Earnings Call Transcript - GBX Q3 2023

Operator, Operator

Hello, and welcome to The Greenbrier Companies Third Quarter 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 two 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, Vice President & Treasurer

Thank you, Anthony. Good morning, everyone, and welcome to our third quarter 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 Q3 and our outlook for fiscal 2023, we will open up the call for questions. In addition to the press release issued this morning, additional financial information and key metrics can be found in a slide presentation posted today on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2023 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 hand the call over to Lorie.

Lorie Tekorius, CEO and President

Thank you, Justin, and good morning, everyone. I hope everyone's enjoying the start to summer. Yesterday, hopefully you saw that we announced that Pat Ottensmeyer will join the Greenbrier Board of Directors. I'd like to publicly welcome Pat to our Board and look forward to working with Pat to get his perspectives on the freight rail market, as well as his insight into U.S.-Mexico activity. As many of you know, Greenbrier hosted our inaugural Investor Day on April 12. For those of you who were unable to attend in person, or via webcast, the replay will be available on our website for a short period. The full presentation will be available forever at the SEC website. During the three-hour event, we touched on four areas: first, our leadership position in our markets; second, our diverse manufacturing capabilities and long track record of innovation; third, our strong lease origination capabilities and differentiated syndication model; and lastly, the consistent improvement in our financial performance across economic cycles. We also laid out Greenbrier strategy to increase margins in our manufacturing segments, grow our recurring revenue base through lease fleet investments, and follow a capital allocation strategy focused on returning value to shareholders. And while it has only been two months since that investor day, I'm pleased to share the progress we've made in each of these areas. In some cases, we're ahead of our own internal schedules and in others, we're laying the foundation to execute our strategic plan. As I briefly recap results for this quarter, I'll highlight some achievements toward these goals, with the important caveat that we do not expect our progress to be linear, and our strategic plan and targets contemplate a five-year time horizon. Returning to the quarter, we generated revenue of $1 billion. Our deliveries totaled 6,600 units, down from Q2 due to the timing of syndication activity. And while revenue dipped slightly compared with the prior quarter, aggregate gross margin improved by 190 basis points to 12.3%. Increasing our aggregate gross margin to the mid-teens by fiscal 2026 is one of the targets we provided during the investor day. We are pleased to report the progress on that front. Gross margins of manufacturing of 9.6% increased 260 basis points compared with the prior quarter. Some of the efficiencies we discussed during the investor day materialized more quickly than expected. While there will be unforeseen issues during some quarters, we're confident that many of the efficiencies achieved thus far will continue. In particular, supply chain issues that have been recent headwinds seem to be largely in the rearview mirror. As we've discussed previously, we're bringing fabrication in-house for basic primary parts and sub-assemblies as part of our make versus buy strategy. The first phase of this work will be completed in the fourth quarter that we're in today. We expect to achieve our full cost savings targets of $50 million to $55 million in fiscal 2025. Additionally, in the quarter, we completed the sale of Gunderson Marine Portland as part of our capacity rationalization plan that's expected to result in annual savings of $15 million to $20 million. These are costs that are being taken out of the system permanently. Gunderson rail completed its last railcar on May 18, after shipping over 110,000 units since 1985. I'm extremely pleased to share that Gunderson's new owner will retain many of the hardworking production workforce of that facility. Now, moving across the business, maintenance services continue the positive momentum seen since the start of the year despite ongoing labor challenges. Their margins continue to improve sequentially on improved pricing volume and the operating efficiencies we've been focused on establishing over the last two years, expecting a strong end to the year from this segment. As Brian will discuss shortly, we've laid the foundation for expanded leasing strategy. This is an important component of our multi-year plan and is expected to result in the doubling of recurring revenues within the next five years. The market backdrop for leasing remains very positive, and we're in a great position to execute our plan. Returning capital to shareholders is an integral part of our capital allocation strategy. I'm pleased to report that our Board increased our quarterly dividend by 11% to $0.30 per share yesterday. Our dividend has doubled since its reinstatement in 2014 and illustrates the importance the Board places on this activity. The broader economic background is somewhat mixed, with several factors creating economic crosscurrents. Despite the ongoing economic murkiness, our outlook in North America remains unchanged, with railcar deliveries expected to be at or near replacement levels for the next few years. In Europe, there is softness in demand for intermodal wagons, but this has been more than offset by the bulk rail freight sector, where we continue to see strong demand across various markets. Despite the backdrop, at the company level, we continue to take actions to create a stronger, more sustainable Greenbrier. We're confident in the long-term strategy we set forth during our investor day and our team's ability to execute on that strategy, which focuses on the things we can control and is not reliant on an overly optimistic demand scenario. I look forward to sharing our progress towards these targets on future calls. Now I'll turn it over to Brian to discuss the railcar demand environment and our leasing activity.

