Earnings Call Transcript - GBX Q4 2025

Operator, Operator

Hello, and welcome to the Greenbrier Companies Fourth Quarter 2025 Earnings Conference Call. 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 of Financial Operations, the Americas. Mr. Roberts, you may begin.

Justin Roberts, Vice President of Financial Operations

Thank you, Megan. Good afternoon and evening, everyone, and welcome to our fourth quarter and fiscal 2025 Conference Call. Today, I am joined by Lorie Tekorius, Greenbrier's CEO and President; Brian Comstock, Executive Vice President and President of the Americas; and Michael Donfris, Senior Vice President and CFO. Following our update on Greenbrier's record-setting 2025 performance and our outlook for fiscal '26, we will open up the call for questions. Our earnings release and supplemental slide presentation can be found on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2026 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. We will refer to recurring revenue throughout our comments today. Recurring revenue is defined as leasing and fleet management revenue, excluding the impact of syndication activity. Finally, Greenbrier will be participating in the following conferences over the next few months: The Stephens Annual Investment Conference on November 19, the Goldman Sachs Industrials and Materials Conference on December 4, and the Susquehanna Virtual Freight Forum on December 10. And with that, I'll hand the call over to Lorie.

Lorie Tekorius, CEO and President

Thank you, Justin, and good afternoon, everyone. I appreciate you joining us today. A strong finish in the fourth quarter made fiscal 2025 Greenbrier's best year yet. We achieved record full-year diluted earnings per share and delivered record core EBITDA, supported by disciplined execution across our business. Our aggregate gross margin was nearly 19%, and Greenbrier generated more than $265 million in operating cash flow. We also achieved a return on invested capital of nearly 11% within our long-term target range. These results reflect our team's resilience and the strength of disciplined execution paired with efficient operations. We're seeing the tangible results of the transformation we set in motion nearly 3 years ago, with key long-term performance goals being realized. Greenbrier today is a stronger, more agile organization, a business better positioned to deliver performance across market conditions as proven by our record financial results for 2025 on 2,000 fewer deliveries than in fiscal 2024. Strong operating performance in manufacturing led to healthy margins and our network is operating with greater efficiency, precision, and alignment than ever before. Process improvements, balanced production lines, and disciplined cost control have driven sustained expansion in manufacturing margins. Our flexible manufacturing capacity allows us to rapidly respond to changes in demand and maximize operating efficiency. Our in-sourcing capacity expansion in Mexico is effectively complete, and the full value of the initiative will be realized as production scales through 2026 and beyond. Likewise, we continue to drive overhead efficiencies throughout our global manufacturing network. This agility and responsiveness are a competitive advantage for Greenbrier. In Europe, we continue to unlock efficiencies through ongoing footprint rationalization, driving cost savings and developing a more competitive and responsive platform for the region. As we announced today, we're proceeding with the closure of 2 additional facilities. Combined with our previously announced actions, we expect annualized savings of $20 million from this footprint rationalization. I should note that these actions and savings will not impact our European production capacity. Rather, they position Greenbrier to sustain higher margins in varying demand environments. The steady growth of our Leasing & Fleet Management business has been an important contributor to our performance. Our lease fleet continues to perform exceptionally well with high utilization rates and strong renewals. We've maintained a disciplined approach to growth and are on track to meet our goals of doubling recurring revenues by fiscal 2028. Our capital allocation framework remains focused and disciplined. We deploy capital where returns are strongest while maintaining balance sheet strength and liquidity. This prudent approach and a strong liquidity position support our ability to fund strategic priorities while delivering attractive returns to shareholders. The growth of our recurring earnings, combined with our strong manufacturing, provides a durable cycle foundation for Greenbrier. Integration is a defining feature of our model. Manufacturing generates efficiencies and scale, and leasing provides stability. And together, they create an earnings base that differentiates Greenbrier. The operational progress and recurring earnings we've built into our business means that Greenbrier now operates at a structurally higher level of resilience. Our results this year clearly demonstrate that our efficiency and lease fleet growth initiatives have raised the baseline of our performance and position us to achieve what I described as higher lows. Today, we are well positioned to continue generating cash flow, financial performance, and shareholder value for years to come. Our fiscal 2026 guidance reflects this improved foundation. Our model is designed to perform with durable returns and the flexibility to respond to market demand. Looking ahead, we remain committed to operational excellence, innovation, and responsible growth. In closing, I want to recognize our employees, customers, and shareholders for their trust and partnership. Fiscal 2025 was a milestone year for Greenbrier, setting the stage for continued momentum into the year ahead and beyond. And with that, I'll turn the call over to Brian.

