The Greenbrier Companies, Inc.
Q2 2017 Earnings Call Transcript

Published: 5 Apr 2017

[Operator:]

Hello, and welcome to The Greenbrier Companies Second Quarter of Fiscal Year 2017 Earnings Conference Call. Following today's presentation, we will conduct a question-and-answer session. Each analyst should limit themselves to only two questions. 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 instant replay purposes. At this time, I would like to turn the conference over to Ms. Lorie Tekorius, Senior Vice President, Chief Financial Officer and Treasurer. Ms. Tekorius, you may begin.

[Lorie Tekorius:]

Thank you, Laura, and one quick question for those of you who - or one quick clarification for those of you who might be listening. I am no longer Treasurer. Justin Roberts, who many of you chat with on a regular basis, is now the treasurer of The Greenbrier Companies. So, good morning again, and welcome to our second quarter of 2017 conference call. On today's call, I am joined by our Chairman and CEO, Bill Furman. We'll discuss our results for the quarter as well as provide our outlook for the rest of fiscal 2017. And following our prepared remarks, we will open up the call for questions. In addition to the earnings 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. I would also like to draw your attention to the other press release issued this morning, announcing the $1 billion Greenbrier Mitsubishi UFJ agreement. Bill will speak to this further in his remarks. 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 2017 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. We finished the first half of our fiscal year with strong results. Highlights for the quarter included adjusted EBITDA of $94.5 million and earnings of $34.5 million or $1.09 per diluted share on second quarter revenue of $566.3 million. Aggregate gross margins during the quarter were robust at 21%, marking the seventh quarter out of the past two years that we've achieved an aggregate gross margin north of 20%. Operationally, we recorded deliveries of 3,900 units, including syndication of 550 units. Orders received in the quarter totaled 700 railcars valued at nearly $50 million. And subsequent to quarter-end and excluding MUL transaction just announced, we received orders for another 1,000 units. This reflects the non-linear nature of order activity we're seeing in the industry. Our diversified backlog as of February 28 was 22,600 units with an estimated value of $2.44 billion. Included in backlog are 3,800 covered hopper railcars for use in energy-related sand transportation, an area of concern for some. We reached satisfactory agreements with our customers for all of these railcars resulting in no reductions to backlog. We'll produce 1,000 units in 2017 and 2018 with the remaining units produced thereafter or sooner if market conditions or our customers' needs change. Our backlog gives us good visibility through the rest of 2017 and into 2018 and beyond. This visibility combined with our strong balance sheet position us to further advance our strategies, our geographic diversification and building railcars where our customers need them. Moving to our business segments, quarterly gross margin in our Manufacturing business was 22.2%, driven primarily by continued strong production efficiencies and improved product mix. In addition to strong manufacturing performance in North America, we began recognizing revenue and margin related to our deliveries from Europe into Saudi Arabia. Wheels & Parts quarterly margin was 8.7%, a sequential increase due to higher wheel set volume. When compared to historical levels, our aftermarkets business continues to experience headwinds due to the impact of challenging market conditions. As traffic has improved over the last few months, volumes in this segment have improved as well. Leasing & Services gross margin was down 330 basis points to 33.8% in Q2 compared to Q1, primarily driven by higher volumes of externally sourced syndication activity, which typically have lower gross margin percentages. Greenbrier is in a strong financial position with over $900 million of liquidity, during the quarter we successfully issued $275 million of convertible senior notes, due 2024. The notes bear cash interest rate of 2.78% and an initial conversion price of $60.16 up 37.5% from the $43.75 closing stock price on the date of pricing. The bonds can be settled at our option in either cash, shares or a combination of the two. I'd like to take a moment and explain how these notes impact our financial statements. Due to this flexible settlement feature, accounting requires that we bifurcate the notes between debt and equity. Included in equity is $33.1 million, representing the difference between the face amount of the bonds, $275 million, and the fair value of similar debt without a conversion feature, as similar amount was recorded as debt discounts. Now, over the life of the bonds, the debt discount will be amortized as it record additional non-cash interest expense of about 2.1% for a 5% total coupon on these notes. The shares underlying the bonds will impact our diluted EPS when our stock price exceeds the conversion price of $60.16 using the treasury method. Excluding this offering, we generated cash from operating activities of $52.9 million. We continue to expect to generate positive free cash flow for the foreseeable future. In addition to generating cash flow, our capital management strategy is to focus on return on capital employed and positioning the company to create long-term shareholder value. Returning capital to shareholders continues to be a key component of our overall strategy as evidenced by the 5% quarterly dividend increase to $0.22 per share we announced today. We expect to continue to perform well, even as we reduce production rates on certain lines and transition to more open market priced orders. The strategic actions we've taken including international diversification and prudent balance sheet management position us well to successfully navigate shifting market conditions. Based on current business trends, production schedules and barring any major economic shifts, we're affirming our 2017 guidance, where deliveries to be approximately 14,000 to 16,000 units; revenue to be approximately $2 to $2.4 billion; and diluted EPS in the range of $3.25 to $3.75 per share, excluding approximately $0.17 per share of new convertible interest expense. This guidance does not include expected benefits from the closing of Greenbrier-Astra Rail which is expected to be $0.15 to $0.35 per share accretive on an annual basis. Our increased ownership stake in the operations in Brazil or the just announced MUL transactions are not included in the guidance item. As a reminder, we expect growth capital expenditures of about $65 million with about $30 million in proceeds from the sale of leased assets. Depreciation and amortization is expected to be about $60 million. Our annual tax rate is expected to be about 30% based on the geographic mix of earnings, and we expect fiscal 2017 earnings attributable to our GIMSA joint venture, our minority interest, to be approximately $50 million. At quarter to quarter the amount will vary based on the timing of syndication of railcars built at GIMSA. And I will now turn it over to you, Bill.

