The Greenbrier Companies - Q1 2023

Transcript

Operator (participant)

Hello, welcome to The Greenbrier Companies' Q1 of fiscal 2023 earnings conference call. Following today's presentation, we will conduct a question and answer session. Each analyst should limit themselves to only 2 questions. Until that time, all lines will be in a listen-only mode. At the request of The Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin.

Justin Roberts (VP and Treasurer)

Thank you, MJ. Good morning, everyone, and welcome to our Q1 of fiscal 2023 conference call. Today, I'm joined by Lorie Tekorius, Greenbrier's CEO and President, 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 in Q1 and our outlook for the rest of the fiscal year, 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 the slide presentation posted today on the IR section of our website. I'd like to remind you that matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Lorie Tekorius (CEO and President)

Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2023 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. Good morning, Lorie.

Thank you, Justin, and good morning, everyone. I hope everyone had a good holiday season. Our Q1 results showed areas of continued strength and identifiable opportunities to improve our operations. We produced 6,800 units in the quarter, a 10% sequential increase. Of these, 2,300 units are investments held on our balance sheet to be syndicated or capitalized into Greenbrier's long-term lease fleet in a future period. Remaining customer deliveries totaled 4,800 units. Revenue was in line with expectations. The efficiencies expected from higher production levels have not yet been fully realized. Aggregate gross margin was impacted by higher costs of outsourced components driven by inflation, transportation expense, and other logistics challenges. Material shortages and delays and other lingering supply chain issues, including rail congestion in Mexico, created production disruptions primarily at our manufacturing operations in Mexico.

We remain focused on managing our costs and supply chain. We're optimizing our internal fabrication capacity, which will improve profitability by having more control over vital supply chains and address supply chain inefficiencies. Additionally, as disclosed in our earnings release, we'll cease new railcar production at our Portland, Oregon facility in May following the delivery of existing commitments. This is not a decision we've taken lightly, given our history of manufacturing railcars in Portland. However, it's an action that reflects our commitment to optimize the efficiency of our manufacturing footprint and deliver stronger margins. We're undertaking a strategic evaluation of our marine business, which operates at the same facility. We're currently engaged in a range of discussions to determine both the future of marine operations and the overall use of the Portland facility.

I remain confident we'll attain a good outcome for all of our stakeholders, which include employees, customers, and shareholders. Our maintenance services group continued their positive momentum and started 2023 with their strongest Q1 performance in five years as initiatives focused on increasing efficiency translated to results. Our wheel business, unfortunately, was negatively impacted by increased labor and transportation costs. We're currently working with our customers to modify contracts to address the current cost environment. Turning to the U.S. economy, while it continues its resilience, rising interest rates and inflation now weigh on growth. The labor market has remained strong and we're cautiously optimistic about the industrial sector of consumer spending softens. The economy appears to be normalizing after years of unprecedented demand caused by lockdowns and subsequent government stimulus.

Economic activity will slow with an estimated annual US GDP growth rate of only 0.2% in 2023. The lower outlook projects an economic soft landing that'll be characterized by a strong labor market, but with elevated inflation and interest rates throughout the year. Consumer spending, which makes up two-thirds of economic activity, will likely determine the timing and depth of the slowdown. We continue to believe the North American rail freight segment will be resilient through a mild recession. Rail labor negotiations in the latter months of calendar 2022 drew broad public awareness to the integral role the rail industry plays in our economy. The near-term threat of a railroad worker strike ended on December 2nd with President Biden signing preventative legislation. Challenging railroad service conditions now follow us into this new year.

We're optimistic the railroads will make steady progress on their service models over the course of the year, and increased hiring is an early positive step in this direction. Turning to our European business. Despite an energy crisis caused by the Ukrainian war, high inflation, and the rising interest rates, the European economy appears to be holding up well. Energy prices are down from their peaks due to a mild winter and gas storage facilities at full capacity. German industrial output grew in the last quarter, surprising most analysts. Rail traffic levels in Europe are high, and fleet utilization is nearly 100% for most wagon types. The one exception is international container traffic, where volumes are down due to the sluggish Chinese economy, which continues to struggle with COVID. Our European business performed well despite the war and lingering effects of the pandemic.

