Yahoo Finance The Greenbrier Companies, Inc. (NYSE:GBX) Q1 2024 Earnings Call Transcript
The Greenbrier Companies, Inc. (NYSE:GBX) Q1 2024 Earnings Call Transcript January 5, 2024
The Greenbrier Companies, Inc. beats earnings expectations. Reported EPS is $0.96, expectations were $0.71. GBX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to The Greenbrier Companies First Quarter of Fiscal 2024 Earnings Conference Call. Following today's presentation, we will conduct a question-and-answer session. Each analyst should limit themselves to one question with a follow-up if needed. Until that time, all lines will be in a listen-only mode. 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.
Justin Roberts: Thank you, Andrea. Good morning and Happy New Year to everyone. Welcome to our call today for our fiscal first quarter. Today I'm joined on the call by Lorie Tekorius, Greenbrier's CEO and President; 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 in Q1 and an update on our outlook for the remainder of fiscal ‘24, we will open up the call for questions. In addition to the press release issued this morning, additional financial information and key metrics can be found in a slide presentation posted today on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2024 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. And as a reminder, I'd like to invite you to join us for our Annual Shareholder Meeting today at 12:00 PM Pacific, 3:00 PM Eastern. A link is available on our website and we'll go live about 15 minutes before the call. With that, I am going to hand it over to Lorie.
Lorie Tekorius: Thank you, Justin, and good morning, everyone, and Happy New Year. I hope everyone had a great and safe holiday season. And while Monday marked the start of a new calendar year, we're entering the fifth month of our fiscal year, and with the first quarter in the books, our fiscal 2024 is off to a great start as we continue to execute our strategy. Our financial performance indicates early progress as we execute Greenbrier's multi-year Better Together strategy. Three fundamental priorities drive this strategy. First, we will maintain our manufacturing leadership position across geographies. The second priority ensures we meet our customers' needs while optimizing our industrial footprint for efficiency and margin enhancement.
Third and equally important we're pursuing disciplined growth in leasing and services. We remain committed to enhancing our manufacturing performance, while growing recurring revenue and generating tax-efficient cash flows through investments in the lease fleet. The detailed work of facility rationalizations in manufacturing and maintenance services that began in fiscal 2023 continues. We will transform to be simpler and more profitable. Aggregate gross margins and gross margins in our manufacturing segment, specifically this quarter reflect the strategic push. And while I'm sure everyone on today's call understands this, I think it bears repeating that we do not expect progress on our strategic initiatives to be linear. In some cases, we're ahead of our internal schedules, and others, we're laying the foundation to execute the plan.
Our goals target a multi-year completion window and there will be ups and downs, but I'm pleased with our performance at this early stage. Turning to our results. We generated over $800 million in revenue and aggregate gross margins of 15%, an increase of 250 basis points. This aligns with our target to achieve aggregate gross margins in the mid-teens by fiscal 2026. One quarter of mid-teen margins is an excellent start, but it would be premature to declare the mission accomplished on our multi-year strategy. First quarter manufacturing gross margin of 11.1% is an increase of 180 basis points, compared with the prior quarter. As we previously disclosed, the sale of our Gunderson Marine operation and our Texas foundry have resulted in permanent cost savings of approximately $20 million per year.
Our insourcing initiatives to bring fabrication in-house for basic primary parts and subassemblies as part of our make-versus-buy strategy is proceeding on schedule. We expect to achieve our total cost savings targets of $50 million to $55 million from this initiative in fiscal 2025. Moving across the business, maintenance services continued its positive momentum even though wheel volumes were seasonally lower heading into winter. On a solid revenue base, gross margin remained strong at 14.6%. Several initiatives are underway to continue to enhance this unit's efficiency by improving car flow, material planning, and cycle times at all of our facilities. And then as Brian will explain shortly, our expanded leasing strategy is gaining traction.
This is a critical component of our multi-year plan and is expected to result in the doubling of recurring revenues within the next five years. The market conditions for railcar leasing remained positive, allowing us to generate compensatory lease originations and renew leases at higher rates. As we continue to grow the lease fleet and work towards achieving our recurring revenue targets, we remain disciplined and focused on building a high-quality balanced portfolio. Our Q1 performance maintains the health of our balance sheet, allowing us to invest in our business, while continuing to return capital to shareholders. This has been our long-standing and preferred approach to capital allocation. I am pleased to report that our Board declared a quarterly dividend of $0.30 per share this week representing Greenbrier's 39th consecutive quarterly dividend.
