Earnings Call Transcript
GREENBRIER COMPANIES INC (GBX)
Earnings Call Transcript - GBX Q2 2020
Operator, Operator
Hello and welcome to The Greenbrier Companies Second Quarter of Fiscal Year 2020 Earnings Conference Call. Following today's presentation, we will conduct a question-and-answer session. Each analyst should limit themselves to only two questions. Until that time, all lines will be placed 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, Vice President and Treasurer
Thank you, Heidi. Good morning everyone and welcome to our second 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 provide an update on Greenbrier’s near-term priorities as we manage through the COVID-19 pandemic, and then we will discuss the results for the second quarter. 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. 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 2020 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier. And with that, I'll pass it over to Bill.
Bill Furman, CEO
Thank you, Justin, and good morning everyone. As we begin, I want to take a moment to extend good wishes for the health of everyone on the line with us today. I also want to acknowledge the work of the many health professionals, emergency responders, government officials, and individuals who are on the frontlines battling this pandemic, as well as those in our armed forces and National Guard around the world and here in America. Finally, I thank all the Greenbrier employees in our factories, offices, and at home, each now operating under essential industry status. The world is not only in a severe health crisis, but obviously an economic crisis affecting businesses differently. As you will hear today, the ability to continue to operate our factories with a strong backlog in hand allows us to protect liquidity and maneuver in a way that other industries and other businesses cannot under current circumstances. We're now operating under two essential priorities: Number one, to provide for the safety and security of our workforce; and number two, to provide for the liquidity and economic wellbeing of the enterprise and its shareholders. In the face of this pandemic, management priorities and behavior immediately shifted to the extraordinary challenges at hand. We quickly implemented contingency plans and assembled incident response teams. We assessed the risk to our business in real time and are taking swift actions to ensure Greenbrier is defensively positioned to manage through a period that presents a range of unknown and unknowable challenges. We're safely operating, and I emphasize safely operating, all our manufacturing and essential service sites, including those sites that manage over a quarter of industry railcars in the United States and North America. Greenbrier's operations constitute essential infrastructure and essential businesses as defined by the U.S. Department of Homeland Security and other U.S. and international agencies, including all stay-at-home orders issued in the jurisdictions where we operate at home and abroad. Greenbrier supports operations vital to the national transportation system and the Department of Defense and other federal agencies. We perform our functions under the statutory and regulatory authority of the Department of Transportation, Surface Transportation Board, the Federal Railroad Administration, and under the Jones Act in our marine operations. Accordingly, Greenbrier will help maintain the delivery of vital goods including food, medical supplies, and fuel to communities in the United States, and all the nations that we supply around the world. We will keep our nations and those nations smoothly functioning in the railroad system. Along with the welfare of our employees, we're determined to protect the economic wellbeing of the enterprise during unprecedented market and economic conditions. As discussed in our earnings release today, we are laser-focused on liquidity. Our goal is to produce $1 billion in reliable liquidity within the remaining five months of our fiscal year, ending in August of 2020. Before the onset of the pandemic, we had already begun to reduce the size of our manufacturing footprint due to anticipated lower levels of railcar demand and reduced aftermarket activity. Adjustments to production and staffing levels that began in September of last year continued into the second and third quarters as we idled excess capacity in North American manufacturing facilities, largely in Mexico, as well as at Greenbrier Rail Services locations. Since we began this initiative, we have adjusted global operations through workforce reductions equal to approximately 20% of Greenbrier’s total global workforce. These reductions now exceed 3,500 workers. Yesterday, we took steps which would add another 200 workers over time. Our colleagues who left this fiscal year are people who each made important contributions to our success; many have spent their entire careers in this business. They are leaving us through no fault of their own. Each affected employee is a person with a name and a family. This is a fact we never forget. We recognize that this is a period of shared sacrifice. As a result, I have taken a voluntary immediate reduction in my salary of $250,000; and for our Board of Directors, each has voluntarily reduced their cash compensation. We've frozen pay increases for members of management. Moreover, cash and earnings will automatically flow from curtailed bonus payments if we do not meet targeted performance metrics along with a discretionary reduction that I will work with the compensation committee of the Board of Directors to request. All that remains to be seen. But it is an automatic relief felt for difficult times baked into a company that is well-seasoned in dealing with difficult times in a cyclical business. This is not our first rodeo. Greenbrier’s business is flexible enough to quickly adapt to changing market conditions. Our franchise is strong, and we hold a position as the number one or number two player in three core markets: South America, specifically Brazil, North America, and Europe. The strength of this franchise is demonstrated by the fact that half of this quarter's orders were generated from abroad. Of that half, about 1,000 cars are to be built in North America for a good customer in the Gulf Cooperative Council. With the strong experienced management team, Greenbrier again has navigated through difficult markets in the past. Historically, we've come out stronger as a result of our combined efforts. Not only did we recover, but we transformed and dramatically increased the scale of our business through hard work, focus, execution, and diversification of our revenue streams. Although this is a stressful time, no matter how the remainder of this year plays out, we know our role in the transportation industry remains vital. Beyond layoffs and other obvious reductions, we’re committed to take aggressive actions to shrink Greenbrier’s cost profile and improve its balance sheet, and Lorie and Adrian will speak more to this a little later. Based on our current backlog, we are left with very little open production capacity for the remainder of both the fiscal and calendar year. At Gunderson, our marine backlog extends through the fiscal year and the calendar year. Our current production rate stretches into 2021 and beyond. A large multiyear manufacturing backlog of railcar units provides one source of stability in difficult times as we operate our facilities. These long-term customers are very reliable and have virtually never wavered in fulfilling commitments, even if they have to at times put cars in storage. All that provides resilience and a bridge to an improving industry dynamic and economic conditions. In addition to the liquidity goals I mentioned, we have stress-tested Greenbrier’s balance sheet to ensure our liquidity, and we have run many scenarios to look at worst case. While we have suspended earnings guidance, we expect to remain profitable. We do not know, nor can anyone know how this crisis will evolve and resolve. Today, this is the biggest risk we all face together. Scenarios may emerge that we cannot reasonably anticipate, but we are confident we're managing those factors within our control and we're also prepared to manage others through the worst of times. This means we are prepared to adapt to the new economic realities. We’ll take the difficult and necessary actions to protect Greenbrier’s economic base, preserve its financial stability, focus on our core business, remove essential activities, and restore shareholder value for years to come. Now, over to you, Lorie, for your comments.