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

Greenbrier secured new railcar orders totaling 4,600 units worth $650 million. After the quarter ended, we received additional orders for 7,900 units valued at $975 million. The orders remain diverse across most railcar types, except for intermodal. As of May 31, Greenbrier's global backlog stands at 23,400 units valued at $2.9 billion, excluding the recent orders. Our railcar backlog does not include 1,000 units valued at $85 million linked to our railcar conversion program. Despite a decline in freight volumes, railcar demand remains stable due to unmet replacement needs and tight supply. We continue to see strong inquiries and orders for various railcar types. We are pleased with the performance of our leasing and management services this quarter, with renewal lease rates increasing by double digits and extended terms, while maintaining nearly 99% fleet utilization. The lease durations are staggered to manage cyclicality and provide potential for favorable renewals. We have a significant volume of renewals coming in 2024 from a portfolio we acquired in September 2021, and we are actively renewing these leases ahead of expiry. As discussed during our investor day, we plan to grow steadily in the coming years, committing to invest $300 million annually for the next five years on a net basis. We are focused on railcar types that will create a balanced fleet and reduce concentration risk, ensuring we only invest in the right assets with proper lease terms and counterparties. During Q3, we financed $54 million of debt from our nonrecourse leased railcar warehouse facility, backed by $72 million of assets, totaling about $120 million through the warehouse over the last two quarters. We recently increased our warehouse facility capacity to $550 million from $350 million to support our growth plans, with unchanged terms. Fourth quarter fleet activity in the warehouse will leverage a 75% debt to equity ratio. We are continuously evaluating our financing strategies to significantly expand our lease fleet and aim to more than double recurring revenue in the next five years. As shared during the investor day by William Glenn, who oversees our European operations, we are progressing with leasing capabilities in Europe, well ahead of schedule, and have a strong pipeline of leasing deals, including our first syndication agreement. Our Capital Markets team syndicated 800 railcars this quarter, which is a decrease from Q2 due to production timing. This market remains liquid, with a strong appetite for the asset class. We are preparing for a busy year in 2024. In management services, we are adjusting our commercial focus and business development toward customers whose needs align more closely with our core competencies to deepen customer relationships. This is an exciting time for Greenbrier as we enhance our manufacturing capabilities and expand our leasing and management business. We remain transparent with our growth initiatives and look forward to updating you on our progress as we implement our strategic plan.

