Greenbrier Companies Inc (GBX) 2022 Q1 法說會逐字稿

Hello, and welcome to the Greenbrier Companies First Quarter of 2022 Earnings Conference Call.

(Operator Instructions)

At the request of the Greenbrier Companies, this conference call is being recorded for replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer.

Mr. Roberts, you may begin.

Thank you, Eiley. Good morning, everyone, and welcome to our first quarter of fiscal 2022 conference call. Today, I'm joined by Bill Furman, Greenbrier's Chairman and CEO; Lorie Tekorius, President and COO; Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer; and Adrian Downes, Senior Vice President and CFO.

Following our update on Greenbrier's performance and our outlook for fiscal 2022, 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 factors that could cause Greenbrier's actual results in 2022 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 turn the call over to Bill.

Thank you, Justin, and good morning, everyone.

Fiscal '22 is off to a good start, driven by strong commercial performance, disciplined management of our production capacity and continued growth of our railcar lease fleet. Momentum in our business is being sustained. The first quarter of fiscal 2022 continued our strong order trajectory. As a result, Greenbrier posted its fourth consecutive quarter with book-to-bill ratio over 1x. New railcar orders and actually were 1.5% for this quarter, new railcar orders of 6,300 units were worth $685 million were across a broad range of railcars. We ended the quarter with a backlog of approximately $3 billion, the highest level in about 3 years. Our order intake for the first quarter alone represents 35% of new orders received during all of fiscal 2021. Our recent partnership with U.S. Steel Corporation, and Norfolk Southern Railway to design and launch new high-strength steel gondolas, having multiple environmental benefits demonstrates this momentum. In addition, in a moment, our Chief Commercial and Leasing Officer, Brian Comstock, will share more about this and some other exciting customer-focused initiative. And I should mention in terms of backlog, we have booked another $200 million of rebody work, which is sizable, but not counted in our backlog.

We are now ramping up 21 active production lines in North America, and approximately 8 internationally. Importantly, we are harnessing our flexible manufacturing footprint to extract more production from each line. We expect this to increase in deliveries to increase over the course of the year. Meat production requirements, we recently expanded our global workforce by about 10%. Intensive management of safety, hiring and supply chain issues continue. Continued success in these areas is key to maintaining our strong start to the year. Specifically, on the supply chain, our global sourcing team continues to do an exceptional job of mitigating disruptions to support increased production. Our wheels, repair parts business is now known as Maintenance Services.

The new name doesn't change the back that this business unit endured a challenging quarter. Labor markets and supply chain disruptions have both impacted its profitability. Naturally, this lowered our consolidated margins, which were below our expectations to begin with. Mary will speak to the changes we are making to improve the performance of our maintenance services business unit. Greenbrier Leasing continues to perform very well. Our investment activity is considerably outpacing initial targets. Asset utilization, a key performance metric for the leasing business is high at 97.1% with a portfolio that is well diversified across car types strong lessee credits as well as maturity ladder. Additionally, we exceeded the initial investment target for GBX leasing by $200 million to the portfolio of $400 million in only 9 months of operations.

This reflects the strong momentum in the business and our core manufacturing markets in North America. I'm sure there may be questions on this or other comments by management, but be sure to read this but note in our press release having to do leasing supplemental information is very informative.

The Omicron variant of COVID-19 were suddenly following the end of the quarter. As a result of well-established safety protocols, our operations have not been significantly impacted at present by the rising cases globally and in North America, but we are closely tracking the rapid community spread of this variant, and we're taking all appropriate precautions.

We continue with safeguard protocols and we will enhance these as dictated by best practices as well as adhering to local health authority requirements in the locations where we operate.

In the U.S. and Europe, it appears this wave might peak in the coming months. There are indications that the current variant carries milder symptoms than previous versions of the virus, particularly for this double -- or those who are double vaccinated and those with boosters.

Nevertheless, we must remain vigilant. After 2 years, the full contours of the pandemic remain dynamic and unpredictable. Our resolve is effectively to manage Greenbrier through evolving COVID challenges and that resolve remains steadfast.

Our outlook remains unchanged, except that we believe it is growing to be much more positive.

We maintain a positive outlook for the fiscal year for a variety of reasons. These are supported by industry metrics as well as operating momentum, driven by a strong order book, demand backlog and manufacturing ramping.

For example, a portion of idle railcars in North America decreased from 32% in July to just below 20% by December. Industry forecasts for 2022 and 2023 are very encouraging as Brian Comstock will share with you.

All this shift suggests that industry fleet utilization is nearing 80%. And again, Brian Comstock will add more on these points in a minute. And we can talk in question and answer.

