Greenbrier Companies Inc (GBX) 2020 Q4 法說會逐字稿

Welcome, and thank you for standing by to the Greenbrier company's fourth quarter and fiscal year-end 2020 earnings conference call. Following today's presentation, we will conduct a question-and-answer session. (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.

That sounds great.

Sir, you're live, you may go ahead.

Thank you, Jill, and good morning, everyone. Sorry for the delayed start. We are having some technical difficulties with our provider. But such is life in the time of COVID and everything else that seems to be going on.

Welcome to our fourth quarter and fiscal 2020 conference call. On today's call, I'm joined by Greenbrier's Chairman and CEO, Bill Furman; Lorie Tekorius, President and Chief Operating Officer; and Adrian Downes, Senior Vice President and Chief Financial Officer. They will provide an update on Greenbrier's performance in the quarter and year 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. 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 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

And with that, I will pass it off to Bill.

Thank you, Justin, and good morning. I'd like to start out by saying the obvious that we're living in very interesting times and to point out that Greenbrier brings a 40-year track record into 2020, and this is not the first time we've confronted unusual times. We've designed flexibility into our businesses by growing liquidity to $1 billion since March and Greenbrier has a time-tested approach to market uncertainty. Our Greenbrier management team is deploying that and has deployed that proven strategy during the past 6 months.

Greenbrier launched a rapid response to COVID-19. We dramatically improved liquidity, including controlling costs appropriate to current business conditions. These actions position the company well for the current market, and we have a strong capability to meet demand as it resumes over time. We are very grateful for our employees' dedicated -- continued dedication and also that of our customers, suppliers and other constituencies. We've all been impacted by the pandemic, which has created not just concerns about personal health and safety but also questions about our collective future. Social isolation, climate concerns, wildfires in the West and unrest over social injustice, an election year, all have been put together in this soup, which has created a malaise we have to fight every day.

Greenbrier's global workforce has been working under very challenging conditions. We care about our employees, our customers and our communities. We launched a number of important programs during the year related to COVID-19 safety, community outreach, diversity and inclusion, including environmental stewardship. These are all part of our effort to address the uncertainty and to bring stability and optimism for the future.

Unfortunately, COVID-19 still has a grip on our nation and on much of the world. This may continue for some time. Greenbrier's experience with COVID-19 has followed the pattern seen throughout the U.S. and the world. With declining cases and more recently -- and optimism during the summer months and a more recent upward spike, we continue to monitor the health and well-being of our global workforce, and we have active protocols in place for potential COVID-19 exposures and clusters to be reported and acted upon immediately as they may appear.

Each of our manufacturing plants is meeting or exceeding CDC requirements and recommendations as we protect our employees operating as an essential industry while maintaining our other business activities. Our requirements are being enforced by management with a high degree of discipline. Despite high community spread in some areas and, in fact, in many areas where we operate around the world, only a small percentage of our total global workforce has tested positively. This is relatively good news. And it's due in part to our policy of rapid response, strong health policies designed to prevent outbreaks and to address them quickly if they occur within our factories.

Our workforce exceeded 17,000 at the end of 2019 and reduced to 15,000 employees in early March and after rightsizing stands at just over 10,500 people today. Throughout that period and since March, we've had an average of about 13,500 employees. I am saddened to report that 4 families have been affected by fatalities among our workforce. But on that population, we have the blessing of only having had 4. Three employees residing in Mexico, and 1 in Romania died after testing positive for the virus, 3 out of the 4 had pre-existing conditions, but 1 was a healthy person in his 40s.

Augustine Rodriques passed away earlier this month. In August, Greenbrier also lost Octavio Perez, John Lorenzo Gonzales and Constantin Vasina. Each of them is in our thoughts and we are aiding their families. Our remembrance of them includes a reminder about the need for all of us to remain diligent and vigilant with our own health and safety practices, to practice safe distancing, wear masks, and to be alert to this medical crisis everywhere we go.

