Greenbrier Companies Inc (GBX) 2018 Q3 法說會逐字稿

Hello, and welcome to The Greenbrier Companies Third Quarter of Fiscal Year 2018 Earnings 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, Marqi.

Good morning, everyone, and welcome to our third 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 remainder 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 statement made by or on behalf of Greenbrier.

And with that, I'll open up the call for Bill.

Thank you, Justin, and good morning, everyone.

Greenbrier posted strong operating and financial results in our third fiscal quarter, highlighted by healthy gross margins, a strong balance sheet and a very strong operating cash flow for the quarter.

We also had order activity that was the best so far for our fiscal year.

And that order activity, while predominantly domestic -- North America, also was supplemented by our international strategy as well.

So we had strong orders in international.

Markets have improved both in North America and globally.

Our strategy continues to be to strengthen our core North American markets while growing in international railcar markets.

This strategy is clearly succeeding, and we are adding to it, as I will comment on later in my brief remarks.

As the press release indicates, we are reaffirming our guidance provided in April for the year.

I'm only going to make a few remarks this morning, leaving time for questions.

I want to touch on the economy as we see it, the market and a few comments about our strategy.

First the economy.

Healthy global macroeconomic conditions and a positive freight car outlook have led to activity that favors rail transportation.

For example, higher crude oil production in the Permian Basin in North America as well as in United States as well as strong business and consumer spending resulted in increased carloads in North America.

This included very strong intermodal rail loadings at near all-time highs.

And internationally, the economic environment also appears healthy.

Political unpredictability on several fronts remains an ongoing uncertainty, chief above -- among those would be U.S. trade policy, including recent enacted and proposed tariffs.

But setting that all aside, the global and U.S. economies are very, very strong, and I think that's the bullet that we would like to emphasize this morning.

Year-to-date, railcar loadings finished up 4.3% compared to 2017 and again driven largely by intermodal sand and chemicals.

Increased crude production will continue to drive demand for plastic pellet hoppers and specialty tank cars to ship downstream chemicals.

All these, plus recent OPEC announcements, far lower than the expected productive increases restricted to 600,000 barrels per day are indeed positive signs for our industry for America and our company.

Most recently, this morning, and earlier in the week, we have seen 2 very good commentaries by Matt Elkott at Cowen and by Stifel concerning the state of the tank car business.

In our case, we are seeing stronger demand for tank cars both pressure vessels and even railcars for oil by rail.

And we think that the Cowen remarks are quite good and both are well worth a read, both Stifel remarks and the Cowen remarks.

2017 was the best year ever for U.S. intermodal traffic.

Through May 2018, intermodal was up 7.4% year-over-year.

With capacity constraints, rising oil prices, including weakening competitiveness of trucking, rail has emerged as a primary mode of shipment even for some shorter hauls, which until recently, were only the domain of truck traffic.

Average weekly train velocity has declined by 0.8% year-over-year since the start of 2018.

Historically, as you all know, slower train speeds have correlated with increased demand for railcar equipment, a key positive for our business if not for our rail colleagues.

Pressure continues on new and used railcar lease rates, but as railcar loadings indicate, the industrial economy is doing better now than over the past several years, and we see a lot of reason for optimism both on lease rates and for railcar demand.

We're taking a disciplined approach serving increased demand to ensure that our production capacity aligns with demand in a way that will benefit our businesses.

We are hoping for margin enhancement by exerting pricing discipline.

Our balance sheet has continued to strengthen and provides us with significant optionality and flexibility for capital distribution to shareholders as well as for investment in growth opportunities.

Greenbrier's investment in GBW has not delivered the returns we expected and is an ongoing drag on earnings.

This activity in the repair space carried out with our partner at Watco is -- has been producing disappointing financial results.

We're working closely with our partner, and we expect to come to a solution on this, which will include careful consideration of the welfare of GBW customers and our employees.

Our international strategies are also working.

I'm excited about those.

Acquisition integration in Europe is on track.

We are trimming down and making more efficient our operations in both Poland and Romania.

We have a total of almost 4,000 employees now in Europe, and that gives us a good springboard to other countries in the region and, of course, in the GCC.11:11 AM

Our freight car knowhow and experience from operating globally is improving shareholder value.