Now turning to some other milestones in Q1. On November 1st, we released the 4th annual edition of our ESG report On Track Together. I'm pleased to report that Greenbrier has been identified on the list of the most responsible companies in America, according to Newsweek and the global research and data firm Statista. The third-party recognition validates Greenbrier's commitment to our values and our pursuit of responsible corporate citizenship. On a company level, we continue to review and optimize our portfolio to create a stronger, more sustainable Greenbrier. As announced earlier this week, we've acquired the minority interest in GBX Leasing from The Longwood Group. This action bolsters Greenbrier's leasing platform, simplifies our business structure, and promises long-term value to our shareholders. Growing our leasing business provides us a broader, more holistic view of the railcar equipment market than that of solely an OEM builder.

It also discourages the prospect of overbuilding since an asset can be on our books for over 30 years. Despite the short-term operating challenges, momentum is good entering calendar 2023. With strong railcar order activity and elevated lease rates, we're confident in Greenbrier's long-term strategy and our team's execution. On our last quarterly call, we mentioned we discussed the strategy further at our upcoming Investor Day. We're currently planning to hold that event in April and look forward to sharing additional details soon. Now I'll turn it over to Brian to discuss the railcar demand environment and our leasing activity.

Brian Comstock (EVP and Chief Commercial and Leasing Officer)

Thanks, Lorie, and good morning, everyone. In Q1, Greenbrier secured new railcar orders of 5,600 units worth $700 million, a 17% increase from Q4. These orders extend production into calendar 2024. We delivered 4,800 units in the quarter, resulting in a book-to-bill ratio of 1.2 times. As of November 30th, Greenbrier's global backlog was 28,300 units valued at $3.4 billion, an indication of the strength of our customer relationships and demand for Greenbrier's products and services. As a reminder, our new railcar backlog does not include 1,800 units valued at $150 million that are part of Greenbrier's railcar conversion programs. We continue to see healthy railcar inquiries and orders for a variety of railcar types despite a slowing economy.

As we pursue commercial and leasing transactions, we are employing pricing discipline that considers current market dynamics and the state of the economy. Railcars and storage are at a cyclical low due to demand spikes, rail freight service challenges, and retirements outpacing new railcar deliveries. From January to November of 2022, there have been approximately 50,000 railcars scrapped. This is more than delivered in all of calendar 2022. Tight railcar supply provides tailwinds for new orders in a range of railcar types. Earlier this week, we announced the buyout of the minority stake in GBX Leasing, our railcar leasing joint venture. Full ownership of the fleet furthers our leasing strategy while simplifying our business structure. We are pleased with the performance of leasing and management services in the quarter.

Our lease rates on renewal are increasing by double digits, and we are extending lease terms while maintaining a high fleet utilization of 98%. Our lease fleet grew to 14,100 units at the end of the quarter. Keep in mind that a number of the units added to our lease fleet in the quarter could be syndicated over the course of the fiscal year. We intend to grow our long-term lease fleet by approximately 2,000 units this fiscal year. Fleet growth for the year is focused on railcar types that will further diversify the fleet, reducing concentration risk. We funded another $40 million of leasing term debt during the quarter and will fund the final $35 million in Q2.

Additionally, we have not borrowed on the $350 million leased railcar warehouse facility, although we are evaluating financing strategy for the remaining of our lease fleet adds for fiscal 2023. Our capital markets team syndicated 300 railcars in the quarter, a decrease from last quarter due to the timing of production activity. We do see sufficient investor liquidity in the market for the duration of fiscal 2023. With one fiscal quarter in the books, we enter calendar 2023 energized and excited by the opportunities in front of us to grow our leasing business and successfully execute our market-leading syndication strategy. All of this supports our ultimate goal, to provide our customers maximum flexibility to access Greenbrier's superior products and services.

Adrian will now speak to the financial highlights in the quarter.

Adrian Downes (SVP and CFO)

Thank you, Brian, good morning, everyone. Before moving into the highlights of the quarter, I would like to remind everyone that quarterly financial information is available in the press release and supplemental slides, which can be found on our website. Our performance in Q1 was mixed, with strong commercial, leasing, and maintenance services performance offset by headwinds in the manufacturing business, particularly in North America. A few items I want to speak to for the Q1 include revenue of $767 million, which decreased sequentially, primarily from the production of 2,300 leased railcars onto the balance sheet. As a reminder, we do not recognize manufacturing revenue or margin until the railcar leaves our balance sheet. However, we do recognize lease income for railcars on our balance sheet.