Lorie Tekorius, who will be Greenbrier's CEO and March takes the helm in a very important and exciting time in the long history of Greenbrier.

Before I turn the call over to Lorie, I'd like to provide some closing remarks on where Greenbrier stands today. I became the CEO when we were founded -- my partner and I cofounded a small asset leasing business in 1981.

We entered manufacturing with the acquisition of Gunderson in 1985, and we have continued to build on those 2 foundations. Today manufacturing is our largest unit, comprising about 80% of our total annual revenues. But manufacturing is both driven and complemented by a robust commercial and leasing business as well as asset management services.

Today, our asset management, maintenance services touch about 1/3 in the North American fleet. It's been a remarkable journey for me and for the company. Greenbrier has steadily grown its industry footprint and today is the leading railcar manufacturer in North America, allowing us to operate at scale.

We also now operate in 4 continents, serving global railcar markets worldwide with similar market shares in each of these. All of this has been accomplished through the hard work of remarkable people who without the guidance through their capacity for innovation, disciplined management and unyielding focus on the needs of our customers as well as our workforce and other stakeholders.

We purposely built the company to grow at scale and prosper across business cycles. Under Lorie's administration, she plans to do more of that along with some new initiatives of her own. As global railcar markets emerge from a cyclical trough on that was severely exacerbated by the pandemic, I am proud of what the Greenbrier team has accomplished and the market-leading positions we've achieved.

I'm also proud of the significant value we've created for our shareholders. I expect this will continue for many decades to come as Greenbrier continues to drive innovation in industry, broadening its footprint globally and by product line and expand its leasing and services business.

I would take just a brief moment as others may do later to welcome our 2 newer directors subject to the vote of our shareholders today, James Hubei and Ambassador Antonio Garza. Both are highly qualified, and we welcome this step before refreshment. I also would like to congratulate 2 directors who served throughout almost the last 18 years to 20 years on our board, (inaudible) Dugle, and Donald Washburn. Next week, we'll put out a brief congratulatory note marking this milestone, but I want to assure them that we remember them, they're always welcome to visit and we thank them for their strong contributions over the years.

I'll now turn the call over to Lorie Tekorius, Greenbrier's incoming CEO. I I have no doubt that Greenbrier will flourish under her administration.

And Lorie, next time, you're going to be running this call. So thank you, and congratulations.

Thank you, Bill. Thanks. Good morning, everyone.

And before I get into the details on the quarter, you may have noticed and I think Bill referenced that we renamed 2 of our reporting segments. Our wheels repair and parts segment is now Maintenance Services and Leasing & Services is now Leasing & Management Services. The new names more closely reflects the customer solutions we provide and have no impact on the financial results. Greenbrier fiscal Q1 reflected continued labor challenges in the United States, competitive pricing from orders taken during the depth of the pandemic trough and production inefficiencies from line changeovers and ramping of capacity.

I'm proud of our employees around the world that continue to perform well, even as uncertainty about. It is certainly an understatement to say that increasing head count safely by several thousand employees and increasing production rates by 40% to 50% is challenging. But with an experienced leadership team, we'll lead this opportunity to scale our operations, all while keeping our workforce healthy and safe.

Safety across our organization has been and will continue to be our #1 priority. In the quarter just ended, we delivered 4,100 units, including 400 units in Brazil.

Deliveries decreased by about 9% sequentially, which primarily reflects the timing of syndication activity and line changeovers in North America.

Our global manufacturing continues to take a measured approach to increasing production rates and activity as they work through orders taken during the trough. Our global sourcing team continues to perform minor miracle on a regular basis, ensuring we avoid significant production delays.

Our Maintenance Service business was significantly impacted by labor shortages exacerbated by the COVID pandemic. These shortages impact throughput billing efficiencies and profitability. We've made a number of changes to our hiring and training practices and we're seeing improved retention rates, but maintenance cycle times can be 75 to 90 days so it will take some time for the benefits of these changes to flow through the operations.

Further, this business was impacted by lower wheel change-out volume. I do believe the team has made the necessary changes that will lead to positive results over the course of fiscal 2022 in our Maintenance Service business. Our Leasing & Management Services Group had a good quarter with strong fleet utilization and the integration of a previously disclosed portfolio purchase in September. Between the portfolio assets and originations for Greenbrier, GBX leasing grew by approximately $200 million in the quarter. And as of quarter end, that fleet is valued at nearly $400 million, nearly doubling in value across the quarter.

Importantly, this growth reflects the continued disciplined approach to portfolio construction, underwriting and credit quality standards. We are not pursuing growth at all costs.

Our strategy remains to create repeatable revenue and stable tax-advantaged cash flow that will take the edge off the dip in new railcar demand that are well known by all in this call.