Many customers in North America have global footprints.

So this strategy also allows synergy with these customers on a global stage.

Based on current production rates and schedules, we have reaffirmed our guidance for the fiscal year.

And we remain confident in the long-term strength of our strategy and our integrated business model.

We look forward to completing a strong fiscal year next quarter.

In fiscal 2018, we've supplemented our strategy with 2 significant new pillars: number one, a deep commitment carryout over the last year to building our talent pipeline and succession planning; and secondly, the use of our balance sheet to deploy capital in our core business at increased scale.

In summary, our top takeaways from the quarter are as follows: number one, all parts of the business are doing well, except for GBW, and we're addressing that.

Things are improving, number two, in the marketplace, both domestically and in international; number three, we're enjoying good results on target with guidance; and four, we have added 2 new elements to our strategy to improve the business and to grow.

Now I'll turn this over to Lorie or back to Justin.

Lorie?

Thank you, Bill, and good morning, everyone.

The third quarter continued the strong momentum on fiscal 2018, and we're confident in achieving our guidance for the year.

Our quarterly financial information and metrics are available in the press release and, as Justin indicated, the supplemental slides released earlier today.

I'll just hit a few highlights for the quarter and then provide color on guidance for the full year.

Highlights for the third quarter include adjusted EBITDA of $86.9 million and adjusted earnings of $42.4 million or $1.30 per diluted share on revenue of $641.4 million.

Our earnings were negatively impacted by a $9.5 million or $0.29 per share associated with a noncash goodwill impairment charge recognized by GBW.

As Bill indicated, this operation continues to underperform our expectations.

As we account for GBW under the equity method, our share of the results, including the impairment charge, are reflected in earnings law from unconsolidated affiliates on our income statement.

Over 20% of our 5,600 units delivered in the third quarter were outside of North America, reflecting our expanded international footprint.

We continue to execute well operationally across all business units and posted aggregate gross margins of 16.9%.

Our strong operating cash flow of $87 million was driven by operating performance, including syndication activities.

As Bill indicated, orders in the third quarter totaled 6,000 units valued at over $600 million.

This was our strongest order activity in 2.5 years, setting aside the 6,000-unit multiyear order from MUL last year.

These orders comprised a broad range of railcar types, including intermodal, tanks, automotive units, hoppers and boxcars.

And while the average sales price in the quarter benefited from a mix of larger size railcars, the North American market continues to be competitive and nonlinear.

Our balance sheet is robust and provides flexibility to grow the business.

Our cash balances and available borrowings on credit facilities exceed $985 million, including cash of $590 million.

We remain confident in our capital allocation strategy, focusing on cash flow generation and return on capital employed.

This strategy will continue to create long-term shareholder value.

On that point, Greenbrier has a history of steady increases in the dividend.

The most recent increase, being in April 2018, of 9% to the current $0.25 per share.

The dividend announced today generates a yield of about 2% and is our 17th consecutive quarterly dividend.

Based on current business trends and production schedules for fiscal 2018, we expect delivery to be approximately 20,000 to 21,000 units, which includes about 10% from Greenbrier-Maxion in Brazil.

We expect our revenue to be approximately $2.5 billion and diluted EPS of $5, excluding the $0.29 per share impact of the GBW goodwill impairment but including the $0.70 per share nonrecurring net benefit from the tax act.

However, the last quarter we have received a few questions about the $0.89 per share tax benefit we discussed in the second quarter.

That tax benefit consisted of 2 pieces: the nonrecurring remeasurement of deferred income taxes on the balance sheet partially offset by the transition tax on reinvested foreign earnings, the net of which generated a $0.70 per share benefit.

And then an adjustment for the 6 months ended February 28 of the domestic rate from 35% to the new blended U.S. rate of approximately 26%.

This resulted in an additional $0.19 per share benefit.

So those 2 combined are the $0.89 that we talked about in the second quarter.

We view the benefit of the $0.70 per share to be nonrecurring and largely noncash in nature.

It is not indicative of ongoing operations.

