The Greenbrier Companies' (GBX) CEO William Furman on Q2 2016 Results - Earnings Call Transcript

| About: The Greenbrier (GBX)

The Greenbrier Companies, Inc. (NYSE:GBX)

Q2 2016 Earnings Conference Call

April 5, 2016, 11:00 AM ET

Executives

Lorie Tekorius - SVP, CFO

William Furman - Chairman, President and CEO

Analysts

Ari Rosa - Bank of America Merrill Lynch

Brian Colley - Stephens, Inc.

Bascome Majors - Susquehanna Financial Group

Matt Brooklier - Longbow Research

Thom Albrecht - BB&T Capital Markets

Matt Elkott - Cowen and Company

Derek Rabe - Raymond James

Kristine Kubacki - Avondale Partners

Operator

Hello and welcome to the Greenbrier Companies’ Second Quarter of Fiscal Year 2016 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’d like to turn the call over to Ms. Lorie Tekorius, Senior Vice President, Chief Financial Officer, and Treasurer. Ms. Tekorius, you may begin.

Lorie Tekorius

Thank you, and good morning, everyone, and welcome to Greenbrier’s second quarter fiscal 2016 conference call. On today’s call, I’m joined by our Chairman and CEO, Bill Furman. We’ll discuss our results for the quarter ended February 29, 2015, and comment on our outlook for 2016. After that, we will open-up the call for questions.

In addition to the press release issued this morning, which includes supplemental data, more financial information and KEY metrics can be found in a presentation posted today on the IR section of our Web site.

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 2016 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

We posted solid results for our fiscal Q2. Highlights included adjusted EBITDA of $108.2 million and earnings of $44.9 million or $1.41 per diluted share on revenue of $669.1 million and deliveries of 4500 units.

We also completed the profitable syndication of a significant portion of the 4,000 railcar portfolio acquired in our fiscal Q1 generating revenue of $100 million and gross margin of $6 million, which is reported in our leasing and services segment.

There was an additional $24 million of revenue deferred in conjunction with the transaction. The decline in deliveries compared to Q1 is a result of lost production time due to major line changeovers and a lower volume of new railcar syndication.

Just to clarify, none of the units syndicated as part of the acquired portfolio transaction are included in deliveries.

Our lease fleet utilization declined during the quarter, primarily driven by the sale of railcars on lease. As a reminder, our own fleet is fairly small, 9,400 units and a small number of units off leased can significantly move the dial on utilization.

The number of off-lease units actually declined modestly from the first quarter. Orders totaled 3,000 new railcars during the quarter and included automotive carrying cars, boxcars, intermodal cars, tank cars, and covered hoppers.

Total orders were valued at nearly 310 million for an average price of approximately 103,000 per railcar. As market conditions moderate, we expect the timing of orders to continue to be lumpy. Our diversified backlog of 34,100 units with an estimated value of nearly $4 billion continues to provide good visibility.

Aggregate gross margin, excluding the acquired railcar portfolio syndication, was 20%. The syndication generated high rates of return from such a short-term whole period. However, the margin percentage had a diluted impact, resulting in aggregate gross margins of 17.9%.

Looking at our manufacturing segment, our gross margin was 20.4%, reflecting continued strong operating performance partially offset by production inefficiencies due to line changeovers and marine production, as well as lower syndication volume.

Wheels & Parts margin increased to 10% from 7.3% in the first quarter, primarily due to seasonally higher wheel and component volume. Leasing and services gross margin dollars were up Q2 compared to Q1, driven by the syndication of the acquired portfolio which was diluted to the margin percentage.

We continued to demonstrate the strength of our balance sheet and diversified business model with past initiatives implemented to streamline operations translating into solid gross margin.

I’d like to now take a few minutes to discuss the various ways we monetize railcars through our lease syndication model and how it impacts our financial statement. We’ve intentionally been driving more volume through our model of originating leases for new railcars, which once built are carried short-term on the balance sheet and leased railcars for syndication.

Upon sale, these transactions are reflected in manufacturing, revenue, and gross margins, as well as deliveries. We also opportunistically sell railcars out of equipment on an operating lease. The results of these transactions are reflected in gain on sales.

As we’ve refined our syndication pipeline, we’ve had the opportunity to acquire groups or portfolios of railcars that we can blend in with our newly built railcars to give our syndication customers a more diversified portfolio. The results of the sale of the acquired railcars is reported in leasing revenue and gross margin.

While the various ways these transactions impact our financials can be difficult to model from a segment perspective, our focus has been to drive value through our integrated model and provide products to satisfy our syndication customer’s needs, while providing a positive return to our shareholders.

Satisfying customers’ needs and solving problems are an integral part of Greenbrier's DNA and will always be a part of our business model. We ended February with over $580 million of liquidity from cash balances and available borrowings on our revolving credit facility.

We generated cash flow from operations of $212.8 million during the quarter. Our balance sheet is strong, with net funded debt of just $114 million and a net funded debt to LTM EBITDA of just 0.2x. This compares to 2.7x just three years ago.

We remain committed to our balanced approach to capital deployment and enhancing long-term shareholder value while continuing to seek and identify opportunities to grow the business. In today's release, we announced our quarterly dividend of $0.20 per share. We will be issuing another release tomorrow correcting a reported record date for the dividend.

We repurchased over 533,000 shares of common stock at a cost of $13.3 million during the quarter. Over 3.2 million shares have been repurchased at a cost of $137 million since the inception of the share repurchase program in October 2013, representing about 10% of our diluted share count. We have 88 million available under our share repurchase program.

