Hello, and welcome to The Greenbrier Companies First Quarter of Fiscal Year 2017 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 Ms. Lorie Tekorius, Senior Vice President, Chief Financial Officer and Treasurer. Ms. Tekorius, you may begin.

Thank you, Vince. Good morning, everyone and welcome to Greenbrier’s first quarter 2017 conference call. On today’s call, I am joined by our Chairman and CEO, Bill Furman, as well as this frog who has taken up residence in my throat. We’ll discuss results for the first quarter as well as provide outlook for the rest of fiscal 2017. Following the 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 on the IR section of our website. Matters discussed on today’s call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier’s actual results in 2017 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. We kicked off the year with strong results given the continued pressures from a challenging industry environment. Financial highlights for the quarter include adjusted EBITDA of $85.7 million and earnings of $25 million or $0.79 per diluted share on first quarter revenue of $552.3 million. Aggregate gross margins during the quarter were robust at 20.4%. Operationally, we delivered 4,000 railcars, including syndication of 500 units through our leasing platform. Just to clarify one point, there were no units delivered during this quarter under our Saudi contract. We continue to expect these deliveries to begin in 2Q. Orders for the quarter totaled 2,400 new railcars valued over $230 million and included a diverse set of railcar types such as automotive carrying units, covered hoppers for various uses and non-energy tank cars. We expect moderate market…

Thank you, Lorie and I am sorry about that frog in your throat. It’s a very good quarter. We are off to a very positive start. Thank you for joining us this morning. So on top of the good results, solid operating performance, EBITDA and manufacturing margins exceeding expectations, EPS only a few cents under consensus, we really feel good about what was admittedly a quarter with a number of moving parts. Today, we will try to address your questions and already we have received a few from the field just early this morning and we will try to be prepared to answer those of you who got up early to send his notes. Our balance sheet, as Lorie suggests, provides us with considerable flexibility as we compete in a challenging business climate and seek global opportunities to invest in growth. More importantly, our strong backlog and our continuing order activity, not just in North America, our core markets, but internationally as that business builds in it and we have now been on at this for a couple of years, these are strong tailwinds to our manufacturing and leasing business. I am going to depart from usual practice for a moment to just give you some insights in our Annual Meeting day to day and our Board goes through regular annual economic review of activities. We have gone through an interesting period following the U.S. election and running up to the U.S. election. Sometimes it’s hard to adapt, to adjust. Our Board is very focused on adapting, to adjusting and accepting the new order of things. Even today, as I read analyst reports about Greenbrier and about the market in general, I wonder if we are reading the same material. After the U.S. election, economic forecasts are becoming much more…

Thank you, Bill. And with that, Vince, we’ll turn it back to you for Q&A.

Thank you, Lorie. [Operator Instructions] Our first question is from Mr. Matt Elkott with Cowen & Company. Sir, your line is open.

Good morning. Thank you for taking my question. I wanted to clarify something start by clarifying something that you guys mentioned in the comments about the frac sand cars. I know you are not including any frac sand cars in the 2017 guidance. Now, the 2,500 under negotiation those were for 2018 delivery. So does this imply that the 1,300 were intended for 2017 delivery?

No.

No, I missed the last tag of that, sorry.

Well, because there is a total of 3800 sand cars in that.

Yes, the second…

We are not – we are just trying to clarify on the 2,500 that we were pointing out. The difference between the 3,800 and the 2,500 are spread between ‘18 and a little beyond that.

Yes. Let me just speak directly to the disconnect on energy cars and sand cars. If we have them in their schedule, we can discount them as The Street seems to be discounting them. Very smart people out there who follow our stock, we are very grateful they follow our stock, but on top of this issue, we like to work with our customers. We like our customers as source of all value and we are working with some of these customers as time goes by. We think most of this is all behind us. We have one significant block, the 2,500, but I am not concerned particularly about sand cars. I think the outlook for that market from all the work we are doing in the Middle East, I think that market is going to come back. All you got to do is read the numbers with the BofA information has got the range from oil prices in the $50 to $70 range. If the policies and supply conditions and demand conditions continue on the trend they are on, I am a little more bullish than some others on the higher end of that range. I think sand is coming back with that amazing technology in America. We have got the capacity to participate, particularly in the $60 range. So I think that this is – this is not a bad thing to have a position in sand cars. But we don’t count it in our thinking. I don’t want you guys to worry about it. It’s not in our guidance. And when we give this guidance, you can count on them.