The benefit from the lower U.S. tax rate is now a normal part of doing business, and we do not consider it an adjustment to earnings.

Now moving on, for the rest of the full year, we expect G&A expense to be $190 million to $195 million.

In order to accomplish our strategic growth goals, we are investing in our global platform, including our international business development team.

And we're initiating programs to strengthen and develop the next generation of leaders at Greenbrier.

Days on sales will be about $45 million as a result of our fleet rebalancing activity and a stronger secondary market.

Gross capital expenditures are expected to be about $185 million with $150 million of proceeds from the sale of leased assets.

Depreciation and amortization is still expected to be about $75 million.

And as a reminder, earnings from unconsolidated affiliates reflect our share of the results from operations that are not consolidated but primarily GBW and our Brazilian operations.

Our Brazil operations had a challenging quarter, largely driven by a trucking strike in May and continued economic headwinds.

We continue to believe in the long-term potential of the freight rail market and our investment in Brazil.

Reflecting the lingering GBW and Brazilian headwinds in the fourth quarter, we expect breakeven to a loss of $3 million in this line item.

We expect 2018 earnings attributable to noncontrolling interest to be $20 million to $25 million.

As a reminder, noncontrolling interest represents our partner's share of the results of GIMSA in Mexico and Greenbrier-Astra Rail in Europe.

Our consolidated tax rate for the fourth quarter is expected to be around 27%.

Our rate fluctuates due to the geographic mix of earnings and other discrete items.

To sum it up, we're excited about Greenbrier's future.

We're focused on our growth strategy that includes human capital as well as an international footprint.

This will benefit all of Greenbrier's stakeholders.

And now we'll open it up for questions.

(Operator Instructions) The first question comes from Matt Elkott.

On the order front, I just want to make sure I understand the commentary clearly.

So was there no outsized one-off order included in that 6,000?

Was it a bunch of customers?

Let's have Justin respond to that.

He's got the stats right in front of him.

Matt, you're correct.

There is no large one-off orders in there.

It was a variety of customers, a variety of car types, and it was very organic in nature from that perspective.

So would you say this is part of an ongoing momentum that's still happening right now?

I would say that's what it seems to be, yes.

As we've spoken, it's been a gradual process of improvement in North America.

And we seem to be seeing a stronger translation from in-query activity into order activity.

Matt, consistent -- this is Bill Furman, consistent with what you wrote in your commentary, which I just had a chance to read this morning, I believe, personally that 2017 was the drop.

We are seeing across the range of all of the car types much more interest, I think people have, in some cases, been on the sideline.

There may still be a bit of hesitation because of trade issues, which are important.

But I think that's going to shake out.

And I think that the 2018 -- calendar 2018 is really off to a roaring start.

Velocity is in favor of rail suppliers and, lastly, the intermodal particularly is way up.

So we see this momentum going through the second half of the year, calendar year and well into 2019.

Pipeline -- our pipeline has increased as well.

Bill, speaking of 2019, based on this order activity and the ASP that you're getting, would it be far-fetched to think that 2019 could be -- could at least match 2018 as far as earnings, if not even exceed it?

I'm going to let Lorie respond to that because you guys are always trying to get us to issue earnings -- the guidance before we finish our budgets and put a -- tie a bow on them and the board has approved them.

So I'm going to let Lorie answer that.

I'm not allowed to answer -- they won't allow me to answer that question because I'm always optimistic.

Thank you, Bill.

I believe I'm optimistic as well.

But as Bill indicated, we haven't finalized our production schedules for 2019.

We're still looking at that and knitting it all together.

One of the down sides, if there is one, to becoming a much larger and broader company with product mix and international footprint, we have a lot more information to accumulate.

So I would say we are excited about the future of Greenbrier, whether it's 2019, 2020, 2021, we're very excited about where we're going.

Got it.

And just one last question.

Tell me if I'm thinking about this correctly.

I know you guys -- most of your production for the North American market comes from Mexico.

And we have this steel tariff situation in the U.S. And does this actually put you guys at an advantage given you can acquire non-U.

S. steel and then sell finished goods into the U.S., so you have acquired the steel at lower price than the finished goods.

