The Greenbrier Companies' (GBX) CEO Bill Furman on Q3 2016 Results - Earnings Call Transcript

| About: The Greenbrier (GBX)

The Greenbrier Companies, Inc. (NYSE:GBX)

Q3 2016 Earnings Conference Call

July 06, 2016, 11:00 AM ET

Executives

Lorie Tekorius - Chief Financial Officer, Senior Vice President, Treasurer, Principal Financial Officer

Bill Furman - Chairman of the Board, President, Chief Executive Officer

Analysts

Matt Elkott - Cowen and Company

Allison Poliniak - Wells Fargo

Justin Long - Stephens

Matt Brooklier - Longbow Research

Ari Rosa - Bank of America Merrill Lynch

Steve Barger - KeyBanc Capital Markets

Bascome Majors - Susquehanna

Thom Albrecht - BB&T

Art Hatfield - Raymond James

Kristine Kubacki - Avondale Partners

Mike Baudendistel - Stifel

Presentation

Operator

Hello and welcome to the Greenbrier Companies' third quarter of fiscal year 2016 earnings conference call. Following today's presentation, we will conduct a question-and-answer session. Each analyst should limit themselves to only two questions. Until that time, all lines will be in a listen-only mode. At the request of The Greenbrier Companies, this conference call is being recorded for instant replay purposes.

At this time, I would like to turn the conference over to Ms. Lorie Tekorius, Senior Vice President, Chief Financial Officer and Treasurer. Thank you, you may begin.

Lorie Tekorius

Thank you Carrie and good morning everyone and welcome to our third quarter conference call. On today's call, I am joined by our Chairman and CEO, Bill Furman. We will discuss our results for the quarter ended May 31 and our outlook for the rest of 2016. Following our prepared remarks, we will open-up the call for questions.

In addition to the press release issued this morning, which includes supplemental data, additional financial information and key metrics can be found in a slide presentation posted today in 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 2016 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

Greenbrier's results for the third fiscal quarter particularly in light of a shifting rail industry environment were solid, both from a financial and operational perspective. Financially, gross margins were strong and highlights include adjusted EBITDA of $99.5 million and earnings of $35.4 million or $1.12 per diluted share on revenue of $612.9 million.

Operationally, we delivered 4,300 units. Orders for the quarter totaled 1,700 new railcars and included automotive cars in North America and Europe, non-energy tank cars and gondolas among others. In total, orders during the quarter valued at about $150 million for an average selling price of approximately $91,000 per car. The lower average selling price was driven by a mix shift to smaller units in Europe. Our diversified backlog of 31,200 units valued at $3.6 billion continues to provide visibility in these changing times. In our marine business, we received orders for two articulated oceangoing barges during the quarter and three oceangoing deck barges in June bringing our marine backlog to over $120 million.

Aggregate gross margin, excluding syndication activity in the quarter associated with the railcar portfolio acquired in the first quarter, was 22.5%. We continue to be pleased with the syndication returns on this portfolio, even though the mathematics have a dilutive impact, resulting in aggregate gross margins of 20.7%. Looking at our manufacturing segments, our gross margin was 23.1%, up 270 basis points due to improved efficiencies, favorable product mix, and favorable pricing. Wheels and parts margin increased to 11% from 10% in the second quarter, primarily due to higher scrap pricing and a more favorable product mix. Although we are still seeing headwinds in this business segment due to decreased railcar traffic, leasing and services gross margin was up in Q3 compared to Q2 driven by lower volumes syndication activity from the portfolio acquired in the prior quarter.

We ended the fiscal third quarter with significant liquidity of nearly $570 million from cash balances and available borrowings on our revolving credit facility. During the quarter, we redeemed $14 million of our convertible bonds and repaid $75 million on our credit facility. Our balance sheet is very strong with net funded debt to last 12 month's EBITDA still at 0.2 times with lower LTM EBITDA.

From a capital perspective, we remain committed to our balanced approach to capital deployment and thus positioning the company towards enhancing long-term shareholder value, while continuing to seek and identify opportunities to profitably grow the business within our core set of competencies. In today's release, we announced a 5% increase in our quarterly dividend to $0.21 per share. We did not buy back any shares during the quarter under our repurchase program. Since the inception of this program in October 2013, we have cumulatively repurchased over 3.2 million shares for a total cost of approximately $137 million, representing about 10% of shares outstanding. We have $88 million remaining under our current share repurchase program which will be utilized opportunistically.

Based on current business trends and production schedules, our refined guidance for the full fiscal year is deliveries to be approximately 20,000 to 21,000 units, revenue of approximately $2.8 billion and diluted EPS in the range of $5.70 to $5.90. Looking forward, we expect a continued challenging railcar environment into fiscal 2017. The strategic actions we have made including diversification and prudent balance sheet management, position us well to navigate shifting market conditions.

And now I will turn it over to Bill.

Bill Furman

Thank you Lorie, and good morning everyone. Thanks for joining us this morning. Well, during the quarter, we delivered strong revenue and profitability, both net earnings and EPS, and we are on track to deliver on the expectations we set for the full fiscal year and into 2017. We continued to deliver above the 20% gross margin target set over a year ago. And additionally, our ROIC is extraordinarily high 29% for the quarter, continues above our target of 25%, again for the third consecutive quarter. These metrics demonstrate our focus on cash flow, return on capital employed, and long-term shareholder value.

