The Greenbrier Companies, Inc.
Q3 2015 Earnings Call Transcript

Published: 1 Jul 2015

[Operator:]

Hello and welcome to the Greenbrier Companies’ Third Quarter of Fiscal Year 2015 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 Ms. Lorie Tekorius, Senior Vice President and Treasurer. Ms. Tekorius, you may now begin.

[Lorie Tekorius:]

Thank you very much, Mickey. Good morning, everyone and welcome to Greenbrier’s third quarter fiscal 2015 conference call. On today’s call, I am joined by our Chairman and CEO, Bill Furman and CFO, Mark Rittenbaum. Today, we will discuss the results for the quarter ended May 31, 2015 and comment on our outlook for the remainder of 2015. After that, we will open up the call for questions. And in addition to the press release issued this morning, which includes supplemental data, more financial information and key metrics can be found in our earnings deck posted today on the IR section of our website. As always, matters discussed on this 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 2015 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. The highlights for our third quarter includes record revenue, adjusted EBITDA, deliveries and the value of our backlog. Aggregate gross margin of 20.9% was the new quarterly record and was driven by performance from our manufacturing and lease syndication businesses. Orders during the period totaled 5,300 new railcars, valued at $640 million. Our diversified backlog remains a robust 45,100 units with an estimated value of $4.86 billion. While our revenue and EBITDA this quarter were both all-time highs, diluted EPS missed Street expectations by $0.30 per share. Let me take a minute to bridge that gap. First, we had non-recurring cost of approximately $5.2 million after-tax or $0.16 per share for professional fees and other transaction costs associated with the potential acquisitions, for which discussions terminated in June and our advocacy of new tank car safety regulations. Second, a $100 per ton decline in scrap metal prices in a single month adversely affected our wheel services business by $1.1 million after-tax, or $0.03 per share. And third, net earnings attributable to non-controlling interest, better known to some of us as minority interest, was higher in the third quarter than for the first half of 2015. This increase is due to a higher proportion of our deliveries, about 45% being built at our 50-50 joint venture, GIMSA. As many of you know for accounting purposes, we consolidate 100% of GIMSA’s revenue and gross margin. The line items, net earnings attributable to non-controlling interest represents our partner’s 50% share of the GIMSA results, which has to be deducted in determining Greenbrier’s earnings per share. So, the more high margin units delivered in any given quarter from our GIMSA facility, the higher the minority interest line item will be. For the fourth quarter, we expect this line item to be at least similar to the third quarter. Now, I will turn it over to Bill.

[Bill Furman:]