Assuming there's no tariffs added on finished goods, like railcars, on products from Mexico?

Matt, were that the case, we probably would not be disposed to comment on it, given the current political situation.

It certainly is an interesting observation.

We have -- our actual flagship factory, Gunderson, is in the United States.

We have certain advantages, particularly in transportation there.

We see the steel tariffs as currently enacted today to be pretty much a leveler for all car builders and suppliers.

We see some of these increases as temporary and will pass through the -- like the gopher passes through the snake, there's a bit of a bulge now, and it's awkward to deal with it, but it's going to pretty much level everything out.

We may have a temporary advantage in Mexico, as you point out, but again, it's not something I would want to highlight to policymakers.

Fair enough.

And just one last question since it's a Friday before the 4th of July weekend.

It's probably not a very busy call, but the ASP went up significantly from last quarter.

How much of that is due to steel prices going up?

I think it really is driven up a lot more by the mix of cars.

So as there's a number of really large cars that -- and as you know from following us for a long time, Matt, depending on the weighting or the mix of car types, whether it's smaller-cube covered hoppers or the large boxcars, indicates how much material is going in, which really reflects behind that ASP.

Right.

And intermodal is a leavening mix.

The degree to which you have intermodal orders can drag down that price.

The higher-priced cars can drive it up.

So as we've said many times, earnings and order rates are not linear.

This has been a very good quarter.

We're happy about the homogeneity in the order base and the broad base that we're seeing.

The next question comes from Justin Long of Stephens.

This is (inaudible).

Changed my name.

On the quarter, I guess, first question from me is on the order book in the third quarter.

Could you give a little bit more color on how many orders came from North America versus international markets?

And if you look at the backlog today, could you also give that split between North America and international?

Lorie has addressed the deliveries for the quarter.

I believe it's fair to say that, that was comparable statistic for orders as well.

And basic backlog.

And backlog.

Right, which, just as a reminder, that's about 20% of our deliveries were outside of North America.

And I would say similar for orders and backlog.

Okay, great.

That's helpful.

And secondly, I wanted to ask about the pricing environment and how that's trended over the last several months.

I know last quarter, you made the comment, there were some instances earlier in the year with others getting a little bit more aggressive on larger orders.

It sounds like those were kind of one-offs.

Have you seen any of that activity continue?

Or is the pricing environment now stable maybe even a little bit better?

I think it's a little bit better.

When you take orders and push prices down to take orders, you fill your factories up with lower-margin product.

I think there's more responsibility and discipline in the industry.

Of course, our customers are large.

They're powerful.

And they like to play each of us off against the others.

But you pay a price if you fill up your factories with 0 margin or breakeven.

And some of our competitors have been less than responsible about doing that.

In the longer run, it will hurt them and hurt shareholder value.

And I would say, more recently, we've been a bit more disciplined than what you were talking about earlier in the year.

Yes, because they're filling up their -- the basket, and it's easier to then compete on delivery, which is very, very important.

And of course, we always compete on quality and delivery transparency and support of the customer on the aftermarkets.

Okay, makes sense.

And last one from me.

You've talked more recently about momentum in Europe.

When you think about the EPS contribution from Astra this year, what's baked into the guidance for fiscal 2018?

And is there any kind of framework you can help us think about for next year in terms of where that number could go?

Well, as we've said before, we feel like Astra can add kind of the range of $0.15 to $0.35 per share on an accretion basis on a net.

While we're not explicitly giving guidance on that piece for 2019, we do feel that 2019 will be a strong year for Astra as the European market continues to recover and as the integration proceeds on the very strong footing we've accomplished so far.

Yes, certainly on a relative basis to this year, we expect more from Astra next year.

Integrating 5, 6 shops in Poland and Romania is not the -- is no small undertaking.

We focus basic on substance getting that together.

We would see a, relatively speaking, earnings tailwind in 2019 from Astra whether or not it meets absolute short-term goals, which we might have set for it earlier.

I think the real takeaway on international is we have a broad base of activity in North America, Latin America.

Brazil is a springboard for the rest of Latin America.

Not that that's a large market, but also a springboard as an alternative to the Middle East and Africa.