G&A costs were up for the quarter due to some one-time accruals and the timing of long-term incentive compensation grants, and we have also reduced, which was not mentioned in the press release, our North American and global workforce about 8% or 800 people. We have done that in order to recognize changing market environment in North America and to tighten our belts in a more uncertain environment while we leverage efficiencies. Our growth initiatives will continue on the theme of high ROIC, mainly in international and domestic improvements for efficiency. And I just want to call out that with the dividend increase we are now running a coupon above 3% yield and we believe this is a sustainable thing.

So I think the big question in our industry is what to make of weaker railcar loadings in the North American market in a more challenging environment. As we discussed last quarter, 2015 and 2016 were years of extraordinarily strong industry backlogs and record railcar deliveries exceeding what we would consider normalized industry demand. We do expect a period of lower order activities and deliveries for the industry. Average annual industry deliveries are about 50,000 railcars. And we note that FTR now has the industry at 45,000 for calendar 2017. These are always inexact estimates, but we believe that those levels are reasonable, probably driven by strong replacement demand in car types that have been squeezed out in earlier surges with energy cars.

Due to the business transformations we have made over the last five years, Greenbrier is well-positioned for this transition in our markets. Today, we’ve deployed a lower cost flexible manufacturing footprint that was not fully available to us just five years ago, and we have made investments in our aftermarket businesses that has led to reliable performance, which helps stabilize cash flows during a period of lower new railcar deliveries.

We also enhanced our leasing and management services business, which enables us to capture more value through a railcar's lifecycle. Our leasing fleet now includes over 260,000 cars under management in a capital-light model. In 2015, Greenbrier originated $700 million in lease transactions. Year-to-date, for the current fiscal year, Greenbrier has originated nearly $500 million. We continue to believe there is upside in international markets. Hence we are continuing investments in those markets and our philosophy is to go where the orders are.

Order activity for Greenbrier, although off-record peaks continues at a steady pace, our backlog remains very positive and strong and provides very good earnings and cash flow visibility for the next few years. For example, during 2017, we have much of the backlog or the orders -- or the production that we intend to build in 2017 already in backlog. Strategic opportunities across our business segments in geographic diversity will help us succeed in this more normalized environment.

A couple of more notes. In manufacturing, our footprint with more automation, lower-cost facilities around the world and a global network enables us to enjoy gross margins unavailable to us a few years ago. Some major changes, increased automation at Gunderson, our flagship manufacturing company in Portland, now specializing in three high valued car plus oceangoing marine barges with a heavy backlog in marine defying some of the more gloomier forecast that have been existing in the industry. We are actually seeing quite a lot of interest in our marine model on the West Coast. We have three factories, of course, in Mexico and we have diversified our car types building every car operating in every space in the rail business other than coal cars.

And lastly, we have increased our manufacturing flexibility for line changeovers and lean manufacturing. Very importantly, we have a growing international footprint in selected markets. We have initiated a new joint venture with Sumitomo Corporation, GBSummit, for finishing of axles and we look forward that GBW, our repair network joint venture with Watco to tens of thousands of recertifications in the recertification of tank car cycle, plus future safety standards will be kicking-in in 2018, if not sooner, due to the hazmat marked cars that need to be recycled and we are looking forward to sequestration of the demand for the DOT 117 car which is six to eight times safer than the older DOT 111 prior to introduced service.

We have a new investment in Brazil with the option to grow further in both new railcars and castings. Our presence in the Gulf Cooperation Council nations, led by our business in Saudi Arabia and we have opened new offices in Riyadh and kept the Saudi Arabian order for Saudi Arabian Rail in 2017 will give us a boost as we deliver part of the 1,200 railroad tank cars to the government on Saudi Railway Company from our European facility under AR standards and U.S. manufacturing oversight. Opportunities also exists in other areas outside North America, both from bases in Brazil, United States and our factories in Poland. These would include Eastern Europe and Eurasia and selected in Africa also being of long-term interest.

With a strong balance sheet, as Lorie has noted, providing flexibility and many options during changing our business cycles. Our net debt that was less than $100 million at the end of the quarter. We are focused on our shareholders and our stakeholders and our employees. We have a unique business model which spans a broad range of products and services. It's virtually impossible for our peers to match that value proposition. And the market has not seen the new Greenbrier model operate in these softer conditions. With a larger market share and scalable and dependable low-cost manufacturing operations now in three continents, enhanced aftermarket business activity and a strong leasing and asset management team. So stay tuned and watch us work.

Back to you, Lorie.

Lorie Tekorius

Thank you Bill and Carrie, well, go ahead and open it up for questions now.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Matt Elkott of Cowen and Company. Your line is now open.

Matt Elkott

Good morning. Thank you for taking my question. I have a question about the product mix, both in the quarter and going forward. So your ASP for the quarter went down from last quarter to $91,000 from $103,000, but your backlog ASP held steady at $116,000, which means you guys delivered some higher ASP equipment in the quarter. Can you give us more color on that equipment? And also, what are the drivers behind the decline in ASP in the quarter from last quarter? Is it overall pricing or is it specific to a product mix shift?

Bill Furman

Lorie, do you want to take that?