Looking forward, the second half of 2016 will be impacted by line changeovers, product mix changes, and lower production rates on certain lines. We also expect some minor headwinds to our aggregate gross margin percentage as we syndicate the rest of the acquired railcar portfolio over the second half of 2016.

With a strong start to the year and our current outlook, we remain confident in our ability to achieve our 2016 guidance. Based on current business trends and production schedules for fiscal 2016, we’ve narrowed our previously disclosed guidance for deliveries to be approximately 20,000 to 22,000 units, revenue to exceed $2.8 billion, and diluted EPS in the range of $5.70 to $6.10.

And now I’ll turn it over to Bill.

William Furman

Thank you, Lorie, and good morning. As those of you who followed us -- who follow us closely know we’ve made some significant bench-building management changes recently, and I’m thrilled that Lorie has taken on her larger role now as CFO at Greenbrier, as well as the new responsibility Mark Rittenbaum has been given at as Executive Vice President for Commercial Leasing and Finance. We thank both of these Officers for their many contributions over the years and look forward to many more.

Just in the context of the numbers, I'm happy with the results for this quarter and as Lorie has indicated, we’re going to have a year that will be within the range of expectations that have been set.

So what I'm going to try to do today is to provide some context on our markets, and more importantly just to remind you of our business plan, offer some perspective on how Greenbrier is a much different and stronger company today compared to five years ago.

Today, Greenbrier is much more capable than it was of successfully navigating, and in fact thriving in shifting market conditions. Our management team, as well as the Board of Directors and our employees at Greenbrier have all played important parts in navigating through this five-year transformation.

Indeed, we are experienced in operating through business cycles, and I might remind all of those who follow us that there is an essential cyclicality to the railcar business. Today, my perspective is that much of railcar demand will be specific to the U.S dollar and the strength of U.S economy. And U.S economy to me continues to look to have strong legs, particularly in some areas of industry, and while we focus often on those industries that are weaker, there are many businesses in America which we build cars for such as boxcars, automotive, intermodal that have prospective outlooks that are strong.

From 2011 to 2015, as everyone knows, our entire industry benefited from a dramatic increase in railcar deliveries, primarily driven by significant demand for energy-related railcars. In 2015, industry deliveries, for example, had ballooned to over 80,000 units and industry backlog far in excess of 100,000 cars, driven largely by this energy renaissance in America and high oil prices. Oil prices are now lower. It’s up to you to decide if and when they will rise. Again, I believe they will, and I believe that the most significant thing that has occurred in the last decade is this new energy independence in the United States and in North America.

However, back to our industry, this growth was unprecedented and at Greenbrier we successfully stepped up our output to meet demand. But we continue to focus to diversify and balance in all the various meaning of those words including the word diversity, and we prepared for less prosperous times, knowing that the circle in our industry goes round and round. Sometimes our customers need us and sometimes we need our customers. And again, our experience in operating through such times will be very, very useful in the coming cycle.

And I shouldn't characterize it as a cycle in that sense. We see it as a return or normalized level of demand. In 2015 we reported record deliveries, while so growing a record backlog that provides us great visibility over the next two years, while the benefit of the experience it comes again from operating our business through numerous cycles.

Our management and Board of Directors have always been focused on the fact that shifts in demand sometimes significant, are a normal part of the business. So that the breadth of product range, the diversification that we’ve done in our products, efficiency, quality, and service, of the keys to the success.

So our investments in new products, expanded services, efficiencies, and entirely new industrial markets have indeed transformed Greenbrier and now position us for continued success and diversity, including in international markets which have strong legs and in a continued normalized reasonable demand for railcars in North America.

So let's Greenbrier -- let's recap just what Greenbrier looks like and our business looks like today. While we all know we manufacture railcars in North America and Europe, we also now have investment in Brazil, and a growing presence in the Middle East. We have nine wheel services locations, port railcar parts assembly and reconditioning locations in our wholly-owned GRS business unit.

Beyond that, we partnered with Watco companies, a leading short line import terminal operator, on GBW railcar services. A 50-50 JV that provides repair services at more than 30 strategic rail locations across America. Within those areas we’re specializing in car types and we are engaged in service design that will reduce transportation costs to our customers and enhance profitability. GBW is looking very strong.

And we have energized the railcar leasing and services platform. We continue to have about 9,500 owned railcars and a capital like model with 250,000 cars or units under management. In 2015 alone we originated $700 million in lease transactions, which feeds our system of repair, manage railcars, and creates multiple value picks for our shareholders and stability for our workforce and for our supply chain.

We are also making important strides in our wheels and parts business. Just today we announced GB Summit; a 50-50 joint venture with Sumitomo Corporation of America to establish an axle machining facility located in San Bernardino the West Coast. This creates a new West Coast alternative for axle service near major intermodal rail operations to serve America’s two busiest container ports, but a long-time supplier and trusted supplier and when it opens in early 2017 GB Summit will be the prominent location on U.S for machining new axles of all kinds and transportation costs and advantages to Greenbrier and its shareholders and to our customers will be great.

Geographically, however, we are expanding far beyond. Our traditional North American markets as we continue to see strong opportunity abroad. We launched a highly successful, and earlier referenced award-winning railcar manufacturing joint-venture in Brazil and Greenbrier’s manufacturing teams have improved the efficiency of that entity through our global supply chain partner and other strong partner Amsted Rail.

And as early reported we were awarded a contract to build over 1,200 railcars for Saudi Arabia Railway, which are being built under ADR standards at our Greenbrier Europe facility in Poland under U.S., in collaboration with our Polish colleagues by U.S team. And these are being built now. I recently led a Greenbrier delegation to the Middle East rail expo in Dubai, the largest convention of its type for rail market participants in the Gulf and in Northern African and the Middle East, and Greenbrier was the only American-based railcar manufacturer to significantly exhibit at that expo which was attended by more than 9,000 people.

