Greenbrier Companies Inc  (NYSE: GBX) Q1 2020 Earnings Call Transcript

Greenbrier Companies Inc  (NYSE: GBX) Q1 2020 earnings call dated Jan. 08, 2020

Corporate Participants:

Justin M. Roberts — Vice President and Treasurer

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

Lorie L. Tekorius — President and Chief Operating Officer

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

Analysts:

Bascome Majors — Susquehanna — Analyst

Justin Long — Stephens Inc. — Analyst

Matt Elkott — Cowen — Analyst

Steve Barger — KeyBanc Capital Markets — Analyst

Allison Poliniak — Wells Fargo — Analyst

Ariel Rosa — Bank of America — Analyst

Presentation:

Operator

Hello and welcome to The Greenbrier Companies First Quarter Fiscal Year 2020 Earnings Conference Call. Following today’s presentation, we will conduct a question-and-answer session. [Operator Instructions] At the request of Greenbrier Companies, this conference call is being recorded for instant 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 and Treasurer

Thank you, Sarah. Good morning everyone and welcome to our first quarter of fiscal 2020 conference call. On today’s call, I’m joined by Greenbrier’s Chairman and CEO, Bill Furman; Lorie Tekorius, President and COO; and Adrian Downes, Senior Vice President and CFO. They will discuss the results for the first quarter and fiscal 2020. Following our introductory 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. Also, if you’re in Portland today, our Annual Meeting will be occurring today at 2:00 PM Pacific at The Benson Hotel. A link to a webcast of the meeting is also live on our website and you can follow along to the activities and events as well.

Matters discussed on today’s conference call include forward-looking statements within the meaning of the Private Securities and 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 2020 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 hand it over to Bill.

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

Thank you, Justin, and good morning everyone. As we enter 2020, Greenbrier enters its fifth decade of operations and we’re operating at a much larger scale in the very small leasing company founded nearly 40 years ago with only 300 railcars in Huntington, West Virginia. Just in the last year, we’ve achieved much greater scale through the acquisition of the ARI manufacturing assets, building on our various initiatives in international markets.

In normalized markets, Greenbrier with its present platform should be capable of reaching $4 billion in annual revenue and perhaps more. Of course, we have to get margin and financial performance to match that revenue, but we believe we are firmly on the right track to do so. Our top objectives for calendar 2020 is to continue to integrate and extract value from the growth over the last two years. In its early stages, growth often results in uneven short-term financial performance. We ask our shareholders to be patient, while we go through this process. And all of this can be expected, we are dedicated with an action plan to improve operating performance and align financial metrics to our increased scale, all to produce shareholder value.

Greenbrier, as you know, has a four-part strategy. First, we are strengthening our North American core markets. Setting aside ARI for a moment, North American manufacturing operations during the first quarter of fiscal 2020 were broadly in line with our expectations. We continue to progress on key areas, including cost reduction, succession planning, smart manufacturing initiatives, quality and customer satisfaction. The ARI acquisition strengthens our geographic footprint, bringing product diversity and a larger scale in domestic markets.

Second leg of Greenbrier strategy international operations has also brought diversity and stability. These investments are producing results. In Q1 and in the last quarter of fiscal 2019, we had a very strong turnaround in operations. And post quarter during the month of December, a strong order book came from relationships in the GCC, European orders and long-awaited momentum in Brazil, borne out by significant multiyear transaction for several thousand railcars.

The third and fourth elements of our strategy are robust development of Greenbrier’s talent pipeline, and bringing the business to a larger scale. Talent investment is occurring throughout our organization. Of course, ARI deal has brought us excellent talent and greater scale in our core domestic markets. New employees and important roles will help us integrate ARI into Greenbrier and also serve Greenbrier’s existing manufacturing platforms. We believe ARI will be accretive to Greenbrier as operations are fully integrated.

Despite a slow start, as Lorie and Adrian will describe, we’re seeing cost synergies as expected and remain on target with our goals. In 2019, we identified challenges and deployed remedial actions in our European and Brazilian and repair operations. The positive trends in our European business continued in Q1 with the second straight quarter pre-tax profit. This contrasts with steep losses throughout most of fiscal 2019 as a result of legacy issues. Although overall resorts in Europe — our results in Europe will remain choppy through 2020 due to some older transactions at Astra Rail, the reversal of Europe’s drag on earnings has already occurred and is meaning to our bottom line.

In Brazil, we are happy to see the return of significant railcar demand as a result of rail privatization, concession renewals, highway congestion and government policies. Brazil’s backlog and orders have intensified significantly in recent weeks as referenced by the multiyear railcar order I mentioned a moment ago. The South American railcar market is better positioned in 2020 than at any time since Greenbrier first entered that market in 2015.

It is obvious in North America that there is a clear disconnect between economic conditions in the North American freight car markets in the US and North American economy in general. As the US economy still registers respectable growth, the rail sector is impacted by trade tensions and Precision Scheduled Railroading or PSR. In the broader economic environment, the US economy continues to display resiliency and there are reduced concerns about a general US recession, according to the Bureau of Economic Analysis, US real GDP growth was 2.1% in Q3 2019. Employment is also a continued positive for the US economy. There were 266,000 jobs added in November.

