The Greenbrier Companies, Inc. (NYSE:GBX) Q3 2020 Earnings Conference Call July 10, 2020 11:00 AM ET

Company Participants

Justin Roberts - Vice President, Corporate Finance and Treasurer
Bill Furman - Chairman and CEO
Lorie Tekorius - President and COO
Adrian Downes - Senior Vice President, Chief Accounting Officer and CFO

Conference Call Participants

Justin Long - Stephens
Matt Elkott - Cowen
Bascome Majors - Susquehanna
Steve Barger - KeyBanc Capital Markets
Allison Poliniak - Wells Fargo
Ken Hoexter - Bank of America

Operator

Hello and welcome to The Greenbrier Companies Third 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 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

Thank you, Christy. Good morning, everyone, and welcome to our third 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. Today, they will provide an update on Greenbrier's fiscal third quarter as well as our near term priorities during the pandemic and continued economic fallout. Following our introductory remarks, 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 2020 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

And with that, I'll turn it over to Bill.

Bill Furman

Thank you, Justin, and good morning, everyone. As we begin this morning, let me express my continued gratitude to our workforce who've been working very hard and succeeding under extremely difficult circumstances. Our thanks extend to employees in every factory, office, and many now working at home as well as to our customers, our valued business partners and our shareholders.

Recent times certainly have been extraordinary. Greenbrier and its people are responding to the challenge. And we've adapted very quickly. The rail industry and shipper traffic already had been weakened by trade issues prior to the pandemic and then came the oil shock and the pandemic. More recently, we've all been saddened by the social and racial injustice, and perhaps the time spent by so many in social distancing and isolation have given us the gift of reflection.

Since co-founding Greenbrier almost 40 years ago with my partner, Alan James -- late Mr. James, our success has exceeded all of our expectations at the time. It began with an investment of $5,000 each out of my basement and 50-50 handshake deal through partnership based on either of us being able to pledge our entire network in a business transaction. Today, we are among the largest freight railcar transportation equipment service providers in the world

From a 300-car fleet out of Huntington, West Virginia, Greenbrier being named after the Greenbrier Resort by its expressed permission has grown to one of the most valuable franchises in the rail service area of the world. It's been a fantastic journey with many adventures and contributions from so many participants along the way. Far too many to name.

This is not the first time or the worst time throughout our career that our industry has gone through difficult situations. The playbook is well known, respect for capital, liquidity, quick reaction, the sizing of platforms and then recovery. And our industry is quite versatile and quite capable of recovering very rapidly as we've seen in past recessions.

Greenbrier, in the face of the dual challenges of pandemic and the economy has taken swift, decisive and difficult actions. Undoubtedly, more will be demanded of us in the months ahead. Yet I am confident that Greenbrier's management team is up to the test.

Again, I want to thank all of our employees, customers, shareholders who believe in us, and we will not let you down. I'm honored and humbled to lead Greenbrier at this moment in time.

As we begin, allow me to briefly share my reflections on recent social events, societal events that are occurring within the short time since we last held a call together. These events have once again reminded us of social inequities that existed in our country long before COVID-19 panic and pandemic reached our shores. We can draw hope from the recent despair and participate in the positive and necessary changes. At Greenbrier we will pursue change by living our core values.

For over 40 years, respect for people has been woven into Greenbrier's DNA. We respect people because of the uniqueness they bring to us and the diversity of thought and experience embedded in our culture.

In addition, we strive to do what is right. It's just the right thing to do. And it's productive thing to do. Dozens of studies on productivity over the last hundred years have demonstrated the attention to the workforce, whether it's through the Toyota Production System or other production system, such as Greenbrier’s, pays off.

Greenbrier recognizes that a diverse workforce allows us to better reach our business objectives. Bringing together employees with a range of background and experience helps solve business challenges more effectively and allows us to better serve our customers.

While we know all this to be true, we also know that corporations and we need to do more. Greenbrier is establishing an internal framework to engrain efforts to combine -- to combat social inequities and these will go deeper into our core strategy. As a company, we are doing our part to address inequality and to be part of the solution on environment, diversity and inclusion.

We will be metrically driven in our efforts, and we expect to be held accountable as we seek continuous improvement.

Part of Greenbrier’s service to society, however, is maintaining a successful business, a successful business enterprise. Today, we are focused on the priorities as detailed on our last earnings call, which are providing for the safety and security of our workforce and ensuring the economic well-being of our business.

Good progress has been made as we’ve moved through, amazed, and measured response, a balanced response appropriate to the conditions we face.