In addition to managing our lease fleet, our Management Services, or GMS group, continues to provide creative railcar asset solutions for over 450,000 railcars in the North American freight industry.

One other positive development subsequent to quarter end is that our leasing team successfully increased the size of our $300 million nonrecourse railcar warehouse facility by $50 million to $350 million. Our capital markets team executed well this quarter, and we expect syndication activity to grow throughout the year, similar to our overall cadence of delivery. Syndication remains an important source of liquidity and profitability for Greenbrier.

Looking ahead, we see strong momentum through fiscal 2022 and beyond. We have talented employees and experienced management who are focused on driving results and shareholder value. I'm very excited about the long-term opportunity for Greenbrier.

And now Brian Comstock will provide an update on the current railcar demand environment.

Thanks, Lorie, and I hope everybody had a great holiday season as there's a lot to be excited about as we move forward. As mentioned in October, I remain excited about the momentum we are seeing in all of our markets globally. In Greenbrier's first quarter, we had a book-to-bill of 1.5, reflecting deliveries of 4,100 units and orders of 6,300 units. This is the fourth consecutive quarter with a book-to-bill ratio exceeding 1x and reflective of the strengthening environment New railcar backlog of 28,000 units with a market value of $3 billion provides strong multiyear visibility.

These are the type of demand environments for Greenbrier's flexible manufacturing is a vital differentiator. In addition to new railcar orders, we recently received orders to rebody 1,400 railcars as part of Greenbrier's railcar refurbishment program.

This program is an important part of our growing partnership with our customers to sustainably repurpose North America's aging fleet to ensure that rail remains the most environmentally friendly mode of service transport.

As of November 30, our modernization backlog included 3,500 units valued at $200 million. This is a valuable business that is additional to our new railcar backlog and and absorbs production capacity. In addition to our railcar refurbishment program, we announced another sustainable initiative in early December, a collaboration between U.S. Steel, Norfolk Southern and Greenbrier for a new gondola, using an innovative formula for high-strength, lighter-weight steel developed by U.S. Steel.

Each gondola's unloaded weight is reduced by up to 15,000 pounds. Norfolk Southern will initially acquire 800 of these Greenbrier engineered gondolas. The work done by Greenbrier and our partners promises significant benefits to all 3 companies and the freight transportation industry as a whole as we lead the way to a net zero carbon economy. One item worth clarifying is the 800 gondolas will be part of the Q2 order activity.

In December, we also announced Greenbrier's joining of the RailPulse coalition. I'm personally excited about the prospects of this technology with the goal to aggregate North American fleet data onto a single platform.

This has the potential to improve safety and operating efficiency while providing enhanced visibility to customers, reinforcing Rail's competitive share of freight transportation. Greenbrier's lease fleet utilization ended the quarter at over 97%.

We continue to see improved lease pricing and term on all new lease originations and lease renewals as well as continued strong demand for leased equipment. North American industry delivery projections saw an increase to nearly 49,000 units in 2022 and over 60,000 units in 2023.

Given the strong reduction in railcars and storage but continued congestion at reports, which is impacting traffic and overall economic growth, we believe these projections are very reasonable and see similar dynamics in Europe.

As you can see from our recently announced initiatives, Greenbrier's global commercial and leasing team remains focused on providing innovative solutions to our customers. Now over to Adrian for more about our Q1 financial performance.

Thank you, Brian, and good morning, everyone.

As a reminder, quarterly financial information is available in the press release and supplemental slides on our website. I'll discuss a few highlights and will also provide an update to our fiscal 2022 guidance.

Highlights for the first quarter include revenue of $550.7 million, deliveries of 4,100 units, which includes 400 units from our unconsolidated joint venture in Brazil, aggregate gross margins of 8.6%, reflecting competitive new railcar pricing from orders taken earlier in the pandemic and labor shortages.

Selling and administrative expense of $44.3 million is down 20% from Q4, primarily as a result of lower employee-related costs. Net gain on disposition of equipment was $8.5 million. Like many leasing companies, we periodically sell assets from our lease fleet as opportunities arise.

We had an income tax benefit of $1.4 million in the quarter, primarily reflecting net benefits from amending prior year tax returns.

Non-controlling interest provides a benefit of $5.2 million, primarily resulting from the impact of line changeovers and production ramping at our Mexico joint venture. Net earnings attributable to Greenbrier of $10.8 million or $0.32 per diluted share and EBITDA of $42.2 million or 7.7% of revenue.

Moving to liquidity. Greenbrier has a strong balance sheet. Liquidity of $610 million is comprised of cash of over $410 million and available borrowings of nearly $200 million. We are well positioned to navigate any market disruptions we expect to persist into calendar 2022.