Lorie Tekorius, President and COO
Thank you, Bill. Good morning, everyone, and thank you for joining us. I'll briefly provide some additional detail on the quarter, although I have to admit that February 29, the end of our quarter seems like a lifetime ago. The world has shifted very quickly and we've pivoted to respond to the shifting global landscape. Over the last six months, we've been rationalizing production capacity and overhead in response to anticipated levels of new freight railcar demand and reduced aftermarket activity. Demand has weakened due to macroeconomic conditions, including trade disputes, faster train speeds resulting from the implementation of PSR, and significantly lower freight rail loadings, which have dropped sequentially for almost 15 months in nearly all commodity categories. The industry remains supported by a backlog of over 51,000 railcars, but all builders in North America have taken steps to slow production lines in 2020. It's important to note that these conditions were present and we were adjusting capacity prior to the COVID-19 pandemic and the collapse in global oil markets. We continued to adjust operations as needed to ensure the long-term health of Greenbrier. And as a brief recap to the quarter, deliveries this quarter were 4,500 railcars, and we received orders for approximately 8,500 units valued at over $815 million. These orders originating from our international sources accounted for over 50% of the activity in the quarter, and about 1,000 of those units were part of a joint international commercial effort for a customer in the Kingdom of Saudi Arabia and will be built in and serviced to North American markets. Our backlog worldwide remains strong at 30,800 units valued at $3.2 billion. Operating performance at our ARI manufacturing facilities improved in the quarter. And our North American manufacturing group continued to perform profitably, producing high quality railcars safely, even as production rates were adjusted and demand declined. Our European and Brazilian operations performed as expected in Q2, and order activity was strong. Notably, we received the first multiyear order in Brazil in many years, and both our European and Brazilian operations are benefiting from some rightsizing that we executed in fiscal 2019. The continued improvement in our repair operations is a reflection of the remedial actions taken over the last 18 months. The Wheels & Parts operations benefited from their higher seasonal volumes, although volumes were pressured compared to past winters. And our leasing revenue in the quarter included externally sourced railcar syndication activity. And as a reminder, this activity caused leasing's gross margin percentage to be lower as a percentage of revenue than its typical 45% to 50% range. Excluding the externally sourced syndication activity, our leasing segment’s margin percentage was 47.2%. And with respect to the business response to the COVID-19 pandemic, all global operations are currently meeting or exceeding the CDC’s recommendations. To protect our workforce, Greenbrier has implemented health screenings including daily temperature readings, operating through split shifts, enhanced social distancing, and expanded deep cleaning at all locations. We're operating under a dual mandate of maintaining business continuity alongside ensuring employee health and welfare. As an essential business that supports global infrastructure, Greenbrier is dedicated to fulfilling its role to facilitate the continued stability of the transportation supply network. Greenbrier and its employees take the responsibility of helping to ensure the delivery of vital goods including food, medical supplies, and fuel to communities very seriously. As you heard from Bill, in addition to ensuring the business continues to operate, we are focused on increasing liquidity. This will be accomplished through a variety of actions including eliminating nonessential capital expenditures, aggressively reducing our overheads and general and administrative expenses, and evaluating other strategic actions. We expect to come through the current crisis a stronger, more resilient Greenbrier. As a management team, we remain confident in the long-term strategy developed with our Board of Directors but are focused on executing the near-term priorities that Bill described. Now, over to you, Adrian.