Lorie Tekorius

Sure. So speaking initially to just the decline in ASP for the orders, as I intended to mention in my remarks, we had a higher proportion of orders that were in our European operation, and they were for a smaller car type which came with a smaller sales price. I would say, we have seen prices remain fairly stable here in North America. Obviously, the order environment is a bit tepid. So there is not a lot of activity going on there.

When you look at the overall backlog and the ASPs and the ASP's in revenue, I would just remind you that this is the reason that we diversified our product mix. So we have a wide range of products including boxcars, automotive cars that are all fairly high priced. Other cars like gondolas or sand cars which would be a lower sales price, so it is all that mix, we are not going to probably get into the pluses and minuses of all the details of what we have built during the quarter, we have given a little bit of color on the order activity, which included automotive cars, gondolas, and some nonenergy tank cars. So it's just the mathematics of that various mix, and it's part of why we diversified our product offerings.

Bill Furman

I would just add to that, it probably is a bit of an anomaly for the quarter. We will have to see what the next couple of quarters looks like.

Matt Elkott

Okay. Fair enough. And speaking of gondolas, are you guys expecting or are you seeing already an uptick in inquiries and potentially orders driven by potentially the benefit from the highway bill that was passed last year beginning to materialize and people prepping for new administration that could use that as infrastructure spending as one of the easier levers to pull to stimulate the economy?

Bill Furman

Yes. We are.

Matt Elkott

Okay. Fair enough. Thank you very much, guys.

Lorie Tekorius

Thank you Matt.

Bill Furman

Operator, our next question?

Operator

Our next question is from Allison Poliniak of Wells Fargo. Your line is now open.

Allison Poliniak

Hi guys. Good morning.

Bill Furman

Good morning Allison.

Allison Poliniak

Good morning. So obviously a pretty solid backlog still as you look out 30,000 plus units. Could you maybe help us understand the duration of that backlog? Are there a number of multiyear orders in there? Any sort of help further framing that?

Bill Furman

Sure. We have a number of multiyear orders. Our strategy is basically comprised of three parts for our leasing fleet base sales to a select small number of strategic leasing partners and shippers. So we have backlog extending, Allison, out to 2020.

Allison Poliniak

Okay. Perfect.

Bill Furman

It is heavily concentrated in 2017 and mid-2018 or into 2018.

Allison Poliniak

Okay. So then trailing off then. Could you help us, Lorie, I know you talked about the European orders being impactful in terms of the average price, but could you help us quantify how much of those orders were for Europe?

Lorie Tekorius

I would say, it may be 25% or so of the orders were related to Europe.

Allison Poliniak

Okay. So small. Thank you.

Lorie Tekorius

You bet, Allison. Thank you.

Operator

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

Justin Long

Thanks and good morning. First question I had was just a higher level question. So the railcar demand environment seems to have weakened faster than many anticipated. It doesn't seem like we are going to get energy related railcar orders for a while. But when you combine that with rail volumes that have been declining on a year-over-year basis and train speeds that are improving, what gives you confidence that the industry can normalize at that 50,000 unit replacement level or you mentioned FTR is now at 45,000 units versus being a more dramatic step down like we have seen in prior cycles?

Bill Furman

Well, I don't think that prior cycles, it's a great question, prior cycles are particularly a good indicator. We look at things like replacement demand of the aging fleet and demographics among car types. Because as we said before many times, a railcar is not a railcar, is not a railcar. So it's very specific to individual fleet components. The additional factor that you did not mention and you mentioned two major drivers, but the railroads themselves have invested heavily in infrastructure, and coal traffic has been one of the big drivers of decline in the loadings. So loadings overall are down but there are some selected markets such as chemicals and others that have had positive loadings. We continue to believe that there will be strength in longer term in intermodal and we expect to get orders in that area. We also have had a fairly strong automotive and boxcar demand.

Justin Long

Okay. And maybe just to follow up on that, I wanted to ask about manufacturing margins. I think last call, Lorie, you said if we go to a replacement market of 50,000 units, you think mid-teens gross margins would be achievable. Let's just say the market is worse than that, something around 30,000 units. What kind of margin performance do you think the company is capable of in that environment? And then also on margins, if you could provide some commentary on your expectations for manufacturing margins in the fourth quarter?

Bill Furman

Let me take just a brief introductory remark and I will turn the rest of the question over to Lorie. Looking at margin expectations, we have to be precise about what we need here. Our margin in backlog and we have a very strong backlog, might be on average considerably higher than the margins on some new orders. So it takes a while for any lower margin business to work itself into and through the backlog. You also have to keep in mind, with a long backlog as we have, if we are adding orders more slowly to the end of the queue, we are missing opportunities to build during early 2017 and so on. So it's going to be some time before this really works through the system. And I think that margins are sustainable in the higher end of the range in any case due to manufacturing footprint that we have.

Lorie Tekorius

And I would just, to add on to that Justin, as you know we have through a number of cycles before the market softens up. The interesting thing in this cycle is, I don't think in Greenbrier's history, we have ever gotten to one of these softer markets that will be noted by a reduction in deliveries with the kind of backlog that we have today. I feel like a broken record sometimes but I think that absolutely goes back to our plan to diversify our product mix. So it allows us to participate across a broader product range of demand. And then with the footprint that we have here in North America, particularly down in Mexico, where we have made some significant investments, those are very efficient plants. So I agree with Bill that over the next several quarters, we should see margin staying in the mid to upper teens. We continue to be very proud of the manufacturing margins that we are achieving today. And as you start blending in more recent orders and with the backlog, we might see margins come down, but I would stand by what we said before, which in a normalized market, which I would say we are still not in a normalized market, our manufacturing margins would be mid to upper teens.