Further, we have design and engineering synergies and customer synergies from all of this.

We have a little negative going on with Brazil temporarily as the concessions are being awarded down there.

So there too we would expect a stronger performance on that international front.

On balance, international will be a solid performer.

And there's some exciting things going on where we can grow that base and improve our earnings diversity and optionality.

The next question comes from Ariel Rosa, Bank of America Merrill Lynch.

Congrats on a good quarter.

Obviously, nice to see the stock responding that way.

So you mentioned the tank car market.

And seeing a little bit of an improved environment for tank car orders.

I was hoping if you could just discuss that quickly and kind of the evolution of that market from where it was a few years ago and what you think is really driving that demand?

Because if you go back 1 year or 2 years ago, it seemed like a lot of people were concerned about oversupply in that market.

And now that narrative seems to have reversed.

Is that -- are the new orders being driven by the regulatory changes?

Or is there's something else that you're seeing there that's really creating that uplift?

That's a great question and an incisive question, I think, a very, very important one.

There's a mixed contribution of forces that are positive at this time.

The regulatory changes have a relevance because, as the dates get closer when major program work.

And as you know a car has to go in for program work that might require $5,000 to $10,000 of work.

People are opting to look at that fleet decision very closely on some of the DOT-111 slick cars, and that's certainly a factor.

That's not been driving a great deal of retrofit activity, which is the sorrow of our GBW unit because we expected that as did the industry.

However, on the new-car side, it's been a factor.

I'd say that if you're monitoring the Canadian situation, car shortages than just the general trends of sluggishness and fluidity in the market -- in the railcar traffic, you're seeing that there's a boost from Canadian demand with -- in that regard on oil.

And lastly, the Permian Basin production, it's all good news going on down there.

There's a little bit of a lift.

It's not a great big lift for oil by rail, but it's certainly strengthening oil by rail.

However, oil by rail is not the whole question, not the whole answer to what's going on.

There's a lot of pressure vessels.

There's a lot of derivative type cars.

And as we've improved our tank car model and can do smaller lots, it's been possible for us to get into a lot of different pressure vessels and in other tank cars, which has been a primary source of the diversified demand for tanks.

Okay, great.

That's really great rundown, Bill.

And then second, just wanted to ask about GBW.

Maybe if you could just elucidate a little bit more on what the challenges there seem to be and if you think it's salvageable or how we should be thinking about that going forward?

Well, the way I'm thinking about it is very practical.

I know we've a lot of dedicated people, a lot of dedicated customers in that business, but the execution of our plan, which was derived on expectation of heavy demand for tank car retrofits, the execution was hampered by the fact that we built a ballfield and nobody showed up for the game.

The fact is that the retrofits haven't come along in quantities that we expected.

And the market turned in a different way.

That may be changing over time, of course, and that would be positive to the entire network.

Second thing that happened is it's a scale issue.

We have a national network.

The deliverance, utilization, efficiency at scale, international network given the different histories of each of the shops became more difficult under 2 administrations.

We had Jim Cowan running it, a great operator.

It suddenly began producing losses.

And then Rick Webb has been running it, also a very good operator.

We just can't seem -- we seem to have created some diseconomies of scale.

So we're working on, practically speaking, just stopping the drag.

And if you look at the drag on earnings that our share has been, capital calls, we just want to take this to either a different scale.

And we're looking at a transactional solution to the issue.

So we won't have this drag in our earnings nor the destruction from this size of joint venture repair business.

The next question comes from Steve Barger, KeyBanc Capital Markets.

Bill, in your prepared comments, you talked about how much balance sheet capacity you have, and I doubt if you've ever had this much liquidity this early in an improving cycle.

So can you talk a little more about the opportunities you see for investment domestically and internationally?

Yes, thank you, Steve.

Excellent question.

Our strategy, as I said, has now -- now that we have a strong hold on the domestic market, things are improving.

And we feel like we can't check the box on that.

We are -- have a core business in North America, but things are improving very nicely.

And we've achieved most of our mission there.

And number two, expanding internationally.

So we have added the leg of growth at scale.

And aggressive building for the last year of our talent pipeline, that includes going down far below middle management in development programs, recruitment and so on.