This activity is more of a timing variance since these railcars will either be syndicated or capitalized into our long-term lease fleet later in the year. Deliveries of 4,800 units include 300 units from our unconsolidated joint venture in Brazil. Aggregate gross margins of 9.1% reflect higher costs for outsourced components, material shortages, and lingering supply chain issues, including rail congestion in Mexico. We are investing in internal fabrication capacity to improve our control over this aspect of our supply chain, while the rail congestion continues to slowly improve. Selling and administrative expense of $53 million is 22% lower from Q4, primarily as a result of lower employee-related costs, including incentive compensation and consulting expense. The pre-tax impairment charge of $24.2 million was related to long-lived assets at our Portland, Oregon, manufacturing facility.

This was triggered by the decision to end new railcar production at the facility after an evaluation of our production capacity requirements. Excluding the impact of this impairment, adjusted net earnings attributable to Greenbrier of $1.6 million generated adjusted EPS of $0.05 per share. Adjusted EBITDA was $48.7 million or 6.4% of revenue. Greenbrier's liquidity was $477 million at the end of Q1, consisting of cash of $263 million and available borrowings of $214 million. Our liquidity remains ample. The primary use of our cash during the recent quarter included a continuing investment into our lease fleet and the expenditure of working capital related to the manufacturing supply chain issues we have already mentioned.

As a result of the strength and flexibility of our balance sheet, we continue to be well-positioned to navigate these market dynamics. During fiscal 2023, we expect liquidity levels to increase from improvements in operating results and working capital efficiencies, as well as increased borrowing capacity, resulting from more railcars placed on our balance sheet. As a reminder, the remaining tax refund associated with the CARES Act of roughly $30 million is anticipated to be collected this fiscal year and will be additive to Greenbrier's available cash and borrowing capacity. Greenbrier has $100 million authorized under our share repurchase program, which was just extended by our board of directors through January 2025. Our board and management team remain committed to a balanced deployment of capital designed to create long-term shareholder value.

We will continue to use this capacity opportunistically based on fluctuations in the price of Greenbrier shares and within the framework of our broader capital allocation plan. Subsequent to the end of the quarter, we have repurchased nearly 100,000 shares. On January 5th, Greenbrier's board of directors declared a dividend of $0.27 per share, our 35th consecutive dividend. Since reinstating the dividend in 2014, Greenbrier has returned over $400 million of capital to shareholders through dividends and share repurchases. Based on yesterday's closing price, our annual dividend represents a dividend yield of approximately 3.1%. Turning to our guidance and business outlook, based on current trends and production schedules, we are maintaining Greenbrier's fiscal 2023 guidance, which includes deliveries of 22,000-24,000 units, including approximately 1,000 units from Greenbrier-Maxion in Brazil.

Revenue between $3.2 billion and $3.6 billion. Selling and administrative expenses of approximately $220 million to $230 million. Gross capital expenditures of approximately $240 million in leasing and management services, $80 million in manufacturing, and $10 million in maintenance services. Proceeds of equipment sales are expected to be approximately $110 million. Our now wholly-owned lease fleet will increase by at least 2,000 units in fiscal 2023. We will see how the leasing market evolves throughout the year and will be flexible and opportunistic in our growth strategy for the fleet. Gross margins, we expect full year consolidated margins will be in the low double digits. Our bottom line results in Q1 do not fully characterize the improvements and positive momentum occurring in our business.

We expect our performance to improve in the coming quarters as we hit our stride and we see the benefits of tough decisions taken in Q1. Our management team is experienced with a demonstrated track record of success. Our robust backlog provides strong visibility and stability over the coming years, and we look forward to improved results as we progress through the year. Now we will open it up for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press Star, then One on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then Two. As a reminder, please limit yourself to two questions. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Justin Long with Stephens. Please go ahead.

Justin Long (Managing Director of Equity Research)

Thanks, and good morning.

Operator (participant)

Morning, Justin.

Justin Long (Managing Director of Equity Research)

I wanted to start with a question on the supply chain, just given the trends there seem to be a little bit disappointing relative to expectations. Any updated thoughts on the supply chain recovery going forward? For the ceasing of railcar manufacturing operations at Portland and the increased capacity internally as it relates to fabrication, is there any way to put a number around the cost impact that could have going forward?