Thank you, Lorie, and good morning. Greenbrier had a good quarter considering the distractions in the quarter, which included a serious effort at a strategic acquisition on an opportunity that presented itself and we look at it very seriously. At the end, we could not bring it to closure. We also wrapped up our advocacy for safer tank cars and worked on some other strategic projects related to our international strategy. So, it was a busy quarter. We are very pleased with several of the records we hit this quarter, as Lorie has mentioned. We also had a strong market share for the first three months of the year as reported by ARCI, and we were clocked at 43% of all orders received during that first calendar quarter. And we fully believe we can hold our own in the evolving marketplace. The market is changing somewhat and it will always change. Still for us, it presents many opportunities. On revenue basis, book-to-bill remained positive for the quarter for the seventh consecutive quarter. We are happy with the order book we received and we think we can continue this record. We have a strong commercial and leasing platform and our manufacturing base is nimble and is very diversified. Our market share has doubled over that enjoyed in past cycles in the upward part of a cycle. And we have always been much better at gaining market share and closing transactions in down markets than in up. I would not describe this as a down market. I would say that 15,000 cars as reported by the industry is much more close to a normalized replacement demand market. So, I think that people are really overreacting to a little bit to some of the things that they see in the marketplace. It is complicated world, and energy and other things have affected these markets, but – and perhaps just really quickly mentioned a couple of those in a moment. So, the market is not really down in the sense that it might have been in the late – in 2009. It is changing. And while we are experiencing some speed bumps, at least compared to the robust levels of demand, as reported in the last two years industry wide, we have worked for the past five years to prepare ourselves for a market like this, which is normal, a normalized market. So, we remain optimistic about the future. A comment about strategy. What kind of acquisition we were looking at, why now? Well, the reason we are looking at opportunities and an interesting opportunity presented itself that the reasons are simple. For the $5 billion backlog, which represents almost 2-year run-rate if we ran at continuous production for that, a nimble and diversified manufacturing footprint, the completion of major CapEx spends, we have prospects of several strong years of revenue and cash flows and a much stronger and we possess today a much stronger balance sheet than we have for many, many years. Look at Pages 15 and 16 at sequential EBITDA growth in the handouts to or the attachments to our press release and we expect to continue strong trajectory of EBITDA. And therefore, we will have cash to invest. From this position of strength, we can look closely at strengthening our footprint in the businesses we know well. These are manufacturing, leasing and mechanical services, along with a growing and strong international footprint, which will diversify and hedge currency-driven swings, such as we are currently seeing in North American rail loadings in certain segments, in some, but not all car types. A railcar, as we have said to you many times before, is not a railcar. One has to look at the individual loading segments and look at what is driving the top line statistics, while we cannot say very much more about the opportunity that we pursued due to the NDA, we can say that we took a very serious look. In the end just did not believe we could get a deal done on terms that we felt met the times. We are very pleased that the Department of Transportation as Transport Canada decide, in effect, to adopt Greenbrier’s recommendations for safer tank cars making our tank car of the future the gold standard for transportation of hazardous and flammable commodities by rail. Those regulations were only enacted and adopted officially this week, so they only now became effective. We are certain that they will protect the industry from liabilities associated with safer tank cars and hazmat and flammable service. And also as stakeholders in the entire industry take time to reflect on the meaning of these rules, how they will be enacted and implemented by refineries and railroad stakeholders through various squeezing out or pricing mechanisms, the regulatory changes will produce retrofit and replacement demand, which will add legs to car building and repair, if not immediately due to the times and over the next year or so. Some factoids to consider. Energy prices are not down. They are trending up from lows both in dollar denominations and in real terms and other currencies. Currencies do matter. Currencies are one of the major drivers for reduction in agricultural, the demand exports for coal and so on. That in turn has affected velocity. But oil prices are settled in U.S. dollars and U.S. dollars are stronger while other currencies are weaker. Why does that matter to us? Why does that matter to Greenbrier and to the shareholders of Greenbrier? Well, rig counts in North America are down, but drilled and capped rigs have grown considerably. Sand demand is down, but tremendous latent demand remains as energy prices recover. Fracking and energy independence is a long-term thing for North America, yet we have a balanced portfolio. I am not sure why certain analysts have singled us out for exposure in the energy field. We have less exposure than our peers. However, we aren’t complaining about that, we are just pointing out some obvious things. A dollar-driven commodity demand falloff as well as weaker coal and rail [caps] [ph] has improved velocity by rail. This may well go on for a while, but not forever. So, it matters that, for example, some large stakeholders, for example, in the Middle East, Saudi Arabia, in particular, paid in U.S. dollars, but can spend in weaker currencies. Now, consider the equivalent price of oil, for example, in euros or in rubles over six months ago. So, this fact allows them to live with cheaper oil prices for the time, but not forever, given geopolitical pressures. Secondly, Greenbrier has a very strong footprint in Mexico and we are strengthening ourselves in Brazil and the Americas. Currencies are making exports much more attractive in those currencies, particularly in agriculture and manufactured products, where both countries have a significant GDP footprint. This is a developing tailwind for all of our international business and we do about 65% – manufacture about 65% of our revenue base right now in international jurisdictions. There are increased geopolitical stresses, not just in the Middle East, but in Europe, which create upward pressure in the value of fungible commodities. While Greece is a tragedy for the Greece, it is not for Europe. Oil is a fungible commodity and do not overlook what North America has achieved in energy sufficiency. It is long-term play and a game changer. We are very pleased with the core strategy. And while we live in interesting times, we embrace change and the opportunities that changing markets may bring. For us, I think it is a time of great opportunity. I turn it back to you, Mark.

[Mark Rittenbaum:]

Thank you, Bill. I will make a few concluding remarks and then we will open it up for questions just turning a bit to liquidity and our outlook. We ended May with over $325 million of liquidity from our cash balances and available borrowings under our credit facilities. Our net funded debt, LTM EBITDA is now less than 1-to-1 at 0.9 times and reflects our continued focus on strengthening the balance sheet. We remain committed to enhancing shareholder value. In the third quarter, we announced our fifth straight dividend of $0.15 a share and we repurchased 23,000 shares of common stock at a cost of $1.5 million. You will note repurchases were a little light this past quarter as we were precluded from repurchasing our stock due to the trading window being closed as a result of the potential acquisition, which was under consideration. We do have availability of over $42 million available on our share repurchase program and we will continue our balanced approach of reinvesting free cash flow in high rates return projects, acquisitions in our core competencies and returning capital to shareholders. We continue to stay on track our integrated business model and flexibility in an ever-changing market will allow us to achieve our two financial goals initiated during the fourth quarter 2014 call with our aggregate gross margin reaching 20.9% during the third quarter, we achieved our longer term goal of at least 20% margin of full year ahead of plan. And when we announced our Q4 earnings, we will be giving outlook for 2016 as well as new intermediate term financial goals. We also remain on track to reach our 25% ROIC by the second half of 2016 with an ROIC annualized from this last quarter of 21.3%. Turning to more immediate guidance, based on current macro and industry trends and excluding the non-recurring cost of $7.5 million pre-tax, or $0.16 per share from the third quarter, we reaffirm our previous guidance of revenue of $2.6 billion to $2.7 billion for the current year, adjusted EBITDA of $420 million to $435 million, and deliveries of approximately 21,500 units. Our guidance is narrowed for the year to $5.70 to $5.85, again, excluding these non-recurring costs of $0.16 a share. As I have just mentioned, we will provide outlook for 2016 on our next call, but we certainly, based on current trends and our strong backlog, as Bill pointed out, expect strong earnings and free cash flow for the foreseeable future. Now, we will open it up for questions. Operator, if we could turn it back to you to please give instructions for participants to do so. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our first question here is coming from the line of Justin Long from Stephens. Sir, your line is now open.