The national unemployment rate is a notable low 3.5%. On the other hand, the freight rail sector is participating in a partly self-induced downturn in traffic, driven by Precision Scheduled Railroading or PSR and international trade tensions. Approximately 4,000 cars or almost 25% in the North American fleet is in storage. FTR associates recently reduced this forecast for rail deliveries significantly to 38,000 units in calendar 2020 and 39,000 units in calendar 2021.

However, the settling out of trade policies, the stoke economic and investment uncertainty for the past several years is a promising development if it can be fully realized. The recently announced Phase 1 of a trade deal with China has sent equity markets higher and should help spark some recovery in North American freight loadings as it takes effect.

Another significant thing that has occurred after two years of hard work in December, the course of 24 hours Congress took two major steps to ensure trade stability for the railway supply sector. These advances have been championed by Greenbrier and other industry participants over recent years. First, the House passed the United States-Mexico trade agreement or USMCA.

We expect the Senate will approve that contract soon. It continues to advance and when signed by the President, this will eliminate longer-term concerns relating to the supply chain within our North American freight car equipment industry, and more particularly for Greenbrier eliminate a potential threat to our heavy investment in Mexico. Receiving less attention, but with strong importance to us was a provision signed into law by the President on December 20, that protects the rail industry from subsidized and unfair intrusions by Chinese state-owned enterprises in the United States. This is a serious issue internationally. Other nations economically aligned with US are also waking up to the threats posed by aggressive Chinese intrusions on many fronts from cyber security to over espionage.

In closing, we continue to treat 2020 as a year of integration, concentration execution and building of succession planning in the talent pipeline. During the years ahead, we should focus on absorbing our growth, generating positive cash flow, positive ROIC and creating shareholder value. We have grown the Company significantly in the past in the last two years, while addressing weaker areas of our business. Greenbrier, I firmly believe is positioned for sustained and strong performance ahead. Companies in America cannot manage only quarter to quarter and build. We are affirming the full-year outlook for fiscal 2020 that we shared in October.

Lorie, over to you.

Lorie L. Tekorius — President and Chief Operating Officer

Thank you, Bill, and good morning everyone. I’ll briefly provide some additional detail on the quarter. Deliveries were 6,200 railcar units and we received orders for approximately 4,500 units, valued at $450 million with over 1,000 of these coming from our international markets in Europe and Brazil. Orders in the quarter were primarily for tank cars, covered hoppers and gondolas. And even though we’re operating in a weaker economic environment for freight car demand in North America, our backlog worldwide remained strong at 28,500 units, valued at $3.1 billion. And while our headline performance in the quarter was less than we expected, we continue to make solid progress in turning around previously challenged areas of our business, such as Europe and repair. I’ll provide some additional color on these operations shortly.

The operating inefficiencies at one of our ARI facilities in Q1 were exacerbated by several lost production days due to a component supplier issue and a complete disruption of gas service to the facility through the fall to the external provider. Further, this is our first full quarter executing on our customers agreements. Some of these agreements are quite different from our typical contracts and we’re just starting to harmonize them with our own. The challenges within ARI are both isolated and familiar, similar to issues we’re successfully fixing in Europe. We’re executing on corrective actions and we expect to see a turnaround in the next three to six months. Lower deliveries from our wholly-owned manufacturing facilities for the quarter and a higher share of deliveries came from our 50-50 joint venture GIMSA in Mexico, which limits the amount of the income that flows through to our bottom line. Most of this is just a function of timing that will reverse trend in Q2 and Q3. Overall, Greenbrier’s North American manufacturing group produced another good performance this quarter and continues to demonstrate its ability to rapidly respond to shifting demand trends. And while integration consumes a significant amount of time and resources, the group continues to produce high quality railcar safely, even as general purpose lines are being slowed or closed, as I mentioned last quarter and our Mexican facilities are performing well and exceeding expectations.

Our European unit delivered a modest profit in Q1, as Bill mentioned, its second consecutive profitable quarter since the new management team took over and that team is successfully creating a culture focused on safety, quality and profitability. While the global economy continues to face headwinds, the European market is demonstrating stable demand levels, order activity and backlog remains strong. The demand environment in Brazil is slowly improving, driven by the number of factors that Bill mentioned and the operations were effectively breakeven in Q1. We expect continued modest improvement throughout the year and the team in Brazil had successfully obtained that large multiyear order that Bill mentioned. This is a first such order in many, many years.

Our repair operation for which we institute a remedial actions in fiscal 2019 are included within our business units that also houses our aftermarket’s Wheels & Parts operations. I’m pleased to report that operational changes made last fiscal year are slowly improving performance. One of our largest facilities that was rightsized has returned to profitability and another location has recovered to an acceptable margin to allow us to further evaluate our long-term options there.