[William Furman:]

Thank you, Lorie, and good morning. All right, well, I was pleased to see that Greenbrier continued its solid financial and operating performance in its second quarter and throughout the first half of fiscal 2017. And as Lorie mentioned this morning, we announced an important expansion of an existing customer relationship with Mitsubishi's leasing company, MUL. In light of positive momentum with liquidity and cash flow, our board also increased our dividend this quarter by 5%. I want to pause for a moment to recognize a historic milestone we announced in February, the construction of our 100,000 intermodal double-stack unit at Greenbrier's U.S. flagship manufacturing facility at Gunderson here in Portland, Oregon. I want to extend our thanks to the entire board of directors and our management team, to our 1,000 highly skilled Gunderson employees here in Portland and to their families who helped reach this milestone. On a broader scale, these folks helped pioneer the double-stack car phenomenon and shape the intermodal renaissance in North America and around the world. We're very proud of their engineering capabilities and the qualities they bring to the manufacturing process. This car type, Greenbrier has made more than half of this car type sold in North America. And we manufactured more double-stack cars than any other car builder anywhere in the world. Turning to the balance of our fiscal 2017 and into 2018, visibility will be driven by our ability to maintain production efficiencies, timely syndication activities and the level of freight rail activity and global economic performance. Other factors will be improving rail loadings, declining rail velocity which is conversely not so good for railroads but good for car builders and the optimism we are hearing from some of our customers. The strengthening of the U.S. and global economy and our sizeable backlog will also be helpful to us in maintaining momentum through 2018. As Lorie has indicated, we have not changed our guidance and we continue to reaffirm our earlier comments about 2018. We believe that it should be something similar to 2017. These things allow us to make some positive assumptions about business conditions for the reminder of our fiscal year as Lorie indicated. Let me say a bit more about the expanded relationship with our established lease syndication asset management partner, Mitsubishi UFJ Lease & Finance or MUL. Our relationship with MUL is now about four-years-old and during that time they purchased 5,000 railcars from Greenbrier as announced in the U.S. this morning at 9 AM eastern time and to be announced at the opening of business in Tokyo today or tomorrow. MUL will make a major move in the North American rail leasing market. It plans to grow its North American portfolio and fleet from today's 5,000 railcars to a total of 25,000 railcars over the next four years. Our new agreement includes a multiyear purchase agreement for 6,000 newly manufactured railcars through 2020, and importantly it establishes Greenbrier as MUL's sole supplier of newly manufactured railcars through 2023. Additionally, MUL will also expand its railcar portfolio through lease syndications and the acquisition of used equipment from Greenbrier. Finally, we'll create a new asset-management service center to be owned 50% by each company, solely for railcars in the MUL fleet. That fleet will be managed separately from other cars, the 266,000 cars that Greenbrier managers for over 50 railroads and other customers in North America. As MUL acquires railcars over the ensuing years, those cars will also be managed by the new entity. Under this arrangement, Greenbrier will continue to receive fee income from MUL for its railcar asset management services and we are very pleased about this opportunity to extend our relationship with a good and trusted partner like MUL, one of the partners, one of the largest and well respected public financial institutions in the world. Turning to operations, we're executing well and we remain focused on a two-part strategy to, number one, enhance our core North American business during this time in the market cycle in North America; and number two, expand internationally in targeted regions that offer promising growth opportunities for freight rail. We've made substantial advances on both prongs of the strategy during the year, particularly in our aftermarkets business. We have more to do. We are seeing the results of profitable operations in Brazil, Europe and other jurisdictions where we have entered patiently over the last 18 months. So I'm pleased that this is paying off. With all these factors, including a very strong manufacturing performance for the quarter I was very pleased to see our aggregate gross margins remain above 20% and manufacturing margins increase. International investment and continued expansion represents an exciting opportunity for further growth at Greenbrier. In the Western European market, Greenbrier-Astra Rail is proceeding as planned. In the future, it will not only double Greenbrier size in Europe, but it will provide more importantly access to growing markets adjacent to the European Western market, in Eurasia and the Gulf cooperative council. We're waiting anti-trust approval from Poland on the Astra Rail transaction, which we expect to be provided and this is the only other required approval after having already received critical anti-trust