Perfect. Thank you, Bill. And Lorie and also another thing Lorie mentioned was about 2018 EPS potentially not declining as much as 2017 EPS if market conditions continue the same way they are now. I believe based on your guidance for 2017 and the current expectations for 2018, 2018 consensus expectation imply a 43% decline in 2018. So – and you had a – and based on 2017 guidance, that would be a 39% decline from 2016. So can you give us a bit more clarity? I mean, instead of 39% in 2017, we could see that cut in half in 2018 the decline or is there even a chance for potentially flat earnings in 2018?

Matt, thank you for the question and thank you for picking up that comment. We have noticed that the expectations out there for 2018 for Greenbrier are a significant step down from 2017. Based on what we are seeing right now with our healthy backlog where our production schedules are, we see 2018 as being more – it might be slightly down from 2017, but it’s not going to be the nearly 40% drop that you saw from ‘16 to ‘17. So again, maybe a slight dip, but not the kind of significant step down that analysts are expecting right now.

And I guess with a potentially slight positive surprise, it could even be flat from 2017?

Fair enough. Because if you look at what – we have got 25,000 cars in backlog, we are going to deliver those in fiscal ‘17. And then if you look to ‘18, we probably have 8,000 to 10,000 cars in backlog today, January of 2017, 8,000 to 10,000 cars in backlog for delivery in our fiscal ‘18, which doesn’t start until 9 months from now. So, we feel like there, again, assuming that we are continuing to see order activity like we saw this last quarter. It will be lumpy. It won’t be the same quarter-to-quarter. But we don’t see that kind of drop off in 2018. And as Bill was talking about with the administration and there are so many moving parts right now in our economy, it’s really hard to say where this is going to go. We do think we feel very strongly if things were to stay just as they are today, it would be a slight decline to flattish, ‘18 to ‘17.

Got it. And we have heard recently from some channel checks that there has been somewhat of an uptick in inquiry for railcars since the election. Have you guys seen that?

We have a strong pipeline. I think since the election, there is a lot more activity in positioning by major customers who might have been on the sidelines. Other analysts have observed that, the ones that put out the weekly reports. So yes, I think that, that is something that is happening, because if you are a valued player and you are looking for the best price, you don’t want to wait till the market turns. This market typically turns pretty rapidly as you have seen. And the building blocks are all in place for it to turn with economic recovery in America, especially even if there is major infrastructure spend, a major tax bill that delivers some of the promises and the other stimulus that’s going to occur with deregulation.

Got it. So, the increased level of activities on inquiries by customers is stemming more from kind of a hopeful sentiment associated with what some perceive as a more pro-business administration. It’s not tied to a specific shift in demand.

It isn’t politics at all. It’s economics. And it is the result of the probable policies that are likely to be adopted that will be stimulated at a time when we have a fairly low unemployment rate. So, all you got to do is look at the economic forecast and the shift. The demand curve has shifted and it’s going – it’s expecting everyone’s mental view of how to protect their own supply chain. Just now I answered that question, but it’s not politics, its policy and its economics.

Okay. And just one last question, Bill, you did address potential policy changes earlier in your remarks. I have a kind of a twofold question on Mexico, with a big part of your manufacturing infrastructure for the North American market in Mexico, what are your concerns that a potentially protectionist policy in the U.S. could pressure your margins? And is there anything you can do to prepare for that scenario? That’s my question. And secondly, we saw recently an example of a major automaker scrapping plans for a Mexico manufacturing plant. If we see more of this happen, how would it affect demand for auto recs for you guys?

