The Greenbrier Companies, Inc. (GBX) Q1 2022 Earnings Call Transcript

The Greenbrier Companies, Inc. (NYSE: GBX) Q1 2022 earnings call dated Jan. 07, 2022

Corporate Participants:

Justin M. Roberts — Vice President, Corporate Finance & Treasurer

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Lorie L. Tekorius — President & Chief Operating Officer

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

Adrian J. Downes — Senior Vice President, Chief Financial Officer & Chief Accounting Officer

Analysts:

Justin Long — Stephens, Inc. — Analyst

Matt Elkott — Cowen & Co. LLC — Analyst

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

Ken Hoexter — BofA Securities, Inc. — Analyst

Bascome Majors — Susquehanna Financial Group LLLP — Analyst

Steve Barger — KeyBanc Capital Markets, Inc. — Analyst

Presentation:

Operator

Hello, and welcome to The Greenbrier Companies First Quarter of 2022 Earnings Conference Call. [Operator Instructions] At the request of The Greenbrier Companies, this conference call is being recorded for replay purposes.

At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin.

Justin M. Roberts — Vice President, Corporate Finance & Treasurer

Thank you, Riley. Good morning, everyone, and welcome to our first quarter of fiscal 2022 conference call. Today, I’m joined by Bill Furman, Greenbrier’s Chairman and CEO; Lorie Tekorius, President and COO; Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer; and Adrian Downes, Senior Vice President and CFO. Following our update on Greenbrier’s performance and our outlook for fiscal 2022, we will open up the call for questions.

In addition to the press release issued this morning, 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 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 2022 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

And with that, I’ll turn the call over to Bill.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Thank you, Justin, and good morning, everyone. Fiscal 2022 is off to a good start driven by strong commercial performance, disciplined management of our production capacity and continued growth of our railcar lease fleet. Momentum in our business is being sustained. First quarter, fiscal 2022 continued our strong order trajectory. As a result, Greenbrier posted its fourth consecutive quarter with book-to-bill ratio over 1 times. New railcar orders and actually we’re at 1.5 this quarter. New railcar orders of 6 point — 6,300 units worth $685 million across a broad range of railcars.

We ended the quarter with a backlog of approximately $3 billion, the highest level in about three years. Our order intake for the first quarter alone represents 35% of new orders received during all of fiscal 2021. A recent partnership with U.S. Steel Corporation and Norfolk Southern Railway to design and launch new high strength steel gondolas having multiple environmental benefits demonstrates this momentum. In addition in a moment, our Chief Commercial and Leasing Officer Brian Comstock will share more about this and some other exciting, exciting customer focused initiatives.

And I should mention in terms of backlog that we have booked another $200 million of re-body work, which is sizable but not counted in our backlog. We are now ramping up 21 active production lines in North America and approximately eight internationally. Importantly, we are harnessing our flexible manufacturing footprint to extract more production from each line. We expect this to increase and deliveries to increase over the course of the year. Meet production requirements, we recently expanded our global workforce by about 10%. In terms of management of safety, hiring and supply chain issues continue. Continued success in these areas is key to maintaining our strong start to the year.

Specifically on the supply chain, our global sourcing team continues to do an exceptional job of mitigating disruptions to support increased production. Our Wheels, Repair & Parts business is now known as Maintenance Services. The new name doesn’t change the fact that this business unit endured a challenging quarter. Labor markets and supply chain disruptions have both impacted its profitability. Actually, this lowered our consolidated margins which were below our expectations to begin with or it will speak to the changes we’re making to improve the performance of our Maintenance Services business unit.

Greenbrier Leasing continues to perform very well. Our investment activity is considerably outpacing initial targets. Asset utilization, a key performance metric for the leasing business is high at 97.1% with a portfolio that is well diversified across car types and strong lessee credits, as well as maturity ladders. Additionally, we’ve exceeded the initial investment target for GBX Leasing by $200 million to a portfolio of $400 million in only nine months of operations. This reflects the strong momentum in the business and our core manufacturing markets in North America.

I’m sure there may be questions on this or other comments by management, but be sure to read — this — the footnote in our press release having to do leasing supplemental information is very informative. The Omicron variant of COVID-19 emerged suddenly following the end of the quarter. As a result of well-established safety protocols, our operations have not been significantly impacted at present quite rate — the rise in cases globally and in North America. But we are closely tracking the rapid community spread of this variant and we’re taking all appropriate precautions. We continue with safeguard protocols.

And we will enhance these as dictated by best practices, as well as adhering to local health authority requirements in the locations where we operate. In the US and Europe, it appears this wave might peak in the coming months. There are indications that the current variant carries milder symptoms than previous versions of the virus, particularly for this double — those who are double vaccinated and those with boosters. Nonetheless, we must remain vigilant. After two years, the full contours of the pandemic remain dynamic and unpredictable.

Our resolve is effectively to manage Greenbrier through evolving COVID challenges, and that resolve remains steadfast. Our outlook remains unchanged, except that we believe it is going to be much more positive. We maintain a positive outlook for the fiscal year for a variety of reasons. These are supported by industry metrics as well as operating momentum, driven by a strong order book, demand backlog, and manufacturing ramping. For example, a portion of idle rail cars in North America decreased from 32% in July to just below 20% by December.