In short, we have to grow to afford to do that for the future of the company.

And we believe we can achieve scale in our domestic business and in our international business.

And we have active transactions that we're pursuing in both of those areas but probably focusing on our core North American markets more proportionately in that regard.

So we are looking at opportunities for growth in our space, in the areas in which -- where we have talent, one of those areas.

Our core businesses are manufacturing, engineering, equipment design, rail, freight car design and leasing.

We also have a very active wheels and parts business, and we continue to be dedicated to the repair business addressing, however, that we must be profitable in that business even though -- even when we have negative results, it still contributes to our integrated model.

So setting aside the repair business, where we're having headwinds, we are likely to increase our scale.

And one of the primary categories manufacturing, engineering or our wheels and parts businesses along with leasing.

Is the capital deployment designed to reduce cyclicality?

Or do you think more about the scale and less about diversification along those lines?

Well, we're thinking about both, but we do what we do well.

And we think if you focus on what you do well, you're probably better off and on a marginal basis going out and just adding bits and pieces to a network without understanding the relevant industry as well.

So probably strengthening our core.

The international diversifies us though, and I think we are very interested in diversifying our base.

There's a lot of optionality.

It's just an amazing thing what kind of opportunities come once you planted your flag in a country or a region as we have both in the GCC, in Eastern Europe examining transactions between -- in that region actively.

Some will be at scale and some will not be.

But they'll be consistent with our current business.

However, that's only part of it.

We -- as Lorie indicates, we continue to be focused on dividend yield and returning appropriately capital to shareholders.

And it's true.

We are very, very liquid.

If you've got a company that has a market cap of $1.5 billion and you've got $900 million of liquidity, that's not such a good profile because, if we deploy the capital on reasonable basis, just the arbitrage itself will add tons of EBITDA to our earnings.

Right.

Well, and in the near term -- I mean, obviously, there's been a disconnect between the optimism that you're expressing and how shares of not just you but all industrial companies have been acting.

Does that move buy back up the list in the near term for capital allocation?

I think we are -- exhibited a clear preference for dividends.

We think dividends attract a stronger institutional base that's interested in long term as opposed to the trading base that's in and out of stock.

We're studying governance.

You might have noticed our proxy is completely different this last year than it was 1 year or 2 ago.

We're only focused on substance, and we're trying to attract that kind of investor.

But basically, we are still attentive.

And if our stock were to move into a range where it's really -- it's something we can't afford, we certainly would be buying back stock.

We have bought back a lot of stock as circumstances have warranted.

In recent weeks, I would say, just in this last week, stock trading down the way it did, it certainly got our attention.

So we have that policy in place, and we're very attentive to it.

The next question comes from Bascome Majors of Susquehanna.

I wanted to follow up on the GBW JV.

I know you haven't said that you plan to exit that wholly, but just as a thought exercise for us.

What would that -- can you tell us what the equity income line would sort of look like if that were to go away so we could get a better feel for what else is in there, which I believe is mostly Brazil but anything else you want to point out, that would be helpful.

This is Bascome Majors, right?

Are you...

Yes.

I thought I recognized your voice, you didn't identify yourself.

All right.

I'll let Lorie address that question on the...

So you're right, Bascome.

The 2 largest items that are in earnings from unconsolidated subs are our GBW joint venture and the Brazilian operations.

There are a few smaller items, our investment in Ohio Castings, which is a Castings joint venture that we have here in the United States.

We have a few other small investments that really don't rise to getting into a whole lot of detail.

So we think that we definitely have a plan that we're focused on when it comes to GBW that should reduce those headwinds as we move forward.

Brazil, the timing is a little bit harder to be exactly predictable.

There's a lot that's going on in that economy that's associated with the railroad and the concessions and the timing of that which impacts demand.

So like I said earlier today, we're really excited about being in Brazil, and we're excited about our investment.

We think it's the long-term growth, but it's hard to predict exactly when that's going to shift.

So to be more concise about that.

And I think Lorie gave a very good description.

Our goal in 2019 will be to reduce that negative contribution from all sources and add a positive contribution which will be relevant to performance in 2019.

If -- the Brazilian thing is very temporary.