Adrian Downes, Senior Vice President and CFO

Thank you, Brian, and 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 the quarter was strong across all business segments with improved aggregate gross margin and adjusted EPS in Q3 compared to Q2. Highlights for the quarter include the second consecutive quarter with revenues of $1 billion or higher. Deliveries of 6,600 units was the second highest quarter for deliveries since the fourth quarter of 2019 and includes 200 units from our unconsolidated joint venture in Brazil. Aggregate gross margin of 12.3% was 190 basis points higher than the prior quarter, resulting from stronger margins in the manufacturing and maintenance services segments, attributed to improved operating efficiencies in both segments at higher pricing and volumes in the maintenance services segment. We expect the operating momentum will continue as a result of the initiatives described during the Investor Day in April. Selling and administrative expense of $63 million is 7% higher from Q2 primarily attributed to an increase in employee-related costs due to higher incentive compensation expense arising from increased profitability. We had a pretax charge of $17 million related to the sale and exit of our Gunderson Marine business in Portland. The consolidated tax rate of 12.9% was primarily a result of favorable discrete items in Mexico. Excluding the impact of the Gunderson loss on sale and exit-related costs, adjusted net earnings attributable to Greenbrier was $34 million, generating adjusted EPS of $1.02. Additionally, adjusted EBITDA for the quarter was about $97 million or 9.3% of revenue. Turning to liquidity, Greenbrier's operating cash flow turned positive on a year-to-date basis, due to strong third quarter results of nearly $98 million, reflecting improvements in operating performance and working capital efficiencies. Our liquidity was $665 million at the end of Q3, consisting of cash of $321 million and available borrowings of $344 million. The primary use of our cash during the recent quarter included the repayment of $95 million of short-term borrowings on our domestic revolving credit facility, as well as $32 million of share repurchases. As we finish 2023, we expect Q4 liquidity levels to remain strong as operating momentum and working capital efficiencies continue to improve. As highlighted during our investor day in April, one of Greenbrier's strategic initiatives is a balanced approach to capital allocation. An integral part of this strategy is to return capital to our shareholders through dividends and share repurchases. During the third quarter, Greenbrier repurchased 1.2 million shares for $32 million. Between Q2 and Q3, Greenbrier repurchased a total of 1.7 million shares for $49 million, of which $3 million was part of the prior authorization program. Under the current share repurchase program, we have $54 million remaining of the $100 million authorization that extends through January 2025. In addition to significant share repurchase activity, the Board increased the dividend by 11% to $0.30 per share, representing our 37th consecutive dividend. Based on yesterday's closing price, our annual dividend represents a yield of approximately 3.7%. Since 2014, Greenbrier has returned over $470 million of capital to shareholders through dividends and share repurchases. Our Board and management team remain committed to a balanced deployment of capital designed to create long-term shareholder value. Turning to our guidance and business outlook, based on current trends and production schedules, we are raising Greenbrier's fiscal 2023 guidance, which includes the following: our fiscal '23 deliveries guidance is increased to 25,000 to 26,000 units, including approximately 1,000 units from Greenbrier-Maxion in Brazil. We're also increasing our fiscal year 2023 revenue guidance to be between $3.8 billion and $3.9 billion. Selling and administrative expenses at approximately $230 million to $235 million, and gross capital expenditures of approximately $280 million in leasing and management services, $90 million in manufacturing, and $15 million in maintenance services. Proceeds from equipment sales are expected to be approximately $76 million. Consolidated gross margin is unchanged, and we expect full-year consolidated margin percent to be in the low double digits. In closing, I'd like to reiterate a few points: we are confident in our long-term strategy as highlighted at our investor day; I believe the best is yet to come. Our management team is incredibly experienced with a demonstrated track record of success. We are supported by a robust backlog, which provides strong visibility and stability over the coming years. Our liquidity and balance sheet strength allow for opportunistic growth. As we look to finish our year strongly, we're well positioned to drive shareholder value into 2024. Now we will open it up for questions.

Operator, Operator

Our first question will come from Matt Elkott at TD Cowen. Please proceed.

Matt Elkott, Analyst

Good morning. Thank you. Lorie, can you maybe first quick clarification, what was it specifically that made it possible to achieve those manufacturing efficiencies ahead of plan?

Lorie Tekorius, CEO and President

A great question, Matt. I would say it's tremendous hard work and focus by the men and women in our manufacturing operations. As you'll recall, last quarter, we talked about the headwinds that we were struggling with supply chain and our focus on how to reverse that trend. This is one of the areas where we're seeing improvement ahead of what we thought internally we would be able to achieve. As not just Greenbrier, but as many companies have seen over the last several years, supply chain can be one of those things that can be a persistent headwind, or it can pop up. So I'm just pleased with the focus and attention and execution in our manufacturing group.

Matt Elkott, Analyst

Got it. Thank you for that. And then were there any big orders from a single customer in either the 4,600 in the quarter or the 7,900 after?

Lorie Tekorius, CEO and President

I'll let Brian chime in in a minute if he'd like. But actually, yes, we had several large orders, but nothing that was really a multi-year or something that drove it that was strong diverse demand across a number of customers, car types, commodities, and a nice, healthy combination of lease originations, as well as direct sales. Brian, is there anything you'd like to add?

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

No, I think you hit it, Lorie. Matt, basically, it's kind of the normal blocking and tackling. We had several large orders, not just one or two. But also we had kind of the diversity of what we see every day. Some of it was pent up from earlier in the quarter, which we thought would come in Q3 and as are in the previous quarter is now coming in. But it's just kind of the run of the mill, no multi-year orders, just your standard fare, as far as the orders came in and order diversity.