Brian Comstock, Executive Vice President and President of the Americas

Thanks, Lorie, and good afternoon, everyone. Greenbrier delivered exceptional performance in fiscal 2025. In addition to the record financial results already mentioned, we maintained consistent execution during the year, and our gross margin improved from the actions we've taken over the last 2 years to enhance our production efficiency. Many of these improvements are structural and are continuing to deliver benefits. We view the near-term market conditions as an opportunity to intensify our focus on production layout, process improvements, cost reduction initiatives, and optimization projects ahead of a production ramp-up anticipated later this year. While demand is an external factor, we remain relentlessly focused on improving operating efficiencies and reducing costs. In Q4, Greenbrier received approximately 2,400 new railcar orders valued at more than $300 million, bringing full year orders to more than 13,000 units. We closed the year with a backlog of 16,600 units valued at $2.2 billion. This backlog reflects a healthy mix of product types and customers, demonstrating our market leadership. As a reminder, programmatic railcar restoration work is excluded from these figures. This work bolsters manufacturing margin, and it's performed on approximately 2,000 to 3,000 units annually. We continue to focus on order quality with activity that supports efficient production scheduling and sustained attractive margins. Our commercial team has done an excellent job navigating a complex operating environment. In North America, freight trends and tariff dynamics are moderating new railcar demand, leading many fleet owners to extend acquisition timelines. I think it's worth reiterating what Lorie mentioned earlier; we achieved record earnings despite operating in a modest market for new railcar demand. In my 27 years at Greenbrier, earning more than $6 per share in a 30,000 car build year seemed unlikely until now. This is a clear reflection of how this leadership team has evolved and what it's capable of achieving. Across our global businesses, we are focused on optimizing our manufacturing footprint and driving additional cost efficiencies. In Europe, ongoing footprint actions are expected to yield about $20 million in annualized savings. Leasing & Fleet Management delivered another solid year. Recurring revenue reached nearly $170 million over the last 4 quarters, representing almost 50% growth from our starting point of $113 million just over 2 years ago. Our lease fleet grew by about 10% in fiscal '25 to just over 17,000 units with high fleet utilization at 98%. The fleet remains diversified by car type, lease term, and customer. In fiscal '26, 10% of our leased railcars are up for renewal, and we've already renewed 1/3 of those units at substantially higher rates. We're building a balanced railcar portfolio through discipline and selectivity, and we see opportunities to accelerate fleet investments in the medium to long term. Our lease fleet debt facilities, including the warehouse credit facility, senior term debt, and asset-backed term notes are structured as nonrecourse obligations. They are prudently aligned with current needs and support growth at an average interest rate in the mid-4% range, well below prevailing market rates. These facilities provide stability, flexibility, and efficient access to capital. Greenbrier enters fiscal '26 with backlog visibility, a disciplined commercial pipeline, and an operating platform designed for consistencies. Our teams remain focused on sustaining execution, optimizing the mix, and maintaining the balance between manufacturing and leasing, which has proven so effective. As Lorie noted, the transformation of our business has positioned Greenbrier to deliver more stable outcomes through the cycles. The commercial organization is fully aligned with that goal, pursuing opportunities that enhance the through-cycle earnings, strengthen relationships, and extend our competitive advantage. We are confident in our near-term performance and long-term outlook. Our experienced leadership team has consistently demonstrated the ability to successfully manage through market cycles. We remain focused on steady execution and sustained performance as we advance our strategic plan. The progress we've achieved meeting or surpassing every target we have put forward reflects the expertise, commitment, and teamwork of Greenbrier employees worldwide. I'm deeply appreciative of their efforts and proud of what we continue to accomplish together. And with that, I'll hand the call over to Michael.

