Greenbrier Companies Inc (GBX) 2021 Q3 法說會逐字稿

Hello and welcome to The Greenbrier Companies Third Quarter of Fiscal 2021 Earnings Conference Call. (Operator Instructions) At the request of The Greenbrier Companies, this conference call is being recorded for instant replay purposes.

At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin.

Thank you, Riley. Good morning, everyone, and welcome to our third quarter of fiscal 2021 conference call. On today's call, I'm joined by Greenbrier's Chairman and CEO, Bill Furman; Lorie Tekorius, President and Chief Operating Officer; Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer; and Adrian Downes, Senior Vice President and CFO. They will provide an update on Greenbrier's performance and our near-term priorities.

Following our introductory remarks, we will open up the call for questions. In addition to the press release issued this morning, additional financial information and key metrics can be found in a slide presentation posted today on the IR section of our website.

As a reminder, matters discussed today 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 2021 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

And now I'll turn it over to Bill.

Thank you, Justin, and good morning, everyone. The recovery in our markets, we forecast for the second half of this calendar year, is now well underway. Greenbrier followed a disciplined strategy throughout the pandemic, and as a result, the company is in a very strong position. Last year, we articulated our strategy centered on continuing safe operation of our facilities as critical supply infrastructure under U.S. Presidential Policy #21, U.S. Department of Homeland Security and U.S. Department of Transportation. We also emphasized building and sustaining a strong liquidity position to withstand worst-case scenarios, eliminating all nonessential spending, reducing our fixed costs, rightsizing our labor force to reduced pandemic demand.

Our actions were purposeful and particularly regarding employee safety and those issues related to our cost base and manufacturing capacity. Greenbrier has a flexible business plan and a flexible manufacturing strategy. Along with scalable manufacturing, these are central to Greenbrier's response not only in the V-shaped downturn but in the improving market outlook and the upturn and strong economic recovery. This phase of our strategy is equally important. It presents novel challenges and operational risk as we add a large number of new production lines, many involving product changeovers, manufacturing line additions and new designs.

Simultaneously, we must safely, and I emphasize safely, integrate large numbers of new or furloughed manufacturing employees. Fortunately, our management team is seasoned and experienced at managing these operating dynamics. We are confident in our ability to execute.

Of course, COVID-19 continues to be an issue we're addressing. Reduced contagion rates among our workforce in U.S. and Mexico and Europe are very good to see. Brazil remains a hotspot. But because we are proactive, cases among our Brazilian colleagues remain relatively low.

Despite these measures, we recently lost another colleague, [Jorge Telest], to COVID-19. Jorge worked in the paint department at our Greenbrier Sahagun, otherwise known as Plant 2 facility, in Mexico. He was in his early 40s and had worked in Greenbrier for over 4 years. Jorge is the eighth member of the Greenbrier family we have lost to COVID-19. We are supporting his family through this difficult time.

As vaccines become more widely available around the world, it is essential to remember that COVID-19 is a dangerous and increasingly contagious disease. We are urging and incenting our employees to get vaccinated. I urge all of you to consider doing the same thing who may be listening on this call. As new COVID variants appear globally, we will remain attentive and defend our employees and our stakeholders against this very continued -- this continued very real threat.

I'm pleased to see that Greenbrier's financial results for the quarter demonstrate a strong solid performance. Lorie and Adrian will cover our detailed results later in the call. For now, I will simply say that we are very pleased. Q3 earnings moves Greenbrier solidly into the black for fiscal 2021 through 9 months after a very weak first half. And the outlook is strong for the fourth quarter and 2022.

Importantly, our liquidity position also remains strong. At the end of the third quarter of 2020, we announced we achieved a liquidity target of $1 billion. Despite some challenging quarters since then, Greenbrier continues to maintain almost that level of liquidity, including cash and additional available borrowing on our debt facilities, future tax refunds and other initiatives underway.

In the third quarter, we also executed a strategic debt refinancing, taking advantage of the opportunity to do so in these markets where money is reasonably available and interest rates are cheap. We extended maturities on our convertible notes at another 4 years at favorable interest rates. Liquidity is important during a steep recovery cycle, a V-shaped cycle, remembering that this is a 100-year pandemic that everyone has had to navigate. And this part of the cycle requires increased working capital. So we're pleased that we will have the working capital to deal and navigate through this time, particularly with supply chains being a little royal. We are balancing efficient management of working capital and protecting our supply chain, ensuring production and labor continuity.