Adrian Downes, Senior Vice President and CFO
Thank you, Lorie, and good morning, everyone. As a reminder, quarterly financial information is available in the press release and supplemental slides on our website. Highlights for the second quarter include revenue of $624 million and deliveries of 4,500 units, which includes 800 units in Brazil; aggregate gross margin of 13.8%; the quarter included a contract modification payment of $9.2 million net of tax, which strengthened our backlog and profitability. A hallmark of Greenbrier is the flexibility to find win-win solutions to our customers' needs. Net earnings attributable to Greenbrier of $13.6 million or $0.41 per share, excluding approximately $1.7 million net of tax or $0.05 per share of integration related expenses, adjusted net earnings attributable to Greenbrier of $15.3 million or $0.46 per share, and adjusted EBITDA in the quarter was $71.6 million or 11.5% of revenue. We successfully achieved $4.3 million of pre-tax cost synergies related to the ARI acquisition in the quarter and $7.1 million year-to-date. Because of the current uncertainties and shifting priorities, we are not reaffirming our synergy targets of $15 million in fiscal 2020 at this time, although we will continue to work towards this target. Total liquidity at February 29th was $620 million, which includes $170 million of cash, and we have no significant debt maturities until late 2023. As you heard on the call already, we are working to significantly expand liquidity, through a variety of actions with a target of $1 billion. We are also in the process of examining the various governmental programs available to Greenbrier and our employees, including programs like the payroll tax deferral provision and employee-friendly modifications of existing employee funds as a result of the CARES Act. We plan to utilize these to the fullest extent possible where beneficial. Greenbrier’s Board of Directors remains committed to a balanced deployment of capital to protect our business and simultaneously create long-term shareholder value. Greenbrier has declared a quarterly dividend for 24 consecutive orders with periodic increases. Today, we're announcing a dividend of $0.27 per share, which represents a yield of 7.5% based on yesterday's closing stock price. As announced in our earnings release, we are suspending our prior guidance for the year. Greenbrier’s management team has a long history of managing through volatile times. While the COVID-19 pandemic is without precedent and has created significant uncertainty on a global basis, we remain convinced that the proactive actions we have taken so far and the planned actions we have described today will position the Company for long-term strength. Now, we'll open the call for questions.
Operator, Operator
First question comes from Justin Long. Your line is open.
Justin Long, Analyst
Thanks. Good morning. And I appreciate you taking the questions. Maybe to start just bigger picture on the industry and what you’re anticipating from a railcar production standpoint. FTR has recently lowered their forecast for 2020 and 2021 to the low to mid 20,000 units range. I'm curious, as you think about cutting back your capacity and some of the things you've discussed in the prepared remarks. Is that the type of build rate from an industry perspective that you're planning on or do you anticipate any upside or downside to that? And then also, if you could just talk about cancellation risk in the backlog or deferral risk in the backlog, curious if you've seen any of that play out the last month or so?
Lorie Tekorius, President and COO
Sure. I'll begin, and I believe Bill will add to this. Good morning, Justin. It's great to hear from you. Looking at the industry outlook, FTR has certainly experienced several changes regarding expected deliveries in 2020 and 2021. At this moment, given the current situation, it is difficult to predict exactly what deliveries will look like in the next few years. It seems reasonable to assume that the projected numbers might hold true over those years. There's definitely potential for upside. Historically in our markets, we've seen predictions that seemed dire, only to have unexpectedly positive developments arise. One strength of our management team, particularly within our manufacturing group, is their ability to respond swiftly to emerging opportunities. This is why we are opting for a slower production pace instead of halting it completely. Maintaining a steady, albeit slow, rate provides us with flexibility. Regarding your second question about the risks associated with our backlog, as we review it and examine the various types of cars we are producing, we currently do not have significant concerns. However, it’s hard to navigate this period without some level of worry. We have a strong track record of collaborating closely with our customers when issues or modifications are needed concerning car types or delivery schedules. Overall, we feel that our backlog positions us well and serves as a positive indicator for future activities.
Bill Furman, CEO
I appreciate your question. We've experienced several developments, as Lorie mentioned. The volatility in the oil market is concerning, particularly for the chemical and oil by rail sectors. While Greenbrier doesn't have a significant concentration in sand, many of our institutional investors do. We're closely monitoring this situation. However, we are not witnessing cancellations. The qualitative aspect of our portfolio is something we consider, but our commercial team's agility in recent deals has enhanced our backlog, increased profitability, and generated immediate cash flow, which we aim to replicate in the future. We have strong customer relationships, and we believe our backlog is robust, along with our ability to operate our factories under essential service regulations.
Justin Long, Analyst
Okay. Thanks. That's really helpful. And then, second question I had was on SG&A. I get the suspension of guidance totally understandable and in this type of environment. But when you look at the things you can control and you think about some of the headcount reductions that you've seen. Is there any clarity you can give us on what you're expecting for SG&A this year, or what's getting baked into the comment that you made Bill that you expect to remain profitable?
Bill Furman, CEO
Lorie, I think you should address that. We want to be careful about throwing out any specific numbers. As I mentioned, we anticipate being profitable. Our manufacturing operations are quite resilient. We do expect to see reductions in general and administrative expenses in all areas, particularly in selling, general and administrative costs. This won't just involve factory personnel; we've already made some adjustments. However, I'm not sure what you would like to add, Lorie.