During the last earnings call, I discussed the core values that have shaped Greenbrier over the last 40 years as well as our ongoing commitment to support positive change. In September, we launched our formal IDEAL commitment, which stands for inclusion, diversity, equity, access and leadership. Other programs include an enhanced environmental, social and governance, ESG program and report.

Greenbrier's approach to ESG involves a number of steps to promote environmental responsibility. These include enterprise-wide reporting on Greenbrier-related greenhouse gas emissions, tracking air emissions, monitoring and conserving water consumption and concern in monitoring of the cleanliness of water run-off. We will continue to drive practices that serve our employees and the communities where we operate and in the environment. You can learn more about our work in the full ESG report released today on our website.

Turning to operations and as reflected in the press release, our results for the fiscal year, unsurprisingly, came in below what we had expected at the beginning of the year. And given the circumstances, maintaining Greenbrier's profitability during the second half of our fiscal year is a considerable accomplishment. Recall that our industry was heading into a weaker period prior to the pandemic, suffering from the effects of railroad operating initiatives like PSR, lower oil prices and a sector, a diminishing of demand. In a way, this was a blessing because we already had begun, prior to the pandemic, to reduce our production capacity and to rightsize our workforces and overhead costs, to cut capital and so on at the start of our fiscal year.

When the potential impact of the pandemic became apparent in March, we took a series of decisive and prompt measures to protect the enterprise and ensure Greenbrier could attain the strongest possible financial position. Building a flexible capital base to weather an economic crisis of unknown severity and duration was our first financial priority. We set an ambitious liquidity target of $1 billion, which has been achieved and exceeded. We will continue to monitor that target from quarter-to-quarter. We significantly reduced operating expenses and capital expenditures. We also temporarily restructured several of our key relationships with partners and suppliers during COVID-19 to create material financial benefits for Greenbrier during the crisis and also to assure them of our long-term commitment to our business relationships.

Finally, we rationalized manufacturing capacity across our global production networks, most significantly in North America. Here in Portland, for example, we closed our railcar facility while still operating our marine business at Gunderson. In fiscal 2020, we suspended operations on 13 rail production lines, and we reduced our total employment base as referenced earlier by more than 6,500 people. Supporting all this, we delivered positive operating cash flow of $405 million in the last 2 quarters of the year, which is a significant contribution to Greenbrier's overall financial health.

During the second half of fiscal 2020, we completed several commercial transactions at a time when transactions were scarce. We did creative things with technology to adapt. I want to commend our commercial engineering and manufacturing teams on a successful pivot to engage customers with nearly 50 virtual sample railcar events carried out this year. These events enable Greenbrier to directly connect with customers to meet their needs despite travel restrictions. North American orders for us were lower in the quarter compared it Q3, while still respectable under the circumstances. However, our international presence, again, complemented North American performance. Orders by units were roughly balanced between North American and European customers, with several hundred units in Brazil.

We have done well maintaining backlog and strength during the year and the quarter. Our $2.4 billion multiyear manufacturing backlog of railcar units continues as a source of cash flow and stability in more challenging times. More important than the dollar amount of our backlog is the type of customer who supports it. Over 90% of our North American customers have an investment-grade credit rating. These customers provide our manufacturing facilities with a baseload of multiyear deliveries that enables continuous operations and the readiness to scale quickly as demand improves and resumes.

The rail sector has experienced the far-reaching impacts of COVID-19 as all industries have. It is an important and strategic -- vitally strategic industry to all economies worldwide. We expect this recovery will be a leading indicator of the broader economic recovery after COVID-19. Subject of course -- to the course of the pandemic, we believe our industry could turn the corner in the second half of calendar 2021, and we also believe that a snapback could come very suddenly. This would positively impact our performance in our fourth fiscal quarter and entering into fiscal 2022.

Economic uncertainty persists across all our end markets, but there are pockets of recovery and longer-term trends are favorable. For example, there were 2 significant policy developments in Europe within the last month. First, the [EU] parliament voted to accelerate greenhouse gas reduction targets and the European Commission and EU Transport Minister signed the Berlin declaration to accelerate the growth of rail freight. There are strong reasons for these actions as rail freight consumes 1/3 the amount of carbon as trucking. So these movements are likely to be replicated around the world and indeed, only in the last 3 days, Japan has made major movements to follow suit. Longer term, we will keep a close eye on what clean energy will mean to our customers, to our industry and specifically to our business.