We're focused on liquidity, cost reduction, capital, preservation, respect for capital and all of this is beginning -- is showing in numbers, but in the quarters ahead, depending on how circumstances go, certainly if current circumstances continue and there's no major improvement in our sector of the economy, you will see those metrics improve and improve. We continue to monitor the health and well-being of our more than 13,000 employees worldwide. As you will hear from Lorie, we have protocols in place for any potential COVID-19 exposure. These are reported immediately and immediately addressed.

Our protocols are being enforced by our management with a high degree of discipline. Greenbrier's experience rate with active cases has remained very low as a percentage of our entire workforce. Our recovery rate is outstanding. We extend our wishes for a full recovery to each affected employee and their families. To slow the spread of the virus, each of our manufacturing plants is either meeting or exceeding CDC recommendations as we safeguard our employees while maintaining operations.

And also as Lorie will address later, despite high levels of reported virus spread in Mexico and Brazil, and now concerningly and more recently in the U.S., our safety protocols and our swift response to identify cases have limited our exposure to plant-wide outbreaks. We have swiftly acted to prevent clusters and to contain any outbreak. So we have not throughout have had the instances that have occurred at other businesses in the United States and around the world.

Financially, we've met or exceeded our near-term goals. Our consolidated cash balances have increased by over $0.5 billion since the start of the quarter. We've decreased our net debt by almost $200 million. Our efforts to rapidly reduce selling and administrative expenses also contributed to our financial performance in the third quarter, despite closing of some manufacturing lines, which have blurred the real effect of our initiatives in that area. Even then, S&A expenses have decreased by almost 10% sequentially and we expect further reductions into the fourth quarter and into 2021.

The benefits of our expense reduction initiatives and our capital preservation and drive for liquidity, while we're operating our essential businesses around the world, will provide lift for the business, additional cash flow as the economy moves through this difficult time and into recovery. And the pandemic has the effect for all businesses to consider a leaner business model with less overhead, capitalizing on some of the benefits we have learned through remote operation and at-home work. Our manufacturing model is built on flexibility. Remember that before the outset of the pandemic, we already had begun to reduce the size of our manufacturing footprint in Brazil, in the United States and Mexico 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 third quarter of this year as we idled capacity in North American facilities, as well as at Greenbrier Rail Services locations. Since we began that particular initiative, we've adjusted North American operations through workforce reductions equal to approximately 40% of Greenbrier’s North American workflow -- workforce. Prior to the third quarter, the majority of these separations occurred at two of Greenbrier's three Mexican operations.

It is always a tough experience and emotional experience to separate from our colleagues and from so many of our friends who possess so many talents and good qualities. This time around is no different.

In the third quarter, we took the necessary but difficult action to suspend our railcar manufacturing and operations lines at Gunderson, our long time flagship facility in Portland, Oregon. The third quarter also saw Greenbrier eliminate the wide range of administrative positions in all our business units and corporate departments. These actions resulted in a reduction of 1,600 North American employees in the third fiscal quarter on top of the almost 4,000 positions, which earlier were removed since the beginning of our fiscal year in quarters one and two. All impacted employees received severance benefits tied to their length of service, fully now reflected in the financials you have seen for the quarter and designed to bridge them into government programs. This is part of our philosophy of respect for our workers -- respect for our workforce. The severance benefits bridge was needed because public programs have too often an unacceptably delay in delivering earned public benefits to our working citizens who become, through no fault of their own, out of work. It was especially hard to part with workers at Gunderson who had persevered with us through many down cycles and natural -- through financial emergencies over the course of our 35 year ownership of that operation dating back to the FMC Marine and Rail division and dating back to the Gunderson Brothers' business begun on the waterfront in 1918. Greenbrier's Jones Act-compliant Marine business continues at Gunderson, backlog there extends well into calendar 2021 with a strong pipeline for new vessel orders. So we will continue to operate Gunderson on a much smaller scale.

As I said at the start, we've seen a great deal happen in a short time. Fortunately, we have a well-earned experienced team. And this is not our first rodeo. No matter what comes next, Greenbrier is tough and Greenbrier is ready. If necessary, we are prepared to manage through the worst of times. But we think this is not the worst of times. We've had worst recessions in our industry times in the 70s when only 5,000 cars per year were built. That was when we acquired Gunderson seeing opportunity. According to great Carl Icahn, it's when things are tough you want to look for good opportunities. Greenbrier is an excellent opportunity for investment. Greenbrier has built an incredible franchise in railcar engineering, manufacturing, lease originations, leasing and management services. We have loyal customers all over the world. We have a strong position in the North American marketplace, based on efficient and flexible plants. We manage one quarter of the North American railcar fleet in one way or another we touch that fleet.