Lorie Tekorius (CEO and President)

I would just say on taking in and parsing through some of that.

Justin Roberts (VP and Treasurer)

That was like 3 questions in one, Justin.

Lorie Tekorius (CEO and President)

Starting with supply chain, I think as we have ramped up our activities as well as other industrial manufacturers, that has put more pressure on the supply chain that we rely on, particularly in Mexico, which we recognized and have taken the action to start insourcing initially the vital components that we need for building railcars and making certain that we are achieving the kind of cost that we need to. You know, we're not happy with what happened in the 1st quarter, but we are taking action and we expect that new fabrication facility to be online early in our 4th fiscal quarter. You know, things are changing and moving.

I think as we talked about it, we would expect this to be probably a couple hundred basis points of margin impact as we move through the fiscal year associated with supply chain. With the Portland, Oregon facility, not sure that we would quantify, you know, a facility-by-facility financial result. You do see the asset impairment that we took that's associated with the railcar piece of our business, evaluating the assets that are dedicated to railcar production and adjusting those to an appraised value. We are still in the process of evaluating our marine business to determine what comes of that. Then the last question, now I don't remember. We're not gonna be using the Gunderson facility for any of the subcomponents. This is insourcing that will happen near our facilities in Mexico.

Justin Long (Managing Director of Equity Research)

Got it. I think you tackled everything. Just to clarify one point, when you mentioned a couple hundred basis points of improvement in gross margins from the supply chain, is that manufacturing gross margins? Is that just solely related to the supply chain getting better, or is that incorporating what you're doing on the fabrication side?

Justin Roberts (VP and Treasurer)

Justin, that is on manufacturing, and that is solely related to what we're doing on the internal fabrication piece. The improvement, or I guess I would say lack of disruption on the supply chain going forward, is a little harder to quantify, but I would say that that's a similar, if not maybe even larger number ultimately.

Justin Long (Managing Director of Equity Research)

Okay, that's helpful. Last thing I wanted to ask about was just the railcar order environment. Could you break down orders in the quarter between North America and international? Maybe, Brian, you could chime in on the sustainability of this kind of 5,000-6,000 orders per quarter flow going forward.

Brian Comstock (EVP and Chief Commercial and Leasing Officer)

Yeah, Justin, it's Brian. You know, about 95% of the orders in the queue were for North America, substantially North America. December was a stronger month than what we typically see because of the holidays, we're already off to a good start. I would say the cadence continues to be very similar to what we've seen the last three, four quarters in North America. We're not seeing any fall off at all at this stage.

Justin Long (Managing Director of Equity Research)

Great. Very helpful. I appreciate the time.

Operator (participant)

Next question comes from Ken Hoexter with Bank of America. Please go ahead.

Ken Hoexter (Managing Director and Senior Equity Analyst)

Great. Good morning. Maybe you could talk a little bit about the manufacturing margins. Typically, we see a fall off in Q2. I don't know if given the closing at Portland, it sounds like that doesn't occur till May or some of the other moves you're making should. You know, are there gonna be increased costs given the fabrication moves, as well as still getting the supply chain online until that's up and running in the 4Q? Do we see an even extended dip in 2Q on margins? Maybe just walk us through, Adrian, your thoughts, or Lori on kind of seasonality and impact from the moves you're making.

Lorie Tekorius (CEO and President)

I'll start, and then Adrian or Justin can chime in. It's a good point, Ken, that yes, seasonally 2nd, our 2nd fiscal quarter, which includes a lot of holidays, does sometimes have an impact on our margins. So it's probably a mixed bag as you think about how we step through the year. We're not gonna get into quarter by quarter margin expectations. We do expect there to be, though, an overall improvement as we move across each of the quarters of this fiscal year. Regarding rail production at Gunderson, you know, we had a full quarter of production in the 1st quarter at our Portland facility, and that will continue through May.

We will have those three quarters, which I would say is, you know, it's neutral to a bit of a drag on margins, but that's where I would say that kind of shakes out. Any additional costs that are associated with ceasing those productions or, you know, the transition of our workforce, we will make certain to capture those separately and communicate them separately.

Adrian Downes (SVP and CFO)

Can also the investment in bringing the fabrication in-house is something that would be capitalized. You know, that would be something to provide long-term benefits. You wouldn't see necessarily a higher operating expense from that. You would see overall margin improvement.

