The Greenbrier Companies, Inc. (GBX) Earnings Call Transcript & Summary

Hello, and welcome to The Greenbrier Companies Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] At the request of The Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Travis Williams, Head of Investor Relations. Mr. Williams, you may begin.

Thank you, operator. Good afternoon, and everyone welcome to our Third Quarter Fiscal 2026 Conference Call. Today, I'm joined by Lorie Tekorius, Greenbrier's CEO and President; Brian Comstock, Executive Vice President and President of the Americas; and Michael Donfris, Senior Vice President and CFO. Following our update on Greenbrier's Q3 performance, our outlook for fiscal 2026, we will open the call for questions. Our earnings release and supplemental slides can be found on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2026 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. We will refer to recurring revenue throughout our comments today. Recurring revenue is defined as leasing and management services revenue, excluding the impact of syndication transactions. With that, I will turn it over to Lorie.

Thank you, Travis, and good afternoon, everyone. We appreciate you joining us today. Greenbrier delivered solid commercial, operational and financial results in the third quarter. Global macroeconomic conditions in our markets support freight railcar lease rates and utilization where Greenbrier is further strengthening as we serve our shipper customers. Those same conditions pressure demand for new freight railcars, though maintenance and replacement needs continue and provide a foundation for future orders. This combination of market dynamics and a dedicated focus on operational efficiency led to sequentially improved gross margin and earnings. The improvements that have been made across Greenbrier over the last several years are yielding benefits and combined with operating discipline, cost control and commercial excellence create a more resilient earnings profile through cycles. Or in other words, we're demonstrating our ability to deliver higher lows across the cycle due to the strength of our business platform. Our commercial team continues to expand Greenbrier's market reach, adding new customers while strengthening relationships with long-standing partners supported by our lease origination capabilities. These proficiencies leverage our integrated go-to-market model across direct sales, leasing partnerships and syndication. Turning to the market. In our core North American market, railcar deliveries have averaged about 35,000 per year since 2020. The current industry forecasts indicate less than 25,000 new railcars for calendar 2026, which will be the lowest level recorded since 2010. And the projection for calendar 2027 shows an increase to over 34,000 deliveries. Rail loading trends are up in several key commodity categories, including grain, petroleum products, chemicals and intermodal. Although intermodal activity is uneven as some commodities are shifting towards trucking to navigate service-related friction in the rail network. And while the uptick in freight rail modal share is uneven, we believe the longer-term outlook is positive. Our experience tells us it's a matter of when, not if new railcar demand will increase and activity coming out of a trough tends to arise sooner and more robustly than anticipated. In Europe, wagon deliveries are expected to be around 9,000 units for calendar 2026 and the next several years. We're utilizing our lease origination capabilities strategically in this market as well to serve our customers while managing productivity and reducing costs. Our Manufacturing segment, which includes maintenance, wheels and parts activity in North America, executed well in the third quarter. Operating efficiency, cost discipline and solid program and maintenance work helped drive the overall performance in the current macro environment. Our lease origination capabilities provide key flexibility to manage new car production and support utilization across our manufacturing footprint. In addition, our in-sourcing investment is delivering broad-based sustained efficiency gains that will further improve earnings power as demand grows. In Leasing & Fleet Management, we saw a significant expansion of our own lease fleet with continued high utilization. We remain focused on growing this platform and doubling our recurring revenue base by 2028 through both our own manufacturing operations and secondary market opportunities as they arise. The enterprise-wide improvements that have been made at Greenbrier are supported by a strong financial foundation. A healthy and well-capitalized balance sheet and ample liquidity provides flexibility to support operations, invest in the business, return capital to shareholders and execute our strategy. As we look ahead, our focus remains squarely on operational execution, commercial discipline, capital allocation and ongoing enhancement of through-cycle performance. You can expect Greenbrier's solid results across the cycle to continue driving long-term shareholder value. Finally, I want to thank our employees for their focus, commitment and execution. Each and every one of their efforts demonstrates the strength of Greenbrier's culture and the durability of the platform that we've built. And with that, I'll turn the call over to Brian to discuss our operations in more detail.