approval from both Austria and Germany, markets in which there is much more commercial-activity. In Brazil, we're increasing our ownership stake in Greenbrier-Maxion, from 19.5% to 60%. We will take over the management of that company as a consequence of the greater equity stake. The strategic investment provides Greenbrier with over 60% market share of new railcar production in Brazil, as well as the ability to offer aftermarket services, including railcar repair and refurbishment and similar to our model in Western Europe, it will be launch pad for new railcar products and services, as well as new product development for the rest of Latin America and to markets in Africa and the East. Turning to the broader economy, in North America and even in the world and especially in emerging markets we are seeing some encouraging data relating to increased rail traffic and investment. And this is particularly true in some energy segments such as sand cars and intermodal loadings. Along with declining rail velocity, we believe that in North America, the supply/demand in balance is being gradually restored. During the first-half of 2017, our fiscal 2017, we experienced uneven order momentum. Looking ahead, we continue to believe that the market will improve. Our leasing and service business remains a key part of our integrated business model. We manage over 266,000 railcars for a variety of shippers, leasing companies and railroad customers, including many other partners such as the relationship we have with MUL, and including over 50 railroad customers alone. In this business, confidentiality and trustworthiness is key to our business model. Moving to the aftermarket businesses, results continue to be negatively impacted by challenging markets, lower but improving coal loadings and significantly fewer coal car repairs industry-wide. These persistent conditions are impacting results at our GRS unit, Wheels & Parts, although, this quarter had better performance than the last quarter. And it is more seriously affecting our GBW joint venture with our partner Watco, a 50-50 joint venture in the car repair business. Our current expectation of these conditions will persist for the near-term, but they represent opportunities for improvement sequentially in the next 18 months. So what is today a headwind in our earnings, we expect to be able to eliminate and turn it into a tailwind. At GBW, our share of losses for example for the quarter was $2 million. And this is again a headwind we intend to manage aggressively. We recently restructured GBW leadership team. Jim Cowan, who had been serving the dual-role as CEO of both GBW and Greenbrier International, now is exclusively managing Greenbrier International. Our partner and the CEO of Watco and also the owner of Watco, Rick Webb has stepped in as CEO of GBW along with GBW's President, who is serving under Jim Cowan, Ray Pericola. We are rationalizing our cost structure in GBW and GRS including moves after quarter close to reduce the workforce and overhead levels at both companies. We know that headcount reductions profoundly impact the lives of affected employees and their families, while creating challenges for co-workers. We are working to assist all those impacted by workforce reductions throughout our extended system and our manufacturing edge in our aftermarket businesses. But all of this is essential to our maintaining or continuing to improve margins. Finally, we are strategically investing in automation, artificial intelligence and technology at all Greenbrier units toward the goal of smarter factories. Some of this momentum is already showing up in improved margins. Our aim is to improve the quality of the environment for our workforce and to improve productivity. In addition to a large diverse backlog, we're also seeing good progress in international growth initiatives and we're hearing some positive things from our customers here domestically. Turning to the total environment, and the policy environment in North America, we continue to support the goal of federal tax reform. We believe that tax reform that stimulates growth and reinvestment in infrastructure is the right approach. We're a U.S. based company. A strong economy is good for railroads and for freight rail. Greenbrier is committed to investing in creating jobs in the United States. Our U.S. employment base is nearly 3,500 workers in manufacturing, engineering, finance and administration, including our headquarters company that runs our global operations throughout the world. Including aftermarket services and various support functions, Greenbrier has manufacturing and aftermarket operations at more than 40 locations across 20 different states and is active in the communities in each of the jurisdictions where we operate. Over the past four or five years, we have successfully transformed our company into what Greenbrier is today. Our strategy of global diversification and investing for future growth is bearing fruit and will continue to enable Greenbrier to generate long-term value for our stakeholders. Finally, I will simply note that momentum is something we intend to continue and I believe that others who look at Greenbrier's longer-term view are assuming that we will not improve or have more momentum in the international area, which is already beginning to pay off after patient time of investment. So I remain optimistic and I will now turn it back over to Lorie.