Industry forecasts for 2022 and 2023 are very encouraging, as Brian Comstock will share with you. All this suggests that industry fleet utilization is nearing 80%. And again, Brian Comstock will add more on these points in a minute, and we can talk and question and answer it. Lorie Tekorius, who will be Greenbrier CEO in March, takes the helm at a very important and exciting time and the long history of Greenbrier. Before I turn the call over Lorie, I’d like to provide some closing remarks on where Greenbrier stands today. I became the CEO when we were founded, when my partner and I co-founded a small asset leasing business in 1981.

We entered manufacturing with the acquisition of Gunderson in 1985 and have continued to build on those two foundations. Today’s manufacturing is our largest unit, comprising about 80% of our total annual revenues. But manufacturing was both driven and complemented by a robust commercial and leasing business, as well as asset management services. Today, our asset management and maintenance services touch about one-third of the North American fleet. It’s been a remarkable journey for me and for the company, Greenbrier has steadily grown its industry footprint and today is the leading railcar manufacturer in North America, allowing us to operate and scale. We also now operate on four continents, serving global railcar markets worldwide with similar market shares in each of these.

All of this has been accomplished through the hard work of remarkable people who have helped guide us through their capacity for innovation, discipline management, an unyielding focus on the needs of our customers, as well as our workforce and other stakeholders. We purposely built the company to grow and scale and prosper across business cycles. Under Lorie’s administration, she plans to do more of that, along with some new initiatives of her own.

As global railcar markets emerge from a cyclical trough when it was severely exacerbated by the pandemic, I’m proud of what the Greenbrier team has accomplished and the market leading positions we’ve achieved. I’m also proud of the significant value we’ve created for our shareholders. I expect that this will continue for many decades to come as Greenbrier continues to drive innovation in this industry, broaden its footprint innovation in this industry, broadening its footprint globally and by product line and expand this leasing and services business.

I will take just a brief moment as others may do later to welcome our two newer directors subject to the vote of our shareholders today, James Huffine and Ambassador Antonio Garza. Both are highly qualified and we welcome this step for Board refreshment. I also would like to congratulate two directors who have served throughout almost the last 18 years, 20 years on our board, Duane McDougall and Don Washburn. Next week, we’ll put out a brief congratulatory note marking this milestone but I want to assure them that we remember them, they’re always welcome to visit and we thank them for their strong contributions over the years. I’ll now turn the call over to Lorie Tekorius, Greenbrier’s incoming CEO. I have no doubt that Greenbrier will flourish under her administration.

And Lorie, next time you’re going to be running us, running this call. So thank you and congratulations.

Lorie L. Tekorius — President & Chief Operating Officer

Thank you, Bill. Good morning, everyone. And before I get into the details on the quarter, you may have noticed and I think Bill referenced that we rename two of our reporting segments, our Wheels Repair & Part segment and now Maintenance Services and Leasing & Services is now Leasing & Management Services. The new names more closely reflect the customer solutions we provide and have no impact on the financial results. Greenbrier’s fiscal Q1 reflected continued labor challenges in the United States, competitive pricing from orders taken during the depths of the pandemic trial, and production and efficiencies from line changeover and ramping of capacity.

I’m proud of our employees around the world that continue to perform well even as uncertainty abound. It is certainly an understatement to say that increasing head count safely by several thousand employees and increasing production rate by 40% to 50% is challenging. And with an experienced leadership team, we’ll meet this opportunity to scale our operations all while keeping our workforce healthy and safe. Safety across our organization has been and will continue to be our number one priority. In the quarter just ended, we delivered 4,100 units including 400 units in Brazil.

Deliveries decreased by about 9% sequentially, which primarily reflects the timing of syndication activity and line change over the North America. Our global manufacturing continues to take a measured approach to increasing production rate and activity as they work through orders taken during the trough. Our global sourcing team continues to perform minor miracle on a regular basis we avoid significant production delays. Our maintenance service business was significantly impacted by labor shortages exacerbated by the COVID pandemic. These shortages impact throughput, billing efficiencies, and profitability.

We made a number of changes to our hiring and training practices. And we’re seeing improved retention rates, but maintenance cycle times can be 75 to 90 days, so it takes some time for the benefits of these changes to flow through the operation. Further, this business was impacted by lower wheel change up volume. I do believe the team has made the necessary changes that will lead to positive results over the course of fiscal 2022 in our maintenance services. Our leasing and management services group had a good quarter with strong fleet utilization and the integration of a previously disclosed portfolio purchased in September.

Between the portfolio assets and originations from Greenbrier, GBX leasing grew by approximately $200 million in the quarter and as of quarter end, that fleet is valued at nearly $400 million nearly doubling in value across the quarter. Importantly, this growth reflects a continued disciplined approach to portfolio construction, underwriting and credit quality standard. We are not pursuing growth at all cost. Our strategy remains to create repeatable revenue and stable tax advantaged cash flow that will take the edges of the debt and new railcar demand that are well known by all in this call.

In addition to managing our lead fleet, our management services or GMS group continue to provide creative railcar asset solutions for over 450,000 railcars in the North American freight industry. One other positive developments subsequent to quarter end is that our leasing team successfully increased the size of our $300 million non-recourse railcar warehouse facility by $50 million to $350 million. Our capital markets team executed well this quarter and we expect syndication activity to grow throughout the year similar to our overall cadence of delivery.