Lorie Tekorius, President and COO
Thank you, Bill. That was a good lead in. We are looking across the board. We don't take lightly the number of production workers that we've had to let go over the last six months. So, I would say, while we're not willing to put a specific target out there since we are suspending guidance, I would say that it's going to be a double-digit percentage reduction goal in our SG&A, coupled with looking at overhead costs, which are some of the things that oftentimes can get overlooked. But, as we're resizing our manufacturing footprint, particularly here in North America, there are overhead types of activities that can also be scaled down. So, that’s where we’re pleased that our manufacturing margins have remained in the double digits. We believe that's because we do know how to scale our workforce, both the line workers as well as the overhead to adjust to reduce production rates. And you will be seeing some reductions in SG&A headcount as well as some of the other things that Bill mentioned regarding his compensation, the Board compensation, clearly travel restrictions, the way that they've played out. That's going to have a big impact on SG&A going forward. We have a hiring freeze and we'll be looking at other areas where we can call back some costs.
Operator, Operator
Thank you. Next question comes from Allison Poliniak. Your line is open.
Allison Poliniak, Analyst
Hi, guys. Good morning. Lorie, I just want to follow on that train of thought. Obviously, you guys were addressing operations to begin with trying to fix and support some of them. As you step back, I know it's probably hard today because you're just dealing with the general sort of impact, as of on a daily basis. But, can you maybe comment in terms of what you think you can do structurally to support the foundation and make Greenbrier obviously much stronger coming out of this? I mean, are you guys even thinking of that at this point?
Lorie Tekorius, President and COO
Absolutely. We're considering how to strengthen our core operations, manufacturing, and commercial groups as we emerge from the COVID-19 crisis. One interesting aspect of this pandemic is that it is prompting us to rethink our work processes. It's remarkable how much of our services can continue even while about 90% of our workforce is working remotely. This experience will guide us in determining what will be essential to support our operations. Whether it's our team in Dallas, those in the Portland Metropolitan area, or our employees in St. Charles, we'll reevaluate our use of technology to maintain a strong foundation for our operations, ensuring we have the best talent in place. Additionally, we may identify some costs that we no longer need to bear.
Allison Poliniak, Analyst
Great. I know you mentioned Europe, which is closing for two weeks. Can you provide any insight on Brazil? It seems unclear to me since we've heard reports of some industries shutting down in Brazil today. Are there any anticipated delays or stoppages there that you are preparing for in the near-term, or is it just business as usual in this environment?
Lorie Tekorius, President and COO
Right. And yes, business as usual to the extent that you can today. It is one of the more interesting things because we do operate around the globe, every country seems to have a different approach, and those approaches can change on a daily basis. As I understand it today, our operations in Brazil do continue to operate and the government officials do encourage our employees to go to work. That was probably one of the places that we started implementing additional health screening measures early on. Touch wood, everything has been going just fine down there. But we'll just continue to monitor that. We believe that we have good governmental support that transportation via the rail will be an essential service, and our workers will continue to work. As you know, we've right-sized that operation last year. So, they are able to operate with a fairly thin bench, and their production rates are a bit more modest than you would see here in North America. So, we'll just have to watch and wait.
Bill Furman, CEO
I'd like to emphasize that the U.S. relationship with Brazil has gained significant interest from the current administration. Many countries are following the U.S. and Western approach regarding essential industries, which is vital for Brazil. A substantial part of their economy and exports is tied to transportation. We are the largest manufacturer of equipment produced in Brazil. Therefore, we expect the existing regulations in Brazil and Europe to remain in place, and we are working diplomatically with our government to support that.
Allison Poliniak, Analyst
Great. Thanks. That's helpful. Stay safe everyone.
Bill Furman, CEO
Thank you.
Operator, Operator
Thank you. Next question comes from Bascome Majors. Your line is open.
Bascome Majors, Analyst
Yes. Thanks for taking my question here. I wanted to talk a little bit about the syndication channel. That's been a really important piece of your growth over the last several years, and it's pretty embedded in the model now. Can you give us an indication of how some of these financial buyer customers are responding here? And any indication of how much of the backlog today was sort of slated for that channel? Thanks.
Bill Furman, CEO
I'll let Lorie or Adrian possibly address the last question. In general, we still see a strong distribution network there. I think it's an interesting question because the railcar leasing business is peculiar. It’s a business that we have evolved to be in the leasing business. We can create portfolios if you will and we can also sell them, in fact. I don't believe personally in borrowing short and lending long on a 40-year asset. These assets, as Tigerair learned long ago, North American cars can come back to haunt you, and they can sink a ship. Our system is set up so that we have leases that are quality leases and those leases can be deployed to create cash flow, and as you point out, to create cash margins, liquidity, and extra value in the model we have. As late as last week, we just closed a $48 million deal with one of our existing portfolio companies, a leasing portfolio company that is a loyal customer. All of our customers who have multiyear agreements, including leasing companies, with whom we work closely, are fulfilling their obligations. So, I think that we are in good shape there. If we were relying on the ABS market or something of that nature, and where we have partners who are in the fund business, they have firm commitments and nobility to have their funds pulled. If we were solely in that market, I think it would be a much weaker position. But we have a mixed bag. We're still accepting orders. And we think we're doing well. Lorie, do you want to talk a little bit more about that?