[Lorie Tekorius:]

Thank you, Bill. And, Laura, we'll open up the call for questions, please.

[Operator:]

Certainly. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Brian Colley of Stephens. Your line is now open.

[Brian Colley:]

Hi, congrats on the strong quarter.

[Lorie Tekorius:]

Thank you, Brian.

[William Furman:]

Thank you, Brian.

[Brian Colley:]

So you mentioned it, but we've seen rail volumes improve year-to-date for a handful of commodities and train speeds have also come down from their highs. Could you just speak to whether or not you're seeing this start to drive any pick up in orders or inquiry levels? And just based on some of the optimism you're hearing from your customers, would you anticipate material pick up in orders in back-half of this year?

[William Furman:]

That's a great question. It's very difficult to predict the future. And every time we think we can, we learn humility. We are seeing these things occurring. And I wouldn't say that we are yet at a trough, but we might be at the beginning of the end or the end of the beginning perhaps. We do see much more optimism there. But margins continue to be pressed in pricing. So it remains a tough slot. I think the real story with Greenbrier is that the leverage that we're getting in other jurisdictions where we put 18 months, two years into research and development is helping a lot. And we've been able to thus far keep-up with the market pressure by offsetting with the factory efficiencies.

[Brian Colley:]

Thanks. That's helpful. And also, could you just provide an update on how many deliveries you have locked in for 2018 with the orders you received post-quarter and then also the MUL agreement?

[William Furman:]

Sure, Lorie will answer that. We have now managed all the sand car activity that people have been so concerned about. We'll get the pickup in deliveries from that in this fiscal year. And we have one or two other moving pieces, particularly from the MUL piece. But Lorie can update her views on that.

[Lorie Tekorius:]

Sure. And I think, Brian, right now as we look at 2018, and then as Bill said, we've got a number of moving parts with sand activity, as well as the MUL transaction. As we look at 2018, we probably got somewhere between 10,000 and 12,000 units locked into our production schedules. But as you know, from quarter-to-quarter as we talk those things change. We're regularly working with our customers and makings shifts and adjustments, so we'll provide updates as we have them.

[Brian Colley:]

Great. That's helpful. And then lastly, so in the past you've talked about normalized margins being in the mid-teens. But I was curious if you think this could be - this could still be the case, if a border tax adjustment led you to shift your production more to the U.S.; any way to frame up kind of the margin differential there between the U.S. and Mexico for your manufacturing operations?

[William Furman:]

All right, that's a great entrée into a complicated subject. As you probably can surmise, we're opposed to the proposed border tax adjustment as a part of any tax reform. And we believe that many others are as well. And that it will not be successful in its current format. However, NAFTA renegotiations will bring some of the same pressures. We could easily bring 1,000 jobs back. I earlier noted that we could - we'd be happy to do that into the United States. I don't think it would have an effect on our margins if we did so. Mexico however is very important to us as a launch pad into the rest of Latin America. And through those two entities, Brazil - or countries Brazil and Mexico into targeted markets we have identified in Africa and the East. So it's complex for us and it's not simply about taxation in the U.S. We would also pick up some export opportunity, which we believe would neutralize any disadvantage. But we're very, very active on this issue. We have two - three board members working as part of a task force, an industry task force with the coalition in D.C. And we're cautiously optimistic that we will find a soft landing on that issue.

[Brian Colley:]

Great. Well, I appreciate the color and thanks for the time.

[William Furman:]

Thank you, Brian.

[Operator:]

Thank you. Our next question is from Ken Hoexter of Merrill Lynch. Your line is now open.

[Ken Hoexter:]

Great. Good morning. Bill, can you talk a little bit about pricing? Looking at your backlog, it looks like the new cars obviously coming in at a different pricing. And clearly, mix always has an impact on that. But does that - should we infer any potential margin impact on that as well or just by the product mix, it just signals different pricing?

[William Furman:]

All right, price, as I indicated earlier again and thank you for the question, pricing in this kind of environment, there's a lot of competition. And pricing has certainly been weaker, but we have been thus far able to offset the effect on margins and in most cases by manufacturing efficiencies. I think as the supply/demand equation comes into balance, especially watching velocity and the health of - and mix of intermodal demand and orders just shift from 40-foot container traffic in North America to reloads in 53 is a huge factor. We just had our entire board at Port of Oakland looking at how that affects that port and some of the amazing investments they're putting 53-foot phenomenon, shorter hauls. It's not something that you can figure out quite easily by just looking at the surface. But in general, the mix, it was a big factor in this quarter's rather modest receipts of orders. And we didn't disclose what the pricing was on the second 1,000 cars that were received subsequent to the quarter, closely to the end of the quarter as a matter of fact. But pricing pressures exist and we just have to sort through it as we have in previous downturns. We got a very experienced management team. And we've been focused on maintaining market share particularly in targeted product types like automobile and intermodal.

[Lorie Tekorius:]

And just maybe to add on to that, Ken, our manufacturing group comes to work every day focused on how they can improve efficiencies, productivity. I still like to remind us on regular basis, the job of the manager is to manage. And to the extent that we are faced with more open market pricing on more commodity type railcars instead of the boom of the energy activities, our manufacturing folks in all of our locations continue to fall hard on their orders. And we're pleased to be able to want to get to report these manufacturing margins that they've achieved.

[Ken Hoexter:]

That's great. Thanks for that insight, and congrats on the Mitsubishi. But let me switch subjects for my second question over to - maybe, Lorie, I don't know if you - maybe could begin a little bit on the timing and scale of the Astra and Brazil benefit. So you keep mentioning they're not in the targets. And I guess just to clarify, they're not in your 2018 targets either I'm guessing. Maybe you could walk us through kind of the timing and then the scale, potential benefits, so we can start putting parameters around that.