Syndication remains an important source of liquidity and profitability for Greenbrier. Looking ahead, with this strong momentum for fiscal 2022 and beyond, we have talented employees and experience management. We’re focused on driving results and shareholder value. I’m very excited about the long term opportunity for Greenbrier.

And now Brian Comstock will provide an update on the current railcar demand environment.

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

Thanks, Lorie. And hope everybody had a great holiday season as there’s a lot to be excited about as we move forward. As mentioned in October, I remain excited about the momentum we are seeing in all of our markets globally. In Greenbrier’s first quarter, we had a book-to-bill of 1.5, reflecting deliveries of 4,100 units and orders of 6,300 units. This is the fourth consecutive quarter with a book-to-bill ratio exceeding 1 times and reflective of the strengthening environment. New railcar backlog of 28,000 units with a market value of $3 billion provides strong multiyear visibility.

These are the type of demand environments for Greenbrier’s flexible manufacturing is a vital differentiator. In addition to new railcar orders, we recently received orders to rebody 1,400 railcars as part of Greenbrier’s Railcar Refurbishment Program. This program is an important part of our growing partnership with our customers to sustainably repurpose North America’s aging fleet to ensure that rail remains the most environmentally-friendly mode of surface transport. As of November 30, our modernization backlog included 3,500 units valued at $200 million. This is a valuable business that is additional to our new railcar backlog and absorbs production capacity.

In addition to our Railcar Refurbishment Program, we announced another sustainable initiative in early December, a collaboration between US Steel, Norfolk Southern and Greenbrier for a new gondola, using an innovative formula for high-strength, lighter weight steel developed by US Steel. Each gondola’s unloaded weight is reduced by up to 15,000 pounds. Norfolk Southern will initially require 800 of these Greenbrier-engineered gondolas. The work done by Greenbrier and our partners promises significant benefits to all three companies and the freight transportation industry as a whole as we lead the way to a net zero carbon economy.

One item worth clarifying is the 800 gondolas will be part of a Q2 order activity. In December, we also announced Greenbrier’s joining of the RailPulse Coalition. I’m personally excited about the prospects of this technology with the goal to aggregate North American fleet data onto a single platform that has the potential to improve safety and operating efficiency, while providing enhanced visibility to customers, reinforcing Rail’s competitive share of freight transportation. Greenberg’s lease fleet utilization ended the quarter at over 97%.

We continue to see improved lease pricing and term on all new lease originations and lease renewals, as well as continued strong demand for leased equipment. North American industry delivery projections show an increase to nearly 49,000 units in 2022 and to over 60,000 units in 2023 given the strong reduction in railcars and storage that continued congestion at the port, which is impacting traffic and overall economic growth. We believe these projections are very reasonable and see similar dynamics in Europe. As you can see from our recently announced initiatives, Greenbrier Global Commercial and leasing team remains focused on providing innovative solutions to our customers.

Now, over to Adrian for more about our Q1 financial performance.

Adrian J. Downes — Senior Vice President, Chief Financial Officer & Chief Accounting Officer

Thank you, Brian, and good morning, everyone. As a reminder, quarterly financial information is available in the press release and supplemental slides on our website. I’ll discuss a few highlights and will also provide an update to our fiscal 2022 guidance. Highlights for the first quarter include revenue of $550.7 million; deliveries of 4,100 units, which include 400 units from our unconsolidated joint venture in Brazil; aggregate gross margins of 8.6%, reflecting competitive new railcar pricing from orders taken earlier in the pandemic and labor shortage.

Selling and administrative expense of $44.3 million is down 20% from Q4, primarily as a result of lower employee-related costs. Net gain on disposition of equipment was $8.5 million. Like many leasing companies, we periodically sell assets from our lease fleet as opportunities arise. We had an income tax benefit of $1.4 million in the quarter, primarily reflecting net benefits from amending party or tax returns. Non-controlling interest provides a benefit of $5.2 million, primarily resulting from the impact of line changeovers and production ramping at our Mexico joint venture.

Net earnings attributable to Greenbrier of $10.8 million are $0.32 per diluted share and EBITDA of $42.2 million or 7.7% of revenue. Moving to liquidity, Greenbrier has a strong balance sheet. Liquidity of $610 million is comprised of cash of over $410 million and available borrowings of nearly $200 million. We are well positioned to navigate any market disruptions we expect to persist into calendar 2022. As mentioned last quarter, our tax receivable stands at $106 million as of November 30, and we expect to receive most of this refund in the second quarter of fiscal 2022. This refund is an addition to Greenbrier’s available cash and borrowing capacity.

Liquidity is important to support the working capital needs of the business as we significantly increase new railcar production beginning as we significantly increase new railcar production beginning in 2021 and into 2022. Liquidity also enables Greenbrier to invest in growth as demonstrated by the railcar portfolio purchase in Q1 and the expansion of GBX leasing at a pace exceeding our initial announcement. It has also allowed us to continue to pay a dividend throughout the pandemic during a time of economic uncertainty. Greenbrier’s Board of Directors remains committed to a balanced deployment of capital and believes that our dividend program enhances shareholder value and attracts investors.

Today, we announced a dividend of $0.27 cents per share which is our 31st consecutive dividend. As of yesterday’s closing price, our annual dividend represents a yield of approximately 2.3%. Since 2014, Greenbrier has returned nearly $370 million of capital to shareholders through dividends and share repurchases. Additionally, you may have noticed an increase of approximately $70 million and Greenbrier’s notes payable balance when compared to the prior quarter. This non-cash increase is a result of Greenbrier adopting a new accounting standard with simplified accounting and convertible notes, and no longer requires the calculation of debt discount and associated equity components.