[Justin Long:]

Thanks and good morning. I wanted to ask the first question about the railcar delivery guidance. I guess, the full year expectation was unchanged and it implies a pretty significant sequential increase to around 6,600 units delivered in the fourth quarter. Could you speak to your level of visibility to that estimate? And is that a good quarterly run-rate to think about as we enter 2016?

[Bill Furman:]

Thank you for your question. I am going to let Mark Rittenbaum and Lorie address some of the granular aspects of your question, but one of the things that occurred in this quarter which also accounted for an earnings shortfall, is we got little lower actual syndication in the quarter than our plan just being diverted into the next quarter. And with that as background, we should have a stronger – we should have a stronger performance, which would bump up revenue even more than the record that we had in the quarter. But I think we had revenue recognition of slightly less in this quarter, but I will turn it over to Mark and Lorie to get into the details for you.

[Mark Rittenbaum:]

Right. And Justin, just picking up on that theme in page or Slide 5 of our supplemental slides, specifically to Bill’s point, syndications were about 1,000 units this quarter compared to 1,800 in Q1 and 1,700 in Q2. As a reminder to folks that are newer to the company, we initiate lease transactions with third-party or with customers and then we bundle those transactions and then syndicate them to investors and then manage those assets on behalf of investors and we bundle them into big packages and syndicate them. So, that in and of itself causes a timing difference between when we produce a certain part of our deliveries each quarter and when we actually deliver railcars, so the timing difference between production and deliveries. So, in the fourth quarter, we expect that the number of syndicated units will be closer to the first and second quarter numbers and within that range and while production overall will be slightly ahead of third quarter level. So, we have very good visibility into the deliveries for the fourth quarter. And again, we will – the increase will be due to the increase of syndications. So, we feel good about the guidance for the year. Turning to next year, that 60 – that increase in unit count would imply roughly about a 25,000 to 26,000 car build year or deliveries for ’16, I would say it’s too early for us to give that kind of guidance and that kind of leap up from a 21,500 unit level of this year to something in the neighborhood of 25,000 to 26,000, but we definitely see strong 2016 ahead of us.

[Justin Long:]

Thanks. That’s helpful. And maybe to follow-up on that point, I know you are not going to give detail on 2016 guidance until next quarter, but just given the backlog today from a high level, do you have enough visibility to say that your earnings should be up year-over-year in 2016?

[Mark Rittenbaum:]

I think that it’s probably reasonable to expect that when we come out with guidance that it would be directionally correct from what we see right now.

[Justin Long:]

Okay, great. And last question, Bill, you spoke a little bit about strategy for capital deployment, I was curious if I could get your confidence that you can deploy capital via an acquisition that reduces the cyclicality of the business or just given the move in the stock price we have seen here recently and the fact the acquisition you were looking at in the quarter fell through, would you lean more towards a buyback or utilizing more of that buyback as the use of cash?

[Bill Furman:]

No, I think we put it out, our strategy is to deploy capital wisely, which would be not only accretive, but would serve our return on invested capital goals. The acquisition we have looked at had much potential to do that. But again, as we got into the details of it, we couldn’t come to a deal that we felt serve the times. So we are also looking at the deployment of capital on high ROIC returns for efficiency, especially in areas like automation, further efficiencies which will push our gross margins even in changing markets and will help ROIC and also through dividends and through a balanced approach of share buyback. Again, I don’t fully understand, our stock is on trade, it seems on backlog because we have got a strong backlog, we have got improving margins, it’s not seeming to trade on that, it seem to be very professional investors whose are trying to time the market here or predicting a peak. I personally don’t get it, because this would apply to everybody. But hey, life isn’t fair so we are not complaining, we are just going to do our very best to continue to pound out very strong earnings and cash flow. And at the end of the day, one of our Board’s most important things to do is invest that cash flow wisely. They are fully engaged in everything management is doing and we are enthusiastic about the future. We are not discouraged by current market circumstances, many, many opportunities are out there for us.