Our COVID strategy, along with the 3-year strategy of achieving scale in our business, are producing solid results. Greenbrier has grown substantially over the last 3 years in 3 separate markets. And as Lorie may speak to or your questions and answers, our international backlog now is about 1/3 of our base.

Results in the third quarter reflect both a steady recovery in our markets as well as Greenbrier's ability to manage through some of the most challenging quarters in the company's history and, in fact, in the -- over the last 100 years.

During our last 2 calls, I discussed many of the steps Greenbrier was taking to prepare for economic recovery and positive momentum in our markets. This momentum is reinforced as we prepared Greenbrier's 3-year plan and navigate as we achieve greater scale and efficiency. A greatly reduced and leaner cost structure achieved during the pandemic should also be a boost to our business unit efficiency and our financial momentum.

We're joined today by an important guest, Brian Comstock. Brian is Greenbrier's Executive Vice President and Chief Commercial and Leasing Officer. He is here to share a little bit more about our outlook on the commercial side of our business. Brian?

Thanks, Bill, and good morning, everyone. Across the economy, there are positive indicators and data points that indicate a sustained recovery in rail. In North America, the latest U.S. economic indicators reflect growing optimism, with GDP consensus forecast growth continuing to be revised up. Through May, North American rail traffic was up 12.1%. Loadings were led by increases in grain, intermodal and auto. We expect to see continued near-term demand for intermodal units and grain-covered hoppers as both segments continue to set monthly volume records. These segments should remain highly active well into 2022.

Overall, system velocity has slowed approximately 2 miles per hour due to robust rail freight recovery. Slowing rail velocity, as everyone knows, decreases railcars and storage and increases demand for new railcars. Certain railcar types are in tight supply, including intermodal units, boxcars and gondolas. These fleets are almost fully deployed with over 95% utilization. Total North American railcar utilization is nearly 80% as of June 1.

Since the peak last year, over 160,000 cars have been taken out of storage in North America, bringing the number of stored cars to approximately 360,000 units. With higher scrap pricing and proposed tax benefits for construction of new, more efficient and environmentally friendly equipment, we expect a trend of declining cars and storage to continue.

We are also seeing robust activity in the railcar conversion market with a recent 1,000 sand car conversion order. The increase in commodity prices almost -- across almost every important sector has captured our attention. The current price for steel is more than 3x higher than the August 2020 price. Greenbrier continues to utilize price indexing and material escalation pass-throughs to protect gross margin dollars. Although elevated steel prices can be a potential headwind, order cadence remains robust.

In Europe, longer-term, broad-scale economic reforms to address climate change are ushering in an era of modal shift for freight, from polluting and congested road travel to efficient, higher-speed rail service. This modal shift will drive growth in railcar demand in the years to come. This growth is in addition to the replacement demand as the fleets in the EU countries are aging, with many cars already well past the time for replacement.

Greenbrier's backlog in Europe was strong at the end of the third quarter. Our focus has now turned to ramping up manufacturing output to meet the market demand, with several production lines already booked well into fiscal 2023.

Finally, in Brazil, the economy is improving. Our visibility is good, and we are experiencing our highest levels of backlog since we entered the market. Greenbrier's global commercial team continues to see strengthening in new railcar inquiries and orders. In the fiscal quarter -- the third fiscal quarter, Greenbrier won orders for 3,800 railcars totaling $400 million, and our backlog as of May 31 was 24,800 units valued at $2.6 billion. Subsequent to quarter end, the commercial team has booked nearly 3,000 additional orders for intermodal, automotive, covered hoppers and gondolas.

I want to emphasize, the conversion activity I spoke to earlier is not reflected in the new railcar orders or backlog. Overall, pipelines are strong and I'm optimistic this momentum will carry into fiscal 2022.

Now over to Lorie for more about our Q3 operating performance.

Thank you, Brian, and welcome to the earnings call. Good morning, everyone. Today, we're reporting results from operations that are significantly better than our results for the first half of our fiscal 2021. Our employees produced a great quarter after a challenging first 6 months. One thing we've learned over the last 18 months is that resiliency and flexibility are vital in this ever-evolving pandemic setting. And while it's too early to declare a victory, especially as COVID variants emerge, our flexible operating model is responding quickly and efficiently as well as safely to the improving demand environment.