The broader economy is dynamic and geopolitical strife again commands our attention and concern. For instance, we’re closely monitoring conditions at the Southern U.S. border. While the work performed by our skilled manufacturing and logistics colleagues so far has successfully avoided severe impacts to Greenbrier, the current migration response is unsustainable. We have joined many including railroad leaders, shippers and even our competitors to draw government attention to this situation. Collectively, we will ensure policymakers hear our concerns and address impediments to commercial activity and trades at our Southern border. Meanwhile, the economy in both North America and Europe is showing signs of resilience and our outlook remains positive.
We expect North America and Europe to continue to see stable demand across railcar types, underpinning both new builds and lease renewals. We have excellent near-term visibility for fiscal 2024 and are focused on maximizing our platform's potential as we successfully pursue our multi-year targets. We're confident in the long-term strategy because it focuses on what we can control and does not rely on an optimistic or aspirational demand scenario. I look forward to sharing our progress on future calls. And now over to you, Brian.
Brian Comstock: Thanks, Lorie. During Q1, Greenbrier secured new railcar orders of 5,100 units worth nearly $710 million. Of these orders, approximately 20% derived from lease originations. Orders continue to be broad-based and diverse across most railcar types except for intermodal where market conditions have been soft, but are improving and may provide some upside in future quarters. As of November 30, Greenbrier's global new railcar backlog was 29,700 units, valued at $3.8 billion. Backlog continues to be strong and stable, providing significant revenue visibility into 2025. As a reminder, backlog excludes programmatic refurbishment and re-qualification work, which will produce meaningful revenue during the fiscal year. Our commercial performance reflects our leading market position, strong lease origination capabilities, and direct sales experience.
International orders accounted for 30% of activity in the quarter, reflecting the continuing momentum in Europe and ongoing strength in Brazil. We have been performing well in Europe and our backlog remains healthy, thanks to our broad product portfolio. Our leasing platform is now fully operational in Europe, and our ability to originate and syndicate leases has been critical to the improved performance of our European manufacturing business. We're excited about our opportunity in Europe where the rail industry enjoys strong secular tailwinds, and we expect Europe to increasingly become a meaningful contributor to our profitability. Likewise, Lorie and I recently visited our Greenbrier-Maxion joint venture in Brazil. While unit volumes in South America will always be lower than North America and Europe, recent stabilization in the rail sector there promises a steady stream of business activity in months to come.
Leasing and Management Services also performed well in the quarter. We are steadily advancing on our stated goal of doubling recurring revenue from Leasing and Management Services. Recurring revenue is growing from various sources, including new railcars added to our lease fleet and lease renewals at more favorable terms. We grew our lease fleet from about 700 units, or 5.2% during the quarter as we fulfill our commitment towards disciplined fleet investment of up to $300 million per year on a net basis. As we've made this investment during the next few years to expand recurring revenue, we are focused on railcar types that keep our fleet profile balanced and reduce concentration risk. I want to emphasize that we will only invest in the right assets with the right lease terms and counterparties.
We take this capital deployment very seriously. We will not chase an arbitrary fleet size or value if the underlying assets do not meet our required internal rates of return. Our discerning approach to fleet composition resulted in a AA credit rating for our most recent ABS offering completed in November. We understand these are the highest ratings ever received in the railcar ABS space. We issued an aggregate principal amount of $178.5 million in notes with a blended interest rate of 6.5% and a 2.5 year call feature. The call feature gives us forward flexibility to respond to lower interest rate environment. Our average interest rate of 4.4% on our non-recourse leasing debt is significantly lower than current market interest rates. We continue to evaluate our financing strategies as we grow our lease fleet to achieve the goal of more than doubling recurring revenue in the next five years.
At the end of Q1, our fleet leverage was 80%. We leverage railcar assets at an appraised fair market value, which results in borrowing ratios that are higher on a net book value basis. Our lease renewal rates continue to grow at double-digits and we successfully extended lease terms, while maintaining a consistently high fleet utilization of 98% in Q1. The leasing market remains robust characterized by a shortage of the in-demand railcar types and high fleet utilization among lessors. Moving in sequence with higher interest rates, our lease rates remained compensatory, resulting in elevated rates for both new originations and renewals. We have strategically staggered lease durations to lessen the impact of cyclicality and create opportunities for favorable renewals.
In Q1, we syndicated a total of 1,300 railcars in transactions with a variety of investors, generating strong liquidity and margins. The syndication market remains liquid and has a strong appetite for the asset class as we are confident in our team in our offering both in North America and Europe. Fundamentally the backdrop for the North American railcar market remains solid. We expect railcar deliveries to be around industry replacement levels for the next few years with retirements keeping pace. The supply of available railcars is still near trough levels, which has led to strong lease rate growth, renewals and term length. We are confident we have the right strategy in place to execute our plan in this environment successfully. Now, I'll hand the call over to Adrian who will speak through the financial highlights for the quarter.