[Justin Long:]

Okay, that’s helpful. I appreciate the time this morning.

[Bill Furman:]

Thank you.

[Mark Rittenbaum:]

Thank you.

[Operator:]

Next question is coming from the line of Mr. Matt Brooklier from Longbow Research.

[Matt Brooklier:]

Thanks. Good morning, so I had a couple of questions around regulations, just curious to hear your kind of updated thoughts on the potential magnitude of both replacement tank car orders and also retrofits and then also kind of the cadence at which you think that will unfold the order activity potential and also retrofits?

[Bill Furman:]

Well, as you know from reading the summaries of what occurred, there are things that are apparent in the reports and there are things that are not so apparent in the reports. What’s apparent is there is a period of time that allows shippers and other stakeholders to decide how to handle the new regulations whether to be proactive about safety, protect the public or to allow the window to run for a period of time as they analyze their options. The matter is complicated, of course by improved velocity and the fact that there are cars for some shippers and some stakeholders being even stored. And others are they have demand. So in the current quarter for example, we had the tank car orders in this quarter. We expect to continue to have tank car orders. There is just a little confusion about what to do. Should you – as a shipper should you retrofit, if you are leasing cars you let those cars go back, what’s the timeline the government is giving you to do it and I think that’s all pre-occupying folks a lot more than maybe it should because at the end of the day, I think the General Counsels, most officers are going to say as the refineries are saying, hey we want safer cars. Clearly, the railroads talking about something else that’s not so apparent. The railroads are pushing for safer cars. That’s really apparent. And behavior will push safer cars into the future. So I think the wildcard here really is how geopolitical forces, especially the dollar has caused and contributed to more improved railroad velocity, which allows them to run fewer cars with the same number of – fewer cars that produce the same amount of product. And I think that as it sorts out, it will reach a normalized level. And I really do see a lot of this going on. Coal exports are down sequentially like 25%, that’s a big number in these gross numbers and it helps to improve velocity. We don’t think the energy game is over at all. It’s in a pause like ethanol was a few years ago. Everybody loves to predict what’s going to happen, we can’t predict it, but we see the underlying forces. And the underlying forces are positive for energy independence in North America. So that’s my response.

[Matt Brooklier:]

Okay. And excuse me there has been a lot of talk around industry retrofit capacity, there is kind of varying numbers out there, I was just curious to hear your thoughts on industry retrofit capacity. And then also if you are able to at this point talk to GBW’s potential annual capacity to do retrofits on a go forward basis?

[Bill Furman:]

GBW is continuing to be on the path as last advertised. We have the capacity to do more retrofits than it likely to be demanded. The whole issue of retrofit capacity was a red herring, which is both cynical and hypocritical. There is plenty of retrofit capacity for it’s likely to occur. Right now, there has not been a whole gang of people lining up to the retrofits yet. Whether that will come and what and how – what magnitude it will come, we will have to wait and see. But I think that we are ready to do what we said we would be able to do. We can easily reduce 25% or 20% of the total demand if required. So we have currently a run rate capability of 2,500 units or more in the pipeline, we can take it up to 3,000 cars a year. We can do a lot of retrofits if we called upon to do so. So I am not suggesting we are not receiving retrofit orders, we are. But there is not a big gang of people lining up saying, let’s retrofit the cars. So that was all a bunch of hyperbole. We all have a lot of capacity to do the work that’s necessary over the timeframe that the government has given us to do it.

[Matt Brooklier:]

Okay. So just to sum it up, it sounds like the digestion of regulations at this point with respect to replacing cars and retrofitting cars, that’s taking a little bit more time to develop, but we are still feeling good about the potential total opportunity over the next couple of years?

[Bill Furman:]

We are – we see it as something that will add tailwinds in 2016, 2017, 2018 as these regulations get fully implemented and people decide how they are going to deal with it.

[Matt Brooklier:]

Okay, I appreciate the color.

[Bill Furman:]

Thank you.

[Operator:]

Thank you. Next question comes from the line of Bascome Majors from Susquehanna. Sir, your line is now open

[Bascome Majors:]

Yes, thank you. I want to follow-up on the syndication questions from earlier, it looks like for six quarters now the dollar value of inventory of railcars held for syndication has risen. In the number that you produced has exceeded the number that you have sold. And you mentioned a couple of minutes ago that the third quarter syndication volume was less than you expected when you entered the quarter, can you give us a little color around what drove the shortfall, when you expect this net investment in railcars to shift to more to the monetization sequentially, how significantly that might reverse and what’s giving you that conviction?