Bill Furman

One of the thing about the so-called normalized market, certainly in North America, we are talking about principally North America here. Most of the questions are implicitly North America, I want to remind you that we are well over a year into an international diversification effort which we are serious about. We do expect to see strength in orders in other jurisdictions with profitable business. We are in, secondly, the summer season, which is typically not the greatest period for order activity and I think it won't be until the fall before we really see what the sustained level is of new business activity. But again, I have been and remain somewhat more optimistic than many of you. We will see, if my experiences plays out, I have been through a lot of these cycles and this one is certainly not as bad as it is gotten and theoretically could get. I don't see it happening, especially with our footprint and the diversification we are making in other markets where there is strong demand.

Justin Long

Okay. Great. That's all really helpful color. I appreciate the time this morning.

Bill Furman

Thank you.

Lorie Tekorius

Thank you Justin.

Operator

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

Matt Brooklier

Hi. Thanks and good morning. So I had a question on the sand cars that you called out in your press release. I think the number is like 5,000 sand cars currently in your backlog. What's the rough timing in terms of expected deliveries on those cars?

Bill Furman

Lorie, go ahead.

Lorie Tekorius

Sure. So on those 5,000 cars, as we indicated and I think we indicated on the last couple of quarters, we have been in regular conversations with our customers. Greenbrier's approach to the market is to find a solution for both ourselves as well as our customers, whether it's building railcars, leasing railcars or the like. So with the increase in velocity on the road and the decline in the oil prices, there are excess sand cars. So we are chatting with those customers and the timing of when those cars, we built this, is a little bit uncertain at this point in time. But they are still absolutely orders for railcars and we have not have customers back away from them.

Matt Brooklier

Okay. And I guess the timings is a little bit uncertain. What are some of the other options that you have with those cars? Is there the consideration that you could swap a sand car out and build another type of car for the customer? Is that also in your thought process or an option here?

Bill Furman

Yes. Like each one of our other builders in the space and lessors in the space, we use this position as a bargaining chip for a win-win solution. We can do well with marketing rights to the customers' fleet asset management arrangements. We have a full arsenal of tools that we can use. We do expect to build large number of sand cars in 2017. The last thing I would say about the market for sand cars is that it will be the first market that would recover if oil prices in general recover because of the large inventory of drilled but unfracced wells that need more and more sand. Over the past five years, the dynamic has really dramatically shifted. So these cars, while a little long, today could suddenly become a lot more attractive. And what we are doing is working with our customers to sort though it. We still have more than 80% of our backlog go in nonenergy equipment. We pretty well will work along in working through the solutions for the remaining energy cars.

Matt Brooklier

Okay. Good to hear. And then just one quick follow-up. You talked about diversifying the model. Can you also speak to, if you look at your backlog now and expected deliveries moving forward, what percentage is for the domestic U.S. market and what percentage of those cars are intended for international markets? And maybe how does that compare to maybe last cycle or a couple years ago?

Bill Furman

The international segment today is probably less than 10% of our total backlog and we would like to at least double that in a relevant time frame and possibly increase it beyond that period. It's important to understand though that the investments we are making in Brazil and Europe and in our Mexican facilities give us more striking distance to many markets in the world that five years ago, we would not have and other North American car builders do not have. So it's a little hard to estimate the margin impact of some of these opportunities due to that factor. I think it is very positive upside even at a 20% market share or backlog share. I am sorry. I misspoke. But 20% of our backlog, if we can get to that point, which I think we will.

Lorie Tekorius

And just to tack on to anticipate the inevitable question, to-date we have not been including any orders that will be built down in Brazil in our published backlog. As we go through further investments down there, we will evaluate that at that point in time.

Bill Furman

And oddly enough, that market is rebounding. Despite some of the things you read about Brazil, it's a very wealthy country and we are in it in a fairly economical basis and the fleet replacement activity down there is fairly sizeable.

Matt Brooklier

Okay. I appreciate the time.

Bill Furman

Thank you.

Operator

Thank you. Our next question is from Ari Rosa of Bank of America. Your line is now open.

Ari Rosa

Good morning guys. So starting on the 25% ROIC target, I know Bill you said that you are confident for 2016. What does that look like on a longer-term basis? I am not necessarily asking to provide any outlook, but what are the prospects for maintaining that as the market softens a little bit?

Bill Furman

Well, again the backlog helps a lot because it gives us momentum with the steady cash flow from the backlog. It depends a great deal on order rates for the next year. Obviously our order rates are dramatically below in the industry and for Greenbrier what we achieved during the energy boom. But I think that we still have a target to achieve 25% ROIC on incremental investments. And I think it's just a matter of what the pricing will be in the marketplace, what the mix will be, the quantities will be, because those are the three drivers of margin which in turn drives the ROIC.

Lorie, you want to add anything to that?

Lorie Tekorius

No. I think that's, again we have built a strong balance sheet. We are looking to keep it strong, but that also gives us the opportunity to deploy some capital for opportunistic investments, things that are near our core competencies, ways that we see will be longer-term gross potential for Greenbrier.