So, let’s take the easier part first, which is the auto rec business. Yes, that’s creating a little bit of effect particularly with major north-south railroad and some of the automakers. It benefits some of the foreign makers under the current trade arrangements with Mexico and it is not so good for the U.S. producers, but that’s actually happening. The bully pulpit does work and there was an auto plant, a new auto plant that was going to be made, built down there moved back to the United States. So it is – it will have an unknown affect. However, the opposite to that, the contrary part to that is that consumers are spending and the auto fleet in America and North America is still 11 years old. So we think that auto is often, people pronounce auto as not going to grow. It just hit the big peak and there is still a lot of pent-up demand for automobiles and new technology especially in that segment. On the broader picture, we are aligned with similarly situated manufacturers and other multinational businesses to protect key provisions of NAFTA. And I would just say that this new administration, these people are smart. They are not going to hurt jobs in America. There is a lot of jobs in America that are supported by international trade with Mexico. So I think there is a big difference between locating a new plant in Mexico and sensibly crafting tax policy or other policy that supports U.S. jobs that have assembly operations in Mexico. There is lots of manufacturers, lots of supply chain organizations, lots of jobs, lots of jobs, tons of jobs, particularly in steel, other components that go into railcars that are supported by operations in Mexico. So it’s quite complex. I think…

Thank you very much for the commentary Bill and Lorie. I appreciate it.

Thank you. [Operator Instructions] Our next question is from Ms. Allison Poliniak with Wells Fargo. Ma’am, your line is open.

Hi guys. Good morning.

Good morning Allison.

Yes. Just following on that Bill, this whole cross-border thing is interesting obviously for the broader industry, I mean I guess I am just trying to clarify what your thoughts are that it wouldn’t necessarily get a negative impact, but if they decide to increase your investment in Mexico, then it would hit you more, is that how I should think about it and I know it’s really uncertain right now?

I think it’s very uncertain right now. I think six more months will clear things up quite a bit. We are watching tax legislation in Congress as most of our manufacturing peers, those international companies, I mean there is tons and tons of companies are affected by this kind of policy. Nike, for example, right here in Oregon is greatly affected by policy on trade, not necessarily in Mexico, although surprisingly many people don’t realize that a lot of shoes are made in Mexico. Not necessarily for Nike, but my point is that there are many, many companies that have complex supply chains and we are all very interested in supporting U.S. policy. But first, we have to understand what the rules are going to be in the U.S. policy. Some of the things being talked about are pretty exciting in terms of the combination of tax and incentives for exports. So you could just turn the whole supply chain around and it could be a big win for some companies that have experienced in international trade. Consider, for example, some of the policies are being considered right now on taxation. Because if we really do want to favor exports and we want those jobs in the United States and we make it very attractive to build export products in the United States and if you got markets elsewhere, what kind of strategy does that suggest, suggest a strategy in building components and parts and turning supply chain around, moving it the other way, very interesting. How long as other countries known to slap tariffs on us. And this is not – this is only one out of many things that are just being debated right now, beginning to be debated and we don’t even have the President sworn in yet. So it’s going to be exciting time and I think it’s all good, just like what the stock market being so far and maybe it’s wrong, but there is a reason. Look of the economic forecast. I mean we should be at least ready for the ride because it’s going to be a ride.

Let’s hope. And my next question obviously, international is becoming a bigger opportunity on your railcar business, can you just help me clarify, that backlog number you gave, is that just in North America or does that include the Europe, I know Brazil wasn’t included in the orders, could you sort of help us frame that a little better?

Sure. Europe is included. It’s – I will let – and Lorie address any percentage as a granularity on that. It’s less than 15% of our backlog in normal order rates at current levels. But the aspiration is for that to be greater. Two moving parts, Brazil, we just mentioned that Brazil had orders and awards just in the last quarter, couple of thousand cars. That’s not included as you just said. Astra Rail is not included. They are similar size So there is a lot of noise moving around if we were to count that stuff. We are not counting it right now. And between now and 2018, we got a year to sell railcars all over the world. These are markets that are regional markets. They are not connected to domestic markets necessarily. They could be supply chain connected. So it’s really interesting that people are so glum. I don’t mean you, Allison. But we have to look at the bright side. We accept reality, the facts are facts we should face them. We have a new policy, new administration and things are going to be changing. So if the goal is to build things in America, let’s do it. We can do it. We can move 1,000 jobs here right away, if we really need to. But we have to wait and see. We have to just wait and see how this is all going to turn out. So it’s too quick, too early to be reactionary or overly concerned. It will all work out.