Greenbrier in quarters to come will preserve its financial stability, build a large pool of liquidity, to deploy sensibly any capital opportunities in the future prudently and it will focus on our core businesses. We'll work to shrink our footprint and increase shareholder value as we progress ahead.

Now, over to Lorie.

Lorie Tekorius

Thank you, Bill. And good morning, everyone. Our fiscal third quarter was quite strong in the midst of the pandemic and resulting economic downturn. As Bill said, I'm very pleased with Greenbrier's ability to respond quickly and decisively to the world altering events over the last several months. I'll spend a few minutes on the quarter and then provide an update on our COVID response.

We delivered 5,900 railcars in the quarter, including the syndication of 1,600 units. As we stated previously, the timing of syndications can be lumpy and a higher number this quarter offsets the lower numbers that you saw in the first and second quarter of our fiscal year. This quarter, we received orders for 800 railcars valued at about $65 million. Orders originating from international sources accounted for over 50% of the activity of the quarter and this mix did impact the average sales price of order activity.

Our backlog remained strong at 26,700 units valued at $2.7 billion. Our multiyear manufacturing backlog continues to be the source of stability in difficult times and provides us with the resilience and a bridge to when industry dynamics and economic conditions improve.

We don't expect demand to recover overnight and the number of cars in storage represents the highest level of railcars stored on record. So we're nonetheless encouraged by the activities of our commercial team and conversations we have going on with several of our customers. And while orders in the quarter were clearly low by any standards, we have maintained momentum. And there's a reasonable amount of current activity that’s subject to documentation and final confirmation is not reflected in the current backlog.

Our North American manufacturing group performed resiliently in a uniquely challenging quarter. In addition to building several thousand high quality railcars efficiently, the management team enacted the various protocols needed to ensure employee safety, including daily temperature checks for thousands of employees, redesigning workflows and stations to allow for social distancing and introducing heightened cleaning activity across the network. These actions have allowed our facilities to remain open while providing a safe working environment.

I'm further pleased to report that the operating performance of our ARI manufacturing facilities continued to improve this quarter, reflecting the benefits of remedial actions taken in our first quarter. Performance in Europe and Brazil was in line with expectations. And as already stated the order activity internationally and specifically in Europe improved throughout the quarter and accounted for about half of this quarter's orders.

Europe's economy is slowly reopening, although it will take several months before its back to pre-COVID levels. Brazil's economy continues to struggle through the pandemic and we're working closely with our local management team to ensure the safety of all of our employees. Our wheels, repair and parts operation revenue was impacted by lower rail traffic and fleet utilization, while continuing operating efficiency improvements in our repair business drove improved gross margins in the quarter.

The management team did an excellent job enacting a response plan to COVID across the entire network, allowing employees to work safely, while providing essential services for the North American freight rail network.

Our leasing and services group performed well in the quarter, even with traffic and commodity driven headwind. The earnings of the group was negatively impacted by a $4.3 million charge related to a few financially distressed sand companies. Portion of the charge was driven by the new lease accounting standard. God bless all the accountants. These charges were more one-time in nature and are not expected to repeat going forward. Our lease syndication capital markets team had a robust quarter, as I already said with 1,600 units syndicated, generating proceeds over $180 million. This is a very significant accomplishment given the volatile nature of the financial markets over the last several months.

And now turning to our COVID response. Our incident response team continues to coordinate our efforts related to the pandemic. We're operating under a dual mandate of maintaining business continuity, alongside ensuring employee health and safety. We've kept our factories and shops continuously operating through the pandemic. Whenever we have a COVID positive case appear at one of our locations, strict adherence to our coronavirus guidelines have ensured the health and well-being of Greenbrier employees while allowing our essential operations to continue.

We've undertaken several hard decisions over the last several months in response to the crisis. And as part of our plan to increase liquidity, we've reduced capital expenditures by $50 million, we've reduced annual overhead expenses at our facilities by $65 million and we've reduced annualized selling administrative expense by $30 million. This activity has caused us to part from some of our longtime colleagues, and in many cases, friends. But these actions along with the necessary rationalizing of production capacity in North America will create a stronger Greenbrier in the long-term.

Our business remains healthy, despite the current commercial environment and our leadership position in our core markets in North America, Europe and Brazil is unchanged. This requires hard work and continuous focus. But it's not our first challenge, or our first rodeo and it won't be our last. No matter how our fourth quarter or the remainder of 2020 plays out, we know our role in the transportation industry remains vital. The safe and efficient movement of goods is integral to economies around the world. It factors into any recovery, both near-term and longer term once a greater degree of stability and predictability has resumed.