Matt Elkott, Analyst

That's good to know, Brian. And there was a 10%, sequential step up in the ASP; how much of this was mixed versus other factors, because after the 7,900, after Q3, I think the ASP goes back down to being 4% below Q2?

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

Yes, I think the mix is it's a better mix; we're starting to see a little bit more automotive product, as well as tank cars into the mix. As you know, one of the focuses of I think the industry has been continued to do pricing into a better place as well. I think you're seeing a combination of a better mix as well as continued uplift in pricing.

Matt Elkott, Analyst

Okay, and just one last one, if I may. More often than not your first fiscal half is lower for everything, basically deliveries margins earnings. Do you expect this to be the case for fiscal '24, even as this really is a highly anomalous cycle?

Lorie Tekorius, CEO and President

So I'll jump in, and then I can let others join in. I'm sorry to kind of have a little bit of a chuckle. Because you're right, we do tend to like in the second half and then are a little bit muted for a variety of reasons in the first half of that has not gone without our acknowledgment of that trend. We're very focused on how we can make certain that quarter after quarter we continue continuous improvements from orders, deliveries, margins, cash flow, so you are going to see that sort of focus. Again, it's hard to predict perfectly if something will pop up. But we're not planning to have the first half of next year be soft. We're planning for fiscal '24 to be better than 2023. We're working to make that be continuous improvement quarter after quarter.

Matt Elkott, Analyst

Got it. Thank you very much, Lorie. Thanks, Brian.

Lorie Tekorius, CEO and President

Thanks, Matt.

Operator, Operator

Our next question will come from Justin Long with Stephens. You may now go ahead.

Justin Long, Analyst

Thanks, and good morning. Maybe to follow up on that last point you made, Lorie. When you look at the industry projections for railcar production in 2024 on a calendar basis, a lot of those forecasts are down a decent amount. So I'm curious if you could talk about your view on this broader industry production as we move into fiscal '24. Based on the backlog you have today, including the orders you've just received here in June, can you speak to your level of visibility to production in 2024 at this point?

Lorie Tekorius, CEO and President

I would say for 2024, we've got really good visibility. We still do have some pockets where we have open production, but we feel very comfortable about the ability to fill up that space. Right now what we're seeing in North America is pretty steady production coming out of where we're going to close out the fourth quarter. We don't have any big ramp ups or any big ramp downs, we'll have some adjustments. Some of the recent orders that we've received give us great visibility and continuity on a number of our production lines. The other interesting thing that if you're just looking at the North American statistics, you also have to look at Europe, where we're continuing to focus on how we can serve that market. We're focused on ramping up production in Europe as well; it's not quite the same volume as you would see here in North America. But that will be one of the benefits to our deliveries in fiscal 2024.

Justin Long, Analyst

Okay, great, that's helpful. And I guess shifting to manufacturing gross margins, it was good to see the sequential improvement. Could you speak to how much of that came in North America versus Europe? And then as we think about manufacturing gross margins going forward, what's your comfort that we'll continue to see some sequential momentum moving into fourth quarter and early next year?

Justin Roberts, Vice President & Treasurer

Hey, Justin, this is Justin. I think we saw improvement, both in North America and Europe in the quarter. North America has a disproportionate weighting there, just from a size perspective. Both operations performed very well and improved sequentially. Going forward, we would expect that to continue, maybe not quite to the same extent, but we do see improvement in Q4 and into fiscal 2024, which is kind of hard to believe we're talking about already, but such is life.

Justin Long, Analyst

Okay, good to hear. I'll leave it at that. Thanks for the time.

Lorie Tekorius, CEO and President

Thanks, Justin.

Operator, Operator

Our next question will come from Bascome Majors with Susquehanna. You may now go ahead.

Bascome Majors, Analyst

Thank you. As we look forward, I realize we’re still away from next fiscal year. But do you have a sense of the cadence of when you'll put cars on the balance sheet and off the balance sheet in the manufacturing business?