So while we acknowledge that North American railcar deliveries were slower from where they were in 2014 and 2015, those years were aberrations in many ways, which were driven by an event that is now going to back to more normalized demand. What kind of demand do we expect? We are little bit more optimistic, I must say, than industry forecast -- forecasters. We do expect in our case to have strong demand at other parts of the world where people are buying more railcars and we see more railcars.

We believe just that we will see demand on an average of about 50,000 railcars over the next five years, while customer requirement shift to different railcar types and surpluses are absorbed. It is possible that depending on the economy, we could have something in any individual year and is likely, in fact, out of that range, but we do not see a return to numbers consistent with historical troughs, which normally are driven just as the recent prosperity has been driven by sarcastic events that are 20-year events.

So, Greenbrier believes we’re prepared for these new market dynamics. We have a high percentage of business always -- already booked in our backlog, $4 billion, 34,000 units, and we’re replenishing that backlog even though it has been at a slighter -- slightly lower rate than in recent past.

The essential arithmetic has not changed. If we add, for example, 3,000 cars to that backlog every quarter, which is roughly what we’ve been doing in the last five trailing months, we should be able to maintain that backlog very nicely. And if the U.S economy gathers strength, which could happen and probably will continue to be strong, if the U.S dollar does change to somewhere expecting, things will change for us as well.

As a result of our product differentiation, finally, Greenbrier presently enjoys nearly 30% market share in North America on newly built railcar. So, in North America you can do the math. If 50,000 cars is what the average is and we are trying to get 30% market share, that means 15,000 cars or demand in North America, augmented by aggressive growth in international markets where growth is stronger.

In summary, I believe that this business model, our flexibility or adaptability will service very well and I'm hopeful to moving forward to questions about these remarks and about our numbers. Thank you.

Lorie Tekorius

With that operator, we'll open it up for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] This first question is from Ari Rosa of Bank of America. Ma'am your line is open.

Ari Rosa

Hey, good morning, Bill and Lorie. Just quickly wanted to get your sense on what does the overseas sales opportunity look like? I know Bill you mentioned you were spending a little bit more time in the Middle East. Obviously, we heard about the Saudi Arabia order last quarter. What does that look like kind of on a sustainable rate going forward?

William Furman

We have yet to be awarded new transactions following on that Saudi contract, but we’ve openings in the lines that we’ve dedicated to it in 2018. So, we’ve got some runway to add to it. I would say that in the Gulf Cooperative Council which is where we are focusing and not in Iran, we will not be entering that market. We emphatically will be looking at the countries of Oman, Qatar, Saudi Arabia, and Jordan. We will be focusing on that market, but at also near Asia where strong growth is expected. We believe, we -- our platform in Europe is very valuable and while the general demand for that is slim, we believe we can achieve higher market share because of the advantages of being a U.S company with transparency, high quality, and superior engineering. Most people don't recognize that that region although a strong British background in history, it has -- it had a very strong U.S background that the railroads in that region are generally AAR type U.S railroad specifications. So, I wouldn't say that compared to U.S standards that is -- I would say it's a small market, but with greater -- with significant opportunities. The real issue there though is, if we look at what is going to occur in markets like Brazil, where the market share for the entity we are investing in and continuing to invest down there where currencies are very attractive for present investment, and the present economic stability given the wealth of that country, we will believe will come to an end. These are good times to invest in such opportunities because of the renewal of the rail network is going on, and in fact that's what we look for is what are the governments doing, what government to government support is being given. So if you account the opportunities in Brazil, the Middle East, near Asia, and Eastern Europe, in the specific areas where our government has targeted strategic interests, we believe that there is a very substantial cumulative market rivaling somewhat the lower estimates for this year by those who have more pessimistic views on the U.S North American economy. So, 20,000, 30,000 cars are not out of the range possibility for Greenbrier and its supply chain partners to look to as a market of which we will have some share. So it is significant, but beyond that we are not giving any numbers until we get the deliveries actually in the Saudi contract in place and ensure ourselves that we are done.

Ari Rosa

Okay. That’s really helpful. And then just for my second question, maybe if you guys could provide a little more color on the nature of this JV with Sumitomo and what you guys are looking for in terms of the opportunity there on an ongoing basis. You mentioned early 2017, it will be operational, is that -- without necessarily providing any specific guidance, what you're looking for in terms of the ability of that to contribute to earnings and then to operating profit?

William Furman

Well, this is an integral part of our desire to provide superior package of service design to our customers, reducing transportation, and creating differentiation of our two supply chain related businesses, GBW and GRS. It will be accretive. It will be attractive investment, and I am going to turn to Lorie to give anymore granularity. Our partners -- obviously our partners’ wishes have to be respected and she has had contact with them on what we can collect or say about that.

Lorie Tekorius

Right. And I’d say, while we’re really excited about the joint venture, probably in 2017, it will just be modestly accretive. Again, we see it more than opportunity to solve some of our customers’ issues again having axles on the West Coast where we have significant opportunities, particularly on those large ports that Bill mentioned earlier to you, downsized axles. And so we just -- we’re not going to give specific numbers, we think it would be modestly accretive in 2017 and grow from there.