Justin Roberts (VP and Treasurer)

Finally, Ken, one other piece onto that. As we progress through the year, we will see the increased syndication activity, which is typically beneficial to overall company margins throughout the year.

Ken Hoexter (Managing Director and Senior Equity Analyst)

Great. Thanks for that, everybody. And then I guess, you know, in the past, you've given kind of the balance of production and what you expect. Maybe it sounded like, Lorie, you threw out at the end of your last answer that there was no slowdown in the orders. Maybe talk about how back-end loaded production will be and the move, I guess, away from Portland to Mexico. Is that. You know, obviously, we had a huge surprise on cost this quarter given all the things you mentioned. Is that, you know, just determination that it's just too costly in the U.S. and moving everything to Mexico? Does that mean anything for the U.S. assets from ARI that you acquired in the U.S., or was this Portland specific?

Lorie Tekorius (CEO and President)

This was Portland specific. We are not intending to relocate all of our manufacturing to Mexico. There's definitely a lot of benefits and value of having a U.S. manufacturing footprint. Our, you know, the facilities that we acquired, what was it now, in 2019. You know, they continue to perform well. As you think through deliveries and the impact from ceasing the production at the Portland facility, they're running at a very modest pace. I would say it's not something you're gonna really notice as in looking at the quarterly delivery activity, particularly as in this Q1, we had a larger number of units that we or not capitalize, but are held as investments on our balance sheet, which will be syndicated in future periods, which will then become deliveries, right?

That'll offset, the wrapping up of rail production at Gunderson.

Ken Hoexter (Managing Director and Senior Equity Analyst)

Great. Thank you very much.

William Krueger (SVP and COO)

Thanks, Ken.

Operator (participant)

The next question comes from Allison Poliniak-Cusic with Wells Fargo.

Allison Poliniak-Cusic (Director and Senior Equity Analyst)

Hi, good morning.

Lorie Tekorius (CEO and President)

Good morning.

Allison Poliniak-Cusic (Director and Senior Equity Analyst)

Lorie Tekorius, I wanna go back to your last point, those cars on balance sheet. I know that you guys mentioned the syndication obviously would be beneficial, but is there a way to estimate or how you're thinking about what you're gonna hold on in your own lease fleet? Because I imagine that impacts that margin or the profitability as we're thinking through the year. Just any thoughts there?

Lorie Tekorius (CEO and President)

Well, I'll get Brian to talk to that because he's working really closely as we evaluate, you know, kind of which pieces of equipment we hold onto and which we syndicate.

William Krueger (SVP and COO)

Yeah, Allison, you know, Our stated goal, just to restate it, is to hold about 2,000 cars a year on our balance sheet. I think in Q1, we originated about that many, a little bit more. What we're doing now is we're going through the process of identifying which ones we want from a concentration and return perspective, and then we'll begin to move some of those into the syndication channel. Q1 was heavy in lease product. That's one of the impacts. That will start to get released throughout the year. Our plan from a leasing perspective is, again, to keep about 2,000 cars throughout the year.

Allison Poliniak-Cusic (Director and Senior Equity Analyst)

Got it. That's helpful.

William Krueger (SVP and COO)

Just from a production perspective, we will be producing cars onto the balance sheet and then moving cars off the balance sheet through syndication throughout the year. This wasn't a one-time thing. It's just more a matter of it was more heavily weighted in this one quarter.

Allison Poliniak-Cusic (Director and Senior Equity Analyst)

Yeah, I guess I was just gonna. I think doesn't, maybe we can talk about this offline, Justin. The impact of the cars that you're putting in your own fleet, you don't necessarily recognize a profit. I was just thinking if there was an impact we should be thinking through as you determine what you're keeping and what you're syndicating out.

William Krueger (SVP and COO)

You are exactly correct, Allison. We do eliminate that revenue and margin from the manufacturing business when they are on the balance sheet. When they go into the long-term fleet, then it's just a matter of recognizing the lease income over the period of the lease. Again, we can clean up any details offline, but yeah, you are right about that.

Lorie Tekorius (CEO and President)

I would say this is something that it's a known, right? As we are building equipment that we will capitalize on our balance sheet and hold long term, we absolutely acknowledge that we are foregoing the profit in the moment, but believe that having that repeatable revenue, cash flow, tax advantage cash flow is good as a balance to our strong manufacturing operations.