[Lorie Tekorius:]

Of course, and as I mentioned in my remarks, we do - as we look at the combination of our existing European operations with the Astra operations, we do expect that the net benefit to Greenbrier is going to be somewhere between $0.15 and $0.35 per share on an annual basis. We have not blended it into any specific guidance, because it's hard for us to predict exactly when it's going to happen. So we don't want to be reconciling back against that. The Astra operations are a bit larger than our existing operations, so that's part of what the benefit is there. Don't forget that once we complete this transaction, while we will have a larger overall operations Greenbrier will receive 75% of that benefit and the existing owner of Astra will have a 25% ownership. So that'll hit the minority interest line item. As we look at the activities in Europe and in coming up with this guidance we're focusing more on the western European market and the benefits that we've seen between combining the two different product mixes that we have in each one of those operations to serve the Western European market for assuming modest margins probably somewhere in the mid-teens, and we were really excited. But again, we're actually a little bit surprised that we still quickly received government regulatory approval from two of the three jurisdictions and the one that's taking a little bit longer is Poland, where we actually don't have lot of local sales activity. So we are hopeful that this will close sometime this quarter probably towards the later end of our Q3.

[William Furman:]

I might just add on to that by some quick remarks about Brazil. The total fleet in Brazil is - and the market is somewhat is small, but it's emerging as a very important government policy. The fleet is quite low and presently dominated by five railroad concessionaries. The concessionaries can reinvest only when the concessions are extended. So a number of positive factors have existed in Brazil following a real drop in the economy in political malaise. Currently the government is much more stable. The reinvestment imports and reducing concession reports is very big, and there is a move to recycle some of the older cars and add to the traffic base. However it is not a booming market. The crucial thing about Brazil is the opportunity to make money in the near term and to prove our backlog but also to use it as a staging area for the rest of Latin America to link that with Mexico, and then to export out of those regions depending on currencies coupled with our Eastern European operations into Eurasia and Middle-East. The Silk Road is a very important development in railroading in Europe. There is initiative. There are initiatives there with some of the railroads to take as much as eight days out of transit times to ease and there are lot of equipment rationalization needs to take place. So the strategic reason for the combination of Astra and Greenbrier is very compelling when you look at the total opportunities that exist for export activity as well as the western market.

[Ken Hoexter:]

I truly appreciate the time and I would say thanks Will. Thanks a lot.

[Lorie Tekorius:]

Thanks, Ken.

[Operator:]

Thank you. Our next question is from Matt Elkott of Cowen. Your line is now open.

[Matt Elkott:]

Good morning. Thank you for taking my question. So you guys have not given specific 2018 guidance, but you did give some color back in January as Bill mentioned on this call this morning. I was wondering if when you did give us that color in January. Had you been in talks with MUL then, and how much of that may have influenced your outlook commentary for 2018?

[William Furman:]

We will comment about the conversations but zero was included in the Lorie's remarks. I also just want to say that I've been blessed or possibly cursed by a series of excellent CFOs Mark Rittenbaum and Lorie Tekorius who curb my optimism from time to time and won't let me be optimistic in future guidance. But once in a while, I can slip in a little bit of optimism, and I think the core thing here that you have to assume particularly in the international we're putting a lot of time and energy and now two years, and we're not going to get any more business almost that's incremental or getting more income to support the kinds of numbers that many in the street are saying about Greenbrier's 18. So I think we haven't included any of that really in our guidance. So I think there is really more reason to be optimistic than to be pessimistic. Lastly, I would say that we have a strategic process that's ongoing and is integrated with our budget. Two times a year, we do off-sites and we actually do manage these things as other companies do to produce long-term EBITDA adds and strategic adds and to adjust to changing market conditions. And this is really one of the reasons that Greenbrier often outperforms versus underperforms in its numbers.

[Matt Elkott:]

Got it, that's very helpful Bill. Thank you for that, and just one more question. So if MUL is intending to grow a fleet from 5000 to 25000 in next four years and they've already committed to 6000 from you guys through 2020 newly manufactured cars and they've committed to get all their manufacturer. There are newly manufactured cars from you guys through 2023. The other 14000 cars that are planning to add to the fleet, does that mean that there is potential for more newly manufactured cars than the 6000 they've committed to or they strictly focusing on acquiring cars from the existing North American lease fleet.

[William Furman:]

While I wouldn't care it to describe their strategy because it's known to them and they wouldn't share with us. We have a number of other very important partners in the leasing company business. We only work with a few closely who difficultly buy for cash and then we have a few other syndication partners that are very important to us, Mitsubishi has been a good one and to the degree they share their plans with us. If you start with 6000 cars that we announced with this transaction and added that to the 5000 you do get to 14000 over four years. So if you're noting our press release we indicated that in combination with right as an exclusive manufacturer for MUL. We would be syndicating cars to them and then of course in addition to the core or base 6000 cars that they talked about and you can do the math yourself that's why it's a very big deal that's why it's important to us and we couldn't overlook it because they were intending to do it themselves whether it was with us or someone else, and I think they would do it responsibly. They're very good global financial institution and a very smart company. So I think the chances are that there will be lot of business area if they're model was successful, and I have no reason to believe it will not other than as people who plan it out the market is tougher. I have always found it strange that leasing companies don't buy during the down terms when prices are cheaper but they wait and they buy at the peak. I think Mitsubishi along with others is doing the - they have smart thing today entering the market at the time when values are available. It's interesting how fast this market turns around just looking at same cars for example if you've been watching the press. The roads who service and today have some of the strongest volumes they ever had given the level of fracking. So the sand business which has been declared dead is now prospering again the breakeven levels of wellhead are coming down dramatically really giving the Middle East a run for its money on breakeven rates. So it's a complicated environment.