William Furman

So let me give you color on what modestly accretive must be. As CFO, we’ve -- we discussed in great -- we discussed with CFO, what’s material, what’s not. As -- our numbers have grown, our business has become more complex. The bar for material has gotten bigger, but my philosophy on this kind of thing, few million here a year, few million there, all adds up. So, it’s certainly bigger than a bread box, not the size of a barn yet, but keep in mind that Lorie is bound by pretty rigid standards about modest and material. And I’m not sure modest is what we do anything just for modesty sake. This is significant to the overall business model. I also just want to say though that Sumitomo has been a longtime supplier. We have other incredibly valuable suppliers in that segment of our business such as Amsted Rail and we certainly have a balanced approach. Business is itself a balanced enterprise with people. It’s not about money only. It’s not about shareholder wealth only. It’s about people, suppliers, communities, employees, respect for humanity, and that's what all modern manufacturing systems are built on. Whether it's Toyota, Bombardier, or Greenbrier, those are the things that we’ve -- those are the leverage we have to pull.

Ari Rosa

Okay, terrific. Thank you guys.

William Furman

Thank you.

Operator

Thank you. Our next question is from Justin Long of Stephens. Your line is open.

Brian Colley

Hi, guys. This is actually Brian Colley on for Justin this morning.

William Furman

Hey, Brian. Nice to see you.

Lorie Tekorius

Good morning, Brian.

Brian Colley

Good morning. So, my first question was just on inquiry levels that you’re seeing out there in the market, kind of how they progressed throughout the quarter? And what you’re seeing so far in March and April?

William Furman

Seasonally normally our pipeline of inquires which we track carefully goes up a bit and it's higher than actually last year. There is a lot of sluggishness as all of the very informed analysts in our industry have commented upon. However, I would say that we have targets and we believe we can meet our new targets. I’m not sure how long the present gloominess in the part of observers will continue. But we’re still working on lots of deals. However, no doubt compared to a year-ago, two years ago, which is why I give that perspective. There is -- these are lower levels. I know there is pressure on opportunities and we just have to work through this as we’ve in the past.

Lorie Tekorius

And I would say that we’re having the backlog that we’ve gives us the ability to weather through than more modest demand over the next couple of years, but as we do have that opportunity to keep our facilities producing on a steady pace.

William Furman

Exactly, except that backlog by itself can be an infliction, when you don’t have open space to satisfy a customer who wants a car and is in a very strong -- much stronger negotiating position, which is why we use our lease fleet to help us supply the value proposition so that we can give early delivery. So, it is again all a matter of balance. It’s not about single point management like our political process in the world today. It's about balancing many, many things and our backlog is incredibly strong, a diversified backlog and we have 87% for example of our backlog in non-energy products at this point.

Brian Colley

Thanks for the color. That’s helpful. My second question was just I wanted to know if you could provide an update on how much of the backlog is already locked in for both ’16 and ’17? And then, if you could just speak to the margin profile of your backlog relative to your current manufacturing margins? Any color around that would be really helpful.

Lorie Tekorius

Sure. So, at this point being half way through the year for 2016, where all of our production plants are currently set, does that mean that as we progress through the year that adjustments can’t be made if there is opportunities where we can make some shift. As we look into 2017, we’re not prepared yet to give guidance on our expected deliveries in 2017, but based on current production plans, we’ve probably got 10,000 to 11,000 units booked into production. And as you think about our backlog, it does not mean obviously that’s been our backlog stretches beyond our fiscal ’17, because as we’ve mentioned previously, we did take down a number of multi year orders during -- over the last year or so. From a margin perspective, we’re very pleased with the efforts that have been put in, in our manufacturing operations. As a matter of fact, some of us on the management team were just down in Mexico this past week and we are really impressed with a lot of the changes that is -- that are being done there to improve efficiencies, very much focused on safety, and the quality of the products being built. So, we’ve talked about this a number of times over the last several quarters. The margins that we’re recording are not just been driven by energy related cars and the demand is going there. We have really focused on our diversified product mix that includes taking orders that include looking at how we build these cars, and making certain that we’re investing in ways through our manufacturing operations that will generate good margins across the cycle. We also, as we talked about, we continue to drive volume through our syndication model where we achieved additional margin improvement on the products that are being built, as well as creating that long-term revenue stream as we manage those cars for our customers.

William Furman

I would only add that on this trip, we took our entire Board of Directors visited two and three plants in Mexico, and I think some of them who have never been there -- very minority of the Board, those who had been there were astonished by the progress on some of these key drivers. We are very deeply into many management techniques that will improve efficiency, enhanced margins, but most importantly improve employee productivity, reduce man hours and our foundation of quality -- safety, quality, respect for the workforce are the fundamentals of the Toyota production, system that Bombardier production system foundation for the Greenbrier production systems, we’re in the 40x and these its truly enlightening to see the empowerment of the workforce in that culture. We are producing some excellent cars there. And here at Gunderson, we’ve had a focus on the same thing, automation, reducing labor hours in the core products that we’ve built here. So, all of that’s going to contribute margin and we need that contribution for the shareholders in a more uncertain time.

Brian Colley

Great. Well, I appreciate the time this morning. Thanks.

William Furman

Thank you.

Operator

Thank you. Our next question is from Bascome Majors of Susquehanna. Sir, your line is open.

Bascome Majors

Hey, good morning. Going back to market share, you made some comments earlier -- over the last few years days you have been at 25% to 30%, that’s a lot of that share gain from the new car types you’ve introduced. That’s taking it a lot of higher from say 10 years or so ago, and earlier you mentioned a 30% share and maybe a 50,000 market was something you had in mind. Can you talk a little more about how you're approaching market share of this down cycle? Was $0.30 just a number that was consistent with where you have been or will you push for further share gains in a softer market? Should we get to 50 or below?