[Bill Furman:]

Let me just say that this is not a homogeneous and differentiable production function, it’s not sequentially linear. We from time to time will have issues in documenting or closing transactions. So there is nothing particularly going on except just background noise. It’s not unusual for some transactions to slip into the next quarter. Directionally, when that happens it creates a little bit more load on the assets carried for sale. But there again, we get interim rent that’s much more than we could invest in anything else and transaction is money good. So we are getting rates of return on that fleet, that are very, very good. I don’t think that anything should be read into the fact that syndication or the differential between production and revenue recognition was driven by the syndication lag. It’s just a normal possible thing that can happen quarter-to-quarter. It’s like making sausages, I suppose in a way, but we don't look at it like a straight line kind of thing. And it’s very normal and we are not at all concerned about it.

[Bascome Majors:]

Well, I mean looking into the second quarter, you seem to have some conviction earlier that that syndication sales will rise back up to round a better than it was in the first half the year, can you give us some color into the visibility you have got there, I mean are there hard sales agreements from financial partners? Are there other commitments that are giving you the underlying conviction? Anything you could share here would be helpful?

[Bill Furman:]

Sure. Mark or Lorie, why don’t you talk to that point, that’s a very good question?

[Mark Rittenbaum:]

Right. I appreciate the questions, Bascome. And again, just to close the thought on what Bill was saying as I answer your question is that there is a continuous churn of what is in these numbers, so that much like we are operating in higher syndication levels, so in driving more volume through our lease syndication model. So, we are constantly turning the assets that are in here. But specific to your question, we work with multiple investors and we do have takeouts for what is in here and we are currently documenting since the end of the quarter, we closed on about 500 units in the month of June. And we – back to a question that was asked by Justin earlier, we are in the midst of documenting the remainder of the volume for this quarter that would give us the confidence that in documenting it with an institutional investor that would give us the confidence that we would meet or exceed the goals for this year.

[Bill Furman:]

We just make a fundamental point about the category itself. These are all transactions that we initiated, but under lease and we have an equity investors who are buying that kind of car. And so it’s just a timing issue. It’s – these are all – none of these cars that are assets held for sale are cars that we don’t feel are money good transactions based on the leases that we’ve attached to. So, I think that’s a very important thing. We don’t have a block of assets out there that we bought for inventory and we are trying to attach leases, we attach the leases first and then they go on to that bucket.

[Bascome Majors:]

Understood and I appreciate the color there. One other question, the leased fleet utilization was down about 2 points quarter-over-quarter, and I know 97.5 or so was still a very good number in the historical context. But could you talk briefly about what you are seeing about car type in that market that’s driving the decline in utilization whether that’s temporary or just last quarter was maybe non-sustainable spike to plus 99%?

[Mark Rittenbaum:]

Okay. I think part of the simple math, Bascome, is just when we have the number of units in our own lease fleet that we do of not rounding the 10,000 cars when we take 2% of that 10,000 cars that it only takes a couple of hundred cars that maybe in between leases that would drive that number. So, there is not anything fundamentally that’s going on other than kind of a small fleet size that is driving that in particular cars that are between lease. Overall, the lease market is robust out there. We have already talked about the energy markets. And coal, coal is the area of particular weakness. While we don’t have many coal cars in our own lease fleet, we do have a number of coal cars that we do manage, particularly in our WLR-GBX relationship, where we also have the 25% economic interest there, but outside of that – and that would be the area of particular weakness, but outside of that area, the markets are still solid.

[Bascome Majors:]

Understood. I will pass it on to the next guy. Thank you.

[Mark Rittenbaum:]

Thank you.

[Operator:]

Next question is coming from the line of Eric Ross from Bank of America. Sir, your line is now open.

[Eric Ross:]

Hi, good morning guys. Just wanted to sort of asking about if I can get your thoughts on where we are relative to peak backlog? And maybe if you could give a little bit of an update on any negotiations with customers over cancellations or extending the delivery schedules for cars?

[Bill Furman:]

Well, thank you. We have not had any cancellations. We have – we encourage conversations with customers, where we can find value-adds for them and for us. We have had some swap type transactions that are valuable to both parties. We appreciate our strategic customers who are always ready to have a dialogue, but we haven’t had any cancellations nor have we had any value reduction from that kind of thing, where we are exposed and I think we are exposed less than our peers, it would be in the energy markets, specifically in tank cars and sand cars, but we have a very low percentage of our total backlog in oil cars and the percentage that we have is largely tank cars of the future. So, any more granular about that, we have 2,500 cars that we have in backlog and those cars are very valuable. So, we don’t expect pressure there. Sand has declined by about 10% in total, but the amount of sand required per well is exponentially increasing. So, we see that as a temporary blip in there. We know we have a similar exposure. So, we don’t – we haven’t, we don’t feel – we feel pretty good about this so far. And not to say that won’t happen or that people won’t come and talk to us, but these are opportunities as well as issues and there are opportunities for value creation, which is how we purchase the market, how can we create value for customers and for ourselves out of changing times.