Justin Roberts, Vice President & Treasurer

At this point, we're not necessarily ready to get into that much detail. I would say that we do see a relatively consistent pattern of that each quarter over the next four to five quarters based on production schedules and backlog.

Bascome Majors, Analyst

Thank you for that. Now that most of the supply chain issues in Mexico and the U.S. are behind you, fingers crossed. Is Europe accretive to the overall manufacturing margin, or are those pretty even?

Lorie Tekorius, CEO and President

I would say yes, it is accretive. As Justin said, it's accretive even when you take into consideration the weighting. I mean, North America is one of the largest freight railcar markets in the world. So it's going to be hard for Europe to upend that. But they're definitely accretive to our margins.

Bascome Majors, Analyst

Lastly, can you talk a little bit about the willingness to risk longer-term capital from some of your leasing customers? I know you don't have the same length and duration and size and multi-years as some of your competitors, but just what's the appetite for the leasing companies as we look out the next 6, 12, 18 months? How does that sales channel work, and do you expect that to be supportive of a fairly steady production rate for the industry over the next year or two? Thank you.

Justin Roberts, Vice President & Treasurer

That's a great question, Bascome. I just going to see if Mr. Comstock can handle it.

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

Yes, thanks, Justin, and thanks, Bascome. One of the areas that I reported on this maybe last quarter as well as we're seeing increased interest from the operating lessors. They are traditionally in the market, but over the last couple of years due to COVID and other reasons, there's been a little bit of a pullback, we're seeing more and more confidence on the operating lessor side, which is driving, as you suggest, more stability in manufacturing as well as some of this order pipeline, and we think that's going to continue to build momentum throughout the rest of this year into next year.

Bascome Majors, Analyst

And from the syndication channel, any comments on that customer? Are they starting to get comfortable with the cost of capital and rising interest rates? Do you think that is a growth opportunity, or at least an opportunity for stability in your business as we look out 6, 12, 18 months?

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

Yes, we do. The returns are still very strong. As you know, interest rate pressures have put a lot of pressure on that side of things. The deals that are coming in all hurdle have the appropriate internal rate of returns. As a result, we're seeing more and more interest. In fact, we're seeing even some new entrants that are inquiring about coming into the space. So we feel pretty good from the liquidity standpoint. Long term, we think the syndication customers are pretty comfortable.

Bascome Majors, Analyst

Thank you for your time.

Operator, Operator

Our next question will come from Ken Hoexter with Bank of America. You may now go ahead.

Ken Hoexter, Analyst

Great, good morning. So if I could just kind of follow up on Bascome's question there. Lorie, maybe talk a little bit about the balance of the lease fleet versus the build for external sales and manufacturing. It seems like we've got a lot of volatility where maybe it's you'll get the consistency after you get the ramp up. Are you getting closer to the full ramp up on that production for the internal build versus external sales? I just want to understand how we should think about that given the build to revenue kind of follow through?

Lorie Tekorius, CEO and President

Thanks, Ken. Yes, it's a good question. And what's interesting is you have to step back and look at the strength of lease origination. So same customers, same car type, same commodity. While we are growing our own balance sheet lease fleet, it is still a fairly modest fleet. Sometimes the size of those orders are such that it would really skew our concentration.

Ken Hoexter, Analyst

Lorie, I don't mean to interrupt, but your line went quiet for like the first third of your answer. I'm sorry to do it. But I'm getting IB that other people, they went quiet. Do you mind just starting from the beginning there?

Lorie Tekorius, CEO and President

Oh, my gosh, it was the most brilliant thing I've ever thought. So it's probably because every one of our field sales people was hurriedly calling in, because I was complimenting our sales. Can you still hear me?

Ken Hoexter, Analyst

Yes, perfectly.

Lorie Tekorius, CEO and President

So we often can originate some very large leases. A large number of cars, same customer, same car type, same commodity. While we're excited to grow our own balance sheet lease fleet, it is still relatively modest, and I'm probably being generous in size. Therefore, any of those orders could really skew our concentrations in any number of those areas. So we will continue to work with our syndication partners so that we can diversify and keep that disciplined approach to how we're growing our own balance sheet portfolio. Sometimes our syndication partners are not as keen on our fiscal year quarter ends or year ends as others might be. We're going to take those opportunities when they arise, and we're going to close those transactions as appropriate for the business. So that will continue to cause some lumpiness from quarter to quarter. But you can understand that the basis is we've got strong commercial lease origination capabilities, and we're keeping an eye on having a very disciplined approach to how we're growing the fleet on the balance sheet.