Financial performance in Repair improved sharply on a sequential basis, a trend we expect to continue given additional cost containment reductions that were made late in Q1. There is plenty more work ahead to improve our repair operations and to sustain the overall profitability, but we’re clearly encouraged by these measurable results. The Wheels & Parts operations were positive contributors in the quarter within a challenging operating environment. We decreased rail traffic and increased railcars in storage. Wheel set and component volumes will continue to be under pressure. Despite this, we continue to expect this business to be profitable in 2020, just slightly lower levels than 2019.

I’d also add that this business unit provides strategic benefits outside of financial results. In stronger time, having access to a stable supply of Wheels & Parts is vital, as well as the additional touch points with customers this business provides. Leasing revenue in the quarter was at a more normalized level with no externally sourced railcar syndication activity. This also means that leasing gross margin percentage returned to its more typical 45% to 50% range. Our capital markets team is gearing up for another strong syndication year, although the activity in Q1 was muted due to reduced deal flow compared to the strong prior quarter.

As we look forward, flexibility is one of our key differentiators in managing through these types of uncertain environment and a central to running the Company in a cyclical industry. Our extensive experience and long-term focus underscore the importance of maintaining a core experienced workforce. We will not ramp up and down at the drop of the hat. Our skilled workforce is critical to our long-term success.

Safety across our organization is our Number 1 priority. And while production efficiency is important and necessary, we never pursue it at the expense of safety and stability for our employees. All that being said, we’ll continue the steps I outlined in October, which are necessary to position us for long-term growth and shareholder value. We’re going to right size our production capabilities on certain general purpose freight car lines, we’ll focus on reducing capital expenditures and increasing cash flow.

2020 is shaping up to be a unique and challenging year. We continue to execute on the remedial actions identified last year to improve operational and financial results. To this, we’ll add the ARI integration, which must be successful, all against the backdrop of global economic and geopolitical uncertainty. Our management team is confident in the long-term strategy developed with our Board of Directors and as a result of the talent development activities Bill mentioned, we have assembled and are investing in the right team to execute on this vision.

Now, I’ll turn it over to Adrian to talk about our financial performance.

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

Thank you, Lorie and good morning everyone. Quarterly financial information is available in the press release and supplemental slides on our website. I’ll discuss a few highlights and also affirm FY 2020 guidance. Highlights for the first quarter include revenue of $769 million and deliveries of 6,200 units, aggregate gross margin of 12%. The decline from Q4 is driven by expected seasonality in deliveries and syndicated units, and to a lesser extent by the operating inefficiencies that Bill and Lorie spoke to.

Net earnings attributable to Greenbrier of $7.7 million, or $0.23 per share, include approximately $2.2 million net of tax or $0.07 per share of integration and acquisition related expenses. Excluding the integration and acquisition related expenses, adjusted net earnings attributable to Greenbrier are $9.9 million or $0.30 per share.

Additionally, as part of the accounting for the ARI acquisition, Greenbrier realized a step-up in depreciation and amortization of $2.9 million or $0.09 per share. This depreciation and amortization step-up is not being added back. Adjusted EBITDA in the quarter was $74.2 million or 9.6% of revenue. New railcar backlog of 28,500 units valued at $3.1 billion. Subsequent to the end of the quarter, we agreed in principle to remove 575 units from backlog in exchange for financial consideration.

Internationally, Europe continued with strong deliveries and had another profitable quarter. Total liquidity at November 30 was nearly $600 million, and includes more than $250 million of cash providing flexibility for the business over the long term. Greenbrier’s Board of Directors is focused on balanced deployment of capital to create long-term shareholder value. Greenbrier has declared a quarterly dividend for 23 consecutive quarters with periodic increases. Today, we announced an 8% increase in our quarterly dividend to $0.27 per share. The increase in the dividend demonstrates the high confidence that Greenbrier’s Board and Management have in our ability to execute our long-term strategy.

Currently, our annual dividend represents a dividend yield exceeding 3%. We successfully achieved $2.8 million of pre-tax cost synergies in the quarter. And today, we are affirming the $15 million of expected cost synergies that we announced in October. Based on current production schedules, business trends and the macroeconomic environment that Bill spoke to, we expect Greenbrier’s FY 2020 to reflect deliveries of 26,000 to 28,000, which includes approximately 2,000 units from Greenbrier-Maxion in Brazil, revenue to be approximately $3.5 billion, diluted EPS of $2.60 to $3 per share, excluding approximately $20 million to $25 million of integration and acquisition-related expenses from the ARI acquisition.

Additionally, our supplemental information for 2020 is unchanged and is as follows. We expect operating cash flow of between $150 million and $200 million. Depreciation and amortization is expected to be $110 million, reflecting the full-year impact of the acquisition. Unconsolidated affiliates to breakeven, with potential to contribute modestly. Proceeds from equipment sales of $95 million, generating gains on sale of $15 million to $20 million expected as we finish rebalancing our lease fleet.

Capital expenditures are expected to total approximately $140 million, as we continue investing in the lease fleet and enhancing our facilities. Combined with sales out of our lease fleet, net capital expenditures are expected to be approximately $45 million. We expect G&A to be between $230 million and $235 million, excluding any integration or acquisition-related costs plus as a percent of revenue with 2019. The majority of the increase is driven by the acquisition, but Greenbrier also continues to invest to strengthen and develop the next generation of leaders.