We delivered 3,300 units in the quarter, including 500 units in Brazil. Our Q3 deliveries increased 57% from the second quarter. Our global manufacturing performance this quarter shows that operating leverage of higher production rates, which will continue in Q4. This strong performance is against the backdrop of adding almost 1,000 employees.

Brian mentioned the significant increase in raw material pricing and the volatility in the supply chain. So I'd like to highlight the outstanding job our purchasing and sourcing group is doing. This group is ensuring that our facilities have the materials and components to continue uninterrupted production. At times, that means even collaborating with our suppliers to work with their suppliers to make certain that we have the material we need for our customers.

Over the remainder of fiscal 2021 and into 2022, the manufacturing team is focused on building high-quality railcars while maintaining employee safety. Increased car loadings and rail traffic also began to benefit our Wheels, Repair & Parts business in the third quarter. Each of the units that comprise our GRS business experienced double-digit revenue growth and strong sequential margin improvement.

The margins achieved by GRS in Q3 are the highest since the reintegration of our repair business in 2019. The GRS management team continues to evaluate our footprint and refine our operations around quality, efficiency and safety with a focus on being a key service provider to our customers. The business is prepared for stronger activity levels, and I'm cautiously optimistic that the demand recovery we've seen so far will continue to gain momentum for this business unit.

Our Leasing & Services team had a strong and quite busy quarter. GBX Leasing was formed, and $130 million of the initial $200 million railcar portfolio was contributed to the joint venture. This activity was levered 75% or 3:1. So about $100 million was funded from the nonrecourse warehouse credit facility. We'll continue to fund assets into GBX Leasing as they become available in Q4 and beyond, and we also have several growth opportunities on the radar.

From a commercial standpoint, GBX Leasing is a strong complement to our integrated business model that enhances our distribution strategies to direct customers, operating lessors, industrial shippers and our syndication partners while also creating a new annuity stream of tax-advantaged cash flows. GBX Leasing is consolidated in the Leasing & Services segment of our financial statements, with our partner share of earnings deducted in the net earnings attributable to noncontrolling interest lines. Additional lease fleet and debt information is provided for the Leasing & Services segment in the earnings release.

Our capital markets team, also part of Leasing & Services, syndicated 200 units in the quarter and yielded valuable operating leverage. Our syndication model provides several tools to generate revenue and augment margin. Some are part of our normal course of business, and others are available to be deployed opportunistically. In Q3, we completed an asset sale transaction on favorable terms, which generated increased revenue and margin. We expect syndication activity to increase meaningfully in the fourth quarter.

Our management services group, also housed in Leasing & Services, is a major store of strategic customer value. We continue to drive growth in this business through a combination of onboarding new customers, expansion of services within the existing customer base and growth of managed customer fleets, including the GBX Leasing fleet.

At the end of Q3, Greenbrier was providing management services on 445,000 railcars or about 26% of the total North American fleet. Positive operating momentum is building as we enter fiscal 2022. Given the strong performance in Q3 and continuing into Q4, we expect to exit the year with gross margins in the teens. And from the decisive actions taken over the last 15 months, Greenbrier is a stronger and leaner organization and is well positioned to benefit from the emerging economic recovery.

Now Adrian will provide commentary on our financial performance in the quarter.

Thank you, Lorie, and good morning, everyone. Quarterly financial information is available in the press release and supplemental slides on our website.

Greenbrier's Q3 results were much improved after a challenging first 6 months of fiscal 2021. A few highlights in the quarter, our revenues are $450 million, which increased over 50% from Q2. Each operating unit increased sequentially, although increased production across North America and Europe were the largest driver.

We achieved month-over-month momentum coming out of lower production levels in our second fiscal quarter. Book-to-bill of 1.2x made up of deliveries of 3,300 units, which included 500 units from Brazil and orders of 3,800 new units. This is the second consecutive quarter that book-to-bill exceeded 1x. Aggregate gross margin of nearly 16.7%.

In the quarter, we recognized the benefit from long-standing international warranty and contingencies after the expiration of the warranty period and final resolution of the contract. Excluding this activity, Manufacturing margin would have been in the low double digits.

Selling and administrative expense of $49 million increased sequentially, reflecting start-up costs from the formation of GBX Leasing and higher employee-related costs. Adjusted net earnings attributable to Greenbrier of $23.3 million or $0.69 per share excludes $3.6 million or $0.10 per share of debt extinguishment losses. EBITDA of $53 million or 11.7% of revenue.