Ari Rosa

Okay. Fair enough. So second, I wanted to ask you, you slipped down the higher end of your outlook range. I don't think anyone's asked on that yet. Is that just a timing issue? Or is there something else going on there?

Lorie Tekorius

I think you are absolutely right at the timing issue. We were looking, we only have two more months left in this year. As we said last quarter, we have adjusted some production rates being cognizant of the softer market and with that as we get closer to the end of the year, just looking at it coming towards the lower end of that prior guidance.

Bill Furman

Yes. We mentioned we pulled out 800 workers out of workforce of around 10,000. Obviously that reflects as mostly factory personnel and some overhead which doesn't show up in the G&A. So we are cutting our costs as we do that we adjust the upper range down to just a bit for 2016. So that's probably a linkage that I should have made.

Ari Rosa

Great. That's helpful. And just two really quick ones. I will just combine it into one question. So to confirm on the previous question, the Saudi orders are going to be delivered in 2017, not this fiscal year. Is that correct?

Lorie Tekorius

Though it's correct that it's not this fiscal year but they will be spread between 2017 and into 2018, but probably I think maybe two-thirds in 2017 and a third in 2018.

Ari Rosa

Okay. And so Lorie, you mentioned the balance sheet shoring up and some of the improvements you guys have been making in paying down debt. What are the options that you guys are looking at? Can you talk about whether that will be more M&A focused or is it increasing the dividend like you are doing currently? It could get more aggressive? Or what are some of the options you are considering?

Lorie Tekorius

I am sure that Bill will chime in here, but you are absolutely right and I appreciate you quoting the dividend rate of 5% dividend. Bill and the Board take looking at our balance sheet very seriously and we take increases in dividend very seriously. So it's a statement to our belief that that's something that can be sustained long-term because we know that it's not helpful to investors to volatility in your dividend activity. Other than that, I think as Bill was saying earlier, we are looking at areas outside of North America, quite honestly at this point of time where we see stronger market for rail transportation where we can use, deploy our engineering, our manufacturing capabilities, maybe our leasing opportunities in other areas around the world. But we are going to be prudent about looking at these investments and making certain that it will generate the kind of return that we think is acceptable.

Bill Furman

Yes. We really think that there are strong opportunities in the Gulf Cooperation Council and region in the selected parts of Africa and in Eurasia. So we are beefing up our investment in our European operation, which is a good staging area for some of that. Brazilian operation could be a very useful, especially if currencies remain attractive as they are today in Brazil as the platform for Latin America and for the good parts of the attractive areas in Africa where there is some activities we believe we can reach into those markets. So deployment of capital, we will continue to have very strong discipline. We noted, it's interesting to Google dividend stocks because as you see interest rates so low and returns so low, more and more capital is seeking higher yields, we think a 3% yield is an attractive yield in today's market. We believe we can sustain that kind of yield.

Ari Rosa

Okay. Great. Thank you.

Operator

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

Steve Barger

Good morning.

Lorie Tekorius

Good morning Steve.

Steve Barger

Were those sand cars in backlog ordered by lessors so there could be a potential to convert those to other car types? Or did those come from operating companies? And realistically this is more of an indefinite deferral?

Lorie Tekorius

It's a mixture of both.

Bill Furman

Yes. It's about 50-50 or something like that. But again we are maneuvering very aggressively on that. We think we are about halfway through the cycle of dealing with these things. First there was oil by railcars. We see light at the end of the tunnel there. I hope it's not a train. We also more bullish on oil prices even though oil is down to-date. Spending some time in Saudi Arabia helps get a global perspective and we continue to see evidence that supply and demand will be equalizing in this area and the policy of OPEC is certainly subject to change.

Steve Barger

Thanks for that. Your implied 4Q EPS guidance has a similar result to 3Q. And when I think about your comment on the backlog being more weighted towards 2017 and also your comments on margins, is it reasonable to think that FY 2017 will look like the back half of this year from a run-rate standpoint? Or are there some big negative swing factors out there that I should be thinking about that will drive results below that run rate?

Lorie Tekorius

I would say, that's a great question to try to lead us into talking about 2017, Steve.

Bill Furman

Yes. Good job. You are like on of our Board members, Steve. This is a great question.

Steve Barger

Well, what do you tell them?

Bill Furman

Well, they told us, we don't like guidance generally. They don't, we do. So we are debating it with them.

Lorie Tekorius

I guess, the thing, Steve, that I would point out that if it's taken into consideration in the theory of using the back half of 2017 as kind of a run rate for 2017, again it would be the delivery of cars into Saudi Arabia. So again, that's something that you are not seeing in the back half of this year that should be quite beneficial for 2017 and 2018. The other thing that I would point out is GBW, the joint venture. So while it doesn't hit revenue and gross margin on the upper part of the income statement, I am certain that you have noticed that it's been improving operationally as we move throughout the quarter. Bill mentioned earlier and we continue to hear from Jim Cowan that there are a lot of recertifications that are going on out there. We have been picking up more of those kinds of orders. So we would expect that to continue as well.

Steve Barger

So it sounds like the swing factors you are talking about are more positive than negative, in your view, as it stands now?