Earnings attributable to non-controlling interest is expected to be approximately $55 million to $60 million. Our consolidated tax rate is expected to be 27% and typically fluctuates due to geographic diversity of earnings and other discrete items. One item I’ll highlight since we had strong performance at the GIMSA JV in Q1, that dynamic can have a disproportionate impact on our consolidated tax rates, which only reflects our 50% ownership stake.

The cadence of earnings is still expected to be back-half weighted, but probably closer to a split of 25% to 30% in the first half. Currently, we expect fiscal Q2 will be the weakest quarter of the year due to production line changeovers and a higher number of leased assets on the balance sheet due to a greater proportion of quarterly production flowing through our syndication model.

And now, operator, we’ll open it up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Bascome Majors with Susquehanna. Your line is now open.

Bascome Majors — Susquehanna — Analyst

Yes, thanks for taking my questions this morning. A couple for you. Number 1, on the backlog adjustment where you took some compensation for — from that customer. Was that recognized in the quarter or will that be recognized in the future quarter, and can you just help us size up where that is and how much it was on your financial report? Thank you.

Lorie L. Tekorius — President and Chief Operating Officer

So, Bascome, this is Lorie. Happy New Year. It was not recorded in our first quarter results. That is result of something that happened during the second quarter. We’re probably not going to get into any more detail or to quantify exactly what that financial settlement was.

Bascome Majors — Susquehanna — Analyst

Would that show up in manufacturing or in the leasing business segment in the quarter?

Lorie L. Tekorius — President and Chief Operating Officer

Manufacturing. No, it’s just manufacturing.

Bascome Majors — Susquehanna — Analyst

Okay, thank you. And to Adrian’s last comment on the cadence of earnings, you commented on the second quarter in the second half. Can you walk us through, I mean do you have a sense between 3Q and 4Q, where the bulk of that earnings ramp up sequentially is happening. And can you kind of walk us through the drivers of that assumption, just thinking about how we kind of go from where you expect to be in 2Q to where you expect to exit the year?

Justin M. Roberts — Vice President and Treasurer

Yeah, Bascome, this is Justin. So we would expect that Q2 will be a little bit more probably similar to Q1, but we’re going to see a pretty big step up in Q3, probably similar to what we saw in our fiscal 2019. And then another similar step up in our fiscal Q4 from that fiscal Q3 level. Part of the driver of this relates to syndication activity, so as we are producing railcars at our facilities, putting them on our balance sheet and then syndicating them, some of it is just a matter of timing and finishing up production runs and then packaging them, it’s not an overnight process as it were. So ultimately, those are kind of the biggest drivers. We do have some line changeovers in Q2, that will kind of impact some of that activity, which is why we’re — we see a bit of a dip, I guess, in Q2, but ultimately it’s really just driven by the higher levels of syndication in Q3 and then in the Q4.

Bascome Majors — Susquehanna — Analyst

This is more about syndication than it is necessarily about manufacturing changeovers, it sounds like at least directionally.

Justin M. Roberts — Vice President and Treasurer

I would say directionally, you’re correct. Our production rates are — there is not any kind of a big ramp or anything occurring from that perspective.

Bascome Majors — Susquehanna — Analyst

Okay. Last one from me, you made some comments on syndication. Certainly, the activity was much lower this quarter than it has been. Can you just high level talk about how those conversations are going with those partners? I mean, we’ve had, I guess, some changes and in the rail — at least railcars and asset class in the last few years with volatility in funding costs, but also some declines in utilization that may have surprised some people. Just — how those conversations go with your customers, what is their risk appetite and how are they thinking about this business, short and long term? Thank you.

Lorie L. Tekorius — President and Chief Operating Officer

Sure, I’ll start out, and I’ll let Bill step in maybe a few or Justin, if they’ve got opinion, but I would say that we tend to partner with very, very strong folks, who have — are taking a long-term perspective on investing in 40 to 50 year lived assets. So there has been a lot of news lately about railcar leasing and that whole market. We’ve done a lot of checking in with our customers like we do on a regular basis. We haven’t seen anyone pulling back or shying away. It’s just like you would do with any sort of investment portfolio. They are thinking about their exposures, they’re thinking about the car types they want to be invested in and what is the long-term growth look like, but we haven’t seen anyone running for the hills.

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

Yeah, I think it’s important to recognize that we’re talking about domestic demographics here. We recognized the publicity that has come out recently about leasing and bank leasing in particular. We actually have a very strong customer base of partners, who we view as partners in the operating lease sphere, who are in this business year after year and enter into multiyear transactions. And in fact, we did enter into a multiyear transactions as part of the quarter with an operating lessor. And that group, people are having issues where utilization is as you can imagine and lease rates, as you can imagine with so many car stored and with the effects of PSR, but in terms of the appetite for investing in a long-term asset railcars attached to a lease, we still see a strong appetite for that.