Thanks, Lorie, and good afternoon, everyone. Starting with commercial activity. We received orders for 2,200 railcars during the quarter, valued at $340 million. Demand was led by tank cars and covered hoppers with additional activity in gondolas, open-top hoppers and heavy-duty flats. In addition to constructive rail loading trends, it's also worth noting the significant increases in trucking spot rates driven by driver shortages, elevated fuel costs and carrier attrition. While this alone doesn't signal a broad-based freight demand recovery, sustained higher truck rates would improve the relative competitiveness of rail and intermodal service. Turning to backlog. We ended the quarter with 13,800 railcars valued at $2 billion. Our commercial team remains highly engaged with customers across North America, Europe and Brazil, and we are seeing solid activity across several car types. As Lorie noted, our lease origination capabilities were a prominent feature of the quarter. Lease originations represented 60% of total global orders, including 71% of North American awards and 53% of European awards. This highlights the value of our commercial model, flexible production capacity and our ability to respond to customer needs. The Leasing & Fleet Management segment delivered another strong quarter. We expanded the owned lease fleet to 20,600 railcars and utilization remained exceptionally strong at 99%. Renewal rates were healthy, reflecting both the quality of our fleet and the depth of our customer relationships. During the quarter, we continued to pursue disciplined fleet growth through secondary market acquisitions of approximately 4,400 railcars and remain active in evaluating additional opportunities. These are strategic investments that support lease fleet growth, recurring revenue and long-term value creation. Moving to our Manufacturing segment. Production rates were aligned with current demand levels, consistent with our proactive management of the business. Headcount continues to be adjusted in line with our teams remain focused on maintaining operational efficiency as market conditions evolve. At these production levels, operating performance and margin progression improved, reflecting the benefits of our in-sourcing strategy and focus on cost competitiveness. Recent capital investments are yielding strong returns even at current production levels. Wheelset shipments exceeded expectations. The maintenance team sustained steady throughput, and we continue to see progress in cycle time execution. We also are taking actions to sharpen the focus and efficiency of our maintenance service network. In Europe, demand remains muted, but we are making progress following recent footprint actions. With the facility consolidation complete, the team is focused on streamlining the production process, reducing inventory and improving quality and production rates. We are also seeing encouraging traction in the European leasing market. In Brazil, Greenbrier-Maxion delivered another quarter of strong operational performance, driven by demand in agriculture and biodiesel sectors. Financial performance exceeded expectations, supported by disciplined cost control, operating efficiency and improved pricing. Our capital markets team continued to support the integrated model through strong monetization activity, expanded investor relationships and secondary market. These activities generate profitable through margin recognition and fee income, provide liquidity, support the lease fleet growth and reinforce the benefits of Greenbrier's integrated platform. In summary, we continue to align production with customer demand, execute with discipline across the platform, expand our leasing capabilities and advance key initiatives that support margin performance. And with that, I'll turn the call over to Michael to review our financial results in a bit more detail.

Thanks, Brian, and good afternoon, everyone. Total revenue for the quarter was $577 million. Leasing & Fleet Management revenue was $47 million, up 3% from Q2, primarily reflecting the addition of leased railcars. Manufacturing revenue was $529 million, down about 2% sequentially, primarily due to fewer new railcar deliveries, partially offset by higher maintenance program revenue. Aggregate gross margin was 14.1%, within our long-term target range and improved from Q2. This performance demonstrates the strength of our integrated business model and the impact of our continued cost discipline. Earnings from operations were $32 million or about 6% of revenue. These results reflect solid execution at current production volumes and our continued focus on the areas within our control. Our effective tax rate was about 20%, primarily driven by discrete items related to foreign exchange impacts largely from the strengthening of the Mexican peso. Diluted earnings per share were $0.60 and EBITDA was $69 million or about 12% of revenue. Overall, results benefited from stronger margins, favorable foreign exchange, lower net interest expense in Leasing & Fleet Management and a lower effective tax rate. Turning to the balance sheet. We ended the quarter with total liquidity of approximately $887 million, representing $274 million in cash and $613 million of available borrowing capacity. Operating cash flow for the quarter reflects $227 million of investment, primarily for leased railcars purchased in the secondary market. This investment supports our strategy to grow the lease fleet, increase recurring revenue and generate tax-advantaged cash flows while maintaining strong asset quality and enhancing long-term earnings power. Over time, we expect to finance a portion of the newly acquired fleet, preserving balance sheet flexibility. We also refinanced our leasing term loan with a new $300 million facility, extending the maturity by 6 years, improving credit terms and adding a delayed draw that provides up to $125 million of additional capacity to support future growth. Our capital allocation remains disciplined and balanced. We continue to invest in opportunities that generate attractive returns while also returning capital to shareholders through dividends and share repurchases. Greenbrier's Board of Directors declared a dividend of $0.34 per share, marking our 49th consecutive quarterly dividend. At quarter end, approximately $65 million remained available under our share repurchase authorization. We will continue to use that capacity opportunistically, guided by market conditions and our broader capital allocation priorities. Turning to guidance. Our fiscal 2026 outlook is based on our latest view of fourth quarter manufacturing margins and delivery timing, reflecting that some activity is moving into fiscal 2027. While near-term market conditions remain dynamic, customer engagement is strong, and we are encouraged by the business activity developing for 2027. For fiscal 2026, we continue to expect total revenue of $2.4 billion to $2.5 billion and are narrowing our expected EPS range to $3 to $3.15 per share. Additional details are included in the earnings release and accompanying slides. In summary, Greenbrier delivered solid third quarter results, supported by disciplined execution, resilient aggregate gross margins and continued strength in Leasing & Fleet Management. We remain focused on the priorities that create value, serving our customers, managing costs, increasing recurring revenue and deploying capital with discipline. We believe these actions position Greenbrier to deliver attractive through-cycle returns and create long-term shareholder value. With that, we'll open the call up for questions.