Matt Elkott (Analyst)

Certainly. I know Lori, you mentioned revenue was in line with your expectations, but it sounds like production did slip a little bit to the right because of supply chain. Is there any way to quantify what that number was in terms of production level that you guys had that kind of maybe got pushed to the right and was probably more back half-weighted here? Just any thoughts?

Adrian Downes (SVP and CFO)

Sorry, you asked Lorie Tekorius, I was gonna say a few, $300-$500 is probably what slipped from the quarter from that perspective. The piece that was a little more punitive though was the disruptions and the inability to maintain consistency of productions on certain lines throughout the quarter.

Lorie Tekorius (CEO and President)

Which impacts overhead absorption, so you just have more of that overhead falling through, not being used efficiently.

Matt Elkott (Analyst)

Got it. Thank you.

Adrian Downes (SVP and CFO)

Thank you.

Operator (participant)

The next question comes from Bascome Majors with Susquehanna.

Bascome Majors (Senior Equity Research Analyst)

Thanks for taking my questions. A lot of questions on margin given the surprise, but Lorie, you opened your comments with a look at the macro and a talk about some of the softening, you know, indicators from a top-down perspective. You know, is that a message that we think we're kinda getting to the top of the cycle or more of the plateau type environment that you've talked about with, you know, maybe not as high of highs and low of lows as the railcar cycle as we've known for much of the last 20 years? Can you just unpack the message here from a macro perspective and kinda your strategic views as you look out, you know, beyond a quarter or 2, maybe 2-3 years and how you're playing the business? Thank you.

Lorie Tekorius (CEO and President)

Well, Happy New Year, Bascom. Yeah, I think at least everything that we are seeing both internally and from looking at external forecasters, it certainly appears that we're going to be in more of a plateau when it comes to new railcar production. While that might, you know, disappoint some who like roller coasters, we're kind of excited that we didn't actually have the huge run-up that some other sectors did. Therefore, I don't believe we're gonna have quite that, you know, that accelerated downfall either. It'll be more modest. I think there is a lot of pent-up demand when it comes to rail freight movements. A lot of shippers have had to move their product in different ways. The railroads continue to embargo and not provide the kind of service that their customers need.

As they're able to add workforce, those of us who support the railroads and the rail freight industry believe those loadings are gonna go up, the performance is going to improve, and that'll make for good demand. The thing that's difficult is there a particular movement or car type change that can sometimes create those spikes, in demand that you, is more behind some of those run-ups. Again I don't see that in my crystal ball right now, and I think that having the steady and diversified activity that we're seeing on manufacturing is good both for us. Well, maybe it's a little bit more difficult for our colleagues in manufacturing 'cause it's a lot easier to just build one or two car types as opposed to eight different car types.

It does provide us a lot of benefits in the lease fleet that we're building to make certain that we've got good diversity, good quality customers, and it's good for our operating lessor customers and our syndication partners who are also looking for diversity in the equipment that they buy from us.

Bascome Majors (Senior Equity Research Analyst)

You know, thank you for that. Can you talk a little bit about cash flow? Maybe this is one for Adrian. I know it's a little bit different now that you're investing more and more in the way that you account for your lease fleet, but do you have some thoughts on operating cash flow maybe before that lease investment this year and, you know, if there will be a working capital release as you get through some of these supply chain disruptions that have been, you know, sporadic but in, you know, material, you know, multiple times in the last few quarters. Thank you.

Adrian Downes (SVP and CFO)

Yeah. We would expect, you know, cash flow to be positive the balance of the year on an overall basis. A few of the major drivers, you know, the syndication activity, should generate cash, and you can see, you know, we invested in putting a lot on our balance sheet in Q1. You know, that cadence would be different the rest of the year. We would have, you know, improved operating results that will also help. As you mentioned, you know, we would expect to see some working capital efficiencies as we, you know, navigate these issues that we had in Q1, which are more short-term. We have invested a lot, compared to historical periods in working capital as we've ramped up.

You know, we should start to see some efficiencies just from normal course as well as from resolving some of these, you know, sporadic issues that impacted Q1.

Bascome Majors (Senior Equity Research Analyst)

Thank you both.

Operator (participant)

The next question comes from Matt Elkott with Cowen.