[Matt Elkott:]

Got it. Did you guys say that you delivered any tank cars to Saudi Railways? I thought you mentioned it, but I missed it. You mentioned Saudi Railways in the opening comments, but I missed what you said. Did you deliver any cars to them in the quarter?

[William Furman:]

Yes. We did deliver - we had the first revenue recognition and delivery of those cars and some parts of it.

[Matt Elkott:]

Is that the main reason, the primary reason why the value of the delivery that you made in the quarter is so high?

[Lorie Tekorius:]

Now actually, we have been really pleased with our results across the board, again our international activities as well as what we are doing here in North America. We continue to build a really higher ASP rail cars out of Mexico our automotive cars were doing more especially tank cars, box cars all of those and they continue to impress us here in North America with the margin level that they are achieving even how they're slow in production rates.

[Matt Elkott:]

Got it. Well thank you very much guys. I appreciate the color.

[William Furman:]

Thank you.

[Lorie Tekorius:]

Thanks, Matt.

[Operator:]

Thank you. [Operator Instructions] our next question is from Bascome Majors of Susquehanna. Your line is now open.

[Bascome Majors:]

Good morning and congratulations on booking a very large order in a difficult market. I'm curious if and when the market does turn around. Are you locked in? How does pricing work on that, is it a consistent fixed margin. Are you locked in the pricing as there may be a mid-term? We open around that deal where you can capture some upside if the market does move against or in your favor? Can you just give us a little color on that?

[William Furman:]

Well, the pricing reflects the favorable environment, of course that would be in existence for purchasing cars. However there is a great deal of flexibility and it depends on the car type. So we expect these transactions to be profitable, of course or we wouldn't want to do them.

[Bascome Majors:]

Okay. The pricing is defined for the term of the agreement at this point.

[William Furman:]

No.

[Lorie Tekorius:]

No, it's - as you can appreciate, Bascome, and you can't - well, I guess you could if you wanted to, but it might be an interesting opportunity to take it to be locking in pricing for the next several years. So now, the pricing is yet to be determined as on many of our multiyear contracts where at the time of entering into that contract. We and our customers have an assumption about the car types that they're going to need over the course of the period. And when we value backlog, we base it based on other similar market price activity, which we've not put a value I don't think on the 5000, 6000 cars for MUL yet.

[William Furman:]

Right, and multi-year transactions in general, you don't want to speculate on commodity prices for inputs, for example, steel. So you have to index those or have some way of passing those costs on or the reductions on.

[Bascome Majors:]

Understood, appreciate that. Maybe kind of tying altogether on some of the threads you're questioning so far. In January, I think the words you guys used were that things stay as they are today, that 2018 could be more of a slight decline to even flattish on an earnings basis or just 2017. As you sit today is that - do you feel stronger, weaker? I just - are those comments still stand or has something changed on that front? Thank you.

[Lorie Tekorius:]

Sure. And I will start out. I'm sure Bill will add a little additional color. Yes, my comment still stand on that, that as we look at 2018 today I feel more confident that we would probably be at flattish. And then I think if I reflect back on what we said back in January we thought that there was a bit of optimism, because those comments about 2018 being slightly down to flattish did not reflect a benefit of the Astra Rail combination at that point in time. I don't think we have been through the changes or the governmental approvals. It did not reflect our increased investments in Brazil, I guess, certainly didn't reflect MUL, so all of those things would tend to make it move more positive. But we're not prepared at this time to give specific guidance on 2018, but I would say we're move confident and probably more optimistic.

[William Furman:]

That is a quite remarkable concession by Lorie, because let me interpret that. That's a very - when I get up every morning, I feel stronger every day. But we have to be prudent and we'd like to air on the side of caution. So there is a lot of things that we do to try to improve things and our expectation internally is to try to meet or at least meet 2017 performance. And we exert quite a lot of energy in planning to how to do this. And then, lastly, I'll just repeat what I said about our international activity. It's just serious stuff. We're putting capital in and we're going to have some winners, we're going to have some losers, no doubt. But we've got a very good strategy. And we expect that this will be successful. And yet, in both analyst forecasts, which have way down in 2018. And in our own thinking, we don't dump that into our plan. So it's all upside. And I think that's probably the bigger upside than the ones that Lorie had even mentioned. We expect our operation Astra Rail Greenbrier when it's proved to be very successful. They have a whole line of agricultural equipment that has not been even factored into the equation, the value creation and for factories in Romania that are very, very efficient.

[Bascome Majors:]

Thank you for the time.

[William Furman:]

Thank you, Bascome.

[Lorie Tekorius:]

Thanks, Bascome.

[William Furman:]

Cheer up, Bascome.

[Operator:]

Thank you. Our next question is from Steve Barger of KeyBanc Capital Markets. Your line is now open.