Lorie Tekorius

That is correct. Obviously we can probably all come up with about 20 things that are negative about the North American market. But again we feel really good going into the softer market in North America with the backlog that we have. It allows us to plan our production lines a bit better to consolidate production where we need to, to keep steady lines going. So I do think that there is, if you are thinking about the back half of 2016 into 2017, I think there is upside that you are not seeing in the back half of 2016 that will show up in 2017.

Bill Furman

Steve, we are really focused on getting to 2018 and beyond in most of our planning. We should have a fairly stable year but again, I think you are dragging us into guiding.

Lorie Tekorius

Good job.

Bill Furman

Thank you. Good job. Yes.

Steve Barger

Thanks.

Operator

Thank you. Our next question is from Bascome Majors of Susquehanna. Your line is now open.

Bascome Majors

Yes. Thanks. Just to quickly piggyback on Steve's question there, I think last quarter you said that you had 10,000 to 11,000 cars in backlog for delivery next fiscal year. Can you just let us know if that's still the same or if that's changed at any point?

Lorie Tekorius

In general, it's about the same.

Bascome Majors

Has there been some mix shift? I guess the same cars could have been pushed out and some other stuff put into its place. I am just curious how the backlog churn has looked over the last quarter or two as you have been negotiating?

Lorie Tekorius

Sure and again, in this order and delivery environment, it's kind of just bumping along a little bit. I would say we have had some mix shift as we look at 2017 and what makes up that 10,000 to 11,000 units out of backlog that we expect to deliver into 2017. I think as we continue some of these conversations on the sand, covered hoppers, that might play into what is that mix. But right now, it's just more lining up some of the other activities outside of energy. So boxcars, automotive, things like that, some of the covered hoppers that we are slotting in that production.

Bascome Majors

Okay. And shifting gears, I noticed that the value of the syndicated cars that you carry on your balance sheet came down pretty significantly quarter-over-quarter, but the number that you put in there appeared to go up, if you built 1,100 and sold about 800 based on the disclosure. I am just curious, what's driving that different dynamic there? Can you just give a sense of what's happening in the syndication market broadly? And what's driving the numbers to diverge a little bit on those two?

Lorie Tekorius

So one of the things that going on is the value of some of the used equipment that's just working its way through there. So as we look at to railcars held for syndication, that includes the fleet that we acquired during the first quarter. So you see a little bit of mix shift going on there with how many of those cars are new cars versus the acquired fleet. So I think that's what you are picking up there. We are continuing to move cars through. We did have a number of larger syndications during the third quarter. These are things where we aggregate cars on our balance sheet to get the right mix to go to our financial investors and it creates a little bit of -- it is not as smooth across the fiscal year as maybe some analysts would like. But we are continuing to see strong demand in that area and looking at the cars that we have put in and blend in to give our financial investors the diversity in the portfolio that they prefer.

Bascome Majors

Understood. And just related and this will be my last question, earlier this year you had some spec cars which you were unable to lease. I think it was 500 or so. And it sounded like that had righted itself last quarter. Can you just update us on how many cars or what the value of cars are on the balance sheet that may have been ordered on spec by your leasing company and still unable to lease? And any commitments that may still exist between your leasing company and you, where you don't have a lessor over the next couple of quarters?

Bill Furman

Well, first of all, Bascome and we do not order deliberately on speculation. We do order forward for our leasing company which all leasing companies throughout North America also do in copious amounts, much more than we do. So we don't believe we do that. Occasionally we will end up with cars on our balance sheet. And it ebbs and flows, that's what it does. I don't mean to be humorous about it but it's not something that we think of ourselves as doing. We have a very robust leasing company and we, like all the other leasing companies, have to replenish our stock. Without any inventory, even your grocery store can't sell you a can of soup.

So Lorie, you want to add to that?

Lorie Tekorius

Sure.

Bill Furman

You have got to cheer up, Bascome. You just have got to cheer up.

Lorie Tekorius

I thin Bascome is pretty cheerful.

Bill Furman

I know he is.

Lorie Tekorius

You will see when the 10-Q gets filed later today, Bascome, that that finished goods inventory is probably up about $20 million, to Bill's point and definitely as we are in the more up part of the cycle, as you are aware, we have been driving a lot more volume through our lease syndication model. In order to syndicate those cars, sometimes when the order activity that was going on over the last couple of years, our leasing company needed to get in line just like other companies. So you will see an increase. These are not energy, they are not sand cars that we have added. They are not tank cars. They are other freight cars, covered hoppers for the general purpose markets that we feel with the size of our balance sheet and with our leasing operations and origination expertise, we will not have an issue getting those placed into the market.

Bascome Majors

I appreciate it and that's helpful. I guess I was just trying to understand that there have been cars which have been accumulating of a specific car type or something of that where there just isn't really a market right now.

Lorie Tekorius

It's a great question, but the answer will be, the short answer is no.

Bill Furman

Yes. We have got a robust risk assessment committee that meets at least every month and very regularly we look at the mix very closely, Bascome. And we appreciate your studying the balance sheet. It's helpful to have these kinds of comments.

Bascome Majors

All right. Well, guys, thank you for the time. I appreciate it.

Bill Furman

Thank you.

Operator

Thank you. Our next question comes from Thom Albrecht of BB&T. Your line is now open.