Matt Elkott (Analyst)

Good morning. Thank you. Sorry if my question has been asked as I had some connection issues on my end here. I wanna go back to Gunderson. You know, Lorie and Justin and the team, how much of the decision to close the facility has to do with maybe chronic access to labor issues? Even before COVID. If that was one of the considerations, can you talk about your access to labor in the Northwest versus in other parts of the country, in the Midwest and the, and the South?

Lorie Tekorius (CEO and President)

Sure, Matt. Thank you for that. You know, I don't think that we are unique in talking about having workforce attraction and retention issues. The Northwest is a little bit different as well. It's not a heavy industrial area, so it's a tough area to attract and retain a workforce. I will say that we do have a very solid and dedicated workforce that many of which have been with us for a very long time. As I said in my prepared remarks, this was not a decision that we took lightly. You know, we know that Gunderson is something that we've had for all of our existence, right? This is tough. Our facilities in Arkansas, again, similar to other businesses, struggle to attract and retain folks within a very difficult working environment.

We're thinking about how we make adjustments to where we source folks, how we, you know, how we pay, what our conditions are, thinking through, you know, the hours in a day that someone works or the fact that more people today want to work part-time as opposed to. Sorry, that was. I'm sure that came through in my voice. I'm old, and it's confusing for me that people have a hard time working a full day. We're looking at all the different things that we can do, the levers that we can pull to attract and retain a workforce that I think are great, you know, family wage jobs. I've got so worked up over workforce, I forgot what the rest of your question was.

Matt Elkott (Analyst)

I just was hoping to get some comparison between access to labor, between the different regions. I mean, I think you answered that the Northwest may be a bit more challenging, I guess, than the rest of the country. I also wanna kind of ask you about, I know it's difficult to say, to put a number, like, a capacity, annual capacity numbers, because the cycles differ and the types of equipment produced affects that number. You know, after the closure of Gunderson, how much annual capacity would you say you would have in the US?

Lorie Tekorius (CEO and President)

You know, I think as we've talked about our capacity numbers, Jess will have to correct me if I'm wrong, but I don't think that as we've thrown out what I would air quote, say, theoretic capacity for the North American market, we've probably not been for the last several years assuming large numbers when it comes to the Portland facility, just because we have been operating it at a more modest rate. There was one other thing that I thought about in your the earlier part of your question in thinking about our decision for ceasing railcar production in Portland. Part of it is also where our customers are and, you know, and where our competition is.

As we need to be able to be competitive in the broader market, cost-wise for our customers, there has been kind of this transition to the middle part of the country and south, which is also very good from a logistics and transportation perspective to get our equipment to the customers that want to use it. That also weighed into the decision that a location in the Pacific Northwest does have, you know, some difficulties as you've seen more and more freight moving to East Coast ports and the like.

Matt Elkott (Analyst)

Mm-hmm. Yeah. Makes sense. I know most industries are having supply chain issues, but it seems a bit more pronounced in the case of the railcar industry, Lorie. Do you, I mean, is it First of all, is that the case? Second, why is that? I mean, we've heard that maybe because of a, you know, a more limited pool of suppliers on the component side. Are there any other factors that are specific to the railcar industry that are making the supply chain issues subside at a slower rate than maybe some other industrial areas?

Lorie Tekorius (CEO and President)

You know, it is a little bit head-scratching. I would say that it's likely because we and some of the others in the rail space have been ramping up production. We are putting some pressure on that supply chain that they didn't have over the last 2 years. I think quite honestly, in the rail freight OEM space, we've been, you know. Overall, I'm sure that my procurement folks are gonna, you know, kick me after this, but, you know, I would say compared to the rest of the country, we haven't had the big disruptions. I think it's as we and others in the industrial space ramped up over the last, you know, 4-6 months, it's really putting that pressure on that supply chain to be able to be responsive.

Matt Elkott (Analyst)

Got it. Then just one final question on margins. This is taking a long-term view. You know, all the changes that you're making, Gunderson and then the, you know, leasing, does it change your outlook, long-term outlook for what kind of gross margin you can get?

Lorie Tekorius (CEO and President)

I think these are all steps that we need to take on the journey to having, you know, solid double-digit low, you know, in the teens margins on a regular basis is to look through our organization and determine where we can strain more efficiencies and costs for the business to generate that sort of return. From my perspective, you know, I and the leadership team, we look across the organization, and we're identifying the areas where we can start to take some action, and we're taking that action.