If you had looked a couple of quarters ago, we were getting big order demand down there.

And there's just been a pause.

The elections coming up.

So some -- same things in other areas where elections have been and are going to be held.

Again, I think that's a temporary pause, plus we're sizing and restructuring that operation, and I'm very smart about that.

Lorie's taking a personal interest in Brazil, not because of the beaches or in spite of all of the yellow fever and Zika viruses that are going on down there.

But it's a great country.

And we expect to turn this around in -- by early in 2019.

So we -- if you look at that line item, our goal is to make it go away and make it positive, just to put it bluntly.

That's my personal goal.

And I'll be evaluated on that by my Board of Directors, I'm sure.

Although, I haven't really shown a lot of concern about it because we -- they know what our strategy is.

Okay.

So that's good to hear.

So I mean, if all goes well, that will be a contribution as supposed to a drag overall for you guys in 2019.

Just to -- one more kind of specific item that you may have a little bit of visibility you're able to share on.

I mean, the gains on sale related to the MUL relationship.

I mean, those have been pretty strong this year.

I can't imagine that's sustainable over a very long period given that there's only so many railcars that you can sell them from your fleet.

But do you have a sense based on sort of the relationship with them what that number could roughly look like next year?

I mean, is there any visibility there that you're willing to share just given how much of a benefit it's been this year?

Yes, we know.

But I'm not sure we're allowed to tell you because Lorie will slap me if I try to answer your question.

But that's a multiyear relationship.

As Lori has said before, it's highly attracted to us.

It actually creates, in some respects, a drag on earnings because if you sell these -- the depreciation and everything is the basis as well -- so on.

The fact is, the depreciation basis.

So what we're doing is replenishing the fleet.

With the new tax laws, it's a great trade.

So we have a multiyear agreement.

And this could go on for 4 years.

As to quantitative guidance, I would turn that over to Lorie and Justin.

Thanks, Bill.

I think as we've said, for 2018, we did expect gains on sales to be higher than our normal range of activity because of what we're doing with MUL as well, it's just a great opportunity for us to rebalance our lease fleet.

I think if you were to look at our track record, historically, we have had gains on sales.

I don't know, probably in the $15 million to $20 million range on an annual basis.

I don't see any reason that, that might change as we go forward.

It will be based on market conditions, but it'll probably level off from what we saw in 2018.

Yes, that -- the change has happened in the last couple years.

If you look at our statements, it's hard to compare because we really have a very strong syndication model.

That gives us the capability to deliver to the markets.

The markets have the cheapest interest rates possible much more than our -- lower than our cost of capital.

And if we find trading opportunities where we can buy assets and season them and then sell them if they qualify for gains on sale, you've got a stronger momentum from that engine of growth that exists in our leasing company.

Our leasing strategy is working very well, and we continue to have a diversified base of investors, including some long-term investors in the leasing business with whom we have strong wholesale relationships, MUL just being a recent one but some very strong companies in that space.

So we expect this will continue to be an engine of that gain.

That is really where the excitement comes on the gain of sale.

I just had one more small one kind of [partial] of guidance for next quarter.

I mean, it does seem that, at least to get to your EPS number for the remainder of the year, it looks like the margin will need to step down a bit in manufacturing from where we've been.

Just want to make sure that, that is what you're implying and understand maybe the fundamental drivers between mix, conservatism, anything else you want to point out that's driving that as we think about the kind of the runway we're heading into next year?

Bascome, this is Justin.

I think that there is probably a bit of a step-down.

But we're not expecting a -- again, as we've talked about before, any type of a cliff event.

It's going to be more a matter of, in the range we've been discussing for most of the year and kind of around that 15% mark, which we could get -- if we have kind of additional detailed follow-up, you and I can talk about it on our follow-up call later today.

But I think we do expect that margins have continued to perform a little bit better than we've been projecting, and that's just a testament to the operating efficiency of our manufacturing platform and the strength of our other -- of GRS and our leasing business as well.

Bascome, as soon as Lorie and Justin get less conservative, I'm going to promote them.

They're both fantastic people.

So we're going to end the year strong.

Going into next year, we think we have strong momentum.