[Eric Ross:]

Okay, great. Thank you. And along that vein, is it possible that the new tank car regulations provide some support for that backlog or do you think a lot of those orders have already been placed or is that something that doesn’t happen for several years into the future or what’s kind of thinking around that?

[Bill Furman:]

Everybody – much of these tank cars as if they are homogeneous and differentiable, but they are not, lot of the cars are not jacketed. They are used in some services and the jacketed cars are the ones that are going to be the safer cars longer term. So over time, we expect a movement toward either retrofitting the jacketed insulated cars or to retrofit those and we expect some legs right now. What’s confusing things right know though is coal loadings have an effect. Agricultural loadings have an effect. The effect is on velocity. As we normalize demand down to for the last trailing quarter, the first three calendar months of the quarter, demand is at a rate of 60,000 cars per year, 16,000 times or a little higher than that, which is a traditional replacement type demand to a normalized market. It’s unfair to think that a 140,000 car backlog industry-wide is sustainable or even desirable. To us, it creates issues when we have a $5 billion backlog. How do we fit customers in that we would like to fit into our schedules? And yes, there are some issues juggling and managing slots, but we are quite good at that and I think we are kind of eagerly looking forward to deploying our capabilities in this changed marketplace, but it’s certainly – it’s certainly a very good year when you can look at a 60,000 to 80,000 car order base. I am just amazed at the notion that we have been looking at order rates and linear backlog as index of health of an industry is so vital to North America’s prosperity in the future. It’s remarkable to me that people are so obsessed with this trying to call peak. I don’t know if we are at a peak. I don’t know if we have momentum upward and then neither does anybody else. But I know that – I know our business and we know our business and I think we are just going to be running our businesses efficiently as we can.

[Eric Ross:]

Okay, that makes a lot of sense. Thank you on that piece. Let me throw in one other one there. If you could maybe provide a little more color on what kind of restrictions you guys had in terms of the buybacks and what your thinking is now? I mean, obviously, with the big share price decline, I would think that you guys could potentially be looking to get more aggressive with the buybacks and wanted to hear some thoughts and if those conversations have been had with the Board?

[Bill Furman:]

I think as we pointed out in our press release, we have $42 million of unused capacity that has been given to management to execute. We certainly think that Greenbrier has gotten hit by a lot of fear and concern about calling a peak. I think we are pretty honest company if we see a peak, we will call one. The market is changing and it’s going to change, that’s the nature of the business that we are in. So we sure think that stock is a good value today and I imagine that we will be – keep doing what we said we are going to do which is look at strategic opportunities, higher ROIC and opportunities, things that are die movers in our space where we are capable of working. We got a lot of cash to deploy and we are going to be careful about it. And it’s going to be accretive and attractive, but we are also going to return capital in the form of dividends and stock buybacks and that’s the Board policy and we had a Board meeting yesterday. And I see no reason why we won’t continue to opportunistically take advantage of stock buybacks.

[Eric Ross:]

Okay, great. Thank you.

[Operator:]

Next question comes from the line of J.B. Groh from D.A. Davidson. Sir your line is now open.

[J.B. Groh:]

Thank you. Hey Bill. Thanks for taking my call.

[Bill Furman:]

[Indiscernible]

[J.B. Groh:]

Alright, I appreciate it in any case. Just looking at the backlog and you have sort of given us an indication of the exposure to energy there, what’s the prospect that because oil prices are down, some of the retrofit or the refurbished or the replacement cycle is sort of already captured in some of those orders, rail companies as well, we have already got an order for tank, we probably don’t need the growth part of it anymore, but could we use those orders that we have already placed as our replacement?

[Bill Furman:]

There is some merit to that. But it’s not simple math. So I think the forces are that there is a backlog, there is the right kind of backlog, because again all of those cars are not the same. And there is another shoe to drop, which is not just the regulations but how will the railroads implement their policy in interpreting their regulations. And they are going to be assertive and aggressive about having safe cars carrying oil first and then ultimately ethanol. So the railroads have always been I mean they are certainly they are self-regulating in some respects and they have the right responsibility to conduct safe operations, so I can that is very important to watch. So I think there is an element of this, but the coal loadings being down makes it easier, so that’s a factor too. And then people are just generally confused and they are looking at all their options, so there is a timing delay. It’s very hard to pinpoint but you are right that there are large quantities of certain tank cars are being – have been ordered. If people kind of accommodate changes on some of the regulations and we are running the tank car of the future, so we are very comfortable about our backlog. I don’t know if others are having to come out, production go into storage or not, but ours are not.