Michael Donfris, Senior Vice President and CFO

Thank you, Brian. Greenbrier's momentum carried through the fourth quarter, driven by strong operational performance and meaningful progress on our strategic priorities. We delivered record profitability through effective cost management and disciplined execution. These results position us well entering fiscal 2026. Fourth quarter revenue was nearly $760 million, in line with expectations, enabling us to meet our full year revenue guidance. Aggregate gross margin for the fourth quarter was 19%, an improvement of 90 basis points sequentially. This was driven by stronger operating performance at our Mexico facilities, favorable foreign exchange from a stronger Mexican peso, and disciplined manufacturing execution. These gains were partially offset by a $3 million impact related to our European footprint rationalization. Notably, this marks the eighth consecutive quarter in which we've met or exceeded our mid-teens gross margin target. Operating income was $72 million, nearly 10% of revenue, and this was partially impacted by $6 million in our European footprint rationalization. Our effective tax rate of 36.4% was above both our prior quarter and our full year structural rate of about 28% to 30%. This was primarily due to jurisdictional income mix. Core diluted earnings per share was $1.26, and core EBITDA for the quarter was $115 million or 15% of revenue. For the 12 months ending August 31, 2025, our return on invested capital was nearly 11% and continues to be within our 2026 target of 10% to 14%. Shifting our focus to the balance sheet. Greenbrier's Q4 liquidity level was the highest in 10 quarters at over $800 million, consisting of more than $305 million in cash and almost $500 million in variable borrowing capacity. We generated nearly $98 million in operating cash flow for the quarter and delivered positive free cash flow for the year, driven by strong operating performance and working capital efficiencies. Liquidity remains robust, supported by solid operations, continued improvements in working capital, and expanded borrowing capacity. On debt specifically, we updated our financial statements and disclosures to clearly distinguish between our leasing debt, which is nonrecourse and the rest of our business. This additional disclosure should help us clarify metrics and performance as we grow our lease fleet and nonrecourse debt. Now switching to capital allocation. We are committed to responsibly returning capital to our shareholders through a combination of dividends and stock buybacks. Greenbrier's Board of Directors declared a dividend of $0.32 per share. This is our 46th consecutive quarterly dividend and reflects our confidence in our business. Additionally, during fiscal 2025, we repurchased about $22 million in shares, leaving $78 million remaining in our share repurchase authorization. We will access the capacity opportunistically during the fiscal year and within the framework of a broader capital allocation strategy. With a resilient business model and strong balance sheet, we're positioned for continued performance and long-term value creation. Our guidance for fiscal 2026 is as follows: New railcar deliveries of 17,500 to 20,500 units, including approximately 1,500 units from Greenbrier Maxion in Brazil. Revenue is expected to be between $2.7 billion to $3.2 billion. We expect aggregate gross margin between 16% and 16.5%. Operating margin is expected to be between 9% and 9.5%. I will point out that included within our guidance is a reduction in SG&A of about $30 million versus fiscal 2025. Earnings per share will be between $3.75 and $4.75. For capital expenditures, we expect investment in manufacturing to be approximately $80 million and gross investment in Leasing & Fleet Management of roughly $240 million. Proceeds from equipment sales are expected to be around $115 million, resulting in net capital investment of around $205 million. With our strategic goal of investing up to $300 million to grow our lease fleet each year, we plan to continue to look for opportunities to increase this investment. This year, our team delivered record earnings and the highest liquidity in 10 quarters, while continuing to execute our long-term strategy to strengthen the business ahead of the next growth phase. We remain focused on consistent execution and disciplined capital deployment; with strong financials and operational excellence, we're well positioned to navigate near-term market conditions and drive long-term shareholder value. And now we'll open it up for questions.