Thom Albrecht

Good morning everyone. I wanted to get a little bit of clarification on the backlog and mix influences. I know this has been kind of covered, but not the way I want to ask it. So first of all, you mentioned that the nonenergy cars are over 80% of the backlog. So if I do 5,000 for the frac cars over the 31,200, that's about 16%. Can we pretty much conclude that tank cars are now at about zero in the backlog?

Lorie Tekorius

Energy related tank cars? We have a lot of other tank cars.

Thom Albrecht

Sure. How many tank cars, nonenergy, roughly are in that 31,200?

Lorie Tekorius

I appreciate the question, Thom, but we don't like to get into that level of details disclosing what's in our backlog.

Thom Albrecht

Okay. And then secondly, when I look at the quarter and it was an amazing quarter in some respects, sequentially you delivered 200 fewer cars, yet your margin was higher. I am trying to figure out the biggest influence on the margin. Was that the last push of the energy related tank cars that favorably impacted the margins? Or was it more because the cost of materials, particularly scrap steel, was down so much? What impacted those margins so favorably?

Lorie Tekorius

Well, again our manufacturing folks are doing a fantastic job of having efficient operations. I would point out that in the second quarter we were actually going through a little bit of a changeover, where we were switching from at the leasing covered hoppers over to starting up our boxcar line. So I would say, what you are seeing in the third quarter margins are us hitting our stride now that we have got that changeover behind us.

Thom Albrecht

But were there energy tank cars in that 4,300 delivery number?

Lorie Tekorius

If they were, there weren't very many.

Thom Albrecht

Okay. So hitting your stride, manufacturing efficiencies, but cost of materials was pretty low. I know that it's begun to go up in some markets around the world. But there's been a huge tailwind in the first six months of the calendar year for many companies. Can you comment about the cost of materials?

Lorie Tekorius

Well, I do agree that the cost varies, but when you are running at the kind of production rates that we are running, I don't think that you end up seeing those. When you read different article about what's going on with pricing, those sometimes don't flow through to cost of revenue within one quarter. You have a bit of a lead time, probably six months before you start seeing some of that blend in. So I don't think there is any specific component or steel that would be the major driver to margins being what they were for the quarter because it gets blended in with all the other purchasing activity.

Bill, do you have a comment?

Bill Furman

We are seeing, in North America, a little strengthening in steel pricing. But so far it hasn't been a material factor either way. You are right, in general it has been a tailwind for manufacturing through to lower input costs. In this kind of a market for our segment, we don't see us squeezing out that could occur though. And we think it's more the reflection of capacity adjustments that steel companies have made given there is somewhat successful effort at protecting themselves from Chinese steel dumping.

Thom Albrecht

And Lorie, on the margin comment you made earlier, I think you were just talking about big picture. Over many quarters you would expect manufacturing margins to at least remain in the mid to upper teens. I assume though, in the near term, the next one to three quarters, the step down from the 23% you just had, it's going to be a little bit more gradual. It's not going to be a huge 23% and now you are 16.5% or 17%, right? There's a gradual element to that.

Lorie Tekorius

Absolutely. And as you are aware, we have been through several of these cycles, but I certainly hope each time we have to go through one of these cycles, we improve on our ability to manage production rates, manage production lines, continue to maintain the efficiencies that we have achieved.

Thom Albrecht

All right. Okay. Thank you.

Lorie Tekorius

Thank you.

Operator

Thank you. Our next question is from Art Hatfield of Raymond James. Your line is now open.

Art Hatfield

Hi, morning. Thanks for taking the time. Just a couple of questions. On the parts business, it came in a little bit lighter than we had anticipated. And I was wondering and I know it's a function of what we see in traffic, but I was also wondering, given some of the oversupply in some of the markets, if you have seen or heard of any sort of parts cannibalization going on in existing fleets?

Bill Furman

It's a really great question. I am not personally aware of it. Just on the parts and the wheel business, that is one area that's been hammered very hard by coal declines. So our wheel business margins are less than we would like. The ROIC is less than we would like. We have got a good management team there. But there is only so much that they can do with the cards that are dealt to them. So that's the biggest factors going on in that business segment, is that the coal loadings have been so much affecting the policies of railroads and shippers in replacing wheels.

Art Hatfield

That's very helpful and I think that does explain it. The other question and you had talked about letting go some factory workers and working hard on that cost of goods line and doing a good job there and obviously that shows in the margin. The question I want to ask is about SG&A. As revenue has declined the last couple of quarters sequentially and obviously year over year, that number seems to continue to go up. I am wondering if there was anything specific to the near term or when you can start meaningfully being able to pull the levers on SG&A as you see revenue decline as you go through the cycle?

Bill Furman

Yes. And another great question. SG&A is really very much on our minds. We are in the middle of our budget and planning cycle, which is an 18-month strategic planning and budget cycle and partly tactical. We monitor G&A as a percentage of sales and we recognize that particularly in this last quarter, because of some accruals and other adjustments, it was a little higher than what normalized. So as we go through this planning cycle, we expect to be able to talk more probably next quarter about our G&A expectations. I will point out that we are in the midst of, again, an international diversification. We are investing in markets that we have not been in before. We are opening offices and adding commercial people. We expect that to pay off and pay off handsomely at the same ROIC targets that we have advertised. The ROIC target along with G&A as a percentage of revenues are things that are watched by our Board very, very closely.

Art Hatfield

Great. Thanks for the time this morning.