Now, I'll turn it over to Adrian.

Adrian Downes

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. As you've heard from Bill and Lorie, we delivered strong results in the third quarter despite a challenging environment. Highlights include: revenue of $763 million; and deliveries of 5,900 units, which includes 500 units delivered in Brazil and 1,600 syndicated units; aggregate gross margin of 14.1%; selling and administrative expense of $49.5 million, it’s almost a 10% reduction sequentially.

The effective tax rate in the quarter increased to 41%, driven largely by a foreign currency related discrete tax item at our Mexican subsidiaries. This brought our year-to-date tax rate to 33%. As a background, for U.S. GAAP purposes, we keep the books for these entities in U.S. dollars. For Mexican tax purposes, the books are kept in pesos. Normally these results are similar. However, during third quarter, there was a significant devaluation of the peso, which resulted in a disproportionate amount of peso taxable earnings and peso tax expense, when compared to our U.S. dollar earnings for the quarter. The impact of this item on our third quarter Mexican taxes is treated as a discrete tax item rather than many tax items, which are measured over the course of the year reducing volatility. Based on foreign -- based on current foreign exchange rates, we expect a lower effective tax rate in the fourth quarter.

Net earnings attributable to Greenbrier of $27.8 million or $0.83 per share, excluding approximately $7.3 million net of tax, or $0.22 per share of integration related and severance expenses, adjusted net earnings attributable to Greenbrier are $35.1 million or $1.05 per share. Adjusted EBITDA in the quarter was $99.9 million, or 13.1% of revenue.

One of the questions we've received regularly is to try to quantify the impact on the business from the pandemic. The longer term impact is hard to know at this point, but we are able to quantify approximately $3.9 million of identifiable costs related to COVID-19 in the third quarter. These costs included items like personal protective equipment, additional labor expense, cleaning services and additional interest expense from our precautionary revolver draw downs. We view these items as vital to ensure that our employees are protected and facilities remain open.

Turning to synergies, we successfully achieved $5.6 million of pre-tax cost synergies related to the ARI acquisition in the quarter and $12.7 million year-to-date. We are pleased with the progress the integration team has achieved and continue to be optimistic about the long-term benefits from the acquisition. In the quarter, Greenbrier generated over $220 million of operating cash flow, reflecting robust syndication activity and reductions in working capital.

As production rates moderate, working capital reverses and Greenbrier generates substantial cash. At May 31st, Greenbrier had cash balances of $735 million and additional borrowing capacity of $137 million. In combination with the spending reductions outlined by Lorie, we've achieved our liquidity target of $1 billion. We will continue to enhance Greenbrier's overall liquidity. And with no significant debt maturities until late fiscal 2023 and fiscal 2024, we are on the path to emerge from the pandemic as stronger company. Greenbrier's Board of Directors remains committed to a balanced deployment of capital designed to protect the business and simultaneously create long-term shareholder value.

Greenbrier has declared a quarterly dividend for 25 consecutive quarters with periodic increases. Today, we are announcing a dividend of $0.27 per share, representing a yield of 5% based on yesterday's closing stock price.

We will now open it up for questions. Christy?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question will come from Justin Long with Stephens. Sir, your line is open.

Justin Long

Thanks. Good morning, and congrats on the quarter. Maybe to start with deliveries in the fiscal third quarter, Adrian, I think you mentioned about 500 units went to Brazil. But for the remaining deliveries, could you give the split between North America and Europe? And then also going forward, it sounds like you have pretty decent visibility in deliveries the next couple of quarters. So I was wondering if you could give us some kind of rough sense of how delivery should shake out the next couple of quarters based on your backlog?

Justin Roberts

Sure. Well, Justin, this is Justin, I'll jump in there briefly. So just as a reminder, we are not explicitly providing guidance on the quarters ahead at this point. What I would say is that we had about 700 units delivered in our European operations in our fiscal Q3. And we would expect it to be a similar number in our fiscal Q4 going forward. But, again, we are -- things continue to be a very fluid in the worldwide railcar network.

Justin Long

Okay. That's helpful. And maybe to follow up on North America, do you think that North American deliveries can remain relatively flat sequentially in the fourth quarter as well?

Adrian Downes

I would expect, fourth quarter deliveries will be down somewhat from the third quarter.