Operator, Operator

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

Ken Hoexter, Analyst

Looking at the outlook, we're starting with an estimate of 17,500 to 20,500 cars, which is a decrease from 21,500 this year. Earlier this year at the Industry Conference, we anticipated that car builds would be lower for the next few years. Could you share your thoughts on the current market conditions? Do you believe Europe can help balance this situation? We also heard from a locomotive manufacturer last week, who mentioned that projections for car builds next year are down by 30% to 40% based on industry statistics. Can you provide some insight into this backdrop and discuss how you plan to compensate for it?

Brian Comstock, Executive Vice President and President of the Americas

Yes, it's Brian. I'll start, and then Lorie can add some details. Ultimately, we believe we are currently at the low point of the cycle, and our inquiries are significantly increasing. We expect to reintroduce some products in the latter half of the year. Remember, a couple of years ago, we made a significant change in our approach to the business by using some of our manufacturing space for programmatic railcar restorations. These are large programs that were usually handled in a very inefficient way at repair shops. This shift has helped counteract a lot of the decline we've experienced in backlog over the past few years, and we continue to see this as a partial offset. Additionally, we believe the market is stronger than many are forecasting, especially in the tank car segment, given the recent resurgence in oil demand, along with activity in upstream and downstream chemicals and replacement needs.

Lorie Tekorius, CEO and President

Let me just say that I think you articulated it very well, Brian. While we observe some positive signs emerging in our markets, it's important to recognize that, at Greenbrier, deliveries and backlog are significant metrics, but they are not the only factors influencing our financial outcomes and cash flow. We take great pride in how the team is delivering impressive performance and results, even in a more subdued environment.

Ken Hoexter, Analyst

Great. You mentioned something done in Mexico at the beginning of the call, but I didn't catch what it was. Could you clarify what's happening there? I'm also interested in the impact of tariffs on input costs and how those costs are being passed through. Could you take a moment to explain what's going on, starting with the changes or improvements made in Mexico? I missed that part.

Lorie Tekorius, CEO and President

Sure, Ken. We announced at our Investor Day a couple of years ago that we began investing in our facilities in Central Mexico for in-sourcing. As demand increased, we found ourselves sourcing significant components from farther away. We have completed the in-sourcing project this year, which has positively impacted our financial results, manufacturing, and overall gross margin over the past few years. We expect these benefits to continue for many more years.

Brian Comstock, Executive Vice President and President of the Americas

Yes. I'd just add on to what Lorie said is our charter has been taking cost out of the business for the last couple of years, along with the in-sourcing investment. We've really been focused on taking hours out of our units and reducing cost overall, which provides us a bit of lift in softer markets.

Ken Hoexter, Analyst

And any thoughts on the tariff implications?

Brian Comstock, Executive Vice President and President of the Americas

No. On the tariff side, I just want to remind everybody that we take pride in the way that we construct our contracts. We feel like we're pretty well protected in our contracts just depending on which way they go. The U.S. footprint is also an important strategic part of what we've always maintained. And so we have some ability to pivot in the event that there are some substantial changes. And then again, we continue to work with our colleagues on the Hill to really find balance in these negotiations as they seem to ebb and flow every day.

Ken Hoexter, Analyst

Okay. And if Bascome can indulge me for 1 or 2 more. Just you mentioned after closing 2 facilities, how many did you have in Europe? And what are you down to?

Lorie Tekorius, CEO and President

We had 3 facilities in Romania and 3 in Poland. So now we will be down to a total of 3 facilities, 2 in Romania and 1 in Poland.

Ken Hoexter, Analyst

Okay. Do you think you've finished with the rationalizations at this point? Is that just consolidating production, or has it reduced activity?

Lorie Tekorius, CEO and President

Actually, Ken, what is really great about this is that if you are ever over in Europe, we'd be more than happy to host you at one of our facilities. The properties we acquired, particularly in Romania, have quite a significant amount of land. Over the past few years, we have been on a journey to bring more modernization to our wagon production. Wagons in Europe are much more specialized compared to those in the North American market since we often share the rails with passenger transportation. As we modernized some of our processes, we realized we had more space than we actually needed, resulting in excess overhead. Consequently, we decided to close the Arad facility, which was our largest in Romania, in the second quarter. Given the economic uncertainty in Europe, we also expedited the closure of two smaller locations in Poland. I believe this completes what we need to do for now, but our leadership team has demonstrated that we will make necessary adjustments as opportunities arise or as we need to adapt to changes in any market we operate in.