We are concerned about the effects of too much supply and balancing demand. We’re analyzing carefully to what degree we contributed to that through our model. So we are planning to make some changes in our models, some improvements in our model this year and I think that that business with the exception of the areas in the bank side, which hits our syndication somewhat — is still very strong. Yields have come down, but the money — rates — cost of money has come down. And I think the two drivers there is that with lower money costs and with a lot of capital coming into this market and then with a slump in railcar loadings and stored cars, this is something that we’ve seen many, many years in succession and it will be largely self-correcting.

Bascome Majors — Susquehanna — Analyst

Thank you for the time this morning.

Justin M. Roberts — Vice President and Treasurer

Thanks, Bascome.

Operator

Our next question comes from Justin Long with Stephens Inc. Your line is open.

Justin Long — Stephens Inc. — Analyst

Thanks and good morning. So, maybe to start with a question around some of the temporary operational issues in the quarter that you highlighted. Maybe this is a question for Adrian, but is there any way to quantify the impact that had on manufacturing margins in the quarter? If we look at the 11.5% that you reported, what would that look like on a normalized basis if you stripped out those temporary headwinds? And then, we’d just love to get your thoughts on manufacturing margins going forward and the cadence for that — for the remaining quarters this year.

Lorie L. Tekorius — President and Chief Operating Officer

Yeah, so we definitely had a headwind on the issues and that did show up in our margins. We’re not going to quantify it exactly, but we will see our margins ramp up, still in the low double-digit range over the course of the year as those items resolve themselves.

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

Yeah. And look, we are not in any way diminishing the effect of this first quarter on our expectations at ARI. We had kind of a perfect storm of a number of issues Lorie touched upon, but including during the due diligence, we weren’t able to see with full transparency some of the costs and some of the items for competitive reasons and anti-trust reasons that we’re going into the make up, but we just had a series of effects. If we can normalize that and get that back up to our expectations, this coming — this quarter we’re in or next quarter, I think that will have a meaningful effect on manufacturing margins.

Justin Long — Stephens Inc. — Analyst

Okay. But to just clarify what you said on the second quarter earlier, it was mentioned that it should be the worst quarter of the year. So is the assumption that manufacturing margins get worse sequentially in 2Q and then kind of normalize in the back half?

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

And I would say if they get worse, it’s going to be a few basis points. It’s not going to be, go from 12% down to 9%. It’s more a matter of, is that 50 basis points, something like that. We do expect to have considerable improvement, relatively speaking in the ARI numbers. I — that was a very big disappointment, but again, we understand now, diagnosed the reasons for it, and we don’t expect that to continue at that rate, and that kind of problem to continue at that rate back, we expect considerable improvement in the second quarter.

Lorie L. Tekorius — President and Chief Operating Officer

And I think part of the reason Adrian was saying that the second quarter would probably be our lightest quarter is more around the syndication timing that we were chatting about with Bascome as opposed to anticipating further significant headwinds at the ARI facility.

Justin Long — Stephens Inc. — Analyst

Okay, great. That’s really helpful. And then, maybe lastly Lorie, you mentioned for orders [Phonetic] in the quarter, over 1,000 came from international sources. For the orders that were received subsequent to quarter end, could you share what the mix was between international and North America and anything you’d like to highlight in terms of the mix impact from what we’re seeing in terms of the mix of international versus North American orders right now?

Lorie L. Tekorius — President and Chief Operating Officer

Sure. And I will say that it’s kind of nice, this quarter to be able to finally talk to you guys about the fact that all of the investment that we’re making internationally as part of our four pillars, our strategy, to grow internationally is starting to come to fruition, the time that we’ve invested in both Brazil, the GCC and Europe are really starting to turn around. I would say the majority of the orders post quarter end, so the Q2 orders, probably about what half of those maybe were international.

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

Half the two-thirds, probably [Speech Overlap].

Lorie L. Tekorius — President and Chief Operating Officer

Half the two-thirds were international. So, we’re really excited about that. One of the biggest part of that is going to be the order for Brazil that is something that will give us some great visibility over the course of the next several years, as that market really does start to — concessions get approved and that market starts to pick back up.

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

We may also mention that we have rightsized or reduced the scale of the actual factory in Brazil, so the factory capability more matches the market, we still have a very high market share in Brazil. We’re not trying to target high market share, but this core order is important in terms of the predicament and places the other customers in, because the amount of capacity in Brazil available to build for this next expected five-year increase in demand, which is significant, it’s not a great — it’s been reduced and it’s not a lot of car building capacity to meet this demand. So, we think this is the first — the first block, it will fall toward a stronger performance. We also had very strong performance in orders in Europe, and we had transaction related to the GCC, that was really helpful.

Justin Long — Stephens Inc. — Analyst

Okay. Thanks everyone. I appreciate the time.

Justin M. Roberts — Vice President and Treasurer

Thanks, Justin.

Lorie L. Tekorius — President and Chief Operating Officer

Thank you, Justin.

Operator

Our next question comes from Matt Elkott with Cowen. Your line is now open.