Greenbrier remains, in conclusion, very healthy despite the market environment. Our leadership positions in the core markets in North America, Europe and Brazil remains unchanged. In those 3 markets, we've achieved material scale and market presence on 3 continents. We're squarely focused on managing our business to generate cash flow, to maintain a strong liquidity position regardless of market conditions. We are confident in our ability to do this successfully. We have a seasoned management team who've been through multiple cycles before.

As we say out West, this is not our first rodeo. We will be ready to respond when the market recovers, when that occurs, we will be a leaner company with reduced costs and improved efficiencies. We proudly maintain the strongest and most efficient U.S.-located freight railcar manufacturing footprint. We are an American company. Our powerful U.S. presence balanced with our international locations and interconnected supply chains are assets that make Greenbrier unique.

Now over to Lorie. Lorie?

Thank you, Bill, and good morning, everyone. Greenbrier performed well operationally against the backdrop of continued industry weakness, a broader economic downturn and the global pandemic. I'm proud of what we've accomplished and more importantly, how the entire company shifted to quickly operating decisively in an ever-evolving environment. I'll provide a brief update on the impact of COVID on our operations, our results for the quarter and year and share some of our expectations for fiscal 2021.

On COVID, we continue to execute on our COVID-19 response plan, ensuring employee safety and maintaining our essential status in all countries where we operate are our top priorities. Overall, we've experienced a low infection rate globally due to strict adherence to protocol and rapid response to outbreaks. As Bill mentioned, we've unfortunately had 4 employees that passed away testing positive from COVID in the last few months. Our thoughts and prayers are with their families and friends.

It is imperative that we not become complacent and continue to focus on employee health and safety and that our rapid response teams continue to perform at a high level to mitigate the potential for any cluster to form within our facilities. We are seeing rising rates of infection in all of our communities and need to maintain our focus to navigate the months ahead until some semblance of normalcy returns.

Moving on to operations. We delivered 5,100 units in the quarter, including the syndication of 900 units. We received orders for 2,800 units valued at $250 million, resulting in an ending backlog of 24,600 units valued at $2.4 billion. Orders originating from international stores has accounted for over 60% of the activity in the quarter.

Our North American manufacturing group navigated the shifting landscape well. We continue to build railcars safely and efficiently while maintaining necessary protocols to protect our employees. Rationalization of capacity continued with the curtailment of 2 additional production lines during this quarter.

Greenbrier Europe performed well and continued the improved operational trajectory that began in 2019. Order activity in Europe continued to show strength, tied in with what Bill was talking about and accounted for over 50% of orders in the quarter.

In Brazil, order activity started to improve modestly although the country continues to struggle through the pandemic. An economic recovery seems to be beginning, but we've learned the dynamics of recoveries are unpredictable.

Our wheels, repair and parts operations were impacted by lower traffic volumes. The team did an excellent job of making operational adjustments to control costs and navigate the lower demand environment while maintaining the ability to respond quickly when activity levels improve. I'd like to point out that on an annual basis, for this segment, revenue decreased 27% compared to 2019, even as profitability increased. This exemplifies the significant operational improvements that have occurred, particularly in our repair business.

The leasing and services group performed well in the quarter despite headwinds faced. The management services team continued to grow the business with new customers and implementations occurring steadily throughout 2020. The lease syndication capital markets team had another great quarter, generating proceeds of over $115 million on syndication of 900 units. The financial markets continue to be volatile and credit-sensitive, but these results are a testament of the strength of our syndication model and investor network.

Now looking forward a bit, preserving the near and longer-term financial health of the company is imperative. We generated strong cash flow over the last 6 months and have taken numerous cost reduction steps. We are not complacent about these initiatives, and we'll continue to work hard to ensure our strong liquidity and market-leading position.