[J.B. Groh:]

And then what do you think the – what’s your opinion sort of the prospect of regulations trickling down to other hazardous materials that are non-flammable and maybe getting a second wave here?

[Bill Furman:]

Well, you are referring to the kind of spill that took place in California about 15 years ago open up the base in California in about 15 years ago, I guess or maybe a little longer than that. It contaminated the Sacramento River. And certainty in unit train service, cars become much more susceptible to breach and any higher speed service, the huge trend has been to faster trains and bigger trains. I think it will trickle down over time as people ponder the awesome risks of damage that’s going to be hazardous to the environment. And as we see the environmental lobbyists pushing, especially in the West more protective policies on rivers and watersheds, not just on as – but some of their cars are very hazardous to people, just cars that are flammable, but other cars. And while the safety record is very good, still when an incident that has a little probability recurring but still occurs, when it occurs it’s very serious. So a triggering event is probably what would happen would cause that another serious derailment that causes loss of life or contamination of the water shed. Here in the West, it’s a very serious matter. And I think it’s likely to occur over time.

[J.B. Groh:]

Okay. And then real quick, could you give us kind of an update on what barge revenue was for the quarter and how things are trending and I know you had a nice launch?

[Bill Furman:]

Nice try. Mark will give you color as we can.

[J.B. Groh:]

Okay.

[Mark Rittenbaum:]

Alright.

[Lorie Tekorius:]

And J.B. this is Lorie, revenue for the quarter was around $20 million. And as Bill said, yes we had an amazing launch of the Kirby barge. Not sure if I saw you there, but it was pretty incredible for those listening on the call, you should definitely check out that portion of our website, go to the marine barge section and look at the link for the launching of that Kirby barge.

[Bill Furman:]

That’s the largest barge we have built, 185,000 barrel integrated ton barge operation We have another Kirby in backlog and we have fairly robust demand, first barges series that large probably our core, that would be another tailwind because we expect marine margins to improve while revenue remains about the same, we expect our margins to improve. Even though our backlog has come down somewhat in that business, we are tracking a pipeline of opportunities that continues to be very robust. That’s true also by the way in rail, however.

[J.B. Groh:]

Okay. Thanks for the update.

[Bill Furman:]

Thank you.

[Operator:]

Thank you. Next question is coming from the line of Mr. Willard Milby from BB&T Capital Markets. Sir your line is now open.

[Willard Milby:]

Hi, good morning everyone. Just wanted to touch on GBW for a second, there are some changes being made here, some facility reductions quarter-over-quarter, 39 facilities with 14 tank capable facilities last quarter and now 33 facilities with 12 tank capable facilities, can you talk a little bit about what changes were made this quarter and as you gear up to be EPS positive with this venture in 2016 and beyond and what kind of impact would this GBW you have quarterly as we are looking beyond 2015?

[Bill Furman:]

Great question and I am going to turn it over to our – one of our two Board members on that joint venture, Mark Rittenbaum who is an expert on all the things…

[Mark Rittenbaum:]

Alright. It’s all relative, so anything you are correct of indirectly point out, but as you look at the equity and unconsolidated earnings and unconsolidated subs, which GBW we do not consolidate, it’s not much of the contributor this year. This year, we had been more building a platform for the future, investing in the facilities, investing in people and investing in training and safety. And so as Bill just described in marine, looking at that as a tailwind for 2016 and beyond, we definitely look at GBW as a big tailwind, because as I have said today it’s pretty much kind of at a breakeven consolidated impact to us. So while we haven’t given guidance on that with that 38 shops or 30 approximately, and then with revenues exceeding $300 million. If you just apply any kind of reasonable margin to it, even something got comparable to the run rate for our wheels and parts business, which will come back to kind of an annualized run rate for the wheels and parts business. And then comparable G&A expense, you would see that as a percentage of revenue, you would see that GBW could have the potential meaningfully with the dial in 2016 and beyond.

[Bill Furman:]

I would just add to that, if we have seconded our best – one of our best operating people, Jim Keohane [ph] used to run ARI, the public company. He is known as Mr. Margin. He is a good operating person. He has put some really good building blocks in there assimilating two cultures, 40 shops and he is trimming the sales on some of the less productive shops that overlap, which is a normal part of improving the margins. So we expect the next six months to see better returns there increasing as whatever occurs in retrofits takes place. We hope that those who are concerned about retrofit capacity are right to be concerned and that we will all have a lot of retrofit work to do. So we will see how that goes.