Brian Comstock, Executive Vice President and President of the Americas

Yes. And Ken, it's Brian. Maybe just a little escalation point on what Lorie said is we really are consolidating production into fewer facilities.

Lorie Tekorius, CEO and President

Maintaining the same amount of capacity.

Brian Comstock, Executive Vice President and President of the Americas

Exactly. Just consolidation because we have a lot of capacity at those facilities. And as far as the journey goes, we continue to look at North America as well and what we can do to continue to bring costs out. So I'd say, while it's kind of 80-20 rule we're done, there's still always opportunity to continue to improve and rationalize further.

Ken Hoexter, Analyst

Last 1 for me is you gave the full year. Anything you want to comment on first quarter outlook? I guess you ended at 4,900 deliveries. How should we think about first quarter? And with that, I thank you for your time.

Lorie Tekorius, CEO and President

Hats off to you Ken. You don't never know if you don't ask. But no, we're not inclined to give quarterly guidance. Unless Justin or Michael, you guys want to have something to share.

Justin Roberts, Vice President of Financial Operations

No, I think that's fine, Lorie.

Ken Hoexter, Analyst

Is there a normal seasonal move from how you end in fourth quarter to first quarter? Or does that not play just given your move to balance production?

Justin Roberts, Vice President of Financial Operations

Yes. And I'll take that one. I do think we'll see a stronger back half of the year than the beginning of the year. We're still working through our backlog, and we're still really excited about, as Brian mentioned in his prepared remarks, that we're expecting the back half of the year to pick up as well. So it's probably stronger in the back half than the first half.

Lorie Tekorius, CEO and President

And I would say we've also been reminding our workforce that just because we moved from August 31 to September 1, it's not like we reset the clock. We've focused on just moving forward each day, doing the best that we can, and looking to create long-term value for our shareholders.

Operator, Operator

Next question comes from Bascome Majors with Susquehanna.

Bascome Majors, Analyst

I'll start where Ken left off. I understand you may not want to provide quarterly guidance. However, can we discuss the build pace? There were comments suggesting that things might improve in the second half of the year. I would interpret that as indicating a stronger performance later on, but it may not directly impact the bottom line. Could we review where we stood in the fourth quarter? Is that the production rate we can expect in the first quarter, and what recovery are we planning for in the second half? Is this driven by orders?

Justin Roberts, Vice President of Financial Operations

Yes. It's great to hear from you, Bascome. Looking at the past four quarters and what we expect in the next four, we anticipate that the first two quarters of fiscal '25 will show increased production, but there will be a gradual decline throughout the year. We expect the first and second quarters of fiscal '26 to maintain similar production levels to what we closed with in fiscal '25. Then, we plan to increase production in the third and fourth quarters to achieve more stability in fiscal '27. This pattern reflects our typical seasonal adjustments in the latter half of the year, influenced by customer demand for cars and certain expectations.

Lorie Tekorius, CEO and President

We enter each fiscal year with some open production because it allows us to respond quickly to customer needs.

Brian Comstock, Executive Vice President and President of the Americas

Yes, this is Brian, I wanted to add some insights regarding orders. In relation to the earlier question about locomotives, it's important to note that a significant number of rail cars continue to leave the North American fleet, and we are currently at the lowest levels we have seen in about 4 or 5 years from a national fleet standpoint. There remains substantial demand for replacements rather than growth, which may contrast with what some in the locomotive sector are experiencing.

Bascome Majors, Analyst

All right. And can we talk a little bit about the balance sheet and funding for the leasing business? I mean you talked about hitting your recurring revenue or being on pace for your recurring revenue target. And do you expect your investment in the lease fleet to be similar? And over the long term, I know you have a CapEx guide for this year, but over the long term, do you think that's pretty similar year-to-year? Or is there some cyclical gyrations to that? And maybe lastly, as part of that, has the secondary market maintained its stability? And do you have product to continue to support a P&L impact from that net revenue or sorry, our net sales piece of the net CapEx?