Planned capital expenditures in manufacturing and wheels, repair and parts will be around $35 million in 2021, a level that supports safety and required maintenance. This $20-plus million step down from our fiscal 2020 levels, combined with the $50 million reduction in 2020 CapEx from expectations at the beginning of that year is a $70-plus million benefit to our liquidity. Leasing and services CapEx is primarily discretionary and will be driven by the underlying economics of the leasing activity and opportunities as they present themselves.

In the second half of 2020, we reduced selling and administrative expense $25 million. In 2021, we expect an additional $30 million reduction to an annual rate of $170 million to $175 million. This equates to an overall $55 million reduction in spending and benefit to liquidity.

We'll continue to flex our North American manufacturing footprint as conditions evolve. Throughout 2020, we closed 13 production lines and reduced production capacity by almost 40%. As we enter 2021, Greenbrier North American manufacturing capacity is rightsized to weather the current downturn while ensuring the capability of ramping up quickly and efficiently when conditions improve.

Looking forward, we're navigating a unique, challenging dynamic that brings considerable uncertainty. We have an industry downturn that's been exacerbated by the pandemic. Rising infection rates in all the communities and countries where we operate and a national election with broad ramifications. These factors will likely have a negative sequential impact on our results in the first half of fiscal 2021. We are optimistic about a recovery beginning sometime in calendar 2021, which we expect to benefit our fiscal 2022. We've taken the necessary steps to ensure Greenbrier will exit the pandemic economy a stronger and leaner organization, but that doesn't mean it will be an easy next few quarters.

As you heard from Bill, we're working to ensure profitability for the full year and still see gross margins in the low double to high-single-digit range, albeit on fewer deliveries in 2021. With that being said, we're not providing financial guidance beyond the metrics discussed today. As we gain better visibility or recovery occurs more quickly than anticipated, we will provide incremental expectations and will continue to be regular transparent communicators.

Greenbrier remains healthy. Our leadership position in our core markets in North America, Europe and Brazil is strong. The next several months will require hard work and continuous focus, but this is not the first challenge we've faced, and it won't be the last. Greenbrier is well positioned for when a recovery occurs in our markets.

And now I'll turn it over to Adrian.

Thank you, Lorie, and good morning, everyone. As a reminder, quarterly and full year financial information is available in the press release and supplemental slides on our website.

Overall results were solid in a challenging environment. We were more impacted in the quarter from the industry downturn, which has been amplified by the pandemic. Highlights in the quarter include revenue of $636 million and deliveries of 5,100 units. Deliveries included 200 units delivered in Brazil and 900 syndicated units.

Aggregate gross margin of 10.5%. Cost of goods sold included $4.1 million of severance in the quarter. Excluding this activity, aggregate gross margin percent would have been 11.2%.

Selling and administrative expense of $46.3 million is down approximately 7% from Q3, both quarters included about $1.8 million of severance expense. The effective tax rate in the quarter decreased to 21%, reflecting a partial reversal of the foreign currency-related discrete tax item at our Mexican subsidiaries in the prior quarter.

Net earnings attributable to Greenbrier were effectively breakeven in the quarter. Excluding approximately $5.5 million net of tax and noncontrolling interest or $0.16 per share of integration-related and severance expenses, adjusted net earnings attributable to Greenbrier were $5.5 million or $0.16 per share.

Adjusted EBITDA for the quarter was $55.7 million or 8.7% of revenue.

Full year highlights include net earnings attributable to Greenbrier of $49 million or $1.46 per share on revenue of $2.8 billion. Net earnings include $8.4 million net of tax or $0.26 per share of integration-related expenses and $12.9 million net of tax and noncontrolling interest or $0.38 per share of severance expense. Excluding these items, adjusted net earnings attributable to Greenbrier were $70.2 million or $2.10 per diluted share.

We incurred severance expense throughout 2020 as we adjusted our workforce in response to the industry downturn and the pandemic. Initially, we approached workforce reductions as part of the normal course of business but we were quick to make much larger adjustments across our global workforce, starting in March upon the outbreak of the pandemic.