As mentioned last quarter, our tax receivables stands at $106 million as of November 30, and we expect to receive most of this refund in the second quarter of fiscal 2022.

This refund is in addition to Greenbrier's available cash and borrowing capacity. Liquidity is important to support the working capital needs of the business as we significantly increased new railcar production beginning in '21 and into 2022. Liquidity also enables Greenbrier to invest in growth, as demonstrated by the railcar portfolio purchase in Q1 and the expansion of GDX leasing at a pace exceeding our initial announcement.

It has also allowed us to continue to pay a dividend throughout pandemic during a time of economic uncertainty. Greenbrier's Board of Directors remains committed to a balanced defining of capital and believe that our dividend program enhances shareholder value and attracts investors.

Today, we announced a dividend of $0.27 per share, which is our 31st consecutive dividend. As of yesterday's closing price, our annual dividend represents a yield of approximately 2.3%. Since 2014, Greenbrier has returned nearly $370 million of capital to shareholders through dividends and share repurchases.

Additionally, you may have noticed an increase of approximately $70 million in Greenbrier's notes payable balance when compared to the prior quarter. This noncash increase is a result of Greenbrier adopting a new accounting standard with simplified accounting for convertible notes and no longer requires the calculation of debt discount and associated equity components.

We believe the standard provides better transparency to how the convertible notes appear on our balance sheet. And to be clear, Greenbrier did not incur any impact to liquidity or cash flows as a result of this adoption.

Based on current business trends and production schedules, we're adjusting Greenbrier's fiscal 2022 outlook to reflect the following: increased deliveries by 1,500 units now to a range of 17,500 to 19,500 units, which includes approximately 1,500 units from Greenbrier-Maxion in Brazil. Selling and administrative expenses are unchanged and expected to be approximately $200 million to $210 million for the year.

Gross capital expenditures of approximately $275 million in leasing and management services $55 million in manufacturing and $10 million in maintenance services.

Gross margin percent is expected to steadily increase over the course of the year from high single digits in the first half to between low double digits and low teens by the fourth fiscal quarter as railcars orders during pandemic trough are delivered and conditions in the maintenance services business improve.

We expect deliveries to continue to be back half weighted with a 45%-55% split. As a reminder, in fiscal 2022, approximately 1,400 units are expected to be built and capitalized into our lease fleets.

These units are not reflected in the delivery guidance provided. We consider our railcar delivered on at (inaudible) Greenbrier's balance sheet and is owned by an external third party.

As mentioned in the commentary earlier on the call, momentum continues to build in our business, and I'm excited about what the future holds for Greenbrier. And now we will open it up for questions.

(Operator Instructions)

Our first question today comes from Justin Long with Stephens.

I wanted to start with a question on manufacturing gross margins. I know on the last call, you were very clear about the timing of 1Q and that being the low point of the year.

But I also know you were hoping for double-digit manufacturing gross margins, and we were a bit below that. So can you help us kind of bridge what happened on that front relative to expectations? And any way you can help us think about the sequential progression of manufacturing gross margins moving beyond in the next few quarters?

Sure. You want to go, Bill?

No, you should do that.

Great. So you're right. We always have very high expectations. I think that our manufacturing folks did an excellent job in the first quarter, and it actually exceeded some of our expectations, but we did run into some headwinds in certain areas as they work through, as we said, orders that were taken during the downturn and some of the overhead absorption during the ramping just wasn't quite as robust as we would have expected.

So those were the issues. And then we continue to face labor difficulties, particularly here in the United States. So our facility here in Portland, Oregon as well as our operations in Arkansas. So it's not only the impact of COVID, but it's also attracting and retaining the labor to be able -- to be efficient in our shops.

I'd only add that we have -- there may be just a bit of delay here. The momentum in the second half should be strong to the degree that our margins were to lag. We expect, as has been indicated in guidance that our production rates will increase significantly than earlier guidance. So I think that it will certainly be offset.

Okay. And so as we move into the second quarter, would your expectation be that manufacturing gross margins can get back to the double digits. And when we think about the full year, would you say that your expectation for margins is better than it was 3 months ago given the production guidance increase? Or are the labor issues offsetting some of that?

I think the labor issues are offsetting some of that. We are optimistic. I don't want to get into quarter-by-quarter specific guidance on margins. Our expectation is as we move across this quarter -- I mean, sorry, across the year, margins will improve and get to that double-digit area.

Sometimes the second quarter has the headwind of -- it's just you've got more holidays and some more difficulties. We've seen what's happened with COVID cases popping up, weather and other difficulties. So I would say that we always have high expectations, but I don't want to get into that quarter-by-quarter expected.