William Furman

So that’s a great question. Let me give you that color as candidly as I can. The history for Greenbrier does not indicate the future, because Greenbrier has changed remarkably. Our market share goal is for 30% of an average, 50,000 car year which could of course in individual year very considerably and you know the numbers very well, because I read your material, the industry for 2017, 2018 is softer than that 50,000 car average. But if you’ve got to go back and look at all the possible drivers of that, so we're looking at 30% target on an average over the next five years. Why did we pick 30% for some of the reason we just spoke about and because we have more product diversity and all of the reasons in my earlier comments describing our business, the truth is that we have a unique business model, provide service across such a broad range that is virtually impossible to match the value proposition Greenbrier can choose to offer on targeted customers or targeted products. There are others, big ones, which we will not mention by name, but who do a very good job in this too. But I think there is a clear separation of capabilities in the industry and we intend to ride that wave and our target is 30% of a normalized market. So hope that's helpful to you Bascome.

Bascome Majors

Would you expect that to be higher or lower around the same and let’s call it the down years that we might be experiencing in 2017, ’18?

Lorie Tekorius

So, one thing that I would probably add is typically, historically during a lower demand year, Greenbrier has significantly increased its market share. We’ve done that now. We have increased from 12% to 15% that we historically have to the 30%. So I think maybe we are being a little modest that we would expect it in a more modest year and probably will be above 30%, depending on the car type that are in demand. But as you continue to grow, it's harder and harder to push that market share up. So that's probably where we are -- as Bill is saying it depends on the car types that are in demand where we’ve open production space and the like, but I wouldn't say that its our -- and if hit 30% that we’re just stopping there. That [multiple speakers].

William Furman

I agree with that. The historical reasons for low market share was that our capacity would be absorbed. Our efficient capacity would be absorbed as soon as we hit a normalized year and we lose market share. Whereas we would take market share with the tools that we have in down years, but since we have efficiently build out our plans, we now have done that we put all our capital in, we got incredible maneuverability to maintain a higher share. Lastly I would say that we've one of the strongest balance sheets, management teams in the industry for our segment of the industry in recognizing this part of the industry is always small compared to our customers who are more important than anything else in this equation. We have to deliver superior value to the customers, and so I am really optimistic about this. The Board and I as Chairman and CEO have been very focused on building this management team and we are very, very proud of what this team has achieved. Lorie spoke to that in manufacturing and I think you can hear that. We are really very happy about some of the things we have been able to achieve. So we think this is a reasonable goal and of course we don't mean to be challenging the others in the industry, but this is a tough business and we all got to do the best we can to serve our shareholders and our other constituents.

Bascome Majors

Well, thank you for that color there. On a different angle, do -- if you want to dig into your syndication activity recently, can you just give us an update on that the market? How the types of buyers may be the numbers of bidders you are seeing and the amount of capital chasing these railcar deals, how is that changed over the last 6 to 12 months?

Lorie Tekorius

I would say that we’re continuing to see demand as a matter of fact in talking with our leasing group which is the management group that we haven’t spoken really about today, but they have done a tremendous job over the last several years of moving the sheer volume of product that they have done through our syndication model. They continue to see a lot of opportunities out there that's part of why we took the trip on acquiring that fleet during the fourth quarter is because as we were looking at the railcar that we are building versus the needs for diversification as well as just sheer volume, we saw that opportunity to acquire a used portfolio and blended in with our newly build product, as well as some other assets of our balance sheet and syndicated out there. So I think that let’s you known that there is still a lot of cash out there that’s looking to be put to work. Number of people, I don’t think that I’ve heard really from our manufacturing, our leasing group, that’s really changed, continuing to see great demand.

William Furman

So if I can just interrupt for a moment to say that in the flow of product in 2017 and 2018 will be key to continuing the pace that we’ve been growing that business. Jim Sharp, as the Head of that leasing company has done an outstanding job of growing the business not just in the lease syndication area, but in management services, fee income from a variety of very complex and sophisticated software programs, and reducing our transaction value, or transaction processing costs to something comparable to the business. It's a great tool and it's done a great job. So the Wilbur Ross fleet was a very good example. It helped us to diversify our exposure to energy. We blended a lot of energy products into the final syndication of that fleet and that's been one of leasings priorities over the last year to continue to build the strength of this engine. I would say that if we are in a soft market, soft lease rate market, the contribution from leasing will continue to be very, very strong, but we're focused on how do we develop new product to feed that leasing engine with the machine that they’ve built and it's a fantastic machine.

Bascome Majors

Thank you for that and maybe I can just ask one more on, I guess, this one is for Lorie here. The deferred revenue was a lot higher this quarter, about $84 million, that's roughly double quarter-over-quarter. What is driving this cash coming in before you can recognize the revenues and maybe just for modeling purposes, when would this normalize or reverse?

Lorie Tekorius

Sure. Bascome, the part of that increase maybe about $25 million of the increase was associated with the 4,000 unit railcar fleet that we're syndicating. So, while we recognize about a $100 million of revenue, there is about $25 million that was deferred just based on our -- the situation on some of the leases that those railcars are on and they were going through a renewal process, so as that gets changed, the deferred revenue will be freed up and come off the balance sheet to be recognized in revenue. The other big driver was that we received and I have forgotten the timing on this, but we received the advance payment on our contracts to build railcars for Saudi Arabia. So because that was just the way that contract works you get about 10% advance payments, so that's a big piece of that increase in deferred revenue as well. So that will come down as we deliver those cars which will start in our fiscal ’17, the Saudi contract will start delivering in fiscal ’17.