Lorie Tekorius, CEO and President

And so maybe I'll just say something right quick, and then I know Michael and Brian will fill in behind me. But we are looking at all opportunities. We do see secondary market opportunities as well as new lease originations that can go into our lease fleet. So we have got a focused and agile leadership team that is going to be glued to our customers to understand their needs and figure out how we can drive value.

Brian Comstock, Executive Vice President and President of the Americas

Yes, it's Brian. I just would add that our strategy remains consistent. We have talked about adding about $300 million net each year; that continues to be our plan, good steady growth. However, to Lorie's point, the secondary market is still very robust. There's a number of books in the market today that we're looking at as well as others. And we have assets that we continue to trade as we rebalance portfolios and we think strategically about how we align our lease fleet long term. So we're very active in the secondary market.

Bascome Majors, Analyst

Can you elaborate on your production plan and why you believe it will be stronger in the second half, considering factors like seasonality and discussions with customers that may lead to conversions in calendar '26? You've mentioned your cost reduction initiative in Europe as a potential factor for margins, but aside from that, will production rates and absorption be the main influences on margins? Are there other elements, such as pricing and other inputs, that we should consider regarding margin trends for the year?

Justin Roberts, Vice President of Financial Operations

As we consider the cost reduction efforts, this is an intriguing time for operations because it provides the manufacturing teams a chance to pause and evaluate not only the overhead costs we've previously discussed but also to identify areas for reducing inefficiencies. They can analyze our production processes to eliminate unnecessary steps, reduce hours, and cut costs. This comprehensive approach allows us to rethink aspects of our production and manufacturing. We began this journey, as Lorie, Brian, and Michael noted in recent years. However, this year presents a unique opportunity, especially with a slower pace in the first half, to focus on these activities rather than solely on maximizing vehicle output. We're also able to reposition some of our plant and industrial mechatronic engineers to different facilities to share best practices and ensure consistent designs, all contributing to improved margins. While overhead absorption plays a critical role, it’s not the only factor.

Lorie Tekorius, CEO and President

We continue to think creatively about how to serve our markets. If it means implementing programmatic railcar restoration in what is typically a new car facility, that’s excellent. It utilizes the capacity we’ve invested in, absorbs overhead, and produces solid returns.

Bascome Majors, Analyst

Maybe lastly for me, can you talk really high level about the competitive landscape in new car builds and order taking? I mean, has price become more difficult as the production rate of the industry has gone down to this level? Has it been pretty stable? I mean, you've been pretty clear on focused on doing the right things for your shareholders and returns on your business. But if you could just kind of talk about the back and forth between you and the remaining competitors in the space and whether that's stable or getting more competitive into this downturn?

Brian Comstock, Executive Vice President and President of the Americas

Yes. It's a good question, Bascome. It's Brian. And at the end of the day, it's a little bit of both. So when you look to more commoditized markets, some of your covered hopper cars and what have you, you're seeing a lot more pricing pressure on cars, I say that everybody can build versus tank cars and some of the more niche cars that we're building today. So it's a mixed bag. You're seeing good discipline on the tank side. You're seeing good discipline on other specialty type cars, which is quite a bit of the market today. But where you do see the pricing pressures on those cars that I deem more commoditized, grain cars and things like that.

Justin Roberts, Vice President of Financial Operations

And with that, we'll go ahead and end the call. Thank you very much for your time and attention. Oh, sorry, Lorie wants to say something.

Lorie Tekorius, CEO and President

And I'll just say for all of our employees that are listening to the earnings call today, I want to, again, appreciate all of the work that each of you bring every day, staying safe and executing to take care of our customers, each other to generate a record year of financial performance. Thank you very much.

Justin Roberts, Vice President of Financial Operations

Thank you very much, everyone. If you have questions, please reach out to Investor Relations at gbrx.com. Have a great evening.

Operator, Operator

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