[Willard Milby:]

Alright. Thanks. And one more on margin, I know historically you said that margin important is not going to be linear, it all depends on mix and timing and stuff like that, with your visibility. Is there anything coming in the next couple of quarters that we should be aware of from the manufacturing side of things, line changeovers where we might see step back from these record margins?

[Lorie Tekorius:]

Sure. So, we do – I think we mentioned on the last call that in this fourth quarter, we have got a couple of changes going on some tank car lines, but I have to commend our manufacturing folks, they have done a really great job thus far this year on dealing with a variety of ramp ups, facility changes, additions of lines. So, things are going well. There are, like I said, there are few changes that are happening in the fourth quarter. We are adding some more complicated tank cars to our product mix. These will be pressure tank cars. So, there might be a little bit of headwind there. But overall, they have been performing very well and we expect that to continue.

[Bill Furman:]

The operating momentum should really continue and we – so, we have very favorable circumstances in our backlog. And the backlog, again, is a very big plus for us. And we set out to do multi-year transactions to achieve that backlog. We should reap the rewards of it. The other thing that is very important is that we have capability to maneuver and maneuvering in market where people have needs there is great opportunities to serve those needs. So, we are looking at ways of improving our margins of doing win-win transactions with people and we feel it will be a very interesting and productive time for Greenbrier. We expect to be able to maintain our backlog in the present market circumstances and so I think that 2016 that we are certainly striving for stronger year in 2016. Our goals are strong goals.

[Willard Milby:]

Alright, well, thanks for the time.

[Bill Furman:]

Thank you.

[Operator:]

Thank you. One last question is coming from the line of Mr. Steve Barger from KeyBanc Capital Markets. Sir, your line is now open.

[Steve Barger:]

Thanks. I know you can’t talk about the deal that you walked away from, but can you tell us what multiple you would be willing to pay for a deal and maybe what the margin profile is, so we can start thinking about things that may have crossed your desk?

[Bill Furman:]

What I can tell you is we are looking for transactions that have a high ROIC that make a lot of strategic sense in areas we know and if it’s significant deal was immediately accretive. So, that’s part of our strategy. Other than that, we had an NDA, it’s pretty specific, we want to honor that NDA and we can’t say much more about it.

[Steve Barger:]

If you were going to use that on a deal, what leverage ratio would you be comfortable with and I just say that because you obviously have a ton of liquidity?

[Mark Rittenbaum:]

Right. It is good to point that out, Steve. Indeed, we are prepared to use our balance sheet. It doesn’t much good to brag about a net funded debt to EBITDA of less than 1-to-1 unless we are prepared to deploy it and we have talked about ways of deploying it in the past, but in terms of what kind of leverage we might use, I think it depends on what type of business it is and not only give those out as an examples, but leasing businesses which overall we have gone to long-term asset-light model, but on a leasing business of leverage of up to 4 to 1 is not uncommon on the manufacturing business. It would be closer to 2 to 1. And on the services business, it will be somewhere in between. So, it really depends overall on the – and I am talking about mixes of debt to equity. So, it really does depend on the type of business and particularly any kind of transaction. Of course, there is many combinations of cash, debt and equity that we could use to fund the transaction.

[Steve Barger:]

Yes. As you have looked at deals, are you more focused on buying a business that’s running well or would you buy a fixer upper?

[Bill Furman:]

Well, it’s always better to run something that doesn’t have any more problems than the normal one, run off the mill of a public company. So, we are looking at good companies with solid – good opportunities with solid fit strategically for Greenbrier and it makes strategic sense.

[Steve Barger:]

Yes, I think people would prefer to see a company that’s running well. And just one last I guess statement, I am pretty sure that you are not going to find an acquisition as cheap as your own stock. So, if you can’t find a deal and the market continues to put a single-digit multiple on what has to be hundreds of millions of dollars of cash flow in your backlog, I just urge you to really focus on free cash flow conversions, pile it up and take advantage of what is a pretty unique situation?

[Bill Furman:]

One of the things we have learned in the last five years is to listen to smart people and you certainly fit in that category and it’s part of our platform to return cash to shareholders, the dividends and to look at opportunistic stock buybacks and we have the dry powder and the board recognition of how this can be important over time.

[Steve Barger:]

Thanks for the time.

[Bill Furman:]

Thank you. Appreciate it.

[Lorie Tekorius:]

Right. So, that concludes our call today. We appreciate everyone’s interest in Greenbrier and our quarterly results. And as you all know, reach out to myself and we can follow up on any additional questions. Have a great day.

[Bill Furman:]

Thank you.

[Operator:]

Thank you. That concludes today’s conference. Thank you for participating. You may now disconnect.