But in all things, our business is not -- it's not linear.

So we've had some other moving parts.

We just successfully delivered a really good contract in Saudi Arabia.

We have a lot of visibility in the GCC, the Gulf Cooperative Counsel, and in the region surrounding Turkey and even in the Ukraine.

There's a lot of growth opportunities.

And we're not managing the business for quarter-to-quarter earnings.

So the mix, we're going to give guidance as soon as we have an official budget, as soon as the board has blessed it.

That cycle always ends in August before our fiscal year ends.

As soon as we've got it, we're going to give you guys a lot more transparency.

But I have maybe an optimistic nature.

But our game plans are really working.

And I think in the next 2 to 3 years, our strategy will really deliver great value and then next year as well.

The next question comes from Matt Brooklier of Buckingham Research.

Could you give a little bit of color on demand activity thus far this quarter for railcars?

Matt, this is Justin.

I would say that we're pleasantly surprised by the activity so far.

This -- I mean, it's just -- as I said earlier, inquiry activity is translating to order activity.

And we're, I would say, cautiously optimistic that the -- our fiscal Q4 will be another strong order quarter.

Yes.

For your specific questions, are we booking orders?

Yes, we are, and momentum continues.

A lot of the activity in some of these markets.

Just track the stats of loadings, and you can probably see where the activity is likely to be.

Okay.

Good to hear.

Did you guys book any crude tank cars in your fiscal third quarter?

Matt, again, this is Justin.

We have a variety of tank cars that we've taken orders for.

So we try not to get explicit into car type by car type, but it's a broad variety of tank cars.

But I think the answer is yes, isn't it?

The answer is yes.

Is -- I guess, and going back to some of Bill's comments on maybe the retrofits not materializing maybe as quickly or as many as previously expected GBW.

Is it -- is the market preference here for adding crude cars, it's for new cars over retrofitting cars, or do you think that we are going to retrofit cars.

It's just taking a little bit longer for that story to develop?

I hope I didn't give you the impression we're not retrofitting cars.

It just wasn't this huge wave of demand going back to the time when we pioneered the safer tank car.

Now others also invested in tank car retrofitting because of railroads, in particular, the industry in particular were concerned about the regulations taking effect too early because they didn't think the capacity was -- would be there.

So it's not that we're not enjoying healthy retrofit activity.

And it's not that we're not enjoying a great relationship with our partner, Watco.

It's just that we overbuilt.

And -- but this huge wave was coming.

And the wave was -- it wasn't able -- we weren't able to surf on the wave.

It was nice to bathe in.

But we also had execution issues around putting 34 shops together with different histories is what those shops were put together from a number of acquisitions, some were ours.

It's a lot of different cultures.

And it was just more difficult than we expected to execute on service design, meaning a consistency with the big customers.

And we're competing with a couple of very button-downed shop networks, especially a company like Union Tank Car, really very button-down.

And we -- sorry, so we just misjudged the market.

But we are ready to go -- move on and be sure that we're not -- it's not a drag on our earnings or our time.

So we're just going to work on it, but we are retrofitting cars in -- not only in GBW but in Greenbrier itself in our Maxion facilities.

And the last question comes from Mike Baudendistel of Stifel.

Most of my questions are answered.

I'll just ask a quick one.

I just want to -- wondering if your customers stop ordering frac sand cars, the small-cube covered hoppers, given that there's expectation that more of the sand will be sourced local -- placed local at the drilling sites?

You know, personally, I'm not aware of any big effect on that yet.

I may be not following as closely as I should.

That trend you're mentioning is certainly there, but there's pretty strong demand for that kind of car right now especially, just the cycle of having to replenish the existing wells and the availability of sand from the alternative sources.

They're both factors.

If you wanted to -- we might publish something on that, I'm not sure, later on, if we decide to give more flavor on that market, and that's of interest to other people, I'm sure.

Thank you, everyone.

I appreciate your time, attention and interest in The Greenbrier Companies.

Again, we're really excited about the results for the third quarter, our outlook for 2018 and beyond as well as our growth strategy.

Hope everyone have a great weekend and a great 4th of July.

Thanks.

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