Lorie Tekorius, President and COO
Sure. And just doing a quick scan of our backlog detail, I would say, of our February 29 backlog, only less than 10% of it is going into the syndication market at this point in time.
Bascome Majors, Analyst
That's great news. So, it sounds like some of the build in that inventory was sold subsequent to quarter end in the $50 million deal you mentioned, Bill. Am I hearing that right?
Bill Furman, CEO
Yes.
Lorie Tekorius, President and COO
Right. When you examine the railcars held for syndication line item on our balance sheet, you'll notice that it fluctuates over time, but this doesn't necessarily indicate changes in that specific market. Instead, these variations are often due to the timing of car production and our efforts to combine different types of cars into syndication packages.
Bill Furman, CEO
And again, the majority of those are attached to what in a normal market would be money-good leases, we could syndicate, sell them and receive a margin just for the origination of them. Today, those are good customers, and they have good 5 to 7-year, even 10-year or 8-year cash flows attached. So, we're simply in the leasing business, but in a moderate way. I'd also point out that our balance sheet with that embedded in it still has a one-to-one debt equity ratio. We have $1.5 billion in net book value, equity, setting aside our market cap. We also have a very low amount of debt, I guess, at about $1 billion or so. So I think if you look at the leasing portfolio, in the future, we're going to have more clarity for the Street and for our shareholders. We're going to still continue to try to make this more transparent and clear. The attractiveness of our systems in downturns like this is far and away above those who have leases returning rapidly.
Bascome Majors, Analyst
Thank you for the detailed answer. If I could just echo on a related question on the funding side of that. Bill, you mentioned, in short order hoping to have access to $1 billion worth of liquidity. I think you said today you're at about $600 million. Can you just give us maybe a sneak peek at what you think that other $400 million could look like? Thank you.
Bill Furman, CEO
Yes. I’m going to let Lorie walk through that, unless you want me to take that, Lorie. I could generally make some comments, CapEx…
Lorie Tekorius, President and COO
I want to thank Bill, and I'm confident that either Adrian or Justin, our Treasurer, can also provide additional insights. We have all been deeply focused on exploring various strategies for managing liquidity during this uncertain period. Capital expenditures are a key area we are considering significantly reducing. If you compare our initial plans for this fiscal year with our current outlook, it's clear we're tightening our CapEx even more than what's indicated in the upcoming 10-Q filing or the supplemental slides. I don't expect any immediate return to normal operations come August 31. Our approach will be to strategically allocate capital for our property, plant, and equipment in the months ahead. Furthermore, as we mentioned, there will be reductions in overhead and general administration, which could be nearly as significant as the expected cuts in CapEx. Some of those changes will take time to gain traction, but we are already observing lower spending levels in the first half of this fiscal year compared to what we had anticipated. This reduction is largely due to adjustments we've made in response to decreased production rates and demand. Additionally, we are considering strategic initiatives, including reviewing our existing credit facilities to identify opportunities for accessing additional capital. These are not amendments or new debt; rather, we're looking to leverage the resources we already have available, as well as assessing our current operations.
Adrian Downes, Senior Vice President and CFO
That particular area could be quite large, possibly between $100 million and $150 million. There are several factors to consider. We are not planning to access the credit markets in any unusual manner. While the markets have become tighter, some opportunities remain available. We are not seeking financing except possibly for small additional funding if a good opportunity arises. Overall, we should theoretically be able to exceed $1 billion. However, we must also consider the strategic aspects of non-core businesses, cost-cutting, and cash conservation, as these factors accumulate quickly. Therefore, we believe reaching the target is realistic and achievable within the next five months.
Bascome Majors, Analyst
Thank you all for the detail.
Operator, Operator
Thank you. Next question comes from Ken Hoexter. Your line is open.
Ken Hoexter, Analyst
Great. Good morning, and thanks for taking the call. Can you talk maybe, Lorie, about base levels of production given your contracts? Usually, you see a bounce in the second half. Is that production line capabilities or demand for car types that scale in the second half? I guess, you've got to go back to maybe 2013 before we saw a real weakness in that fiscal third quarter. So, I guess what I'm asking is if the backlog is so strong and ops are ongoing, what do you need to slash? Does the backlog have greater deferrals than you target? Can you cancel your own self-orders? But that kind of doesn't make sense, if you noted all slots were filled for production. So, maybe just talk about how we should think about that railcar build going into the rest of the year?