And just circling back a little bit, Allison on your question, once we do complete the closing of Astra and fold that into our financials, we will wrap their backlog into the consolidated Greenbrier backlog number. Brazil, we will see how that – and with our additional investment we will continue to highlight what their order and their backlog will be as we go forward, but we will try to see what’s the best way to communicate transparently to the market.

Great. Thanks so much, guys.

Thank you. Our next question is from Mr. Justin Long with Stephens. Sir, your line is open.

Hi. Thanks and good morning.

Good morning Justin.

I wanted to ask about was the mix of railcar deliveries that you expect in fiscal 2017, could you provide a little bit more color on tank versus non-tanks. And then as we progress into fiscal 2018 and think about mix on what’s locked in the backlog today, you mentioned 8,000 to 10,000 cars, how do you see mix evolving over the next couple of years?

Do you want to take that?

Sure. So the tank car mix will probably decline a bit as we go forward. As you know, we are building tank cars primarily at our GIMSA joint venture facility as they transitioned away from doing the crude related tanks, they are getting more into specialty tank cars, pressurized tank cars which take a bit more time and run at a slower production rates. So I would say overall from a unit perspective, tank cars will probably be a bit less of overall production as we progress through ‘17 and even into ‘18 to more normalized North American tank car demand level. That being said, those are still high ASP cars and they are – our GIMSA joint venture, all of our manufacturing operations have really stepped up their game over the last couple of years. And we are continuing to see as we did in the first quarter some fantastic margins even at lower rates of delivery.

I will just add one quick note to that real simple one. Those of you are starting to watch 2018, 2019, the wise thing to do with a long-term stack investment. I think that tank cars shouldn’t be counted out of the mix. There is still a big – very big item in the U.S. economy, plus we have two factors that are granular. One is the necessity, a recertification of the older tank car fleet and two is the fact that 2018 and 2020 will arrive. And when they arrive, tank cars that are stronger and safer will have to be adopted unless there is changes in the safety regulations. That’s hard for any administration to do. Safety is very, very important in the railroad industry and it’s the railroad themselves who are driving a lot of this through their pricing policy. So as we see 2018 kick in particularly on the cars, we are today even seeing a lot more of the pipeline then I would sort of suggest or suspect the market would even anticipate in pipeline inquiry – or in tank car inquiries.

Okay, great. That’s helpful, Lorie and Bill. And then secondly, just a quick one on the tax rate, obviously, a lot of discussion about the U.S. corporate tax rate potentially moving lower. If we were to run the math for you guys, if we solve the U.S. corporate tax rate go to 20%, what would the pro forma tax rate for Greenbrier be? I know it maybe a little bit tricky given the mix of your production and in between the Mexico – in between Mexico and the U.S.?

Typically, it depends which tax code is adopted. There is 25 variations right now being debated in the Senate.

Right. And I would say our expectation would be our tax rate will be lower. Lower to what, it’s really hard to say, because as you point out, we are in a lot of different international markets, too. And so there is the blending of our European tax rate. We still have Mexico, so but definitely if the U.S. tax rate were to be reduced, our effective tax rate will be down.

And it maybe a better way to ask it is if you look at a percentage of your pre-tax income, what percentage are you paying a U.S. tax rate on today and what percentage are you paying in Mexican tax rate on today?

I’d say it’s probably a fairly sizable percentage on U.S., because even our production out of Mexico is U.S.-based, but there is a lot of complexity when it comes to the tax regulations that are being discussed of exactly how that will work and how when we take advantage of all of that depending on where the manufacturing of our cars is. So, it’s a very complicated question. I definitely just have to jump to things. We don’t have a specific answer for that right now.

That’s fine. I can definitely appreciate that and some of the color you gave was helpful. So, I will leave it at that and thanks again for the time.

Thank you.

Thank you. Our next question comes from Mr. Ken Hoexter with Bank of America/Merrill Lynch. Your line is now open.

