower end of that.

I'm just curious if there's been any change in your thoughts on Astra's contribution to this year?

Let me take a shot, and I'll have Lorie.

I think for this year, I'll let Lorie speak to it, I think it's still pretty much as we talked about next quarter.

In 2019, we should get a lift from Astra Rail, I think they're really getting their act together and integration is always -- we have 3 factories in Romania, 2 factories in Poland and integrating all that team, certainly, as -- the market was a little more sluggish looking backwards, now the market's lifting up.

So over there, I think we're expecting -- now I've done it, she doesn't want me to give any guidance for 2019.

But I'm pretty optimistic about Astra Rail.

I think they -- we've got a great team, and we're going to really see some good results from them.

Go ahead.

All right.

I have nothing.

You can correct me if you want -- oh, she's got -- coming after me with a fly swatter.

No, I think what you said is spot on.

I wouldn't change anything that we said about the contribution of Astra to the overall Greenbrier from last quarter.

As Bill said, it was a bit more sluggish of a market, we are seeing improvement in that activity that we expect to be beneficial.

Okay.

And then post to the quarter closing, any color to provide on within the North American market orders or railcar inquiries at this point?

We had not disclosed it, but we've had continued order flow, meaningful levels of orders during the -- during this time after the quarter closed in North America, and a very strong performance in the rest of the world.

Okay, and any noticeable change post the steel tariff announcement, I think, maybe there's expectations that customers potentially would try to get ahead of that if new car pricing through -- the pass-through of those incremental costs could be rising?

I'm just curious here if you guys have noticed any change in terms of the market?

Well, there are 2 kinds of customers, enlightened ones and those who wait until the very last minute to try to get their bargains.

They're always looking for bargains.

I love our customers, they are the source of all value.

I think that some are making -- have waited too long to catch the wave.

I think steel pricing will catch those folks and there has been, on the other hand, an enlightened group who are trying to do the very best they can getting car orders right now, and we're parsing all that, we think, in general, the first half of the population are -- we get to see those folks starting to order when they see these steel prices go up, and so I think there's a lot of positive stuff going on in the North American economy, and just read other reports and the tone at national freight, the tone at the financial conference in the Desert, which we had all of our folks attend, is up -- more upbeat than last year clearly, and for us, it's upbeat around the world.

Plus here in North America.

So we're pretty optimistic.

Next is from Allison Poliniak from Wells Fargo.

So on international, your comments there are very positive, and it sounds like an area that you would want to expand through some of your capital deployment efforts.

Could you maybe -- I am not as familiar with the markets but just sort of the opportunities out for you to expand internationally if you wanted to?

Where would you find interest or a reason that's interesting to you?

Well, all of footprints we have now, we are looking at Eurasia connecting Eastern Europe from platforms in Romania.

We, of course, are looking at -- Eurasia includes Turkey and Rabat, it includes Ukraine.

I think the policies towards the Ukraine have changed.

But we are looking at targets for opportunities.

So one of the goals is to expand internationally but in a prudent way, in a measured way and build a global of footprint.

I don’t know that we would allocate a massive amount of capital.

We have a lot of borrowing capacity, if you consider that Greenbrier is part-leasing company, and since that we use leasing to facilitate our sales and railcars and engineering products and projects, it's -- it probably is a more global footprint putting all these pieces together without focusing on a single market.

We are going to focus on this country's required local content, so we will be doing operations that are responsive to local content rules.

I still think that all the core business for Greenbrier is manufacturing leasing commercial, parts, wheels, and that we'll be making probably our bigger investments in our core business and really paying attention to North America.

Okay, that's helpful.

And just in general, on GBW, I know there's been some operational challenges, but are you seeing volumes throughput increased there, I mean, in terms of incrementals, obviously, I would assume we would expect higher incremental after that?

Or is it still a little early on that side?

I'd say that GBW is improving.

I think we've had 2 different managements at GBW.

We are fully bide in with our partner Watco running it.

Rick Webb, who runs Watco, is a very shrewd businessman.

He likes to run things a little differently than in a public company, but he's got sound policies.

As far as we are concerned that business used to be core if it's not going to make money, it's not going to be core.

So we're working with our partner, and we think we're going to -- as earlier announced, we're going to work out an arrangement with them that will be good for both parties.

Okay.

So thank you, everyone.

We appreciate everyone's time and attention and listening to our comments today, and Justin and I'll be happy to chat with some of you later this afternoon, if you have any further questions.

Thanks, and have a great weekend.

Thank you very much.

Bye-bye.

Thank you, speakers.

That concludes today's conference.

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