I think the second half should look stronger for a variety of reasons. The operating momentum should drive the expectations. But I think the timing is really what's happened here, Justin. It's just been -- there's a little bit more of a lag than what we might have thought before.

But again, we're going to have higher volumes than we expected before. And things are going well in manufacturing. It's not that there's a big bunch of glitches. It's really ramping up. And as Lorie said earlier, that's not a seamless matter, but it's going very, very well.

Our next question comes from Matt Elkott with Cowen.

I want to ask you about the -- on the pricing side. Lorie and Brian, I think you mentioned the cars that were taken during the 2020 trough. Were the deliveries in the first fiscal quarter mostly those orders? Or if not, what percentage of the deliveries were or that were taken during a very depressed pricing environment. And also, how many of those cars are still to be delivered in this fiscal year?

This is Brian. It's a great question. Your analysis is correct. At the end of the day, we had a bit of a tail on orders coming out of 2020 that moved into Q1. Looking beyond Q1, we don't have many of those orders to the backlog.

So we start to get into what I call the newer price backlogs in Q2, Q3 and Q4. So not a lot of tail beyond Q1, but certainly, there was quite a bit of tail going into Q1 on some of the legacy priced deals in the trough of the market.

Okay. And Brian, with the orders that are company now, can you talk about how the pricing dynamic differs from the orders that you actually delivered today adjusted for commodity price obviously, core pricing.

Yes. Yes, I would say it's marketably improved.

Okay. Now I mean the industry landscape looks really different from a couple of years ago, it's a lot more consolidated. You guys and Trinity have maybe about 75% or 80% of the manufacturing landscape. So should -- if we do have a robust up cycle in the next couple of years, could we see materially better pricing? And if so, what do you guys think the kind of peak margin at the peak of the cycle could look like in a couple of years. I know your gross margin peaked in 2016 at 22%, but that was a highly anomalous time, deliveries from the crude-by-rail (inaudible) will probably not be repeated.

But any color on what margins could look like at the top of the cycle, what is the delivering the highest number of cars.

That's -- it's a great question. And I think that's one of the things that keeps many of us in this industry for a long time because you never know what's going to happen. So we certainly think that there's a lot of opportunities over the coming years, and our manufacturing team continues to impress us with what they're able to achieve and you're spot on with as we get to higher production rates, you get to see the benefit of that overhead being absorbed across a broader group of cars.

So a lot of it depends on mix. We have had a really disciplined approach to how we're taking orders and thinking about things. So I could see margins getting into the upper teens, be excited if they were in the mid-20s, but a lot of that does come down to mix.

And while our competitive landscape here in North America has changed a bit. We also have some very strong customers that pay attention to what they're investing in, these are long-lived assets, so you can only have -- you have that balance.

I think the other thing is we have the benefit of having our leasing platform. So we also look at how many cars do we want to build and sell versus we're building cars and we can put them into a fleet where we will see that repeatable revenue and cash flow over the coming years. So it's a nice layering effect and it's a good blend of different activities that we have here at Greenbrier.

That's helpful. And Lorie, just one last follow-up to this question. Based on all the dynamics you guys are seeing now, when do you think this production peak might occur actually. Could it be mid-calendar 2023, late calendar 2023 or earlier?

I think you're right, we're probably mid-2023. I think some of it is going to depend on supply chain. It's going to depend on the labor dynamics, making certain that we can continue to operate across the North American market and getting some of the supply chain issues chicken out. We have been fortunate to not really have any of those impact us significantly, but it's definitely something that gets managed every day.

Maybe Brian or Justin could talk to the data that supports 2023 and even beyond. Just in terms of the industry forecasts, I think it would be good to remind everybody what those industry forecasts look like.

Yes. I think that's good, Bill, just to kind of remind everybody that as you look at the projections in 2023, they're projecting 60,000 railcars will be built. The other interesting dynamic as you think about where the future is headed for rail is that the North American fleet continues to contract. I think we're in the 21st month of contraction, which means that there is a heavy, heavy scrap rate that is going on even while new cars are being injected into the system.

So as we think about the future, as the chip situation resolves itself as supply chain starts to become more fluid. You're going to see more and more pressure in demand on the railroads to ship more and more product.

So 60,000 right now is the industry's best guess, but you could see that extend beyond 2023 as well if demand comes on as we think it will.

And just to kind of move this to a little bit bigger picture and longer term also, rail freight is the most sustainable form of transportation. And as the world continues to focus on carbon neutrality, zero emission goals, things like that. We continue to believe that there will be a medium- to longterm growth in the fleet because there has to be a shifting of modal transportation, and that's not baked into anyone's numbers or forecast or anything at this point.

So we continue to believe that what we see for the next few years is great, and it's going to be a great market, but there's also some long-term tailwinds that are going to be dynamic that we haven't ever dealt with before.

