Greenbrier’s earnings beat yields to sobering uncertainty

Greenbrier tank cars on track

Railcar and equipment manufacturer Greenbrier (NYSE: GBX) announced that it was further curbing manufacturing capacity and laying off 3,500 workers in response to continued declines in railcar demand, which have been exacerbated by the coronavirus outbreak.

In its fiscal second quarter 2020 (ended Feb. 29) earnings release, Greenbrier reported adjusted net earnings of 46 cents per share, 17 cents per share better than analysts’ forecasts. While the stock surged more than 30% higher in early trading, the company’s earnings conference call with analysts and investors focused largely on cost reduction initiatives laid out in the release that are aimed at protecting the “viability of the enterprise.”

“Greenbrier is focused on two primary goals: protecting the safety and health of employees and preserving the economic well-being of our enterprise in this challenging environment. We are executing on the latter by increasing liquidity and sizing the organization properly in the current business environment,” said Chairman and CEO William A. Furman.

The company has implemented a new round of cost initiatives in response to the downturn in railcar demand that is likely to be worsened by the COVID-19 outbreak. In addition to the headcount reductions, which were largely in Mexico, Greenbrier has eliminated “non-essential” capital expenditures (capex) and is “aggressively” reducing operating expenses. Those plans include corporate travel restrictions, a hiring freeze and executive pay cuts.

Further, management announced during the conference call that an additional 200 workers were let go on Monday.

Greenbrier has reduced its manufacturing footprint by idling excess capacity throughout North America, including its aftermarket wheels, repair and parts locations. The company has slowed production rates at some facilities to keep those production lines active versus idling.

Management estimated that current production rates account for approximately 75% of the company’s total manufacturing capacity. They expect to reduce capacity by an additional 5 to 10 percentage points by the end of fiscal year 2020. They are looking at fewer daily production shifts at some facilities and potentially reducing production days from five or six a week to four.

The Department of Homeland Security has designated Greenbrier’s manufacturing and services facilities as “essential business.”

The COVID-19 pandemic is weighing on an already depressed railcar market. An industrial economic malaise as well as the emphasis on precision scheduled railroading (PSR), which is designed to improve asset utilization and reduce the number of railcars the Class I railroads need, have resulted in lower railcar demand and forced a large number of cars into storage.

Total Class I Carloads (U.S.) – SONAR: RTOTC.CLASSI

Railcars in storage totaled 394,244 in March, down from the recent peak of 408,100 in December. As a point of reference, railcars in storage were well under 300,000 units during the freight peak in 2018, according to the Association of American Railroads. The organization also reported that total North American rail traffic was down 6% year-over-year for 2020 through week 13.

Fiscal second quarter 2020 results

The Lake Oswego, Oregon-based company’s 46 cents in adjusted earnings per share bested analysts’ forecasts. The adjustment excludes 5 cents per share in after-tax integration expenses associated with the American Railcar Industries acquisition. The company also benefited from cancellation fees of $9.2 million for railcars previously scheduled for production in the second half of 2020.

Greenbrier’s Key Performance Indicators

In the quarter, the company received 8,500 orders for railcars, taking its backlog to 30,800 units with an estimated value of $3.2 billion. However, railcar deliveries totaled 4,500 units, down 1,700 units from the company’s fiscal first quarter and 600 units lower than the 2019 comparable period. Total revenue declined 5% year-over-year to $624 million, with a 560-basis-point (bp) increase in gross margin to 13.8%, 180 bps better than the company’s fiscal first quarter. The margin improvement was a result of a favorable mix of railcars sold as well as the fee income received for cancellations, which doesn’t come with a material cost offset.

Given the uncertainty surrounding the outbreak and future demand, Greenbrier announced that it was suspending its fiscal 2020 guidance, which previously called for total railcar deliveries of 26,000 to 28,000 units, $3.5 billion in revenue and adjusted earnings per share of $2.60 to $3.

“While we have suspended earnings guidance, we expect to remain profitable,” Furman said on the call. Additionally, management expects to see positive cash flow from operations through its fiscal year ending Aug. 31.

The company reported total liquidity of $620 million, $170 million in cash. Greenbrier has targeted a goal of achieving $1 billion in liquidity through cost actions, most notably capex reductions. The company also plans to seek available corporate aid programs established by the government.

Greenbrier ended the period with net debt of $713 million and a net debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 2.1x. The company has no significant debt maturities until late 2023.

Unlike many truck manufacturers that have suspended dividends to preserve liquidity during the pandemic, Greenbrier announced that its quarterly dividend of 27 cents per share remains intact and will be paid on May 13.

Shares of GBX were up 13% in midday trading on Tuesday.