[Operator Instructions] The first question will come from Andrzej Tomczyk with Goldman Sachs.

Just curious if we could start off on the tariff front, just to get a little more clarity there. Our understanding is recent amendments to Section 232 investigations could be imposing a tariff on the full value of tank cars coming into -- coming out of Mexico into the U.S. Maybe if you could just speak a little more to your current understanding of that tariff situation? And what is Greenbrier's current tank car backlog mix? And then maybe just on that, if you guys are actually incurring any tariffs there to start, that would be helpful.

Sure. Andrzej, thanks. And I'll start out, and I'm sure that my colleagues here will jump in and fill in if there's anything that I'm missing. Let me start with the beginning. We are not currently entering tank cars or paying a tariff for equipment that's coming from Mexico into the United States. As you state, there has been some recent pronouncements and determinations that are -- that have industry-wide implications. And we and our industry partners are seeking guidance from CBP on how best to navigate that. So really, right now, it's a situation where there have been some pronouncements made, but it's a change to what has been industry-wide practices. And so again, we and our partners, whether they're the Class 1 railroads, the short lines or even other manufacturers are seeking clarification from CBP on how to be compliant with the communications we've received.

Understood. And then maybe just if we could get a sense for the mix of tank cars that you guys have in the backlog, that would be helpful. But -- and then just, I guess, as a follow-up there, I guess 2 follow-ups. Maybe if those -- if it ended up that those tank car or the tariffs were applied to the tank cars, is there then a risk of retroactive payments just to sort of be clear there? And then separately, are there discussions with customers that there could be potential price escalations if that were to be the case? Just trying to get a sense for if you guys could actually pass through those excess costs.

Sure. And I'll start with the last question first. Yes, we believe that any adjustments associated with tariffs would be passed through to our customers. When it comes to retroactive obligations, right now, that's unclear. And again, this is where we would say that we're seeking clarification from CBP on what some of the language in their rulings means and how we, as an industry, need to be compliant. And then to, I think, the question I missed from the last, as percentage of backlog, so the backlog that Brian talked about, about 20% of that is tank cars.

Yes. I would just add, Lorie, that while it's 20% today, I think we're seeing the mix shift in the market kind of pivot away from tank cars. And so that mix is quickly diminishing. And Lorie is right, we have provisions in all of our contracts to pass through tariffs and duties as appropriate.

And just the other thing to highlight because sometimes folks in our industry tend to forget, but we build tank cars not only in Mexico, U.S.-sourced steel and other U.S. sourced components, but we're also building tank cars in Arkansas at our Marmaduke facility.

Interesting point. And just on that, if I could, what is the capability of shifting production there to the Arkansas facility? Is that something feasible at a later date?

Absolutely. Well, we're building tank cars there right now, and we are evaluating how much we could shift. A lot of this comes down to getting employees to be in our shops. I think this is a struggle for many industries in the United States. It's just finding and training and retaining a skilled workforce.

Yes. Maybe just adding on, it's Brian again, is at the end of the day, we are increasing production at our U.S. facilities, and we have the capability to take on quite a bit of that capacity if need be.

Okay. Appreciate that color. Maybe just shifting to the core business with the ISM now over 50 for half a year now. Are you guys seeing any of that expectations, optimism from your customers, I guess, creep into conversations? Or do you think that the positive ISM readings are more so a reflection of other areas of the economy at the moment? I'm just trying to get a sense for when the broader ISM positivity might be able to translate into improving new railcar backlogs and deliveries.

So I'll kind of come high level, and I'm sure that Brian can speak to some of what he's hearing from our customers. But what I continue to hear and have been hearing for the last several months is a lot of desire from our customers for additional railcars. The interesting point, though, is as the macro environment continues to shift, sometimes there it's creating a delay in when they want to execute on an investment in these long-lived assets. This is part of what Brian was speaking to, I think, before about trucking. We are seeing some temporary shifts over to trucking if we have a shipper customer that is trying to evaluate how best they navigate for their business, whether they're a farmer or a chemical company or otherwise, how to navigate that. But we really do -- this is what we mean by we think there's quite a bit of pent-up demand for new equipment. We just need the broader economy to kind of settle down for a little bit so that people can make those long-term investment decisions. Brian?