Ken Hoexter, Analyst

And then I'm throw at you for my follow-up, a quick numbers question. So I'll follow up with a kind of follow-on question. But the backlog new orders came in at about $123 thousand revenues per car down from your printed $141,000 in that third quarter. Is there anything more to that than than mix? Because that just seems like an extraordinary shift? And then I guess to wrap up, you said you weren't surprised by anything in the quarter yet, you raised your outlook. So I just want to understand what changed, was there something in there that did change that led you to raise the outlook?

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

So Ken, on the ASP question, our ASP on the June order activity is more in line with our Q1 and Q2 activity. It really is just mixed primarily from that perspective versus the Q3. On the outlook question, obviously, Lorie can correct and chime in as needed. But bear in mind that as we have been working through and navigating some of the supply chain issues, the first six months of the year were challenging. We wanted to make sure that we were able to perform as we expected and deliver cars on time to our customers. We had some bumpiness in the first part of the year. Now that seems to have resolved, and we are getting our operating momentum and getting our legs under us. We are feeling more confident.

Ken Hoexter, Analyst

Wonderful. Thanks for the time. Appreciate it.

Operator, Operator

Our next question will come from Allison Poliniak with Wells Fargo Securities, you may now go ahead.

Ryan Deveikis, Analyst

Good morning. This is Ryan Deveikis on for Allison. Congrats on the quarter. Most of my questions were taken, but I kind of want to just pick a little bit, just kind of the smaller market here. So Brazil came in at 200 for the quarter; it didn't really raise delivery there that implies by my calculation around 100. Is that market kind of just softening? Or is it just a near-term headwind that it's like winter.

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

This is Brian, I can jump in, Lorie on that question. Right now in Brazil, you're in a little bit of a softer period only due to capital constraints of some of the concessionaires. In 2024, it looks like things begin to right-size as well as a lot of the expansion in Brazil continues to build momentum. There is quite a bit of infrastructure in Central Brazil and other areas that are being completed. We anticipate long-term that Brazil is going to continue to grow. However, right now, they're more in a level data play.

Ryan Deveikis, Analyst

Okay, thank you. And then I guess one more on the refurbishment side, net backlog has been kind of declining. Are we reaching closer to like an end of the market cycle here where there's not as much activity on those conversions or whatever it's called? Any color would be great.

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

The conversion side is always lumpy. It kind of moves up and down. There are a number of cars that have been programmed already. There is a finite shelf life to the conversions. However, I still think there are several years of opportunity on that side. Behind the conversions, you've got this requalification to tank cars that are ramping up. What you'll see is just a shift from some of the large conversions to some of the large tank car requalification programs.

Operator, Operator

Our next question will come from Steve Barger with KeyBanc Capital Markets. You may now go ahead.

Jacob Moore, Analyst

Hi, good morning. This is Jacob Moore on for Steve Barger. Thank you for taking the questions. For my first one, just going back to the cost savings initiatives that you laid out at the investor day. Could you talk specifically about the actions that you've already completed and maybe quantify how much of that $50 million to $55 million you think you've already achieved? And then also maybe just a quick clarification on the $15 million to $20 million in savings from Gunderson exit; is that now fully out of the system moving forward?

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

Hey, Jacob, this is Brian. It seems we've lost like us; I think they're having some communication problems. I can address the first part of that question for you, which is on the $50 million to $55 million of cost savings. We're probably still in the infancy of implementing that plan. It is ahead of schedule, as you see from this quarter’s earnings, but we anticipate that it will continue to develop really throughout the next fiscal year.

Jacob Moore, Analyst

Got it understood. And then maybe this one's a little bit better suited for you anyways, Brian, for my second question, just broadly, overall rail traffic is down, freight seems to be holding in there. But lackluster traffic trends are starting to compound at this point. So my question is really now the work at the halfway point of the year. Could you expand on the earlier landscape comments and maybe provide an updated outlook on rail traffic trends for the remainder of the year?