Adrian Downes: Thank you, Brian. Good morning, everyone, and Happy New Year to you all. Before moving into the highlights of the quarter, I would like to remind everyone that quarterly financial information is available in the press release and supplemental slides on our website. As highlighted by Lori and Brian, Greenbrier's Q1 performance was strong across all operating segments. The quarter was marked by improved profitability due to the sequential increase in aggregate gross margin percent and operating margin. After covering some of the highlights from the quarter, I'll also affirm our fiscal year 2024 revenue and deliveries guidance and provide an update to our gross margin and capital expenditure guidance. Notable highlights for the first quarter include broad-based new railcar orders of 5,100 units, valued at nearly $710 million with an average selling price of approximately $139,000 per unit.
This does not include a few 1,000 orders in the quarter related to programmatic railcar refurbishment, re-qualifications or re-certifications. Deliveries of 5,700 units include 500 units from our unconsolidated joint venture in Brazil. Consolidated revenue in the first quarter was $809 million, representing a new first quarter record going back to Q1 of 2016. Aggregate gross margins increased by 250 basis points to 15% and have consistently increased over the past five quarters. The margin enhancement can be attributed to a broad-based improvement across all segments, including improved operating efficiencies, market conditions and syndication activity. Selling and administrative expenses of approximately $56 million declined sequentially primarily due to lower employee-related costs.
Quarterly tax rate of 24% was lower than the fourth quarter and benefited from net favorable adjustments related to our foreign subsidiaries. Net earnings attributable to Greenbrier of $31 million generated diluted EPS of $0.96 per share. And finally, adjusted EBITDA for the quarter was $93 million, or 11.5% of revenue. Greenbrier's Q1 liquidity remained solid at $663 million, consisting of cash of $307 million and available borrowings of $356 million, which we believe to be an ample level as we conduct our day-to-day operations. Although our cash flow from operations reflected cash usage of approximately $45 million, our cash balance increased by nearly $20 million in the quarter. The increase was primarily attributed to proceeds from the issuance of debt net of repayments.
Greenbrier's balance sheet continues to be strong and we will remain prudent with how we manage our capital structure and balance sheet. To make it easier to discern between recourse and non-recourse debt, we are now providing a breakout between the two in the footnotes section of our 10-Q under notes payable and revolving notes. In February, we will retire the remaining portion of our senior convertible notes issued in 2017 of approximately $48 million. This is expected to be retired using cash. As Brian mentioned in his commentary, we successfully issued our second ABS offering with a AA credit rating. As a reminder, leasing debt is non-recourse to Greenbrier, and we expect this to fuel the growth of our lease fleet over the next few years.
We are focused on reducing and retiring our recourse debt as cash flows improve. Highlighted in Lorie's commentary, Greenbrier's Board of Directors declared a dividend of $0.30 per share. Based on yesterday's closing price, our annual dividend yield represents -- is approximately 2.7%. Additionally, we repurchased nearly 38,000 shares for just over $1 million in the quarter, leaving $45 million remaining of authorization under the current share repurchase program, which extends through January of 2025. Including activity from the first quarter, Greenbrier has returned over $500 million of capital to shareholders through dividends and share repurchases, something our Board and management team remain committed to. We believe this is a great way to create long-term shareholder value and we will continue to periodically evaluate increases to our quarterly dividend and we'll opportunistically repurchase shares.
Turning to our guidance and business outlook, and based on current trends and production schedules, we are affirming Greenbrier’s fiscal 2024 revenue and delivery guidance, but updating our gross margin and capital expenditure guidance. Our guidance includes deliveries of 22,500 to 25,000 units, which includes approximately 1,000 units from Greenbrier-Maxion in Brazil. Revenues between $3.4 billion and $3.7 billion, selling and administrative expense is expected to be approximately $220 million to $230 million. Capital expenditure has been updated. Gross investment of approximately $350 million in Leasing and Management Services includes fiscal 2024 capital expenditures and transfers of railcars into the lease fleet which were produced and held on the balance sheet in 2023.
Proceeds of equipment sales are expected to be approximately $85 million, and capital expenditures in our manufacturing segment are expected to be around $165 million, which is primarily for our insourcing initiatives, followed by $15 million and the maintenance Services segment. We are raising our aggregate gross margin percent outlook and now expect full-year consolidated gross margin percent to increase to the low to mid-teens. I'm very pleased with the performance of our first quarter results. Our outlook for fiscal 2024 is positive with earnings expected to grow. And now we will open it up for questions.
Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Justin Long of Stephens. Please go ahead.
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