We believe the standard provides better transparency to how the convertible notes appear on our balance sheet. And to be clear, Greenbrier did not incur any impact to liquidity or cash flows as a result of this adoption. Based on current business trends and production schedules, we’re adjusting Greenbrier’s fiscal 2022 outlook to reflect the following: increased deliveries by 1,500 units now to a range of 17,500 to 19,500 units, which include approximately 1,500 units from Greenbrier Maxion in Brazil. Selling and administrative expenses are unchanged and expected to be approximately $200 million to $210 million for the year.

Gross capital expenditures of approximately $275 million in Leasing & Management Services, $55 million in manufacturing and $10 million in Maintenance Services. Gross margin percent is expected to steadily increase over the course of the year from high single digits in the first half to between low double digits and low teens by the fourth fiscal quarter as well cars ordered during the pandemic trough are delivered and conditions in the maintenance services business improve.

We expect deliveries to continue to be back up weighted with a 45%, 55% slip. As a reminder, in fiscal 2022, approximately 1,400 units are expected to be built and capitalized into our lease fleets. These units are not reflected in the delivery guidance provided. We consider a railcar delivered on a lease Greenbrier’s balance sheet and is owned by an external third party.

As mentioned in the commentary earlier on the call, momentum continues to build in our business and I’m excited about what the future holds for Greenbrier and now we will open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Justin Long with Stephens.

Justin Long — Stephens, Inc. — Analyst

Thanks and good morning. I wanted to start with the question on manufacturing gross margins. I know on the last call you were very clear about the timing of 1Q and that being the low point of the year. But I also know you were hoping for double digit manufacturing gross margins and we were a bit below that. So can you help us kind of bridge what happened on that front relative to expectations? And any way you can help us think about the sequential progression of manufacturing gross margins moving beyond — in the next few quarters?

Lorie L. Tekorius — President & Chief Operating Officer

Sure. Do you want to go, Bill?

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

No, I think you should go ahead.

Lorie L. Tekorius — President & Chief Operating Officer

Great. So you’re right, we always have very high expectations. I think that our manufacturing folks did an excellent job in the first quarter and it actually exceeded some of our expectations. But we did run into some headwinds in certain areas as they work through, as we said, orders that were taken during the downturn and some of the overhead absorption during the ramping just wasn’t quite as robust as we would have expected. So those were the issues. And then we continue to face labor difficulties, particularly here in the United States. So our facility here in Portland, Oregon, as well as our operations in Arkansas, so it’s not only the impact of COVID, but it’s also attracting and retaining the labor to be able to be efficient in our shops.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

I’d only add that we have — maybe just a bit of delay here, the momentum in the second half should be strong to the degree that our margins were to lag. We expect, as has been indicated in guidance, that our production rates will increase significantly than earlier guidance. So I think that it will certainly be offset.

Justin Long — Stephens, Inc. — Analyst

Okay. And so as we move into the second quarter, would your expectation be that manufacturing gross margins can get back to the double digits? And when we think about the full year, would you say that your expectation for margin is better than it was three months ago, given that production guidance increased or are the labor issues offsetting some of that?

Lorie L. Tekorius — President & Chief Operating Officer

I think the labor issues are offsetting some of that. We are optimistic. I don’t want to get into quarter-by-quarter specific guidance on margins. Our expectation is as we move across this quarter — I mean, sorry, across the year margins will improve and get to that double-digit area. Sometimes the second quarter has the headwind of it’s just — you’ve got more holidays and some more difficulties. We’ve seen what’s happened with COVID cases popping up, weather, and other difficulties. So, you know, I would say that we always have high expectations, but I don’t want to get into that quarter-by-quarter guidance.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

I think the second half should look stronger for a variety of reasons. The operating momentum should drive the expectations, but I think the timing is really what’s happened here, Justin. It’s just been there’s a little bit more of a lag than what we might have thought before. But again, we’re going to have higher volumes than we expected before and things are going well in manufacturing. So I think there’s a big bunch of glitches. It’s really ramping up. And as Lorie said earlier, that’s not a seamless matter, but it’s going very, very well.

Justin Long — Stephens, Inc. — Analyst

Understood. I appreciate the time.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Thank you.

Operator

Our next question comes from Matt Elkott with Cowen.

Matt Elkott — Cowen & Co. LLC — Analyst

Good morning, and thank you for taking my question. I want to ask you about the — on the pricing side. Lorie and Brian, I think you mentioned the cars that were taken during the 2020 trough. Were the deliveries in the first fiscal quarter mostly those orders or if not, what percentage of the deliveries were orders that were taken during a very depressed pricing environment? And also, how many of those cars are still to be delivered in this fiscal year?

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

This is Brian. It’s a great question. Your analysis is correct. At the end of the day, we had a bit of a tail on orders coming out of 2020 that moved into Q1. Looking beyond Q1, we don’t have many of those orders left in the backlog, so we start to get into what I call the newer price backlogs in Q2, Q3 and Q4. So not a lot of detail beyond Q1, but certainly there was quite a bit of tail going into Q1 on some of the legacy-priced deals in the trough of the market.