The effective tax rate in the quarter was a benefit of 64%. This primarily reflects the tax benefits from accelerated depreciation associated with capital investments in our lease fleet, primarily at GBX Leasing. These deductions will be carried back to earlier high-tax years under the CARES Act, resulting in a tax benefit in the quarter and cash tax refunds to be received in fiscal 2022.

We also recognized $1.9 million of gross costs, specifically related to COVID-19 employee and facility safety. These costs have been trending down, but we expect to continue spending for the foreseeable future to ensure the safety of our employees.

Greenbrier continues to have a strong balance sheet, and we are well positioned for the recovery that is emerging, including cash of $628 million and borrowing capacity of over $220 million. Greenbrier's liquidity remains healthy at $850 million, plus another $149 million of initiatives in process.

In the quarter, Greenbrier began extending the maturities of its long-term debt with the issuance of $374 million of 2.875% senior convertible notes due in 2028. Concurrently, we retired $257 million of senior convertible notes due in 2024 and may, from time to time, retire additional 2024 notes in privately negotiated transactions within the limitations of applicable securities regulations.

As part of the convertible note issuance process, we repurchased $20 million of our outstanding common stock. The principal balance of the new convertible notes will be settled in cash with the flexibility to choose either cash or share settlement for any amounts paid over par. The cash interest expense of the notes is about half of the cash cost of high-yield notes.

Turning to capital spending. Leasing & Services is expected to spend approximately $130 million in 2021, reflecting continued investments into our lease fleet, primarily at GBX Leasing to maximize the tax benefits I spoke to earlier. Manufacturing and Wheels, Repair & Parts capital expenditures are still expected to be about $35 million for the year, with spending focused on safety and required maintenance. Spending will be higher in Q4 than in the prior few quarters as we support the increasing production and business activity levels.

While we have extended the debt maturities of a portion of our capital structure, we will continue to opportunistically extend maturities as it makes sense for the rest of Greenbrier's long-term debt. Today, Greenbrier's Board of Directors announced a dividend of $0.27 per share, which is our 29th consecutive dividend.

Looking ahead, Greenbrier expects the fourth quarter to be the strongest performance of the year. In addition, a full quarter of increased production rates and increased business activity creates positive momentum into fiscal 2022.

And now we will open it up for questions.

(Operator Instructions) Our first question today comes from Justin Long with Stephens.

Congrats on the quarter.

Thanks, Justin.

Thank you.

Thank you.

Maybe to start on the order flow that you saw in both the quarter and the 3,000 orders that you mentioned subsequent to quarter end, could you break that out by geography and just help us understand how much of that is coming from North America versus Europe and Brazil?

I would say that the majority of it is in North America for both the quarter and the order subsequent.

But that's not to say, we did have orders in both of those other geographies.

Correct.

Okay. That's helpful. And then in terms of the impact from the warranty and contingency payments, I know you said that Manufacturing gross margins would have been in the low double digits excluding that impact. But can you get a little bit more precise on what that dollar amount was or EPS impact? And any thoughts on Manufacturing gross margins beyond the next quarter, maybe as we look into 2022 and leverage some of the recent success you've had?

So I'll start out. We aren't going to get into precise detail on that situation. That was a contract that was a new geography for us to operate in as well as a new customer, and it has some extended warranty and other provisions that were satisfied in the quarter that allowed us to release that reserve. Without it, as you said, and we said in the earnings release, our Manufacturing margins would have been low double digits.

We expect those margins to continue to improve as we go across this fourth quarter with improved production rates because we've gotten very good at being very efficient at running at these higher rates. That's not to say that this doesn't require a tremendous amount of effort and focus because we are bringing back a lot of employees, some of which were prior employees, but you still have to go through refreshed training and new safety protocols. But we would expect Manufacturing margins to continue to improve as we exit this year and go into the next year.

And just to clarify that, Lorie, you're saying improvement off of the low double-digit Manufacturing margins or improvement of the 14.5% that you reported?

Thanks for clarifying, Justin. You know I'm conservative at heart. So yes, I would say improvement off of the low double-digit margin.

Justin, I'd just like to add to that, that we view the quarter in that particular matter as homogenized into the flow. The operating momentum really gives us a solid visibility, and the backlog gives us a solid visibility into 2022. So we expect to see this cadence continue and be very, very positive. I might be a little more optimistic about margins than Lorie, but that's always the case, I suppose.