Yes. And I'll just add on to what Lorie said. She's spot on is directionally, we've been watching the inquiries in the backlog. And while it's been fairly stable over the last few quarters, the pent-up demand is really beginning to rise. You're seeing it on the AI data center infrastructure area, where there's a lot of heavy-duty infrastructure required. So when you look at orders to production type of ratios, one of the things that's a bit of an anomaly is some of these cars we're taking in have 3 to 4 to 5x the number of labor hours as a, let's call it, like a tank car or a covered hopper car. And so it's not a one-for-one trade. It's kind of a 4 or 5:1 trade. We're also seeing significant improvement in the steel side of the industry as well, where a lot of cars are attributing out. And then as Lorie said, when you look at driver service rules and just kind of what's happening in the industry, intermodal is really feeling the pressure for growth as well. So the pent-up demand is a real thing. It's a matter -- it's not if, it's just kind of when, and we're starting to see signs of that here in this quarter already.

Got it. And maybe just one more for me before I'll hop back in the queue here. Just a little bit more specific in terms of the manufacturing margin this quarter versus last, was a nice uplift. Just curious if you could share whether mix was a positive this quarter and then maybe how you're thinking about core price versus mix dynamics here into the year-end?

Yes. I appreciate that. It's Brian again, Andrzej, because at the end of the day, mix always plays a bit of a role. But Lorie kind of hit it in her comments, and I think I touched on it briefly in mine as well is the initiatives we took a couple of years ago, the in-sourcing initiatives are really starting to pay off. And it's not just the in-sourcing investment we made on manufacturing primary parts, but also the focus we have on labor efficiency, the focus our team has on overhead and variable costs associated with that have really been paying off in this time. You can look back in time at Greenbrier. I've been here a long time, and we've never had these kinds of margins at this level of production, low level of production in the history of Greenbrier. So we're excited about the opportunity for this market to kind of change and see what we can really do as this -- as the market rises back up.

The next question will come from Harrison Bauer with Susquehanna.

Maybe to ask your sense of demand in a different way. How much of some of the regulatory backdrop on both the Section 232 proclamation on tank cars as well as your outstanding coupler and EPA case is eating into customer demand and sentiment on waiting for some clarity before going forward on some higher order amounts?

It's a great question, Harrison. And I would say, quite honestly, it's really not -- that is not the bigger thing that's holding back our customers from making those decisions to invest in long-lived assets. It's it's again more the broader macroeconomic situation is they're figuring out how to either put existing equipment through a program, run it longer, maybe if they have pops in demand, if they can shift that over to trucking, they do that. But that's really more where we're seeing the holdup is the macroeconomic situation, not what's going on with tariffs or couplers.

Yes. And I'll just tag on. Again, that is -- it's spot on by Lorie, but also keep in mind that there's a lot of Canadian customers that buy assets from us as well. And those tariffs and those things do not apply to cars that are being moved into Canada. It's really U.S. service at this point. So we're continuing to see that demand from a lot of the oil producers and chemical producers up in the Canadian region. But generally speaking, the U.S. customers are not holding back because of any uncertainty at this point. But we are seeing a shift, again, in mix to more covered hopper cars, black cars, special purpose assets and really higher value backlog for Greenbrier.

Okay. And maybe sticking with some of the regulatory environment and on the coupler case, could you give us an update on where you're at with the EPA determination? I know you're waiting to appeal this case. I know it's a specific office within the CBP, but just any color on sort of what's going on in the coupler case and what your opportunities are in an adverse ruling to shift some of the coupler procurement to U.S. sourced?

Sure. So today, we actually filed our administrative appeal. So we have begun that process. And I just want to kind of take a big step back and say that the CBP's determination letter does have industry-wide implications, right? This is not just a Greenbrier situation, but it impacts everyone who's building cars that are bringing them into the United States from Canada or Mexico. And their determination letter included a change in practice that just like with the 232s, we and our industry partners are seeking guidance and clarification as how best to navigate this ruling and how best to be compliant. That said, we do have, I would say, a very agile industry. We have a history of working together to figure out across a variety of landscapes, how best to navigate, whether it's fluctuations in demand or situations that have to do with high prices of steel, whatever might be going on with couplers and where best to source them. So I have no doubt that as an industry, we will find a way to navigate this and come up with how best to continue serving our freight rail customers.

Yes. Maybe I would just point out, it's Brian, Harrison, is that while all of these are serious issues, the financial impact of the couplers is fairly small on a per unit basis. When you think about the total number of specialties and steel cost that's in the asset, it's probably less than 1% of the total impact. So from a customer perspective, it really doesn't have significant impact to them.

Good point, Brian. Thanks.