[Steve Barger:]

Hi. Good morning, guys.

[Lorie Tekorius:]

Good morning, Steve.

[Steve Barger:]

As you said, Bill, you already have deployed a lot of capital onto the international opportunities. But with the convert and with the good free cash flow you've had, you've got $550 million in cash, $900 million in liquidity. What's the plan for deploying the rest of the capital that you have at your disposal?

[William Furman:]

This is probably the most important function the board of directors has. It takes up very seriously. So review capital deployment and ROIC at every board meeting, at every management meeting, which is monthly operations meeting. We're watchful of our lower ROIC, for example at GBW and in our aftermarkets businesses. If those businesses are not remunerative, we have to find a way to make them remunerative. So we're putting capital in higher growth, higher ROIC opportunities for the longer pull. All right, we will continue as Lorie indicated returning capital. We have a consistent dividend policy that the board has approved. And our current dividend is running about a little bit above the average of the Standard & Poor's 500 I think, around a little above 2%, which is modest but I think attractive. And we have in the past, bought back stock. We have other opportunities to deploy capital to the benefit of shareholders. You want to add to that?

[Lorie Tekorius:]

Sure. And then other deployments of capital will be the same that we talked about, in the near-term that we have truly committed to, we've got Astra, which is over the course of between closing and a year later at €60 million, if you add up the investment for making in Brazil, that's another $33 million. As Bill says, we're constantly looking at other opportunities and areas to expand whether it's international or here domestically. And quite honestly right now it's been an uncertain time. So we think it's prudent to have a bit of a - some dry powder to be able to deploy either for opportunities or for a little bit of conservatism.

[William Furman:]

We have been paying down debt. As you can see, our net debt dropped dramatically during the quarter. Our cash flow is more than $50 million. But the quarter on - and so, we have adequate capital. We will continue to focus on debt maturities. And we have to not forget that we have some debt in the balance sheet. But that's offset by our leasing portfolio and we're very under-leveraged when you just isolate our leasing portfolio in the company.

[Steve Barger:]

Bill, I would agree. I mean, as we get close to the bottom of the cycle you have remarkable liquidity. So I guess the question is beyond Astra and Brazil. And I'm not asking that you would do too much too fast. But do you see other opportunities out there at reasonable multiples or good returns that you can move it toward?

[William Furman:]

Yes, but I think we need to be focused very keenly on our strategy of execution on the two core strategies while we are in this cycle of uncertain period in our core North American markets. We have a few things that we have to address. I'm keenly, for example, interested in turning around the GBW losses. That's $8 million, the current run rate this quarter, a year that could be big upside. We are from the downside, have improved ROIC. I think that it's important that we stay the course. The international business is very tough in the sense that it draws on resources. It causes a higher G&A costs. And you notice that our G&A has crept up as percentage of sales largely due to the investments we're making in international travel and consulting and other things. And some of these markets are very, very thin. So it's going to put some pressure on our goals for ROIC. We're going to have to really focus in order to make those work. So we're going to be very careful about not taking on too much. And I'm glad you just mentioned that. As it sounded like a board member.

[Steve Barger:]

And last question, can you tell me what the split of production was in the quarter between Mexico and the U.S.? And did I hear you correctly that you'll be able to export to different markets from both Brazil and Mexico, when Brazil is up and running?

[William Furman:]

I'll take the last part first and I'll let Lorie answer the first question. Last part is, yes, we think the platform in Mexico and the platform in Brazil, and especially given the nature of the trade agreements, and the likely direction that trade is going to take, which might take a really nasty bounce in many directions, particularly U.S. agricultural exports into Mexico. We think that Mexico and Brazil due to currency will be good export platforms into not only Latin America, which is a smaller market, but into Africa and parts of the East. We're focused on Eurasian and Middle Eastern strategy, Middle Eastern only in the GCC, and in Africa. And we have a triangulated capability now out of United States, depending on currencies out of Europe, depending on currencies, and out of Latin America.

[Lorie Tekorius:]

And then, taking the first question last, I would say probably for the quarter about 80% or so of our deliveries came from our Mexican operation. And I think that's been consistent for the last several quarters.

[Steve Barger:]

Right. Okay. Thanks very much.

[William Furman:]

Thank you.

[Lorie Tekorius:]

Thank you, Steve.

[Operator:]

Thank you. Our next question is from Matt Brooklier of Longbow Research. Your line is now open.

[Matthew Brooklier:]

Hey, thanks, good morning. With respect to the 6,000 orders from MUL, what are your thoughts on the cadence of receiving those committed orders over the next 12 months or over the life of the contract? I'm just trying to get a feel for how those orders start to come in. Just also wanted to clarify if you've already accepted any orders under what was announced today.

[Lorie Tekorius:]

Sure, so again just to clarify, so since February 28 we received orders for 1,000 units that doesn't include the 6,000 announced today with MULs. I do believe that we worked on other orders or things that have converted into orders. Nothing - the timing of all these things is difficult to get down to the specific day. And then the timing of the delivery of the MUL 6,000, I think it's going to be spread nicely over the next several years. So I don't have a specific layout in which fiscal year those numbers will show up. So I don't know if you have additional color you'd like to add to that.