That's especially true in our second largest market, which is in Europe, where we have significant industry momentum to move to net carbon zero goals much earlier and remove congestion is reason the government mandates are really pushing this. So we see a much stronger demand environment there.

Our next question comes from Allison Poliniak with Wells Fargo.

Just to kind of go along that next, so I make sure I understand sort of your industry view. So you're saying ['23] of that 60,000 industry view would basically just be a catch-up to replacement with potential for real growth or net growth of the fleet in '24. Is that the way to think of it?

Yes. I think -- this is Brian. I think that's a good way to think about it today. Again, if you think about the contraction you've seen in the fleet and how many cars are being added, there's a scrap rate probably somewhere in the 40,000 car range per year. And so when you think about 60,000 cars it's almost -- depending on how many cars are scrapped that year, it really is almost just replacement demand versus organic growth.

And again, keep in mind, that is today with a very light footprint in auto because of the chip shortages. There's tremendous demand in the auto sector. And when that starts to free up, it's going to put more pressure on railroads and velocity and just moving equipment.

Got it. No, that's helpful. And on the leasing side, obviously, growing quicker, which is going better than you expected, fleet leverage at 65%.

I think your target and I could be wrong, this is 75%. What do you anticipate exiting fiscal '22 in terms of fleet leverage this year? Is it a sort of [up] at 65%? Or is it expanding?

I think we would expect it to continue to increase as we put more assets into the GBX leasing warehouse out of kind of the legacy fleet and then out of our order book as well. So you'll see us kind of moving closer to that 75% rate.

Great. And then I think, Brian, you had mentioned $200 million of modifications in manufacturing that aren't part of like your deliveries. Is that all for fiscal '22? Or is that spread over a multiyear kind of aspect?

Yes, another great question. Most of it is in 2022. Some of it does have a tail into 2023 based on how our fiscal year lays out, but a lot of it is calendar 2022.

Our next question comes from Ken Hoexter with Bank of America.

Lorie, good luck as you transition to the CEO role. Just want to follow up on Matt's question on pricing, where we talked about kind of a great market. It looked like the order book went up about 9%, 10% year-over-year in terms of price per car. Can you talk about kind of mix as you normally do? Is there any demonstrable change in that mix? Or is that -- can we consider that a real impact on pricing on a year-over-year basis?

And is that more a factor of looking at your labor costs going up?

So I can handle the mix side of that equation. I've said this before and it continues to ring true is that the mix is the most diverse I've seen in my 41 or 42 years in the industry, which does not day beats a real oil (inaudible) . But just the baby when I started, but it really is a little bit of everything, which is fantastic for us getting -- growing our lease fleet as well from a diversity perspective, credit profile perspective, and just lease maturity perspective.

But it is everything from multiple types of covered hopper cars, auto, intermodal, gondolas, box cars. It's very, very, very diverse. There's no single particular area that is creating the demand cycle this time, which normally would be an ethanol boom. It would be a crude boom. It's not the case this year. It's very, very diverse.

And the other thing I would say, it is obviously impacting the ASP is going to be we do have commodity price and labor costs have gone up. So those are flowing through and being reflected in those higher ASPs.

That's a good point to remember, we are doing a great job on hedging things like interest rates in our pricing in our, leasing products and also the commodity pricing in the sense we're protecting ourselves in that sense.

And then when you also address the -- your refurbishment business as this really begins to scale on a car basis. Are you doing this at the existing facilities with this an add-on business because of the ARI acquisition. Maybe talk a little bit about how that impacts the margin. Is that reflected in the managed services?

Is that in manufacturing power? Where should we see the given the scaling and growth of that, where do we see the impact of that? And what should we expect as far as the margin contribution from that business relative to the incumbent base?

Great. Great question. And we are doing -- because these are very large programs. And based on our customers' needs, we are going to be running this work through our manufacturing facilities because that kind of repetitive work that we think that we can do very efficiently and effectively at those facilities from a margin percentage perspective, it's going to flow through in manufacturing is what you're going to see on your financial statements. and it's going to be beneficial because these are competitively priced transactions and the work that's going through the facilities is going to add to the overhead absorption.

So we don't see it as a drag on manufacturing earnings. It's also not going to be something that's going to skyrocket it the other way. It's a nice blend with the other new car work that's going on.

It's interesting to note that this is a fairly deep market given the modernization capabilities of the agent fleet. And both Trinity and Greenbrier are finding that this modernization is contributing the ESG goals as well. So I think it's a very attractive future market is going to go through just cycle pretty much along the lines of what you talked about, you might clarify your views on that.