Bascome Majors

Thank you for all the time.

William Furman

We are building those cars now. We have had a successful sample car though just over the weekend. Okay?

Operator

Thank you. Thank you. Our next question is from Matt Brooklier of Longbow Research. Sir, your line is open.

Matt Brooklier

Hey, thanks. Good morning. I wanted to dig in a little bit on guidance. Your railcar deliveries, what’s left to deliver in the second half of this fiscal year, how should we think about that? What’s the cadence of let’s say 10,000, 11,000 cars that you expect to deliver, how does that break out per quarter? If you could provide some color, it would be helpful.

Lorie Tekorius

Sure. That's going to be little more heavily weighted I think to the fourth quarter than the third quarter. In this third quarter that we are in right now similar to what happened in the second quarter, we’ve got a couple of line changeovers that are going on where we are starting out. I think we have talked a couple times about the fact that we are very pleased that we have got some fairly significant size orders for boxcars and we're starting that down in Mexico. We started one of those lines in the second quarter starting the other line here in the third quarter and then we’re transitioning another line and our Plant 3 in Tlaxcala [ph] Mexico. So, I’d say deliveries are as you look at the annual guidance, the midpoint of that compared to what we have delivered for the first half of 2016, you can see that were a little back half weighted and I would say that the bulk of that weighting will be more to the fourth quarter than the third quarter.

Matt Brooklier

Okay. That's helpful. And then, if we look at again what's left to deliver, it would suggest that deliveries are going to be up versus what you did in fiscal 2Q, and I think we are still talking about a target of 20% consolidated gross profit margin yet, I guess, earnings are expected to be down from where they were in the first half of ’16, so is there some disconnect, some incremental cost that I'm missing given the fact that you're probably going to do more deliveries in the second half and we still think that a 20% gross profit margin on a consolidated basis is a fair number as a goal?

Lorie Tekorius

I think a bit of that has to do with our -- the minority interest. So the number of railcars that are being delivered, that are coming out of our northern Mexico, our GIMSA facility, so as those cars get syndicated, so we had a lower number of cars in the second quarter that will actually went through our newly built syndication model, we expect that to pick up in the fourth quarter which will impact while we get to recognize the gross margin that will help us to achieve our goal on the gross margin side. Only 50% of that flows through to the bottom line of net earnings, so as you are aware there is a lot of moving pieces in that.

Matt Brooklier

Right. That makes …

Lorie Tekorius

And the engine [ph] saw that kind of picked up in the second quarter and probably it will kind of stay at that level for the back half of this year, primarily associated with some of the development sorts of activities that we've been doing as we are lowering these new market areas internationally.

Matt Brooklier

Okay. That makes sense. And then just one quick additional question, if I may. Lease fleet utilization, the reported numbers for the quarter at 86%, do you have that number excluding some of the noise that you -- that was incurred during the quarter? I guess the sale that’s syndicated cars, because I think you gave an adjusted number for last quarter; I’m just trying to kind of trying to compare with the two, if you will.

William Furman

That’s a really good question. And Lorie, and Justin I think, you should answer that, but we were very small on the lease fleet, so why don’t you guys address that question?

Lorie Tekorius

Sure. So the number is, if you were to exclude some of that noise similar to what we did last quarter, it will be kind of in the mid 90s of the utilization. As Bill says, you were having such a small fleet; it only takes a small number of cars to move the utilization by 10%. So it's not necessarily as indicative. And as indicated in the press release, the number of units that are off lease actually declined modestly from the first quarter.

Matt Brooklier

Okay, that's helpful. Thank you.

Lorie Tekorius

You bet.

Operator

Thank you. Our next question is from Thom Albrecht of BB&T. Sir, your line is open.

Thom Albrecht

Hey, good morning everybody. Bill, I wonder to ask you a couple of questions about your Middle East comments earlier and some of this reflects my lack of knowledge about that part of the world, but how much of -- what's going on over there is kind of the build out of freight rail systems for the first time or is it -- its just -- its time for new cars. I mean, I don't even know how developed the network is yet alone the demand side. And then tied into that what is the motivation for companies in the Middle East, companies in countries to want to deal with the U.S railcar company? It would seem like Russia or China, and other places would have had more of a natural built-in advantage?

William Furman

The answer to the question is for reasons that are historical and strategic in the nature of Saudi Arabia. And its special relationship with the United States, they adapted U.S AAR standards rather than European standards. Having said that, there are many European expat executives who helped to run the railroads and they do it well, and there is a lot more harmonization between the U.S and Europe in terms of people who run these large companies. For example, our good customer Freightliner is now owned by Genesee & Wyoming. So -- but the real answer to that is that the base question is there is always been special relationship between Saudi Arabia and America. And while it may appear that the U.S has pivoted to Iran. That’s not really true. We have to support Saudi Arabia and they prefer U.S products in this particular area. They also acquire perfectly fine equipment and services in other areas of their economy. The second driver for Saudi, is simply the development of the third pillar of their economic platform which is mining. They have oil, of course, and gas, but they’ve petrochemicals, and now they are really working on the mining and they’re looking at construction of new railroads. So this is a very thin market, and there are many participants in there and there are other car suppliers, notably China, that have supplied that market in the past. We have a geographic advantage we believe under our model, but it's not just Saudi Arabia, it's the other Gulf Cooperative Countries, which is essentially Sunni-based market and the countries of near Asia that are strategic allies of Saudi Arabia and the West.

Thom Albrecht

Okay. And then, on the 3,000 new railcar orders that you received, I don't know if I didn't catch it, but or maybe didn't say, I'm assuming that virtually none of those were tank or frac sand cars, its all the other diversified cars?