Our next question comes from Matt Elkott with Cowen.

You guys mentioned that the fourth fiscal quarter should be the strongest of the year. And gross margins are obviously expected to increase. But does that also apply to EBITDA and EPS? Meaning should we expect an EBITDA higher than $52 million and EPS higher than $0.69 in the fourth fiscal quarter?

I think that's a good assumption based on higher deliveries, what we just talked about with margins and the efficiencies that we're having across all of our operations.

Got it. And then my second question is more of an industry -- broader industry question. I want to try to gauge what the key risks to the manufacturing cycle might be. How concerned are you guys about a scenario in which the economy starts to moderate, negatively affecting freight demand before steel prices ease? Wouldn't that pose a risk to the translation of the strong inquiry activity we've seen into orders? Any thoughts on this would be appreciated, I'm just trying to gauge how concerned you guys might be on a potential economic and freight moderation before steel prices ease and affect the translation into orders.

Jeff (sic) [Matt] we don't expect a lot of moderation economically driven in demand. I know there is concern out there and a lot of talk about this. I think it's overblown. The amount of spending and the stimulus that we've had in this economy plus the V-shaped recovery is going to bring a lot of momentum by itself. I think if we were to assess this, we'd look more at the effects of that demand on the supply chain and inflation.

Our next question comes from Allison Poliniak with Wells Fargo.

Great color on the gross margin. And I know, Bill, you had mentioned -- it sounded like you're ramping, which isn't a bad thing. But is there any sort of cost or something that could temper sort of that pull-through on the operating side as we think about that manufacturing starting to ramp up production, at least in the near term?

No. I think there's a variety of risks in such a V-shaped type of recovery that are just obvious: hiring more people, training them, bringing them back, keeping them safe, having no execution blips. It's more of those blocking-and-tackling things that we have to cope with. And then, of course, the widely advertised surge in pricing. As that pricing moderates in 2022, we think it will be more normalized.

The last thing I'd say is that these things are not bad at all for a company in the leasing business with assets because leasing is a traditional hedge against inflation and that the things we're seeing today makes used railcar more valuable. It makes lease -- puts a floor on the lease rates and pushes them up if there's some mix benefits in the rest. But as far as the risk is concerned, they're all manageable. Just it's the steep curve going down and then the steep curve coming up in a 100-year pandemic event.

Got it. And then just bigger picture. Based on sort of the orders that you guys see coming in and just sort of the conversations that you're having, is there a sense -- I know last cycle was driven by energy, which pushed a lot of the replacement of the more commodity-based cars out of the way. Does it feel like that replacement or pent-up demand is starting to pull through? I mean just any color on how you're viewing, I would just say, high-level thoughts on the cycle this time around?

Yes. Thanks, Allison. This is Brian Comstock. It's a good question. What we're seeing in the market today is really probably one of the most diverse order backlogs that I've witnessed in my 40-plus years in the industry. It really is all segments. There isn't a single commodity. As you guys know, in typical recoveries, there's usually something, some impetus that drives it. We're not seeing that. We're seeing a very, very broad-based need across all sectors and all businesses, which quite frankly, is very encouraging.

Talk about the types of cars and the environmental aspects of this and the capacity aspect. It's just a renewal of the fleet, for example.

There is. There's a lot of cars that are trading out due to age. We finally hit some of those big blocks of cars that were built many years ago. So you're seeing a lot of replacement in that. But you're also seeing organic growth. Inventories are at all-time lows. The PMI index is in expansion territory. And as a result, you're seeing people ramp up kind of across North America.

And then kind of a tailwind to all of that is also the continued driver shortages and a lot of the early retirements of experienced drivers that trucking companies implemented during the COVID crisis. And so you're seeing more conversion to rail or at least attempts to convert to rail. So it's really a good story.

And if I could add just one other piece, Allison, is this is all before any ripple effect from kind of the drive for sustainability, net zero, anything along those lines. That's a -- it's a few years down the road that -- Europe's a little bit ahead of us on that, but U.S. and North America, we're very much early days. And so we are very optimistic about the next several years.

But already, we're seeing customers that are very interested in that environmental aspect. A lot of this, Allison, is being driven by higher-capacity, more efficient cars, fuel-efficient cars. And the current administration is going to be emphasizing that very much in some of the policy things that are going on. For example, the tax bill that is moving through Congress that would affect energy -- would encourage energy-efficient cars. And the shippers are already making these bigger, I think, Brian, it's fair to say.