Matt Elkott — Cowen — Analyst

Thank you. Good morning. Just a quick follow-up on the cars that were taken out of the backlog. Did you guys say if they were for 2021 — fiscal 2021 deliveries or this year?

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

We did not say at this point. Although, I mean, it was for production later on this fiscal year. We are not — we do have ways to fill that gap effectively. So, we’re not concerned from that perspective.

Matt Elkott — Cowen — Analyst

Okay. So they were for this fiscal year delivery and the benefit, the financial benefit from the cancellation will be recognized in this fiscal year as well.

Lorie L. Tekorius — President and Chief Operating Officer

Correct.

Matt Elkott — Cowen — Analyst

Okay. And did you guys say if they were ARI cars or legacy Greenbrier cars?

Lorie L. Tekorius — President and Chief Operating Officer

We did not because we — after post late-July, we evaluated all combined. So, this was just part of our order book and it’s an adjustment based on the customers’ needs and looking at their forward demand.

Matt Elkott — Cowen — Analyst

And can you tell us what type of cars they are?

Lorie L. Tekorius — President and Chief Operating Officer

We prefer not to get into that level of detail.

Matt Elkott — Cowen — Analyst

Got it. All right. Switching over to the leasing business, I saw that the lease fleet utilization dropped by about 370 basis points. Can you guys talk about the reasons behind that?

Lorie L. Tekorius — President and Chief Operating Officer

I’m sure — again, with — as we’ve talked about with railcar loadings being down and cars going into storage, you can appreciate that as we get into renewal situations on cars, there are fewer cars that get renewed right away. Our leasing and commercial teams feel very comfortable with what’s going on as they are evaluating renewals. The one thing to remember with our fleet, it’s a fairly small fleet. So, it only takes a couple of hundred cars being off-leased to really move that percentage utilization.

Matt Elkott — Cowen — Analyst

Okay. And then, staying on the demand in North America, it looks like your orders in the first fiscal quarter were about 3,500 in North America. If you assume a certain market share, I guess, we’re trending pretty much along replacement demand for the industry, if not slightly below that. Are you guys surprised that despite progressively worse rail traffic declines and ongoing PSR implementation, orders have not really dropped much below replacement demand for the industry as a whole?

Lorie L. Tekorius — President and Chief Operating Officer

I think it’s an interesting point. I think this is one of — potentially the perverse impact of PSR because if a — someone who needs to use a railcar is not getting it, they’re having to go out and acquire it themselves. So, it’s shifting some of that ownership of where we get that and I think that’s what’s bringing some of that demand back to the market. The other thing, I mean, as Bill mentioned, we are in a bit of a self-inflicted recession for the rail freight business and that’s a great time for some people to want to step into the market to place orders.

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

Those people who are strong advocates for PSR and we have one of our Board of Directors, who is a railroader, also from Arkansas, a very wise person believes that this will have a — not only a self-correcting effect, but it will make the railroads much more efficient and will create the ability for them to grow their market share. I think they are losing some traffic to trucks and they’re also encountering a lot of very stiff resistance from — through political channels, even if the STB, because there are shippers — many shippers that don’t like the changes. However if it’s healthy for the railroads over the long term, one has to assume that it will be healthy for the rail industry — the rail supply industry.

Matt Elkott — Cowen — Analyst

Great, thank you very much.

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

Thanks, Matt.

Operator

Our next question comes from Steve Barger with KeyBanc. Your line is open.

Steve Barger — KeyBanc Capital Markets — Analyst

Hey, good morning.

Lorie L. Tekorius — President and Chief Operating Officer

Morning, Steve.

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

Good morning, Steve.

Steve Barger — KeyBanc Capital Markets — Analyst

In North America, does your ARI deal mean there has been enough consolidation that you would expect more rational pricing in downturns or do you think lower traffic and the PSR conversation makes people get more aggressive about locking in share in a smaller market?

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

Man, that’s really a great question and I think there’s still quite a bit of capacity in the industry. It is still overcapacity and I think that particularly those players that are — that have maybe a weaker position in the market can be very price aggressive. But I think on balance, the ARI acquisition, it was very helpful for longer-term stability in the business and it certainly has helped our market share. I think the two largest competitors today, Trinity and Greenbrier, and we don’t — we don’t measure our success by market share, but we’ve got — both companies have full range of products and the other — the other two major competitors or players have a narrower range. So, we are able to participate at this point in a much broader front product wise and it can create a net — an adverse behavioral tenancy.

We are watching closely FreightCar. They’ve had a lot of issues, but I don’t think that — I don’t think that that’s a real candidate for either of any of the current parties to be interested in trying to further consolidate.

Steve Barger — KeyBanc Capital Markets — Analyst

Outside of FreightCar, would you expect any further consolidation or do you think that we’re — this is what it’s going to look like for a while? It’s anybody’s guess. I don’t expect it, but I don’t — certainly, we’re not planning to drive it. We’re planning to assimilate and get margin and profitability out of the platform we’ve created over the past couple of years. We’re going to really stick to our netting and get ROIC up, get cash flow up and run it now with the tools that we have.