Matt Elkott — Cowen & Co. LLC — Analyst

Okay. And Brian, with the orders that are coming in now, can you talk about how the pricing dynamic differs from the orders that you’re actually delivering today, adjusted for commodity price, obviously, core pricing?

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

Yeah. Yeah, I would say it’s marketably improved.

Matt Elkott — Cowen & Co. LLC — Analyst

Okay. Now, I mean, the industrial landscape looks really different from a couple of years ago. It’s a lot more consolidated. You guys in Trinity have maybe about 75% or 80% of the manufacturing landscape. So, should — if we do have a robust upcycle in the next couple of years, could we see materially better pricing? And if so, what do you guys think the kind of peak margin at the peak of the cycle could look like in a couple of years? I know your gross margin peaked in 2016 at 22%, but that was a highly anomalous time, deliveries from the crude by rail era which will probably not be repeated. But any color on what margins could look like at the top of the cycle when you’re delivering the highest number of cars?

Lorie L. Tekorius — President & Chief Operating Officer

That’s a — it’s a great question. And I think that’s one of the things that keeps many of us in this industry for a long time because you never know what’s going to happen. So we certainly think that there’s a lot of opportunities over the coming years. And our manufacturing team continues to impress us with what they’re able to achieve. And you’re spot on with as we get to higher production rates you get to see the benefit of that overhead being absorbed across a broader group of cars.

So a lot of it depends on mix. We have had a really disciplined approach to how we’re taking orders and thinking about things. So I could see margins getting into the upper teens, be excited if they were in the mid-20, but a lot of that does come down to mix. And while our competitive landscape here in North America has changed a bit, we also have some very strong customers that pay attention to what they’re investing. And these are long lived assets. So you can only have — you have that balance.

I think the other thing is we have the benefit of having our leasing platform. So we also look at how many cars do we want to build and sell versus we’re building cars. And we can put them into a fleet where we will see that repeatable revenue and cash flow over the coming years. So it’s a nice layering effect and it’s a good blend of different activities that we have here at Greenbrier.

Matt Elkott — Cowen & Co. LLC — Analyst

That’s helpful. And Lorie, just one last follow-up for this question. You know, based on all the dynamics you guys are seeing now. When do you think this production peak might occur actually? You know, could it be mid-calendar 2023, late calendar ’23 or earlier?

Lorie L. Tekorius — President & Chief Operating Officer

I think you’re right. It would probably mid-2023. I think some of it is going to depend on supply chain. It’s going to depend on the labor dynamics making certain that we can continue to operate across the North American market and getting some of the supply chain issues shooken out. We have been fortunate to not really have any of those impact us significantly. But it’s definitely something that gets managed every day.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Maybe Brian or Justin could talk to the data that supports, you know, 2023 and even beyond just in terms of the industry forecasts. I think it’d be good to remind everybody what those industry forecasts look like.

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

Yeah. I think that’s good, Bill, just to kind of remind everybody that as you look at the projections in 2023, they’re projecting 60,000 railcars will be built. The other interesting dynamic as you think about where the future is headed for rail is that the North American fleet continues to contract. I think we’re in the 21st month of contraction which means that there’s a heavy, heavy scrap rate that is going on even while new cars are being injected into the system.

So as you know, as we think about the future, as you know, the chip situation resolves itself. As supply chain starts to become more fluid. You’re going to see more and more pressure in demand on the railroads to ship more and more product. So 60,000 right now is the industry’s best guess. But you could see that extend beyond 2023 as wallet demand comes on as we think it will.

And just to kind of move this to a little bit bigger picture and longer term also. Rail freight is the most sustainable form of transportation. And as the world continues to focus on carbon neutrality, zero emission goals, things like that, we continue to believe that there will be a medium to long term growth in the fleet because there has to be a shifting of modal transportation and that’s not baked into anyone’s numbers or forecasts or anything at this point.

So, we continue to believe that what we see for the next few years is great and it’s going to be a great market. But there’s also some long-term tailwinds that are going to be dynamic that we haven’t ever dealt with before. And that’s especially true in our second largest market, which is in Europe, where we have significant industry momentum to move to net carbon, zero goals much earlier and remove congestion is really the government mandates really pushing this. So we see much stronger demand environment over there.

Matt Elkott — Cowen & Co. LLC — Analyst

Got it. Thank you, guys, very much. Appreciate it.

Operator

Our next question comes from Allison Poliniak with Wells Fargo.

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

Hi, guys, good morning. Just kind along that next to make sure I understand sort of your industry view. So you’re saying ’23, that 60,000 industry view would basically just be a catch up to replacement with potential for real growth or net growth of the fleet in ’24. Is that the way to think of it?

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

Yeah. I think — this is Brian. I think that’s a good way to think about it today. Again, if you think about the contraction you’ve seen as a fleet and how many cars are being added, there’s a scrap rate, probably somewhere in the 40,000 car range per year. And so when you think about 60,000 cars, it’s almost depending on how many cars are scrapped that year, it really is almost just replacement demand versus organic growth. And again, keep in mind that is today with a very light footprint in auto because of the chip shortages. There’s tremendous demand in the auto sector and when that starts to free up, it’s going to put more pressure on railroads and velocity, and just moving equipment.

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

Got it, now that’s helpful. And on the leasing side, obviously growing quicker, which is good better than you expected, fleet leverage at 65%. I think your target and I could be wrong and this is 75%. I guess, what do you anticipate exiting fiscal ’22 in terms of fleet leverage this year? Is it it’s sort of at 65% or is it expanding?