Yes, they are. The shippers are demanding larger railcars, more high capacity, looking at ways that we can do that. And it's -- a lot of it is environmentally driven. So you're seeing all aspects of the market kind of come to play.

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

Solid job on the cost side, just great to see that inflection. Bill, can you talk about -- or I guess maybe Lorie, you mentioned the improvement in margins going not only through the fourth quarter but into '22. How should we think about the rebound relative to seasonality? Should we still expect kind of your traditional weaker first half? Or does the return of growth kind of work through that? You just see kind of acceleration in the production and the benefits? Or alternatively, what's your thoughts on the scaling of costs as that business comes back?

It's a great question. I would say that we do expect -- I don't see anything in what we're looking at from a production perspective that makes me see a huge blip or a huge dropoff. The expectation of what we would love to see in the new car side of our market is just a steady step-up and then maintaining a steady pace as opposed to the significant ups and downs. And so I know that our commercial team and our manufacturing teams have been working very closely to make certain that we are bringing that production back in a modest pace and then maintaining consistent levels. So I don't see any, again, big spikes or drop-offs, Ken, as we move forward into 2022.

Yes. One of the things that affects margin, of course, is cost, and we're focused very much on cost. But the pricing of railcars with steel pricing going up, with capacity more limited. Limited, I mean the larger players having the widest mix of car designs, should give more pricing leverage in the next several quarters. We're seeing that already in some of the activities in the market.

So it's moving toward -- nationally, in the trough, the strength goes to the buyer. But in a rapid upturn and a sustained industrial comeback, it's -- that balance is going to move, so pricing should include and lease pricing should rise also to the degree we reach a different plateau in input costs like steel and other things.

Great. Just to clarify Lorie's answer there. Lorie, you're not expecting then the traditional seasonal large downtick in the first half? It's going to be more maybe balanced into '22. Is that what you're suggesting?

Right. We're not giving explicit guidance, and this is all based on -- everyone's just kind of -- I think what happens is sometimes [everybody] gets worn out as we close out our year, but I'm not expecting that to happen. I think everyone is raring to go, and I expect that to maintain steady pace.

Great. And then my second one would be just on kind of your, I guess, the return of facilities. Is every facility now back up and running? Are there still start-up costs you need to engage to get any of the plants operating? And maybe to Justin, the answer you gave before, what's the ramp of kind of car orders in the other regions? Are you seeing that stabilize? Or are you seeing those accelerate, like you talked about in North America?

Let me talk to the European market. I just returned from some customer visits over there. And that market is being driven, as Brian mentioned, by a very sizable stimulus package that has been approved. And it's -- I think it's EUR 3 billion, EUR 4 billion, EUR 5 billion. There's a really big push toward cars that are more energy-efficient. So that demand is strong and we see very good order visibility in Europe.

I think that Brazil is a market that has got so much potential. And as the economy improves -- and we've had an extraordinarily good year with orders down there over the last 12 months trailing. It's a -- so overall, we see a strong demand in the international sphere. And there's still opportunities in the Middle East and the GCC.

And your thoughts on the plants? So they're all up and running, so you're good to go? Or are there start-up costs there?

Well, the -- it's really just the -- there's not start-up costs so much as there's a sluggishness of bringing back facilities that have not been operating at normalized capacity. And it's just sort of lagged us a little, but I think we're well on our way in our European properties to really have a tailwind as we work -- as we have worked out a lot of those and we're working on now.

Our final question today comes from Steve Barger with KeyBanc Capital Markets.

Can you help us think about the range of deliveries in 4Q? You've talked about it being the strongest quarter of the year, but what's the magnitude of production you expect to see sequentially?

Good question.

Sorry, I'm trying to think about how to phrase it appropriately. I think we would say that we see a pretty strong step-up, probably -- maybe not quite a 50% increase, but somewhere in that neighborhood is what we would see from Q3 sequentially.

And again, these things are -- it's a very fluid situation. I mean there is -- I can't emphasize enough what our procurement team has done to make certain that we've got the raw materials in place to be able to deliver these cars. So that's -- it's one thing to put together a plan. It's another thing to execute against it. So again, getting the material in place, getting our employees in place and being very mindful of the COVID variants and how they might impact our operations.