Lorie Tekorius

I think actually there were a few tank cars that were ordered during the quarter. They were not for energy. I mean, well again there were some covered hoppers that were ordered, they were not the small cube sand covered hopper.

Thom Albrecht

Okay. And then, just want to get a sense of the marketplace, I know you and others have talked about how orders are non-cancelable, but I got to imagine there is a lot of swapping going on. Can you talk about that, because when I look at -- let me just -- just bear with me a second here, I was -- when I kind of look at what your backlog was like a quarter ago, in your earnings call and what it's like today, last quarter you said that crude tank and sand hoppers were like 27% of the backlog, today it's about 17%. So that's sort of implies and you gave some tank figures as well that you would have produced just under 4,000 tanks in the quarter, leaving you with about 682. I can’t imagine that of the 4,500 that you delivered, that 3,960 would have been tanks. So it's a long winded way to say can you talk about what's sort of swapping activities are going on and of the 4,500 approximately how many might have been tanks?

Lorie Tekorius

Right. And so, Thom, definitely when we do our follow-up calls, after this call, we can talk through some of that math.

Thom Albrecht

Okay.

Lorie Tekorius

But you're asking on the backlog and the go-forward, we can dig into that a little bit more deeply, but there is -- we do have customers who are making adjustments, I mean, oftentimes, and that’s why if you look at some of our disclosure in our 10-Q that we say that our backlog is indicative of what we believe it's going to be order, because as we talked about several times we are very focused on housing our customers to solve their problems as long as the win-win for both the customer [multiple speakers].

William Furman

Well, they’re orders. You said that will be ordered, so just to correct that technical misstatement. They’re orders, but there is …

Thom Albrecht

Right.

William Furman

… [technical difficulty] some of those orders is what you’re saying, right?

Lorie Tekorius1

Yes.

William Furman

So we’re managing that very actively. We’ve a risk committee that meets, I think once a week now on the portfolio and there are -- you're asking for some of the secret sauce I suppose, but I doubt any of us in this business who wants to give you, but we will give as much granularity as we can. We -- maybe we should post something just to be fair on that from what we want to say about that mix and how we bought it down. One of the things that everybody is got to understand, always there are different qualities of customers. Customers have specific operating needs, there are two types of energy cars, oil by rail, and other energy cars that are tank cars, and then there are sand cars. So, one of the real motivations for us to do the WLR deal was to mix other product we can mix with sand cars and make a balanced portfolio. So we’re doing a lot to manage that exposure. And I don’t know if that’s helpful or not.

Thom Albrecht

Well, a little bit yes. Let me just ask it in a -- because I gave a lot of numbers and it might be more than you want to reveal, but last quarter you also said that crude was about 11% of the backlog. Your slides today I think say they are at 2%. I'm guessing that going from 11% to 2% was not just producing 3,960 tank cars, but there had to be some reshuffling, is that a fair assessment or the clients took other car types instead of tank?

Lorie Tekorius

I think possibly Thom, the difference as in the last quarter we were including along with crude, we were also including ethanol as part of those energy cars.

Thom Albrecht

Okay.

Lorie Tekorius

So I think that has probably does the mathematical difference. That are more refined in our disclosure this quarter to focus on the truly the crude car.

William Furman

You know ethanol is not one of the difficult areas. The two difficult areas would be well, crude by rail where customers are taking big hits in storing some cars and buying cars or leasing cars and then sand cars that it probably will comeback faster than crude. It’s very revealing to look at when these dates are that these older cars though, are going to have to be based out between now and 2025. You’re looking in a 154,000 cars of all flammables that are going to have some serious issues. So, these are 40-year assets. It is really premature to be terribly concerned about this, but Greenbrier is and we have been maneuvering aggressively to reduce our exposure in the near-term to the high-risk energy cars. So now with 17%, let's suppose we have 5% of that fleet -- 5% of the total fleet, we have even talked about just so people will stop asking about is why don’t we just write that out of our backlog, but its in our backlog and that would be distorted. So, we think we’ve got this under control. We think that we know what we’re doing, and -- but we maybe we should just publish more granular numbers, so that we can explain, its very question. It’s pretty granular that we probably need to publish it for everybody [indiscernible].

Thom Albrecht

Right, right.

William Furman

Yes, okay.

Thom Albrecht

Okay. Thank you.

Lorie Tekorius

Thank you, Thom.

Operator

Thank you. Our next question is from Matt Elkott of Cowen and Company. Sir, your line is open.

Matt Elkott

Thank you. Most of my questions have been answered. I just have a quick one here. You guys talked about the international opportunities in the Middle East, Eastern Europe, and Brazil. I wanted to ask you about Mexico. Are there any potential long-term opportunities associated with energy reform in Mexico? I know Watco just announced a new facility down there on the Kansas City Southern line, but have you thought about this at all?

William Furman

Yes, in fact in earlier conference calls we’ve explicitly stated that we’ve an America strategy that looks to expand on the strength of our two relationships that are primarily Watco and GIMSA, which is our joint venture in one of our three facilities in Mexico, both of whom have significant history and expertise in the energy business. There are several large customers there in addition to that. There is a heavy demand for refined products. Watco is particularly well suited to be a partner in that type of service and I'm not sure how much they’ve disclosed about what they’re specifically doing that’s quite significant. So that whole area is an exciting area not only for supply companies in the United States in railroads like Southern -- Kansas City Southern, but for companies like Greenbrier who have been grow with the footprint we’ve down there.

Matt Elkott

Great. Very helpful. Thank you very much, Bill.