Some of it's gonna take a little bit of time. You know, we'll do our best to be transparent with you and our shareholders about how we're the steps that we're taking, but it's all towards that longer term goal of having those steady margins and I would say truly higher highs and higher lows. You know, having the lease fleet will help, I believe, to take some of the trough out of the low cycles when it comes to railcar manufacturing. Potentially, we have, you know, a couple years here of some steady demand on that side of the business, which will allow us to really look through the operations and see where we can continue to optimize them.

Justin Roberts (VP and Treasurer)

Great. Thank you, Lorie. Appreciate it.

Operator (participant)

The last question today comes from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Steve Barger (Managing Director and Equity Research Analyst)

Thanks. Good morning, everyone.

Lorie Tekorius (CEO and President)

Good morning, Steve.

Justin Roberts (VP and Treasurer)

Morning, Steve.

Steve Barger (Managing Director and Equity Research Analyst)

Appreciate the detail on some of the actions you're taking in the near term. On the last call, you suggested earnings would have maybe a 40% first half, 60% second half waiting. As you think about it now, should we be thinking that's more 25, 75, or what do you expect for an earnings cadence for the year?

Justin Roberts (VP and Treasurer)

I think that's more realistic given the performance in Q1.

Steve Barger (Managing Director and Equity Research Analyst)

The 25, 75?

Justin Roberts (VP and Treasurer)

Yes.

Steve Barger (Managing Director and Equity Research Analyst)

Okay. Lorie, you've had to deal with some tough operational conditions for a while. You're obviously taking actions to address that. For 2023, Can you just talk about your priority list? Is it really fixing gross margin first? Is it driving syndication activity or market share? Then second part to that question, maybe you answered this to some degree, but longer term, what do you see as the key to driving shareholder value creation? What's that message that you're pushing to the team?

Lorie Tekorius (CEO and President)

You're trying to steal our thunder from April, Steve. Tell you all my secrets right now. You know, I think I would say yes. My number one focus is improving our gross margins, getting to that steady margin that I know that we can do. We will look to how we're optimizing the services side of our business, which the biggest piece of that is leasing and figuring out how we do that at a modest pace, balancing it with our customer needs for, you know, on the syndication side and the operating lessor side. This is something that Greenbrier's done for years. We have been able to manage relationships with a wide variety of customers and do this in a way that, I think can be beneficial for our shareholders as well as for our customers.

You know, it's not gonna be a revolution. It's gonna be an evolution of how we're gonna continue to build off of the foundation. Looking at some of the investments that we've made over time or where we have value tied up on the balance sheet and how we can either get those investments on our balance sheet to generate better returns or to, you know, offload them and focus on the things that are our priorities.

Steve Barger (Managing Director and Equity Research Analyst)

Got it. Thanks. I'm sure you'll talk more in April about all that. For the near term on the gross margin, what is the biggest bucket of value creation or margin expansion? Is it optimizing the manufacturing or the internal fabrication capacity? Is it just footprint? How much does mix play into that? Like, what levers are you pulling first to drive that near-term outcome?

Lorie Tekorius (CEO and President)

I think definitely it is the supply chain and insourcing some of those vital components that we need to make certain that we are managing those costs. William Krueger, who's now running our manufacturing operation, has been working closely with the teams on the ground to really think through if we have certain capacity within our operations, are we utilizing our capacity to its highest potential and for the most vital components? Really thinking through that a lot more strategically, particularly as we're building a broader range of products that requires a broader ability to provide those sub-subcomponents.

Steve Barger (Managing Director and Equity Research Analyst)

Do you think you have the manufacturing capacity, the process equipment that you need, or would this require investment in machinery to be able to in-source some of that?

Lorie Tekorius (CEO and President)

It will take some modest investments, but that's part of what's in our guidance right now.

Steve Barger (Managing Director and Equity Research Analyst)

That's in the CapEx right now. Okay. All right. Thanks.

Lorie Tekorius (CEO and President)

Thank you, Steve.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Justin Roberts for any closing remarks.

Justin Roberts (VP and Treasurer)

Thank you very much for your time and attention today. If you have any follow-up questions, please reach out to us at [email protected]. Have a great day. Thank you.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now.