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

I think we would expect it to continue to increase as we put more assets into the GBX leasing warehouse out of kind of the legacy fleet and then out of our order book as well. So, you’ll see us kind of moving closer to that 75% rate.

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

Great. And then I think, Brian, you had mentioned $200 million of modifications in manufacturing that aren’t part of like your deliveries. Is that all for fiscal 2022 or is that spread over a multiyear kind of aspect?

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

Yeah, another great question. Most of it is in 2022. Some of it does have a tail into 2023 based on our fiscal year lays out. But a lot of it is calendar 2022.

Allison Poliniak-Cusic — Wells Fargo Securities LLC — Analyst

Got it. Okay. Thank you.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Thanks, Allison.

Operator

Our next question comes from Ken Hoexter with Bank of America.

Ken Hoexter — BofA Securities, Inc. — Analyst

Hey. Good morning, and, Lorie, good luck as you transition to the CEO role. Just want to follow up on Matt’s question on pricing where we talked about kind of the — a great market. I think it looked like the order book went up about 9%, 10% year-over-year in terms of price per car. Can you talk about kind of mix as you normally do? Is there any demonstrable change in that mix, or is that — can we consider that a real impact on pricing on a year-over-year basis? And is that more a factor of looking at your labor costs going up?

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

So I can handle the mix side of that equation. I’ve said this before and it continues to reign true is that the mix is the most diverse I’ve seen in my 41 or 42 years in the industry, which does not date me as a real old man, but just a baby, just a baby when I started. But it’s — it really is a little bit of everything, which is fantastic for us getting — growing our lease fleet as well from a diversity perspective, credit profile perspective, and just lease maturity perspective. But it is everything from multiple types of covered hopper cars, auto, intermodal, gondolas, boxcars, very, very, very diverse. There’s no single particular area that is creating the demand cycle this time, which normally would be an ethanol boom. It would be a crude boom. It’s not the case this year. It’s very, very diverse.

Lorie L. Tekorius — President & Chief Operating Officer

And the other thing I will add is it is obviously impacting ASP. It’s going to be — we do have — commodity price and labor costs have gone up. So those are flowing through and being reflected in those higher ASPs.

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

That’s a good point to remember. We are doing great job on hedging and things like interest rates. Our pricing on leasing products and also commodity pricing. In a sense we’re protecting ourselves in that sense.

Ken Hoexter — BofA Securities, Inc. — Analyst

Thanks for that. And then you also addressed the refurbishment business as this really begins to scale on a car basis. Are you doing this at the existing facilities with this not on business because of the ARI acquisition? Maybe talk a little bit about how that impacts the margin. Is that reflected in the managed services? Is that in manufacturing? Where should we see the — given the scaling and growth of that? Where do we see the impact of that? And what should we expect as far as a margin contribution from that business relative to the incumbent base?

Lorie L. Tekorius — President & Chief Operating Officer

Right. Great question and we are doing because these are very large program. And based on our customer needs, we are going to be running this work through our manufacturing facilities because of that kind of repetitive work that we think that we can do very efficiently and effectively at those facilities. From a margin percentage perspective, it’s going to flow through in manufacturing is what you’re going to see on your financial statements. And it’s going to be beneficial because these are, you know, competitively priced transactions and the work that’s going through the facilities is going to add to the overhead absorption. So, we don’t see it as a drag on manufacturing earnings. It’s also not going to be something that’s going to — skyrocket at the other way. It’s a nice blend with the other new car work that’s going on.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

It’s interesting to note that this is a fairly deep market given the modernization capabilities of the aging fleet. And I — both Trinity and Greenbrier are finding that this modernization is contributing to ESG goals as well. So I think it’s a very attractive future market that’s going to go through this cycle pretty much along the lines of what you talked about. You might clarify your views on that Brian.

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

No, it’s absolutely correct. This is not something that is a short-term phenomenon. This actually is something that as you see scrap car rates go up and you see the value and repurposing components, you’re going to see a long line process here that will extend for multiple years.

Ken Hoexter — BofA Securities, Inc. — Analyst

Great. Appreciate the thoughts. I guess just one, just rounded there, Lorie, you kind of mentioned of accretive. So I just want to understand, is that going to be accretive to existing margins for the upper teens you were talking about long-term potential? I just want to — are you putting a kind of factor on that?

Lorie L. Tekorius — President & Chief Operating Officer

I’m sorry I’ve got too many people. Yes, it’s going to be, I think it’s going to be positive for our overall margins. Obviously, we don’t look to take work into our shops. That isn’t going to be positive overall for Greenbrier and for our shareholders.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Just look at it this way. It’s another $200 million of backlog. If you look at it that way, but we’re not, according to industry convention, we’re excluding it. And our manufacturing backlog is being done in our manufacturing plants, not principally in our repair facilities. It’s really new car type work of major project nature.

Ken Hoexter — BofA Securities, Inc. — Analyst

Great. Appreciate the time. Thanks, guys.

Lorie L. Tekorius — President & Chief Operating Officer

Thanks, Ken.

Operator

Our next question comes from Bascome Majors with Susquehanna.

Bascome Majors — Susquehanna Financial Group LLLP — Analyst

Brian, you talked a few times about the 60,000 2020 delivery projections for some of the industry forecasters. When you take a step back, is that something that you feel like you have conviction in and can manage the business to based on your conversations with customers and in railcar management and leading indicators? Is that really just, you know, here’s what the experts say so that could happen type situation?