Great. Good morning. Lorie, you mentioned it is great feedback on 2018 earlier. Thanks for the thoughts on your declines are potentially going to be flat. In the past, you mentioned kind of mid-teens margins at manufacturing. Is that still your thoughts on where this declines, too, given that the production levels that you are looking at and maybe your thoughts on the trough there at manufacturing?

Yes, I do still stick – I mean when I give that guidance that I believe that over the long-term in a normal market, I believe our manufacturing operations should have mid-teens margins. That is definitely an average and we will have some car types that are generating much higher margins, some that are lower depending on probably the more commoditized car types. But again, as we saw with the first quarter, we have improved our operations tremendously and we are not stopping now. And that’s not just plant layout and production, but that’s engineering and how we are building our railcars, robotics, all those different things that I think that gives me the comfort to say that across the long-term mid-teens margin for manufacturing is a fair number. A trough, I mean, if we were to go to, I don’t know, less than 10,000 cars being delivered, those definitely probably get down into single-digits. I mean, that’s pretty dire straight.

Another way to answer that question is just say simply put that manufacturing and our leasing activities have exceeded our own internal expectations and continue to do so, I don’t think that’s reflected in Lorie’s – we continued to be impressed with the performance there. And the disappointments are the aftermarket business. Those are the areas we have some tail – some headwinds that we didn’t expect. We didn’t expect that and that’s disappointing, but we are going about fixing it and we are very focused on the macro policy climate as it might affect our core business model in the manufacturing, but we are very adaptable in manufacturing. I am pretty pleased with what’s going on there.

So Bill, maybe just to expand on that a little bit more, right? So, if you carry that on to – maybe talk a little bit about the parked cars that we hear about these hundreds of thousands of railcars that are seeing on the sideline and the pace that you are starting to see them come back into use as volumes maybe pickup a little bit here versus the need to order. Maybe kind of differentiate that, because in your charts, you show the eventual move back to that 50,000 annual purchasing, but maybe talk a bit about what is holding that back with the backlog on the rails today?

So, in terms of Greenbrier, we are not the same as other car builders. We have a stronger long-term multiyear backlog that has been very solid, but that is just a base. The surplus cars, so-called surplus, you start with a principle that railcar is not a railcar. There is probably 20 different kinds of railcars. So, you have some cars that are very surplus like old cars. You have other cars that are still in demand and are circulating. So, you have to fragment it into your market segments. Secondly, velocity, very important, it’s not just the loadings. It’s the velocity and coal declines have affected velocity. Now the outlook is more modest at least dampening of the decline in coal and that is a pain relief. So, we have watched velocity statistics from our perspective. We are happy when the railroads can improve their velocity. But it works off the so-called surplus when they have – you know when they have more business, because with more business, their velocity tends to decline and that’s been happening and every one mile per hour of decline really affects that fleet quite a bit. Lastly, there is something that’s similar to structural unemployment. There is a level at which freight cars are going to get stored, particularly seasonally, what happened to be in one of those seasons, cars get stored and in weather, those are all factors. So, it’s not that simple. I wish it was simple, but it’s not simple like many things in life. So, you got to look at the whole thing and parse it out a bit and maybe we need to give more transparency in education to the market. But it can rapidly change. And particularly when you are diversified as we and other – a few other car builders are, you can be nimble and move from one car type to another if you got the right manufacturing facilities and people and skills and capability to do that.

That’s helpful. Thanks for that. And then Lorie, maybe just – you mentioned Astra not included. Obviously, you talked about the accretion potential from there. Maybe you can walk us through for ‘17 and ‘18, again what to expect out of Astra and then the same for Brazil. Just obviously if you are thinking maybe we are closer to trough than expectations, maybe what are some of the potential upsides we can get as you move forward and close these increased investments or acquisitions?