Lorie Tekorius, President and COO
Sure. And we have been, as we said, reducing production rates. I would say right now in North America, we're probably maybe 75% of our theoretical capacity is where we're operating. We would see that coming down maybe another 5% or 10% as we exit the fiscal year. And that's knowing what we know today. Obviously, there's a number of things that can change. We don't believe that we've got any significant issues with any of our scheduled production or any of our customers looking to defer that further. As a matter of fact, we have some customers who are pretty excited to accelerate production, but we're trying to balance that with our workforce. We don't want to let people go and then pull them back and then let them go again. One of the ways that we're able to maintain good manufacturing margins is having steady production rates and a steady workforce. So, as we look at the rest of the year, we're looking at things like reducing where we were running on three shifts at some of our facilities and pulling that back to running just two shifts, maybe working 4 days instead of 5 or 6 days a week. Those are the kinds of measures that our manufacturing team is looking at to balance our headcount with the production rates. And again, as you think about it, we do have strong backlog, but overall demand has subsided. We want to make certain that we are appropriately pacing our production to meet our customers' needs, but also to take us through the next year and a half or so.
Bill Furman, CEO
Yes. Unfortunately, looking at production, we need to increase inventories while also constraining them. We want to face challenges as Lorie mentioned. If we take a step back, considering government policies and their implications at various levels, it’s clear the intent is to keep people home, combat the virus, and flatten the curve. While we hear these messages, I'm not certain everyone understands the reasons behind them and the benefits they bring. Various scenarios suggest we're reaching a peak, but the goal is to manage this situation effectively to ensure our hospitals can handle patient needs. There will be efforts to return to normal, and we're already seeing some positive signs, particularly in Europe, which provide insight into what might be expected in the coming months. If there is success, even Italy is now showing some hopeful indicators. Overall, if we consider the current situation, there is some reason to believe we could see a return to normalcy by mid-summer. However, it's challenging to predict whether demand will rebound for the usual products we expect in the last two quarters of our fiscal year. We're not anticipating that and are focused on cash management, remaining resolute. We're taking steps to safeguard against downturns while being very hopeful for potential upsides, and we'll be prepared to respond when opportunities arise.
Ken Hoexter, Analyst
Thanks, Bill and Lorie. I guess, what I'm just confused by the answer, maybe just to clarify it a little bit more is if every slot is filled and nothing has changed on that, what changes on the second half? Because you've said every production slot is filled, is it that you are slowing down because customers don't want it?
Bill Furman, CEO
Right. Let me interrupt you for a moment just to say what Lorie is saying and what I’m saying is, every slot is filled, but we're reducing the flow through so we can reduce our overhead and we can optimize cash. So, this is something we are working with our customers to do. And I don't think the last two quarters of this year will be necessarily following a pattern over the last few years. That’s a simple answer to I think your question.
Ken Hoexter, Analyst
Yes, that makes a lot of sense. I get it now. I appreciate that.
Bill Furman, CEO
We're taking the initiative to implement a lot of this ourselves.
Ken Hoexter, Analyst
Yes, I understand that production is slowing. Lorie, I want to clarify what you discussed with Bascome regarding the leased railcars for syndication. Does this mean you're retaining more of what you manufacture? I’d like to grasp the nature of the $50 million sale that Bill mentioned. Did you have some surplus at the end of the quarter that you sold, or are you increasing production? You indicated that the backlog isn't substantial for what you're keeping, but it appears that the leased cars for syndication on the balance sheet have increased. Is this trend temporary, or are you holding onto more of what you produce?
Lorie Tekorius, President and COO
Right. So, again, what I was trying to say to Bascome, and thanks for the question, is the timing of syndication is not necessarily linear. And so, as you look at the February balance sheet, it had a higher than normal value and number of units in railcar sales for syndication. What Bill was referencing is something that happened in March, meaning that the syndication in our partners are still open for business and some of that moved off of our balance sheet in the month of March. We expect that to continue. To the question about how much is in our backlog associated with leases that we expect to syndicate and being a fairly small number, I think what you're seeing is what has been happening over the last six months where lease originations have flowed. It's not that we're expecting to keep those on our balance sheet. It’s just that the side of the market slowed down a little bit, consistent with the broader demand for new railcars.
Bill Furman, CEO
In our scenarios, I anticipate that we may have to keep a large amount on our balance sheet, and that's why we think we need the extra capital…
Lorie Tekorius, President and COO
In our downside scenarios, we significantly increased our syndications and assets beyond $48 million, which was just one deal. We've completed two or three times that amount in other significant deals, some of which are still available to us. I believe the terms are evolving and profitability may fluctuate. However, we feel confident in managing this. Additionally, this represents another major risk we are addressing alongside ensuring our factories operate under the protections we have, similar to other car manufacturers classified as essential industries.
Ken Hoexter, Analyst
I appreciate all the answers and time.
Bill Furman, CEO
And then, just to underline what Bill said earlier, again, even if these assets stay on the balance sheet, they are generating lease income.
Ken Hoexter, Analyst
Yes, right. No, I appreciate all the answers and time. If I could just get one housekeeping, Justin. What’s the marine backlog for the quarter?