[William Furman:]

I believe we'll be getting some deliveries in fiscal 2017, so…

[Lorie Tekorius:]

The MUL?

[William Furman:]

I'm sorry, that would be to - those are [sand cars] [ph], yes.

[Lorie Tekorius:]

Yes, so I think for MUL, I think the first deliveries would likely be 2018 of the 6,000 new cars.

[William Furman:]

Okay. Good. Sorry, you're right. I misspoke.

[Lorie Tekorius:]

Okay. As we have a lot going on here.

[William Furman:]

Yes.

[Matthew Brooklier:]

Okay. So it sounds like the deliveries and also the orders are going to be relatively I guess ratably spread over the next four years. And I guess the timing of that is obviously dependent upon what they decide right in terms of the pace in which they're going to build up their railcar fleet.

[Lorie Tekorius:]

Sure. And just to clarify, I think the 6,000 cars will be delivered over three calendar years. I guess, it will be ratably deployed. And there will be a back and forth depending on other production that we have committed. Phase 2, it would be very similar to any other multi-year order that we have.

[Matthew Brooklier:]

Okay. That's helpful. And then just second question, with respect to your backlog, if I look at the dollar value of your backlog on a sequential basis, I look at where you ended fiscal 1Q, you take out what you sold in the quarter and then you add the $50 million of the orders received. The number that I'm coming out with looks like it's a little bit north of the number you reported. So I'm just trying to get a sense for was there any adjustment made during the quarter, adjustment made to the dollar value of your backlog.

[Lorie Tekorius:]

Sure. So we did have a few tweaks during the quarter. Again, this really relates to multi-year orders, whereas we're talking with some of our customers and making contractual adjustments to the value of that or depending on that car types as our customers' needs adjust, we do make adjustments to the value of the unit in backlog. As well as you have currency implications for cars with some of those costs in there as well as the European orders.

[William Furman:]

It's interesting to note. We've been asked this question almost every single conference call over the course of this current adjustment in the marketplace. I think that total cancellations we’ve had maybe are 50 cars. We have successfully renegotiated on a win-win basis other cars and we pretty much have worked up any real threats, certainly in the energy side. And by the way, again, energy tends - it seems to be at least as it relates to sand cars spiking back up again.

[Matthew Brooklier:]

Okay, that's helpful color. I appreciate the time.

[Lorie Tekorius:]

Thanks, Matt.

[Operator:]

Thank you. Our last question at this time is from Mike Baudendistel of Stifel. Your line is now open.

[Michael Baudendistel:]

Thank you. Thanks for squeezing me in. Just want to ask you on the Mitsubishi deal, should we expect on your balance sheet the value of the lease cars for syndication and equipment on operating leases for those values to come down in the coming quarters, because - is more of that value be shifted over to Mitsubishi?

[Lorie Tekorius:]

Well, again, so we will be doing some additional syndications to Mitsubishi. I wouldn't say that they would be the specific reason why that the value of railcars held for syndication might move. Again, in the second-half of the year we actually have a bit of our production phase maybe a slightly higher percentage dedicated to railcars that will be going into railcars held for syndication. So again, that manufacturer of railcars that are going on to a lease then will go on to the balance sheet. The timing of when those actually get syndicated could flip into 2018. And we will continue to syndicate cars to some of our other great financial partners when it comes to that activity. So it's not just specifically MUL.

[William Furman:]

Right, we talked about used cars in the press release to the extent that we sell cars that are used. We expect to maintain our portfolio at approximately the same dollar magnitude. We are continuing to be dedicated to capital-light strategy overall. However, tax benefits with the current tax rules we're reporting and this might give us an opportunity, along with other partners to refresh our tax basis and that would create additional benefits to us while we maintain the - attempted to maintain the static value of our portfolio.

[Michael Baudendistel:]

Great. That's helpful. And then, so I also want to ask you, of the railcar units received during the quarter or after the quarter, can you just tell us how much of those were from international customers? And then how many of the units in backlog are from international customers?

[Lorie Tekorius:]

I would say it was a smaller portion of the total of the 700 cars during the quarter as well as 1,000 afterwards. Again, that market is quite a bit smaller than the North American market, so it would have been fairly small, I think 10% to 15%.

[Michael Baudendistel:]

Okay. And of the backlog, how many of those are international orders?

[Lorie Tekorius:]

About 10% I would say. Sorry for missing.

[Michael Baudendistel:]

They're 10% also. Okay. Great. Thank you.

[Lorie Tekorius:]

Thank you.

[Operator:]

Thank you. At this time, speakers, there are no questions in queue.

[Lorie Tekorius:]

Super. Thanks, everyone, for joining us today as we talked about our second quarter results and again another congratulations to Justin Roberts, who is now our Vice President, Corporate Finance & Treasurer of the Greenbrier Companies.

[William Furman:]

Thanks, everybody.

[Operator:]

That concludes today's conference. Thank you all for participating. You may all disconnect.