Sure. And so for Astra and we are not giving specific EPS accretion numbers, but the Astra operations to just give you a little flavor is a bit bigger than our existing European operation. So when you think about that from Europe being about 15% or so of our existing business and we are talking about doubling that. That can be sizable. Now again, it will get complicated for you guys, because we will have a 75% ownership in that and our partner will have a 25%. So – but we definitely see that transaction as well as activities in Europe and Eurasia being very beneficial to our financial statements as you move late into 2017, but more probably 2018 and beyond, because we think those two operations give us a great platform into the GCC area and some of those other developing countries where we are doing a lot of legwork today to develop a customer base and understanding their railcar need. So I definitely see that being a really bright spot as you get out into ‘18 and ‘19. The Brazilian operations, it’s a smaller market. I think the total market size down there, maybe about 6,000 railcars on an annual basis. We are the largest railcar builder down there. But having a strong presence in Brazil is another stepping up once you go to other areas of the world. So for example, Africa and things like that and Brazil is a huge exporter. So we see opportunities there. Maybe it’s not going to be as big as an incremental benefit to our financial statement, 2018 and beyond as the European, but it’s definitely round out what we have been trying to do here with this. We have got our focus on North America. That is our core. But we want to take our core competencies and deploy them in other parts of the world to offset some of the cyclicality of North America. So I am sure that there are things that you like to add.

No, that’s very well said.

Thanks Lorie. I appreciate the time.

You bet. Thanks.

Thank you. Our last question is from Mr. Mike Baudendistel with Stifel. Your line is open.

Thank you. Just want to clarify, I know you said that Astra is not included in 2017 guidance, is it and also not included in 2018, is that the comment you made on earnings in 2018?

I would say in general terms, it’s rounded in there, it’s not specific number, so not very…

Okay.

Let me just say that we tend to discount a lot of the stuff in our published remarks, which is maybe different than we schedule. But it’s – again, it’s a complex business and we try to be very conservative in how we project to the Street and we would refer to error on the side of safety and not surprises. So maybe a fault, but that’s what we do. So we tend to discount things that haven’t been concluded yet. We haven’t concluded that acquisition yet. So we have concluded it, we probably won’t count it as much as or at all in our minds. So that’s just the way we operate, it’s peculiar, I know, but it’s the way we are.

Okay. Well, that’s still helpful commentary for me. And I also just want to ask you, I guess on GBW, which was impressible in the quarter, could you just walk us through just what needs they have in order for GBW to the quarter, it’s profitable in the coming quarters, is it mostly just rail traffic overall being up or is it just that there are certain bulk commodities that’s driving more that repair business that we are down that would need to improve?

It’s volume, volume and volume. The coal business has really affected our wheel business, which isn’t your question, GBW is your question. But GRS is in some – both. These tend to be more cyclical than we would like, but coal has really hammered them and we need – we have had in GBW some integration service I guess and delivery issues that have been addressed. Re-certifications are coming on strong. We are actually getting a lot more new business. We need to protect our current customer base and provide excellent service, reliability, which we will do. And then we need to see volumes recover in the repair side. So I think we still haven’t seen a retrofit program on older tank cars. Eventually, we believe that will occur. I think it’s a good long-term play, but right now it’s encountering unexpected headwinds, a lot of it having to do with just the general market conditions of the railroad industry and coal.

Great. Thank you. Also just want to ask quickly, the 2,000 orders you see in Brazil, how does that compare historically, I mean was that the best quarter of all time or it’s just put simply that in some historical context would be great?

Well, business in Brazil, you read about Brazil, you can get pretty impressed. Don’t want to believe everything you read just like with all of our analyst reports. I think that the important thing to remember about Brazil is that the economy is export driven. It’s not just mining. It’s agriculture. Right now, it’s agriculture, agriculture. So it is an unusual level of order activities. Certainly, we are embedded now in Brazil. We are following it. There is going to be a real strong need. But historically, that’s a fairly solid amount if you consider the whole market is depending on the cycle of 4,000 to 6,000, 7000 cars. We are going to go through the 5-year period with maybe more demand. There is adequate capacity in there, so there is competition and that will affect margins. I would say it’s – I wouldn’t count that as something that – something we expect unless we get a really good export program out of there and bought in our products, which we are intending to do.

Great. Thank you very much.

Thank you everyone for your time and attention this morning and your interest in Greenbrier. I am sure we will be taking some follow-up calls later today. And for those of you who are really interested, we – and as Bill said earlier, our Annual Meeting is this afternoon, which will be webcast. Thanks and happy New Year.

Happy New Year, everybody.

Thank you. So that concludes today’s conference call. Thank you all for participating. You may now disconnect at this time.