But to that point, now that you’re seeing some benefit from the international investments, can you talk about unit economics. For example, what does gross margin look like for a 1,000 hoppers in Brazil versus a 1,000 in Europe versus North America?

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

Generally comparable level, possibly in the coming upturn, a little higher. Similarly in Europe, margins can be greater. Some of them are small or lower, but I think that both of these units have had sporadic earnings performance. This is unfortunately one of the things that happens with a longer-term plan. But they’re both now poised to obtain pricing leverage and I think we have 50% of the market, roughly 40% of the market in Europe. We have approximately 40% of the market in North America. We have something closer to 60%, 70% in South America. And currently, we’re the only company in Saudi Arabia with a — with established footprint. So, we think we have a good position in the GCC. And margins, like, I think over — in these international operations, are going to be good.

Steve Barger — KeyBanc Capital Markets — Analyst

Do you expect the international businesses will produce free cash flow in FY ’20?

Lorie L. Tekorius — President and Chief Operating Officer

I would say for fiscal ’20 being not specific to a particular year, I’d say probably breakeven to modest positive cash flow.

Steve Barger — KeyBanc Capital Markets — Analyst

Okay. Well — so, that just leaves me to my last question. Operating cash flow was negative in FY ’19. You expect deliveries to increase this year which has working cap implications. So, I guess, given all the moving parts that we’ve talked about, do you expect a positive operating cash flow for the year in FY ’20?

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

Yes, we do.

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

Yeah.

Steve Barger — KeyBanc Capital Markets — Analyst

Thanks.

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

Thanks, Steve.

Lorie L. Tekorius — President and Chief Operating Officer

Thanks, Steve.

Operator

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

Allison Poliniak — Wells Fargo — Analyst

Hi, good morning guys.

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

Morning, Allison.

Allison Poliniak — Wells Fargo — Analyst

Going back to the ARI challenges, is there [Technical Issues] asking a different way, is there a way to help us understand the incremental units that GIMSA had to deliver as a result and how should we think about that in Q2? So your phone connection was a little bit, but I think your question was you’re trying to tie lower deliveries out of our ARI facilities to the higher GIMSA deliveries, which had a disproportionate impact on the bottom line?

Yeah, like incremental units that GIMSA had to take on as a result of the challenges? Can you help us understand that?

Justin M. Roberts — Vice President and Treasurer

So, Allison. This is Justin. So, effectively we had a greater proportion of our deliveries in the quarter came out of our GIMSA, of which only our GIMSA joint venture, which only — about half of it drops to the bottom line. We would expect with an improvement in ARI in Q2 and then the rest of the remaining quarters as well, that will move back to a more balanced delivery cadence. And so, from that perspective, we don’t necessarily see a significant shift in our margins in Q2 or Q3 from that perspective. It’s really more a matter of improved performance with more dropping to the bottom line from that perspective.

Allison Poliniak — Wells Fargo — Analyst

Understood, helpful. And then, on the — just trying to understand your comments, Lorie, on Repair and Wheels. It sounds like you’ve two conflicting things, Repair getting better, Wheels getting worse with volumes. How should we think about the exit rate for the margin in that business for this year.

Lorie L. Tekorius — President and Chief Operating Officer

I think the margin for that business will be a bit lower than what we saw in fiscal ’19 in aggregate, but overall, it will be not very much. Lower and again the Wheels activity is driven by a couple of things in this quarter. It can be a lower quarter due to where the traffic is moving and we’ll build up inventory in anticipation of cold weather and traffic patterns shifting. We haven’t seen that happen yet in the first quarter. So, we’re expecting that in the second quarter. Then with railcar loadings and more cars going into storage, you’ve got fewer cars on the road, so fewer change out at the Wheels. Then there was a third impact of scrap pricing, but we’re expecting that to reverse. So, we’re starting to see the signs in this quarter that in February up some pickup.

Allison Poliniak — Wells Fargo — Analyst

Got it. Thank you.

Lorie L. Tekorius — President and Chief Operating Officer

Thank you.

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

Thanks, Allison.

Operator

And our last question comes from Ariel Rosa with Bank of America. Your line is now open.

Ariel Rosa — Bank of America — Analyst

Hey, good morning guys. So, first question I wanted to ask and I know a number of people hit on this, but referring to the operating efficiencies, maybe you could just elaborate specifically on, kind of, what some of those issues are or were and what’s being done to address them?

Lorie L. Tekorius — President and Chief Operating Officer

So, I’ll take a couple and I’m sure that my colleagues will jump in. We definitely had a supplier issue. So, a critical part of a tank car that was supplied that did not meet spec and we had to spend time getting that corrected, getting replacement, having to go through the process of replacing that. So, that would have been the supplier issue. There were also some other production inefficiencies as we evaluated the design of the particular car that was being built and some — what we would consider some cosmetic issues with the jacket that we did some reinforcements to — our focus does tend to be on the customers. So, instead of arguing about that, we focused on what can we do to keep our customer happy. That impacted the number of days of production.