William Furman

Thank you. I appreciate Cowen being on the call and we’re reading your materials carefully and appreciate your interest in the Company. Thank you for dialing in.

Matt Elkott

Right. Thank you.

Operator

Thank you. Our next question is from Art Hatfield of Raymond James. Sir, your line is open.

Derek Rabe

Hey, good morning. This is Derek Rabe on for Art.

Lorie Tekorius

Hey, Derek. How are you?

Derek Rabe

Good. Just wanted to look at GBW. Congrats on the momentum there over the last year or so. Just looking at the assets under that JV, I have seen they’ve gone up about, I think its $30 million over that period. Can you just discuss some of those investments that you are making in that JV, and then longer term, kind of discuss maybe some of the opportunities and goals around margins over the long run?

Lorie Tekorius

Sure. So, I’d say that we’ve talked a lot last year about the GBW joint venture about how 2015 was really going to be the year that management team spend netting those operations together. And I think as we came out of our fourth quarter of 2015, Jim Cowan and his management team had really been successful in doing that and I think what you’re seeing for the first half of this year is that steady improvement where they’re driving on performance through their operations, they’ve really -- they send swat teams into the various locations where they may be having some difficulties whether its on operational difficulties or making certain to getting the right mix of work into the shop to match what its he strength are. So, I’d say that’s a group where they’ve really kind of embraced some of those core management techniques to be able to manage such a broad network of shops and strain the benefits out of it. Jim Cowan, I think from his prior life, still stays in touch with some of you guys and I don’t think he has been too shy about having some fairly aggressive gross margin goals.

William Furman

But he should not be publishing those if we should be publishing those. So I hope he is not doing it. But I think he is known as Mr. Margin in the industry and he has got very positive -- very strong goals. I’m really high on this guy. He is actually getting a lot done and on the team he has built.

Derek Rabe

That's all I have. Thanks for the time this morning.

Lorie Tekorius

You bet, Derek.

Operator

Thank you. [Operator Instructions] Our last question is from Kristine Kubacki of Avondale Partners. Your line is open.

Kristine Kubacki

Hey, good morning. My question is just on the changeovers. I guess the production or deliveries was a little less than I expected in the quarter, and you guys have highlighted that for the next couple of quarters, and I know you touched on the box, the boxcar run will be a lengthy run. But has something kind of changed, in terms of the length of run, since we’ve seen kind of deliveries that were almost 7,000 in the first quarter? But now, we are kind of now at a new run rate or are customers changing car types and you just can’t get those length of runs anymore?

William Furman

No, I don’t want to give you the impression that customers are out there willy-nilly changing car types. In fact, there has been an advantage to us in recent redeployment to of our concentrate, our plans for building different kinds of cars to an extend runs. So on the manufacturing side, we’ve a very buttoned down plan to deal with a very large backlog of boxcars, that is causing us changeover issue that Lorie addressed as well as we’re making efficiencies improvements in our automotive production capabilities and we’re also streamlining our cost. One example is we have been just really doing a lot more with less people. We’ve furloughed a number of people in some of these factories and reducing our costs in dramatic ways. But the basic dynamic in an industry where everyone agrees there is going to be less demand and more difficult circumstances will be to adjust lines appropriate to the car type and there is at least 20 different car types, and they’re not all the same as we opt and remind all of you guys. So, it’s not an area that I’m particularly concerned about. It’s just normal in this type of market. We’ve built the -- changeovers are related specifically to boxcar and automotive.

Lorie Tekorius

And just one other thing to add Kristine, on just the absolute number of units being delivered that also have to do with car types. So for example, we built fewer boxcars per day and for example we were doing sand cars earlier in the year. So some of it is just as you get into these more complicated car types that have higher number of hours to build, so it comes in so from a top line and a revenue perspective there are higher ASPs, but maybe we do fewer of them a day, because they’re more complicated and take more hours.

Kristine Kubacki

That’s really helpful. I appreciate the clarity there. And then, I guess my second question would just be -- it’s a little bit bigger question, I’m probably going stumble through this, but I guess, and I appreciate your comments about the secondary market, and being able to find investors. It does seem like there is a lot of money chasing yield out there, I guess, and it’s attracting a lot of players to the market. I guess, is it hard on the flip side of that, given that it seems like maybe at other OEMs, there is now available build space and maybe pricing is becoming more attractive? Are you having a harder time finding lessees to attach leases to those cars before you syndicate them?

William Furman

That’s a great question. I don’t know where you get these questions, but you obviously know something about the business. The answer is its more -- it is a more complicated and difficult market, so we’ve to be competitive and in some cases our value props have to be more than competitive to address our market share goals. It doesn’t mean that necessarily it’s going to reduce our margins, because we’ve lots of weapons and in past history to deploy. But I would think the things to watch since that’s such a great question. It would be plant by plant to the degree, we’re granular in some of that and type -- car type by car type, what’s the outlook for those car types? What’s the outlook for intermodal which one of our big products, historically almost half, 50% of the market, great customers in that business. What’s that going to look like and our marine backlog, what’s that going to look like? And then what kind of pick up we’re going to get on these foreign adventures? How risky are they? Those are some of the things that I worry about and I if often don’t see things that I worry about in some of the questions. You touched on one though. So I congratulate you.

Kristine Kubacki

Well, thank you very much. I appreciate the time. Good luck, guys.

Lorie Tekorius

Thank you.

William Furman

Thank you.

A - Lorie Tekorius

Thanks everyone for spending the time with us this morning. We appreciate your interest in Greenbrier and look forward to chatting with you over the coming quarter. Have a great day. Bye, bye.

Operator

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

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