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

Yeah. Thanks Bascome. So we do our own analysis. You know, obviously we take guidance from exterior entities as well, but we’ve really for the last few years relied more on our internal consensus which is built up by a multiple number of touch points we have with customers and outreach programs that we have in the industry, and we feel very confident that those numbers look good into the future.

Bascome Majors — Susquehanna Financial Group LLLP — Analyst

Thank you for that. And, you know, to triangulate that further, Lorie, your comment about — as the cycle strengthens, we think we can generate high-teens margins again, is a 60,000 kind of environment, whether or not that happens exactly in ’22 or ’23, is that the kind of backdrop you would need for overhead absorption and pricing assumptions and other things to drive that?

Lorie L. Tekorius — President & Chief Operating Officer

I think, yeah, that’s — I think that will be fantastic. It’d be great to be at that kind of that 60,000 level and stay at that steady level for a while because obviously the ramping up or ramping down or things that can be headwinds to efficiencies. So getting to that sort of a demand and delivery environment and then being able to stay there is going to be very beneficial to margin.

Bascome Majors — Susquehanna Financial Group LLLP — Analyst

Thank you. And not to leave anyone out here, Adrian, you talked about the tax receivable the last couple of quarters and helping cash flow obviously this consumes cash as you ramp up production and invest in the lease fleet. But can you help us think about full-year cash flow when some of these things even out? I don’t know if it’s an operating cash basis or a free cash flow before some of the lease investment, but how do you think about the cash consumption of the business on kind of a sustainable, more run rate basis versus some of the quarter-to-quarter volatility?

Adrian J. Downes — Senior Vice President, Chief Financial Officer & Chief Accounting Officer

We’d expect quite positive cash flows in the back half of the year. We’re — as you say, supporting ramp up in our business and our working capital at the moment. We’re being cautious there with the supply chain issues. So, you know, that’s not maybe as efficient as it would be in normal times where we’re protecting ourselves by having extra inventory on hand. But I’d expect to see that normalize out as our production stabilizes at these higher levels in the back half of the year and our cash flow to be positive.

Bascome Majors — Susquehanna Financial Group LLLP — Analyst

And when you say quite positive in the back half of the year, just to clarify, are you talking free cash flow or operating cash flow?

Adrian J. Downes — Senior Vice President, Chief Financial Officer & Chief Accounting Officer

Operating cash flow.

Bascome Majors — Susquehanna Financial Group LLLP — Analyst

Thank you for the time.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Thanks Bascome.

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

Thanks Bascome.

Operator

Our next question comes from Steve Barger with KeyBanc Capital Markets.

Steve Barger — KeyBanc Capital Markets, Inc. — Analyst

Hi. Good morning, everyone.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Good morning, Steve.

Steve Barger — KeyBanc Capital Markets, Inc. — Analyst

Brian — yeah. Thanks. Brian, you said not a lot of lower margin cars left in backlog, but I believe Adrian said gross margin would be single digit in the first half. So, first, did I hear that margin comment correctly? And if so, does that mean we should expect another tough quarter from maintenance and lower sequential margin and leasing in 2Q?

Justin M. Roberts — Vice President, Corporate Finance & Treasurer

Well, I’ll answer that one. This is Justin, Steve. I think what we would say is Q2 was always a challenging quarter for our maintenance business because of weather, typically. I mean, the locations you have to deal with, increment weathers, snow, rain, freezing temperatures. And if you kind of look back at years, it’s many times that’s our most challenging quarter in that business. So we see that as normal seasonality.

We would expect it to be better than first quarter, which was much more challenging than we expected. But with the manufacturing piece, we do see that there’s opportunities for improvement and growth and in the margin in Q2. And while most of the competitively priced cars are out of it, we are still ramping up various production lines and that’s where you see it’s more of the overhead under absorptions that we’re trying to be maybe cautious around a little bit.

Steve Barger — KeyBanc Capital Markets, Inc. — Analyst

Yeah. Yeah, so I guess, I mean, I hear you on seeing better momentum in some of the lines of business but the tone on this call seems much more conservative versus the last call. As we think about some of the 1Q tailwinds from tax and equity earnings this quarter, could Q2 be down sequentially?

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Are you kidding me? Really? Because I thought we were much more conservative in the last call. Maybe we’re just not articulating our story very well. But Lorie, what do you think? You think you’re –we’re more conservative?

Steve Barger — KeyBanc Capital Markets, Inc. — Analyst

You did talk about double-digit margin in the first half last quarter.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

All right. Yeah, we did. That’s right. And we had a little bit disappointing start in that. But it was dragged down by maintenance and some other things that I think are self-correcting. But go ahead. I didn’t — I don’t mean to jump in. You should answer this. I’m just taken aback by that comment.

Lorie L. Tekorius — President & Chief Operating Officer

I would think and I would have to go back, and I probably shouldn’t admit this, but sometimes I have a hard time remembering last week, much less last quarter call and what we might have said, but we are a lot more positive. We have come through this first quarter and have performed better than what we expected when we put together our initial expectations for this fiscal year. We see a lot of opportunities where we are ramping — are adding lines more quickly than what we expected, but we are still doing it at a moderate pace.