And then, as I mentioned, that was kind of felt at times like the perfect storm or the not-so-perfect storm, we had — there was an interruption in gas that flows to that facility by the provider. So, I think we lost about five production days with that.

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

I would only add that — that’s a — those are some of the major drivers. There were others — the two companies on operating side are on different IT platforms and we’ve had a little integration issues having to do with understanding that cost system. We’ve also had other production flow issues that just added in. And accumulating, it just had a very major effect on the one facility that builds tank cars. The company had been struggling with some quality issues, which have been addressed, but we still had a legacy in some of those and some inspection logistics that were relating to that, that would allow cars to ship. So, there’s just a number of these. We’re — I can assure you, we’re going through this very carefully in our Board meetings. Our manufacturing people are on top of it we believe and we think that it’s a very good company. We’re very pleased with the people. We think it will be a very good geographic diversification for us. So, we hope that we can report next quarter and the quarter after this that we’ve got this under control.

Ariel Rosa — Bank of America — Analyst

Got it, okay. Okay, that’s — that’s really helpful color. Second question I wanted to ask was, this is kind of a longer-term outlook question, but looking at the market in this condition of oversupply that you described, Bill, obviously earnings are pretty substantially where they were a couple of years ago when the market was maybe a little bit hotter. Is there a prospect for getting back to kind of $4 a share in EPS or even $5 a share in EPS, which is kind of what the numbers looked like a couple of years ago, and obviously you guys have gone through some operational improvements, obviously, you’ve done these acquisitions, you’ve expanded internationally, but it doesn’t seem to be flowing to the bottom line quite like maybe we would have expected to. If we had gone back a couple of years and said, okay, you’re going to go through all of these operational improvements and expansions in terms of geographic reach, and this is what the EPS picture is going to look like.

So, in terms of getting back to that $4 level, is it really a factor of waiting for the North American market to rebound or there are other things that you guys can do in terms of cutting costs or improving margins or something of that sort that maybe starts to see that EPS number creep back up.

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

I think that’s a great question and it goes right to the heart of shareholder value. We are cognizant that our TSR has declined. We’re a cyclical company. We have a longer-term plan to build a much larger scale company. But we have — if you go back — our numbers, we’ve gone from $2 billion. We’re striving to get to $4 billion in revenue and it’s fair to say that we’ve had some execution issues in getting out of the gate. The European operation was a very big disappointment last year. That’s turned around and we’re making profitable contribution. More importantly, the drag on earnings has been eliminated. In fact, all those four areas that we were having difficulties with last year, have been greatly remediated.

So, I think that we easily can get back to where we were and exceed that. It’s hard to remember that these businesses are subset of ventures and they can’t be operated, really, quarter-to-quarter and judged by quarter-to-quarter performance. But I think that the longer view in the next year or two as things stabilize in the market, we should be able to [Indecipherable] where we have been before and we certainly didn’t take these complicated steps to make the company bigger to make less money. We are doing it to return profit to our shareholders and to be responsible, as a responsible citizen in the community to our — the communities we’re in and have a strong employee base and serve our customers.

Ariel Rosa — Bank of America — Analyst

Okay, great. That’s helpful. Maybe I’ll just ask one follow-up there. Maybe you could — I don’t know, is there a way to quantify the magnitude of the headwind that’s represented by this, kind of, overcapacity or oversupply in North America. I mean, is it really a matter of seeing a pickup in railcar volumes before we can actually anticipate that that condition corrects itself.

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

Turnaround in the negative effects of Precision Railroading, PSR. If that inflection point occurs and the traffic — and there are some indications that that is beginning to occur. Just the fact that traffic is down, forgetting about PSR, when traffic is down, velocity always improved. So, velocity has improved. It’s the rate of change is slowing. If the railroads reclaim their franchises and they are not looking at reporting only quarter-to-quarter profits, but they’re looking at the basic franchise over a two-year, three-year basis, they should be able to reclaim market share.

Secondly, this trade cloud in double stacks in intermodal cannot be underestimated. The tensions with China have created very severe effects on agricultural movements and other movements in the United States. Many American producers have lost their markets to say, for example, Brazil, which is one of the reasons we wanted to have a footprint down there. So, I believe that this is — actually, the industry is healthy, but the good news is, the railroads have very healthy financial performance and I don’t think they’re going to abandon the franchise and if they were to attempt to do so, I don’t think the US government over time would allow them to do it. They are too vital to the US economy.

Ariel Rosa — Bank of America — Analyst

Okay, great. That’s really helpful color there. And clearly we appreciate that there are some headwinds that are out of your control. So, nice job operating through some of those. Thanks for the time.

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

Thanks, Ariel.

Lorie L. Tekorius — President and Chief Operating Officer

Thanks, Ariel.

Justin M. Roberts — Vice President and Treasurer

Thank you very much everyone for your time and attention today and have a good rest of your Wednesday. And again, just a reminder, if you’re either in Portland or interested in dialing in, we will have our Annual Shareholder Meeting at 2 o’clock Pacific today. Thank you very much.

Operator

[Operator Closing Remarks]