Justin Roberts, Vice President and Treasurer
It was probably around I think $60 million to $70 million.
Adrian Downes, Senior Vice President and CFO
I think it was 59 or 60.
Justin Roberts, Vice President and Treasurer
So, about $60 million.
Ken Hoexter, Analyst
All right, wonderful. I appreciate the time. And stay healthy and well everybody. Thank you.
Operator, Operator
Thank you. Next question comes from Steve Barger. Your line is open.
Steve Barger, Analyst
Good morning, everybody. Understandable why you would want to reduce capacity. But, how did you decide which plants to close? And I'm specifically thinking about seeing more of the reductions coming from the lower-cost Mexican facilities. Are there supply chain issues down there, or anywhere in North America, or are you refocusing on the U.S. to avoid potential border issues?
Bill Furman, CEO
Partly it was the second reason, but mainly it was the product mix. The significant difference came from the general type of cars produced at our second plant in Sahagun, located in the state of Hidalgo. Our joint venture plant specializes in tank cars, which we manufacture at our third plant in Tlaxcala, in the city of Tlaxcala. Therefore, it seems the issue was more related to the selected product mix along with some concerns at the time regarding a shift towards more U.S. operations and testing the efficiency of the ARI facilities, which are performing reasonably well. However, it’s true that, under normal circumstances, the Mexican base is highly efficient. We anticipate a return to normal operations across all three factories in Mexico.
Lorie Tekorius, President and COO
And I would say at this point, we are not having any significant supply chain issues for the North American markets. We had actually planned ahead as many companies do before the lunar new year and had stocked up on inventory that we would have been getting elsewhere, the essential business that we're operating under actually impacts our suppliers as well. So, we've been able to maintain the supply chains. The one exception is a little bit in Europe where that part of what led to a two-week closure for the year an extended Easter holiday is to allow the supply chain to get caught up. They do transport more via the roads versus on the rails. And I'm sure everyone saw the picture as borders were shut and it took a little bit of time for them to figure out how to expedite the transportation of some of those supplies across borders.
Bill Furman, CEO
It's really important to understand what happened in Europe and to compare it to imagine what might occur in interstate commerce if each state imposed roadblocks and barriers, delaying the transport of goods from one state to another, similar to the situation in Europe between cities. For instance, in Italy, individual towns have blockades restricting entry and exit. While we haven't reached that point in America, we are prepared to handle such a situation if it arises. We have provided credentials to all our essential employees to ensure they can keep our business operations running as essential U.S. industry. We believe our supply chain relies on the railroad system, which is a significant advantage because rail transport does not require stopping at borders and is protected. This is a crucial aspect to understand, as it will significantly impact the rail sector in Europe, presenting a considerable opportunity for us. We hope this situation does not occur in America, but if it does, we are ready, and the rail system will be the solution.
Steve Barger, Analyst
That's great color. Thank you. And just to the point on the mix for the south of the border facilities, how should we think about modeling minority interest in the back half? Will you see lower production from GIMSA?
Lorie Tekorius, President and COO
I would suspect, if you wanted to model, and we're not giving guidance. But, I think one of the things you might notice in our press release today is minority interest was a bit lower than normal. That is tied into the timing of railcar syndication. So, less of the GIMSA joint venture revenue and gross margin, therefore, less going out as our partner share. I would expect that to turn to be more normalized like in the first quarter for the next couple of quarters as the syndications work their way out.
Bill Furman, CEO
However, I would like to make one comment. We are collaborating with our partner given these special circumstances to address that imbalance. If we manage to reach an agreement, I believe we will see an improvement in that area. So, regarding Lorie's comments, we may have a more positive outlook, and we anticipate being able to secure additional funds through our supportive partnership. I am very pleased with their cooperation and the financial backing we have. I am optimistic that we will have some good news to share on this front, and we will likely be very open about the details once it is finalized.
Steve Barger, Analyst
And just for clarity around liquidity and cash flow. You've given a lot of detail around being able to generate cash savings from the actions you're taking. But, as you think about production expectations, managing working capital, timing of syndication activity, do you expect positive operating cash flow this year?
Lorie Tekorius, President and COO
Yes.
Adrian Downes, Senior Vice President and CFO
Yes, we do.
Steve Barger, Analyst
And with lower CapEx, will you generate free cash flow this year?
Adrian Downes, Senior Vice President and CFO
We feel pretty confident that a strong possibility exists based on our current observations. However, as Bill mentioned, there are uncertainties we are not aware of at this moment. Nevertheless, given the current landscape, this is the direction we are focusing on.
Bill Furman, CEO
The great thing is you can operate your factories that this kind of business throws off cash flow, as you liquidate inventories. In a normal cycle, you wouldn't have this issue with cash because you throw up a lot of cash. So, it should be positive. However, if you can't operate your factories, which is the situation many companies are in, then you can't run it up and everything is turned upside down. We expect to keep our factories operating safely and that's a core risk or threat that we’re managing.
Operator, Operator
Thank you. Last question comes from Matt Elkott. Your line is open, sir. Thank you.