Adjusted EBITDA for the year was $310 million or 11.1% of revenue.

2020 was our second highest year ever for railcar deliveries with 21,700 units delivered globally and include a syndication of nearly 3,200 units. International deliveries were over 5,100 units with nearly 1,900 units delivered from our unconsolidated subsidiary in Brazil.

International order activity accounted for 40% of Greenbrier's new railcar order activity of 16,600 units. Orders for the year added $1.6 billion to new railcar backlog.

In Q4, we recognized approximately $5.2 million of identifiable costs related to COVID-19. These costs included items like personal protective equipment, additional labor expense, cleaning services and additional interest expense from our precautionary revolver drawdowns. We expect these expenses to continue for the foreseeable future since each is vital to ensuring the ongoing operation of our facilities and our strong liquidity position.

Turning to synergies. We successfully achieved $2.2 million of pretax cost synergies related to the ARI acquisition in the quarter and $14.9 million in the year, meeting our previously announced goal. The integration team has done an excellent job in trying circumstances over the last 12 months. We are proud of what has been accomplished so far, but believe we still have significant incremental value to be realized as we identify and implement additional best practices across our manufacturing network.

In the quarter, Greenbrier generated $183 million of operating cash flow, reflecting continued syndication activity and efficient management of working capital. For the full year, we generated operating cash flow of $272 million, including $405 million in the last 6 months.

Greenbrier's liquidity at August 31 was $920 million, with cash of $834 million and available borrowing capacity of $86 million. With projects being concluded, we exceed our $1 billion liquidity and cost savings target. While we have built a substantial cash balance over the last 6 months, we will continue to enhance Greenbrier's overall liquidity until we have better visibility on recovery. We have significant cushion in our debt covenants and no significant debt maturities until late calendar 2023.

Greenbrier's Board of Directors remains committed to a balanced deployment of capital, designed to protect the business and simultaneously create long-term shareholder value. Our Board believes our dividend program enhances shareholder value and attracts investors. Today, we are announcing a dividend of 27% -- $0.27 per share, which is our 26th consecutive dividend. Based on yesterday's closing price, this represents a yield of approximately 3.3%.

With all that has been accomplished across the company and continued vigilance, Greenbrier will emerge from the pandemic and downturn as a stronger company.

And we will now open it up for questions.

(Operator Instructions)

The first question comes from Matt Elkott.

Did you guys say what percentage of your backlog is for fiscal '21 deliveries?

We have not -- we did not disclose that at this point. It's a little bit of a fluid situation as some of our multiyear orders have flexibility in when they place it in calendar 2021 at this point. So I would say that a good portion of our backlog will be delivered in 2021, but it's not a linear function at this point.

Okay. So I guess the insights you guys have given us so far in fiscal '21 delivery, that they'll be fewer than 2020 deliveries. But how much fewer, we don't know?

Again, yes, it's a fluid environment, Matt. And as you know, sometimes it's good to have a little bit of open space so that we can take advantage of opportunities as they arise. So to Justin's point, most of our customers don't operate on our fiscal year. They operate on a calendar year. So when they take deliveries is a bit fluid.

Yes. That makes sense. And I think you got probably about 1,100 orders in North America in the fiscal fourth quarter. Can you give us some insights on how order inquiry has been -- ordering increases have been after quarter end?

Let me take that. I think we had -- we didn't announce subsequent orders, but we have had a strong month in orders with about the same level or close to the same level of awards through last week, just looking at 1,100. So we've got some momentum. I'm not sure the 1,100 was typical. As you know, these things go up and they go up and down. But we've got a decent pipeline, which reflects the same information. I think that's -- that others have -- of opportunities -- the pipeline of opportunities, which reflects what others have said about their business.

Bill, if I may, just ask you one quick follow-up on the demand question. We've seen some positive signs as of late, utilization has improved in the last three consecutive months, rail traffic is finally heading in the right direction, mostly intermodal and grain, I think. And the industry fleet is on track to actually potentially decline this year. I guess there -- what do you think needs to happen? We just need to see these trends continue for order activity to start picking up? Or what else needs to happen for us to start seeing green shoots in the railcar industry?