No, it's absolutely correct. This is not something that is a short-term phenomenon. This actually is something that as you see scrap car rates go up. and you see the value in repurposing components, you're going to see a long-lived process here that will extend for multiple years.

Great. Appreciate the thoughts. I guess just one just rounded there, Lorie, you kind of mentioned it will be accretive. So I just want to understand, is that going to be accretive to existing margins to the upper teens you were talking about long-term potential? I just want to -- are you putting a kind of factor on that.

I'm sorry, I've got too many people -- yes, it's going to be -- I think it's going to be positive for our overall margins. Obviously, we don't look to take work into our shops that isn't going to be positive overall for Greenbrier and for our shareholders.

Just looking at it this way, another $200 million of backlog, if you look at it that way, but we're not according to industry convention we're including it in our manufacturing backlog is being done in our manufacturing plants, not principally in our repair facilities. It's really new car type work of major project nature.

Our next question comes from Bascome Majors with Susquehanna.

Brian, you talked a few times about the 60,000 2020 delivery projections from some of the industry forecasters. When you take a step back, is that something that you feel like you have conviction in and can manage the business to based on your conversations with customers and in railcar management and (inaudible) indicators? Or is that really just -- here's what the experts say so that could happen type situation?

Yes. Thanks, Bascome. So we do our own analysis. Obviously, we take guidance from exterior entities as well. But we've really, for the last few years, relied more on our internal consensus, which is built up by a multiple number of touch points we have with customers and outreach programs that we have in the industry, and we feel very confident that those numbers look good into the future.

And trying to get that further, Lorie, your comment about as the cycle strengthens, we think we can generate high-teens margins again is a 60,000 kind of environment. whether or not that happens exactly in '22 or '23. Is that the kind of backdrop you would need for overhead absorption and pricing assumptions and other things to drive that?

I think yes, that's -- I think that will be -- that time would be great to be at that kind of that 60,000 level and stay at that steady level for a while because obviously, the ramping up or ramping down or things that can be headwinds to efficiencies.

So getting to that sort of a demand and delivery environment and then being able to stay there is -- can be very beneficial to margin.

And not to leave anyone out here, Adrian, you talked about the tax receivable the last couple of quarters coming in helping cash flow. Obviously, consumes cash as you ramp up production and invest in the lease fleet. But can you help us think about full year cash flow and some of these things even out.

I don't know if it's an operating cash basis or free cash flow before some of the lease investment. But how do you think about the cash consumption of the business on kind of a sustainable more run rate basis versus the quarter-to-quarter volatility.

We'd expect quite positive cash flows in the back half of the year. We're -- as you say, we're supporting ramp up in our business and our working capital at the moment, we're being cautious there with the supply chain issues.

So that's not maybe as efficient as it would be in normal times, where we're protecting ourselves by having extra inventory on hand. But I'd expect to see that normalize out as our production stabilizes at these higher levels in the back half of the year and our cash flow to be positive.

And when you say quite -- I was in the back half of the year, just to clarify, are you talking free cash flow or operating cash flow?

Operating cash flow.

Our next question comes from Robert Barger with KeyBanc Capital Markets.

Brian, you said not a lot of lower-margin cars left in backlog, but I believe Adrian said gross margin would be single digit in the first half. So First, did I hear that margin comment correctly? And if so, does that mean we should expect another tough quarter from maintenance and lower sequential margin in leasing in 2Q.

I'll answer that one. This is Justin, Steve. I think what we would say is Q2 is always a challenging quarter for our maintenance business because of weather, typically. I mean, the locations have to deal with inclement weather, snow, rain, freezing temperatures. And if you kind of look back at years, it's many times that's our most challenging quarter in that business.

So we see that as normal seasonality. We would expect it to be better than first quarter, which was much more challenging than we expected. But with the manufacturing piece, we do see that there's opportunities for improvement and growth in the margin in Q2.

And while most of the competitively priced cars are out of it, we are still ramping up various production lines and that's where you see is more of the overhead under absorption that we're trying to be maybe cautious around a little bit.

Yes. So I guess -- I mean, I hear you on seeing better momentum in some of the lines of business, but the tone on this call seems much more conservative versus the last call. As we think about some of the 1Q tailwinds from tax and equity earnings this quarter, could yes, be down sequentially?

Are you getting me really because I thought we were much more conservative last call. Maybe we're just not articulating our story very well.

But Lorie, what do you think? Do you think you're -- we're more conservative?

I just talked about double-digit margin in the first half last quarter.

Right. Yes, we did. That's right. And we had a little bit disappointing start happen, it was dragged down by maintenance and some other things that I think are self-correcting. But go ahead, I don't mean to jump in. You should answer this. I'm just taking it back by that.