Matt Elkott, Analyst
Once we've made it out of this pandemic and it’s well in the rearview mirror, are we looking at a manufacturing footprint that is adjusted and right-sized on a permanent basis, meaning total production output less than pre-pandemic levels?
Bill Furman, CEO
We would call it optimized. Yes, we're optimizing our total footprint for the expected market, longer term. We have a great franchise. We have great markets, we simply need to prune the tree a bit and we need to look very, very hard in the strategic bucket that Lorie is talking about, about noncore, non-essential businesses to Greenbrier. Not non-essential in the nature of the business, but those businesses that are central to our new footprint. It's just time to prune the tree, create cash, run the Company for cash, improve shareholder value over the immediate future. I might remind you that after the great depression, or the last pandemic of this scale after World War I, the Great War, everybody came back. They had great casualty rate from that. And then, came The Roaring Twenties. So, when people are housebound and unable to buy, once they get out, they're going to be shopping I think, at least some of them will, many of them, but I know will.
Matt Elkott, Analyst
And also, I just wanted to make sure I understood something on the cadence of deliveries. I know you guys removed some cars for the backlog that were supposed to be delivered in future periods. Historically, your second half deliveries are higher than your first half deliveries, at least in the last couple of fiscal years. Now, given the fact that it seems like you guys are not currently engaged in any further conversations about further cancellations, or deferments, will these second half deliveries be higher than the first half deliveries, if no more cancellations occur?
Lorie Tekorius, President and COO
I think that's a good estimation is that the second half would be stronger than the first half on a deliveries perspective. Some of it’s just again the timing of syndications and the stuff that is on the balance sheet, which will flow through and be counted as the delivery in the second half that will offset some of the production reductions that we're doing. But all in, I would say, at least what we know today, second half deliveries, possibly a little bit stronger than the first half, some of that being driven by international operations, not necessarily North American operations. And again, this is part of why we are suspending guidance is every day brings new activities. And by new activities, I don't mean conversations with customers about potential cancellations, but edicts by governments and municipalities, and that creating a stir and stress on workforce and whether or not people can go to work et cetera, et cetera. We feel very comfortable and strongly that we are an essential business and we will continue to operate. But that doesn't mean that we're not a little bit less efficient as you continue to deal with some of the unavoidable stress associated with this pandemic.
Matt Elkott, Analyst
Got it. So, you mentioned, Lorie, the international deliveries. When everything is settled, do you think you'll look back and recognize that being the only North American manufacturer with substantial international operations helped soften the impact of peak infection rates globally? If one location is in lockdown while others are functioning, do you believe this will work to your advantage once everything concludes?
Lorie Tekorius, President and COO
I would say that our strategy of expanding our footprint internationally absolutely is going to help us be a stronger and more resilient and more liquid entity going forward. Unfortunately, it's not like you can shift production out of, let's say, the United States down to Brazil, to bring back to the United States. But, we do think having manufacturing and a rail freight presence in some of these markets that we believe will be very strong markets for railcar production and freight loadings. So, Brazil and Europe does make us a stronger company going forward.
Bill Furman, CEO
I’d just give an example of that, Lorie. In Europe, the differences, post-crisis that favor rail are going to be dramatic because of the issues with border crossings they've had. And that's quite clear. But there already is a very healthy green movement and a very large investment in rail in the billions to take traffic away from choked highways and other businesses. So, this is going to be very positive for Europe; Brazil, similarly as those kinds of forces are going on. So, I think that the diversification, as Europe comes out of this earlier than we do, will help Greenbrier a great deal.
Matt Elkott, Analyst
Got it. And just one final question, Bill related to what you were just explaining. In past recessions, you guys dealt with losses in the Great Recession and I think in 2013. Can you maybe summarize for us how Greenbrier is different today than it was in 2013, and then during the Great Recession?
Bill Furman, CEO
Sure. I'll give it a try and Lorie can add. Essentially, our product mix is significantly different now. Our position as an industry leader has changed as well. We have a remarkably different franchise, ranking first or second in three major markets, with two being international. In North America, we've expanded our presence, allowing for more flexibility in the United States. Our efficient plants are being improved, and we're making progress each quarter in Arkansas. Overall, the Company has transformed significantly. Our management team brings considerable experience together, and Lorie and the financial team are excelling, with Lorie also gaining valuable operational experience and addressing last year's challenges. I believe the Company is currently on a very strong strategic path. We must navigate through this crisis like everyone else.
Matt Elkott, Analyst
Thank you very much.
Lorie Tekorius, President and COO
Thanks Matt.
Bill Furman, CEO
Thanks Matt. Thank you very much everyone for your time today and your attention. If you have any other questions, you can reach out to myself, Justin, or Adrian down to Lorie, and we also have the Investor Relations email address on our website as well. Thank you. And stay safe and healthy out there.
Lorie Tekorius, President and COO
Wash your hands.
Operator, Operator
Thank you. That does conclude today's conference. Thank you for joining. And have a great day.