Yes. Well, as we talked about before, Matt, the -- we see green shoots, we just always hope they're not weeds. The major drivers that we are watching are the freight cars in storage. We believe there's a new frictional level of storage, much like frictional unemployment, below which it's hard to go. That used to be around 280,000 to 300,000 cars. Now we estimate it somewhere like 400,000. So with the cars taken out of storage, there have been 75,000 cars taken out of storage in the last couple of -- 3 months. That storage statistics is something to watch closely.

And then velocity is, of course, something to watch closely. PSR has had a definite positive effect on railroad operating ratios and efficiency. But as traffic comes back, as you mentioned, a moment ago, and it seems to be coming back. It's important to see whether the speed of trains and the dwell times deteriorate for the rail roads. Of course, if they do, for every 1 mile an hour it creates of deterioration in velocity, it creates about 50,000 cars. That also is not linear.

Those are the 2 big things, watch that supplies -- that storage statistic, continue to watch the traffic. And that's why we are fairly certain that in the second half of calendar 2021, we could see an abrupt snapback in demand. This usually happens very quickly. So lastly, you can talk about a K-shaped recovery which might mean for our industry, a very rapid top of the K with almost like a V, and still other businesses from COVID-19 not doing so well. It depends a lot on consumer confidence and many, many factors. But there's a lot of light in the end of the tunnel, and we just hope it's not a train.

The next question comes from Justin Long.

I wanted to circle back to the point you made, Lorie, on sequential pressure in the business in the first half of the year to just make sure kind of directionally I understood what the message was. Is that an earnings comment? So we should see earnings down sequentially in the first and second quarter versus what you just posted here in the fourth quarter. But then in the second half of the year, there should be improvement. And so for all of fiscal '21, will be profitable. Is that the right message?

I think you've picked up on what we were trying to communicate. We are in very uncertain times. The fourth quarter, while strong, was quite challenging. We expect those challenges to continue in Q1 and Q2. There's a lot of different moving pieces that create uncertainty. There are some positive things going on with railcar loadings, as Bill mentioned, storage statistics come out every time you turn around, it seems. We have a national election. There's just so many different things that are going on that it makes it really tough for us to see over the next 6 months how things might dramatically improve. But we do believe in the long-term health of the rail freight network, and we believe in the strength of Greenbrier, and we expect it will improve in the latter half of next calendar year.

Look, our management mode right now is simply to preserve our flexibility to come back, not cut too deeply into the bone. We've done a great job of sizing the company for the circumstances we're in. We're focused on cash flow, liquidity and getting into that middle 2021 period. We have a lot of things that could cause the snapback for us to be a very quick and a very strong one.

Okay. And secondly, in terms of the backlog right now, is there some color that you could provide on how that splits out between the different geographies? And as we think about North America versus the international business, I know there was a gap, a pretty significant gap in the margins there. It feels like that gap has started to close. So could you talk about how much of a gap still exists today and how you see that progressing in fiscal '21?

You mean a margin gap or the backlog gap?

That's correct. First question on the backlog. Second one on the margin gap, North America versus international.

Yes. So right now, about, I would say, close to kind of between 25% to 30% of the backlog is between Europe and Brazil. Just as a reminder, both geographies have orders that extend out beyond our fiscal '21 time period, and Brazil actually has orders that extend out into 2023 at this point. From a margin perspective, you're right that both other geographies have started to move closer to our kind of company averages. And we do see a little more upside in Europe in the near term, although Brazil, again, kind of in line with Bill's remarks, could respond a little more quickly than anticipated just because there are a number of moving factors and their economy seems to be responding a bit better than expected even just a few weeks ago.

Our next question comes from Allison Poliniak with Wells Fargo.

Just turning to Europe, which seems to be a growing bright spot there with -- it seems like some tighter capacity is driving some to rail in terms of the Europe-Asia route, and you noted some orders there. Could you give us any color? Is that just sort of replacement orders today? Or are you seeing some incremental demand just outside of replacement over in that region?