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

Yes, without a doubt, when you look at the traffic side of the equation, velocities are improving a bit. There are a number of segments that are down because the number of segments in the rail industry is still fairly robust. Auto, there's a tremendous amount of pent-up demand. There are several new facilities coming online. There are several new plastic pellets facilities that come online in late 2024, early 2025. Biodiesel continues to be fairly robust. A lot of new facilities are coming online in that area as well. You still have a tremendous amount of retirements of older cars, as well as a small number of cars in storage. While there are some headwinds in the overall outlook, the build cycle appears fairly level at least we believe so over the next 18 to 36 months, pending any major change in the economic condition.

Jacob Moore, Analyst

Got it. Understood. Thanks. All right, go ahead.

Lorie Tekorius, CEO and President

Can you hear us okay?

Jacob Moore, Analyst

Yes.

Lorie Tekorius, CEO and President

I just want to check and make sure that we're still broadcasting here. Sorry, we've had a few technical difficulties. Thank you, Justin, for your phone. Just to touch on your other comment about Gunderson, there probably will be a little bit of realization on those permanent savings in our fourth quarter. As we get into the early part of our fiscal 24, that will be wrapped up, as we're just working with the new owners for some transition services.

Jacob Moore, Analyst

Got it. Understood. Thank you for taking the questions.

Lorie Tekorius, CEO and President

Thank you.

Operator, Operator

Our next question comes from Matt Elkott at TD Cowen. You may go ahead.

Matt Elkott, Analyst

Thank you for taking my follow-ups. I think this is for Brian. The leases coming up for renewal in '24 that you mentioned. If you are able to get them renewed earlier, the market is pretty hot right now. What kind of rate improvement do you think you can get expiring versus renewal side?

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

Good question, Matt. A lot of the renewals that we're seeing in 2024 are related to the purchase that we did back in 2021. The fleet that we acquired, a lot of those rates were, I would say, sub-market rates at the time. We believe we're seeing quarter-over-quarter double digits, but in those cases, we should see much larger double-digit increases in the renewals in 2024 for at least what we're predicting at this stage.

Matt Elkott, Analyst

And how many cars are those?

Brian Comstock, Executive Vice President and Chief Commercial and Leasing Officer

That's a great question. I don't have that at my fingertips, but I'm sure Justin can get back to you on that.

Justin Roberts, Vice President & Treasurer

Yes, I'd say it's about 2,000 cars.

Matt Elkott, Analyst

Okay, thanks, Justin. And then just maybe one more question for Justin or Lorie. You're pretty close to the mid-teens aggregate gross margin target for '26 quarter. So first, any updated thoughts on this target? And second, can you remind us what the target is contingent on? Do we have to be in a demand upcycle? Does it work at a high replacement level or below replacement level demand because the recurring parts of the business should grow?

Lorie Tekorius, CEO and President

Good question, Matt. The targets are based on more stable demand, so not a boom market. While we are excited about the achievements that we've received in this third quarter, we'd like to get a quarter two of continuous improvement under our belt before we'll consider adjusting those five-year targets.

Matt Elkott, Analyst

Okay, got it. Just one last one. I probably should know this. But have you guys said what's going to happen to Gunderson? What kind of use is it going to be used for?

Lorie Tekorius, CEO and President

Oh, yes, if that hasn't been communicated, it was purchased by a local operation run by a couple of people from Portland, Oregon Green Manufacturing. They will continue marine activities, but they plan to expand beyond what we were able to do. I believe they are considering some additional metal building activities or possibly other infrastructure work.

Matt Elkott, Analyst

But rail cars are not going to be manufactured there anymore?

Lorie Tekorius, CEO and President

Yes. I should have been clear about that, no rail cars.

Matt Elkott, Analyst

Got it. Great. Thank you very much.

Lorie Tekorius, CEO and President

Thank you.

Operator, Operator

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

Justin Roberts, Vice President & Treasurer

Thanks, Anthony. Sorry for everybody, technical issues this morning. Appreciate your patience. Hope everyone has a great day. If you have any follow-up questions, please reach out to Greenbrier either myself if you have my email, or investor relations@gbrx.com. Thanks and have a great day.

Lorie Tekorius, CEO and President

Have a Happy Independence week and be safe.

Operator, Operator

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