I would say -- and I would have to go back and I probably should admit this, but sometimes I have a hard time remembering last week, my last, last quarter's call and what we might have said. But we are a lot more positive.

We have come through this first quarter and have performed better than what we expected when we put together our initial expectations for this fiscal year. We see a lot of opportunities where we are ramping or adding lines more quickly than what we expected, but we are still doing it at a modest pace.

So at times it feels like mean we're talking out of both sides of our mouth. But -- We -- as Brian has said, we're seeing broad demand on a variety of car types, and we're figuring out how can we address that demand, solve our customers' problem.

And I think that's all going to be positive. Now does it actually work its way out into double-digit margins in the first half? Or is there some bleed over as we move into the second half. Again, that's getting into trying to parse quarter-by-quarter. And that's part of why we try not to get into.

We're running a business day to day. We think that we've got a lot of momentum. We think we're going to have as we move through this year, it's going to increase and you're going to see those margins improve.

Let me just elaborate on the economics of that. As we look at the backlog, -- And that's really a significant factor in our business. We look at the leasing momentum. Those are 2 areas for momentum that are significant.

With the backlog, we are able to ramp and increase production on every line. or many of the lines. In one case, on a car type, we've got a strong backlog, we're tripling this production that absorbs overhead as Lorie said. So the timing of it is more problematic. But we're still very optimistic about the year and the financial results for the year.

Our next question is a follow-up from Matt Elkott with Cowen.

So shortly after you guys acquired American Railcar in July 2019. Obviously, the world changed and the production cycle got cut short, basically half for the industry in 2020 and stayed at 30,000 in 2021, which is below replacement.

So I guess this production up cycle this year and much more so next year if you're 60,000 is correct, will be the first time we have a major up cycle with ARI.

Can you just talk about how this could -- how different this could look from prior expansions for you guys, how the mix will be different, what the impact on pricing and margin will be?

And I realize that this could be more at 2023, calendar 2023 dynamic than calendar 2022?

Let me try just set a preface, Lorie and Brian can address this question. The acquisition of ARI, you're right, the timing. We got hit by COVID, but we also had the driving efficiency by the Class 1 railroads so that volume or velocity had gone up.

So we were hit by a mini recession when that shift occurred in utilization on the railroads, then COVID-19. So we have been operating in unusual times. ARI is a real asset, and we are very positive about the ambition that ARI has made to our product portfolio, which is reflected in an ability to attract stronger backlog and stronger customers.

It's expanded our customer base, enhance our cost efficiency through geographic dispersion. So I think that's just a general background for how we see ARI today. We're a U.S. company, it gives us a production capability in the Heartland and it's a positive thing for Greenbrier.

Lorie, why don't you go into and (inaudible) the other things that.

No, I think that that's -- you're exactly right. I mean the timing of that acquisition, what followed on that timing was difficult. I think we've done a nice job managing through the last couple of years.

I'm excited about having that footprint as we go into this uptick in demand. We do have a strong skilled workforce there.

They've got experience building a variety of covered hoppers and tank cars. They've got a lot of experience delivering railcars to shipper based customers that has been a nice addition to our portfolio and an enhancement of our portfolio of customers.

And as you mentioned, towards the location, it is great from a delivery and transportation to our customers.

So these are all things that are going to be positive. We took the opportunity during the downturn and during lower production rates to be able to get into those facilities and take some of the efficiencies that we have grown in the Greenbrier organization and start putting those into the Arkansas facility.

So we actually see that this upturn in demand turning into something that we should see more positive growth out of.

Got it. From a purely mix perspective, is it favorable or a headwind?

We believe it's favorable going forward.

Got it. And then sorry if I missed it earlier, guys, but did you say anything about the inquiry and order activity after quarter end?

No. No. We haven't. This is Brian. I would say, again, a very strong order activity even through the holidays, which is unusual for the month of December. But we're continuing to look. I would say our cadence is still in line and strong with what we're projecting.

And then just one final question. Bill mentioned Lorie, you have existing and new initiatives. Can you maybe talk a little bit about what the new initiatives might be -- might look like? Or what areas at least?

I think you're going to see -- we'll get into more detail that as we move a little bit further into the calendar year. But you're going to see us continuing to grow and enhance the foundation that we've created over the years with strong engineering and manufacturing, coupled with leasing and commercial, you're seeing some that's already with the leasing strategy that we have and focusing on how we can continue to anticipate and solve our customers' issues in creative manner.

This concludes our question-and-answer session. I'd like to turn the call back over to Mr. Justin Roberts for some closing remarks.

I just want to say thank you very much, everyone, for your time and attention. And if you have follow-up questions, please reach out to investor relations at gbrx.com. Have a good day.

Happy New Year.

Happy New Year.

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