We're seeing a lot of intermodal interest over there and other specific car types. We're also seeing the major leasing companies doing -- making investments more robustly than might have been expected. But you're right that it's a bright spot in the whole picture, coupled with stronger developing margins in Europe.

And I would say -- I would add, Allison, as Bill was mentioning in his remarks, there have been a couple of significant policy developments in Europe that is going to push more transportation of freight off of the highways and onto railroads. It is a fairly aged fleet. They do not have all of the reams of information that we have here in North America on the North American fleet, but everything that we read about that fleet is a fairly aged fleet. So there's a lot of opportunities for technological improvements and again that policy push to move freight onto the railroads off of the highways.

Great. And then just turning to your comments around flexibility to handle what will be inevitable upside here. Do you have open capacity in existing lines today where you could kind of eat that up before you have to reopen? Kind of how do you think about that operational upside and your ability to react to that here?

I'd say that our manufacturing group and our commercial group are really amazing in their ability to be nimble and be responsive to our customer needs. There's times when you can look at a production schedule and you think that it's full for 6 months. And if we have a customer that comes up with something, it's amazing how we can make modifications to production rates or how we are producing railcars to make space. That being said, having steady production is also how we strain efficiency out of the manufacturing process. So we do have some open space on existing lines as we look at our fiscal 2021. And if there was a need in an area where we didn't have space, I have all the confidence that our team would figure out a way to be responsive to that demand.

Yes. Just to supplement that very quickly, Allison. It's a good question. We have considerable extra capacity. We've maintained our core capacity in the United States. ARI is doing very, very well. This is principally an issue of what car type might be involved. We closed lines partly because demand is not there for a specific car type. So we have adequate capacity read to cut back very nimbly. And we have capacity, which we could increase on the lines we're running. So we've got a lot of flexibility, as Lorie is saying. We're in a very, very good position because of our capital base. We have surplus capital equipment as we close some facilities. We've got equipment we can move. So I think we can come back without a lot of capital investment other than working capital.

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

So Lorie or Bill, you talked about the syndication. I think Lorie mentioned $115 million on 900 units or about $127,000 per car, which is obviously better than the $89,000 and the new backlog. Is that mix? Is that the scale that we should expect that pricing has gone down at this point in the cycle to see the backlog get filled? Maybe you could just kind of talk a little bit about that. And where are you seeing demand on the domestic side? Is that -- I don't know, is it center beams? Maybe talk about what you're seeing on the domestic side.

So to the first question, I would say, yes, it does have to do with mix. As you are aware, we build the railcars that we're syndicating. We sometimes can be building those 6 to 9 months ahead of time. So it definitely has a different order profile and mix plays into that. The other thing that provides the value and which is why we syndicate is we do have considerable lease origination expertise and so when you're selling or syndicating that railcar, it's not just the railcar, but it's also the underlying lease and cash flow stream. So that is part of the value that our capital markets team brings to the overall Greenbrier business. So I don't know that it's a perfect comparison. There's probably no such thing as a perfect comparison to look at the ASP in syndication to the ASP in backlog or even orders. That being said, there has been considerable pressure on pricing here in North America with demand being down as much as it is and the overall economy. So that -- it's a combination of mix and pricing pressure. Bill, I'm sure there's something you'd like to add.

No. I think you covered that -- one of the questions very well. And nice to see Bank of America here on the call. Thank you, again. The second question, I think you asked was what areas there may be some strengths. There's -- it's surprising how often we have to remind people that a railcar -- there's 25, 30 types of railcars. So it really is an important question. We're seeing pockets of interest in a number of areas, and we would say that large covered hoppers, green and plastic, although I think the plastic pellet market is going to peak out here, scrap cons, chemical and replacement tank cars. Intermodal may gain momentum as referenced in some of the questions, if volumes continue to grow. There's storage statistics on -- you have to watch those closely because they include some inefficient cars like spine cars. So we might get to a point where intermodal will be required again and of course, the perennial boxcar or the high cube boxcar replacement demand.