Bill Furman

Thank you.

Lorie Tekorius

Thanks Art. Good luck.

Operator

Thank you. Our next question is from Kristine Kubacki of Avondale Partners. Your line is now open.

Kristine Kubacki

Good morning. I just have a question on the remaining guidance for the full year. I know it's been asked probably in 20 different questions, but just trying to summarize what you just said about the SG&A. It's a pretty wide guidance going into the fourth quarter. Can you talk about the puts and takes that would put us at either end of that guidance?

Lorie Tekorius

That is great question. A lot of it is just going to be the timing of -- the delivery that we have to our direct sale customers, that's pretty well known and set at this point in time. But as we put things through our syndication model and as we are developing those portfolios, while we have a good idea, we don't always have the specifics of exactly which cars might get syndicated in the particular quarter. So that would be one area. I would expect SG&A to come back down from what we saw in the third quarter. As Bill mentioned, there were a couple of accruals, one of which, just to point out is the timing of when our Board grants long-term incentive compensation and the way that that pattern happens over the course of the year is that the third quarter ends up getting an extra dose in the third quarter. So I think that will be the area. And part of the reason that we have the guidance and the range that we do is there are things that are going on, particularly Bill was talking about in our wheels and parts business that it's hard to be really specific and to predict how railcar loadings and velocity and the reduction in coal activity is really going to impact that business and what might happen with the margins there.

Bill Furman

We did adjust the range slightly downward and obviously we are always shooting for the upper end, if we can. So we are doing what we can do.

Kristine Kubacki

That's really helpful. I appreciate that. And then just a bigger question, Bill, maybe. I was looking at your market share, the industry backlog chart on page three and really, I mean obviously it's almost consolidated down to just you and Trinity versus it was much different. In the last cycle, you had other players were very big. Could you maybe talk about how you expect industry consolidation, if at all, to play out, especially as we maybe and as I think about it, I am more obviously pessimistic on this cycle, but how you see that playing out here?

Bill Furman

Well, it's true. You are more pessimistic on this cycle but maybe I am just optimistic. It's hard to say. The industry consolidation is like the weather. Everybody talks about it, nobody does anything about it. So I don't know what compelling case would be or consolidation, you still are looking at net cash of $100 million to $200 million outlay to acquire something. It seems be according to many analyst in plentiful supply. So it would have to be an interesting play. If you can build factory today for $50 million in a low-cost jurisdiction, the return on investment is a dramatically greater, but you do have competitive factors. I think both Trinity and we have expanded the distance between some of the other participants in the market. We wouldn't say never. We have tried before. But it takes a lot of energy and effort. We are very focused now on executing on our plan, trying to hit the best possible metrics we can, adding to our backlog and continuing to have a sustainable market share. So we are very focused on international agenda and executing in North America. Not likely to take on a lot of new things.

Kristine Kubacki

Okay. That's very helpful. I appreciate you taking my questions. Thank you.

Bill Furman

Thank you.

Lorie Tekorius

Thank you Kristine.

Operator

Thank you. Our next question is from Mike Baudendistel of Stifel. Your line is now open.

Mike Baudendistel

Thank you. You talked a lot about the international opportunities and just a lot of these are in the nascent stage and I was just wondering if you can look out a few years, what percentage of revenue do you expect Greenbrier to have outside of North America?

Bill Furman

Well, as I just mentioned and thank you for your question, we are in the middle of our budget cycle for next year and probably will be giving forward-looking guidance for next year at which point we might want to set some targets which our Board certainly would like us to do for a percentage of our revenues and activities in other jurisdictions. So I don't think we are prepared to do that today other than the color I already gave.

Mike Baudendistel

Okay. That's fine. And I just wanted to ask you, the marine backlog was positive development in the quarter. I just wanted to see how quickly do you expect to deliver that $120 million in marine backlog? And when I look at it historically, it tends to get up to $100 million to $120 million when you deliver that equipment. Is there any opportunity for that to be a larger portion of the business and to have the backlog larger than that?

Bill Furman

Yes, there is. We are still seeing surprising strength here in the West Coast markets which is primarily where our marine oceangoing barge business has been directed. We are seeing a lot more integrated type barge combinations as the technology in that area becomes much more competitive with smaller vessels. Finally, we have been able to participate in Gulf markets effectively for the first time due to lean manufacturing and some of the robotics and automation that we put into our Gunderson facility. Lastly, I guess really lastly, I would say marine is very important to the core business at our flagship facility in Gunderson. We have railcars that we build there. It's primarily a railcar plant, but the marine business not only has these margins on it, but it absorbs a lot of overhead and right now I think one of the positive things about our business is that Gunderson is building freight cars of the type we expect to be sustainable, albeit at a slightly lower production rates than at our peak. So the real benefit of that marine backlog is that it's likely to be sustainable but it's really going to be good into 2018 for Gunderson's core business.

Mike Baudendistel

Great. That's all I had. Thank you.

Bill Furman

Thank you.

Lorie Tekorius

Thank you.

Operator

Thank you. There are not further questions at this time, speakers.

Bill Furman

Thank you very much to everyone for joining us and have a great rest of the summer.

Lorie Tekorius

Thanks everyone. Bye, bye.

Operator

Thank you. And that concludes today's conference. Thank you for participating. You may now disconnect.