So, at times, it feels like we were talking out of both sides of our mouths, but we — as Brian has said, we’re seeing broad demand on a variety of car types and we’re figuring out how can we address that demand, solve our customers problem. And I think that’s all going to be positive. Now, does it actually work its way out into double-digit margins in the first half? Or is there some bleed over as we move into the second half?

Again, that’s getting into trying to pass the quarter by quarter, and that’s — the part of why we try not to get into, we’re running a business day to day, we think that we’ve got a lot of momentum. We think we’re going to have — as we move through this year, it’s going to increase and you’re going to see those margins improve.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Let me just elaborate on the economics of that, as we look at the backlog, and that’s a really significant factor in our business, we look at the leasing momentum. Those are two areas where momentum that are significant. With the backlog, we are able to ramp and increase production in every line or in many of the lines. In one case, on a car type, where we’ve got a strong backlog, we’re tripling the production that absorbs overhead, as Lorie said. So the timing of it is more problematic. But we’re still very optimistic about the year and the financial results for the year.

Steve Barger — KeyBanc Capital Markets, Inc. — Analyst

Okay. Thanks.

Operator

Our next question is a follow up from Matt Elkott with Cowen.

Matt Elkott — Cowen & Co. LLC — Analyst

Thank you for taking my follow-up question. So shortly after you guys acquired American Railcar, I think July of 2019, obviously the world changed and the production type cut short basically had for the industry in 2020 and stayed at 30,000 in 2021, which is below replacement. So I guess this production upcycle this year and much more so next year if you’re 60,000 is correct will be the first time you have a major upcycle with ARI. Can you talk about how this could, how different this could look from prior expansions for you guys, how the mix will be different, what the impact on pricing and margin will be? And I realize that this could be more at 2023, calendar 2023 dynamic than calendar 2022.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Let me try — just set a preference. I think Lorie and Brian can address this question. The acquisition of ARI, you’re right, the timing, we got hit by COVID but we also had the driving of efficiency by the Class 1 railroads, so that volume or velocity had gone up. So we were hit by a mini recession when that shift occurred in utilization on the railroads. Then COVID-19, so we have been operating in unusual times.

ARI is a real asset and we’re very positive about the addition that ARI has made to our product portfolio, which is reflected in our ability to attract stronger backlog, and stronger customers. This expanded our customer base, enhanced our cost efficiency through geographic dispersion. So I think that’s just a general background for how we see ARI today. We’re a U.S. company, it gives us a production capability in the heartland, and it’s a positive thing for Greenbrier. But Lorie, why don’t you go into the more grand — the other things that he’s.

Lorie L. Tekorius — President & Chief Operating Officer

No, I think that that’s — you’re exactly right. I mean, the timing of that acquisition, what followed on that timing was difficult. I think we’ve done a nice job managing through the last couple of years. I’m excited about having that footprint as we go into this uptick in demand. We do have a strong, skilled workforce there. They’ve got experience building a variety of covered hoppers and tank cars. They’ve got a lot of experience delivering railcars to shipper-based customers that has been a nice addition to our portfolio and an enhancement of our portfolio of customers.

And as you mentioned, the location is great from a delivery and transportation to our customers. So these are all things that are going to be positive. And we took the opportunity during the downturn and doing lower production rate to be able to get into those facilities and take some of the efficiencies that we have grown in the Greenbrier organization and start putting those into the Arkansas facility. So we actually see that — this upturn in demand turning into something that we should see more positive growth out of.

Matt Elkott — Cowen & Co. LLC — Analyst

Got it. From a purely mix perspective, is it favorable or a headwind?

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

We believe its favorable going forward.

Matt Elkott — Cowen & Co. LLC — Analyst

Got it. And then I’m sorry if I missed it earlier, guys, but did you say anything about the inquiry and order activity after quarter ends?

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

No. No. We have, this is Brian. I would say again a very strong order activity even through the holidays which is unusual for the month of December but we’re continuing to look. I would say our cadence is still in line and strong with what we’re projecting.

Matt Elkott — Cowen & Co. LLC — Analyst

Okay. And then just one final question. Bill mentioned, Lorie, you will have existing and new initiatives. Can you maybe talk a little bit about what the newly initiatives might be — might look like or what areas at least?

Lorie L. Tekorius — President & Chief Operating Officer

I think you’re going to see. We’ll get into more detail that as we move a little bit further into the calendar year but you’re going to see us continuing to grow and enhance the foundation that we’ve created over the years with strong engineering and manufacturing coupled with leasing and commercial. You’re seeing that some of this already with the leasing strategy that we have and focusing on how we can continue to anticipate and solve our customers issues in creative manner.

Matt Elkott — Cowen & Co. LLC — Analyst

Got it. Thank you very much.

Lorie L. Tekorius — President & Chief Operating Officer

Thank you.

William A. Furman — Chief Executive Officer & Chairman of the Board of Directors

Thanks, Matt.

Operator

This concludes our question-and-answer session. I’d like to turn the call back over to Mr. Justin Roberts for some closing remarks.

Justin M. Roberts — Vice President, Corporate Finance & Treasurer

I just want to say thank you very much everyone for your time and attention, and if you have follow-up questions, please reach out to investorrelations@gbrx.com. Have a good day.

Lorie L. Tekorius — President & Chief Operating Officer

Happy New Year.

Brian J. Comstock — Executive Vice President, Chief Commercial & Leasing Officer

Happy New Year.

Operator

[Operator Closing Remarks]