And also the natural timing of syndications, which sometimes could push from one month to another either in, or out.

But making a more general statement, I -- we've had sequentially and a monthly basis, stronger and stronger revenue. So it's going to be top line-driven as we go into -- move into the coming fiscal year. We're seeing a trend of positive -- very positive trend in revenues and all of the other activities.

As far as the downside, Union Pacific had a great slogan for years. I loved it. It was, we can handle it. And our operating people believed they can handle this. Sure, there are things that we've got to handle, but we can handle it.

Yes. So that suggests maybe 5,000, plus or minus. And Lorie, going back to that prior question, it sounds like you don't expect a big step down in production in the first half of next year. Is that fair?

That is a very fair statement.

And just thinking about the forward model as it relates to the tax rate and SG&A. First, you've got the tax benefit all year. You'll get that in 4Q, right? And does that stretch into '22?

So we will get -- we'll continue to get tax benefit into Q4, not at the same rate that you've seen earlier in the year, but there will still be some that will be beneficial to our rate. And the CARES benefit for us will not continue into next year. So this will be something, but we will continue to get accelerated depreciation and the cash benefit, just not this incremental ability to take losses back to...

Let's be clear on what we mean by next year. Let's define next year. In our first quarter of 2022, we will have some tax benefits from the CARES Act, I believe. Won't we?

No. It will end with our fiscal year, but we will continue to get the cash benefits of accelerated depreciation.

When does the CARES Act expire? I thought it was at the end of the calendar year, I might be mistaken.

It's based on our tax year.

Oh, okay. Yes. Good. I'm sorry.

And so just for modeling purposes, should we think you're going back to -- I've got 27%. Is that a reasonable number for tax rate on the income statement next year?

For next year, yes.

Okay. And also, you had favorable SG&A spending this year due to cost actions, which were certainly necessary. How should we think about SG&A in dollars for next year?

Yes. I don't think we're ready to give guidance on SG&A from a dollar perspective. We would expect those dollars to increase as our customers have opened up their offices and we do more traveling to visit with our customers. I will say that our teams are more aware of being able to utilize technology to have some of those meetings, but those face-to-face meetings are very important. I would just see us bundling more of that travel so that you're not incurring as much. So I think that the teams are all very focused on maintaining some level of discipline around cost, but I would see some of those continue to creep up.

And then the other thing that we've all heard and read about is there is an employee shortage. So we're very mindful of our workforce base and making certain that we are adequately compensating our employees to retain the value that we have.

In general, we look at this in a business that has a cycle more in terms of percentage of revenue even though the cost containment has been really effective, and Lorie has really driven this operationally and is really into all of the working parts. We should return to a more normalized falling percentage of revenue with G&A. And we could expect, however, to be at a plateau much better than we were because we've really taken a lot of inefficiency, and there will be other reforms that will come with this V-shaped recovery. So bottom line, takeaway, the percentage of G&A as of revenue should come down and perhaps be better than historically.

Appreciate that. And since I'm last, I'll -- let me ask one big-picture question for you, Bill, or whoever. Potential Biden executive order challenging anticompetitive practices is in the news today. And it could come as early as today, I guess. But do you think this is a net positive for equipment builders? Or what is your view on what that means?

I believe it's neutral, and it ought to be a concern to the railroad franchise. There shouldn't be any secret that the administration and the members of -- certain members of Congress are concerned about our shippers. And I think a trend towards consolidation in the railroads would be something that would we would hope would be tempered.

So I think it's more of a threat to the railroad system itself, but it's not really a threat as much as it is just something they have to deal with, and they're dealing with it very professionally. And I think that in terms of the STB's interpretation of everything, it will be -- it will all be okay.

Okay. And neutral to equipment one way or another?

Well, it's another thing to digest as you look out there. And who knows. It's -- there are so many uncertainties that in this last 15, 18 months that we can't really deal with it.

Right now, it's an issue the railroad should ponder carefully. There's -- I think they're just receiving a signal. We've a couple of very influential people in the Pacific Northwest in the current Congress and -- in key positions. And I passed on their views and they passed on their views to our railroad friends. So I know they're listening to them. And I think it's just a concern about the strength of being big, and that's kind of what we would expect in the current administration.

Thank you very much, everyone, for your time and attention today. And if you have any follow-up questions, please reach out to us directly. Have a great Friday. Thank you.

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