So there's a number of these areas. The things that are not likely to be demanded in the future are coal cars and for the immediate future sand cars. We had to do a lot to work with our customers in the sand market. We're happy about where we've got that sand portfolio and our leasing business and the cars we manage. And we only have in our own fleet, about 1,200 sand cars. So those are the -- that's the activity. When we talk about green shoots, those are some of the car types that we see.

Hopefully, you hear BofA on the call all the time. But the -- you didn't mention center beams. Is that -- is forest products picking up beyond targets or no?

Forest products is picking up. I wouldn't say there's going to be immediate demand for center beams, but there could be. It's surprising how fast this can snap back due to the reasons that you know very well, having followed us for years. But just when it will happen. I don't have any doubt it will happen. And when it happens, we're going to -- we and our, I'm sure our other colleagues in the industry will be able to jump on it and function quite well, at least talking about the major builders.

Perfect. And then my last question, just the margins in manufacturing. If rates for backlog are coming down, I guess, Lorie, it's always tough because we don't get the breakdown of car types or if there is a difference, but should that -- should we anticipate that margins also are under pressure to that similar scale? Or is there any way you can walk us through on how to think about margins into next year?

Yes, Ken, this is Adrian. And Lorie talked about margins for next year being in the low-double digit, high single-digit region. We were at 11%, excluding severance activity in Q4. So I would say flattish to modestly down is what we're looking at on the margin side.

Perfect. And Adrian, you're talking about manufacturing, right, not overall?

Yes. And in our wheels, repair and parts business, we have seen margins improve, particularly as we've made operational improvements on the repair side. The leasing margins depend on whether we've got external syndication activity, which tends to make those margins volatile.

And our last question today comes from Steve Barger with KeyBanc.

Just looking back to the last production decline in FY '17, quarterly deliveries averaged 4,000, one quarter got down to 2,600. Should we be thinking that's the comparable range for the first half of '21?

I would say that I think that that is a reasonable way to look at it and probably part of this is -- a lot of it is driven by kind of our syndication activity, just when we're producing onto the balance sheet and then when syndication actually occurs off of the balance sheet. But we do see a step down from our fiscal Q4 delivery activity.

So Justin, he mentioned 2 numbers, 4,000 and 2,500, are you making your remarks in the range or on the 4,000?

I would say, in the range between the 2 numbers he put out there.

Right.

Okay. That's great. And then just to go back on the margin again, just thinking the manufacturing margin. Is that -- with the step down in production, and just thinking about that in the context of all the cost actions you've taken, would the margin that you put up in 4Q for the manufacturing segment be achievable or is that more aspirational?

I would say that the Q4 manufacturing margin is definitely achievable, 9.4%, and that includes severance costs, $1.8 million, I think, of severance costs. So definitely, it's what we're targeting from the high-single digit to low-double digits.

So you -- the rightsizing that's taken place already is -- should be enough to allow that to happen even with the sequential step down in deliveries?

All things being equal.

Right. Unless there's some dramatic change for the worse, we think we are over the rightsizing. We still have some pockets maybe in Europe that we need to address. But we just don't want to -- it's more of a manpower, the craftspeople. We don't want to lose our capability to bounce back very quickly. I've been in this business a long time, as you know. I know that it can be boom and doom 1 day and all of a sudden, kaboom, the sun comes out and things come back. But I sure don't think that's going to happen for many months, many quarters and we've got to be cautionary about COVID-19. We're not out of this yet.

Those who are saying we're out of it and it's going to be great, it's not going to be great. It's going to be -- people are going to continue to die at a high rate and through the winter until we have some ability to address it. And that addressing of it is going to come through treatment, probably not a vaccine that is universally going to be a panacea. So we just are being cautionary, and we can't predict the future. I think that's one of the things you're hearing from us is that we want to be sure we're strong, that we are able to come back and when the market comes back, we'll be back. Meanwhile, we'll make adequate cash -- really good cash flow and adequate results in the circumstances.

No. I think -- I agree with all that.

Thank you very much for your time and attention, everyone. Have a great Friday and a great weekend.

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