Justin Roberts

I think some of this has to do with syndication volatility as well, as Lorie and Bill mentioned that our production rates, we continue to take a long, hard look at our rates and our burn rate out of our backlog going forward just to make sure we are managing things well and responsibly.

Bill Furman

Yes, I'd like to just add that yesterday we had extensive meetings on this subject and it appears that the remedial work we've done in sizing the facilities, stabilizing the lines, the flexible lines, particularly the ones in Mexico, we're pretty much in balance with flow-out and flow-in. So I think we are -- I'm honestly optimistic, we will be able to maintain momentum on deliveries. But again, it's very hard to tell the future, it depends on the order flow-in. As Lorie mentioned we have been very cautious in booking orders. We have a fairly large number of transactions in processing. About -- I mean it's fairly significant compared to the order of magnitude, it’s 3 times the amount we booked in the quarter, about half in Europe and half in the United States. So I think that things will be less opaque the end of our coming quarter. But I think we're still looking at a reasonably strong quarter given everything that's in the Q4 and everything that's going on.

Justin Long

Great. That's helpful. And maybe as my second question, I wanted to focus on S&A expense. Some nice progress there and some helpful commentary. There were some unusual items in the quarter, some charges. So could you give us a rough sense for where S&A should shake out on a run-rate basis after all the changes you've made?

Lorie Tekorius

So I'll take that one. As I think I said or Bill said, we do expect fourth quarter selling and administrative expense to tick down from what we saw in the third quarter. Part of that’s driven by, we did have some severance costs and alike that occurred in the third quarter. This management team is laser-focused on making certain that we manage our costs and manage our spending so that we are right-sizing and having the right folks on our team for when demand comes back. One of the things where it's easy to manage our costs right now is there is not a whole heck of a lot of travel going on or entertainment. But we're looking at every single part of our cost structure and reducing those, that will go into our fiscal '21 planning. As Justin continues to remind us, we are not giving guidance. But it is this team’s focus to maintain the momentum that we've achieved in the third quarter and continue that into fiscal '21.

Operator

Thank you. Our next question comes from Matt Elkott with Cowen. Sir, your line is open.

Matt Elkott

Good morning. Thank you. If we take a look back at the manufacturing gross margins, I think they peaked in the first quarter of 2016 at close to 24%. And then if we go back 10 years ago in beginning of 2011, they were in the mid-single-digits after the Great Recession. Looking out for the next three years of the next up-cycle and current down cycle, given the company looks much different now, can you give us some updates on the range -- the cyclical range of the gross margin?

Lorie Tekorius

Sure. So, Matt, it's difficult -- I mean there are so many variables right now in this environment, it's difficult to give specific guidance, but I appreciate that you asked for a range. I would say that we're focused on margins being likely in the low-double-digit area. We might have opportunities for that to be higher. And we'll work very hard to make certain that they're not lower. And I think as you've seen in the past, as the cycle improves, we have tremendous opportunity to move those margins back up into the mid to upper teens.

Matt Elkott

And Lorie, what about in the current down cycle? Do you have like an internal floor that you like to not go below? Clearly the company is in a much, much better position now than it was even six or seven years ago.

Lorie Tekorius

It's a good question, Matt. Again, we have a strong team and we're focused on reducing our costs. I would expect that there's a chance that our margins will get into the single-digits, but I expect them to not drop as low as we've seen in past down cycles.

Matt Elkott

Okay. So I guess the targeted floor is high-single-digits in the down cycle?

Lorie Tekorius

I think that's fair. Yes.

Matt Elkott

Okay.

Bill Furman

I’d just chime in on this. I think we're all facing the same things, but there's quite a lot of pricing discipline that the major builders are introducing into their plans. We do have a flow of business that makes that pretty interesting. And I have to constantly ask you all to remember that there are so many different kinds of freight cars, some tending toward more commodity cars, which have lower margins and others with more proprietary features such as some of the lines that we have added to the ARI facilities. So it depends a lot -- the average depends very much on the mix. And that's something that you guys ought to continue to zeroing on this, as you do such a fine job of doing that.

Adrian Downes

And Matt, you're right. We're a very different company now. We've got much more diversity of products. So we're always able to service the parts of the markets that can be hot even in the down markets, and we've got a much lower cost footprint that allows us to be very efficient. So, that's one of the reasons why our low should not be low as what you've seen in our distant past.

Matt Elkott

And Bill, you mentioned pricing discipline, and not only are you guys different now than a few years ago, but the whole industry landscape is different because your competitor with whom you have 75% or more of the market share is really focusing primarily on leasing. So, you couple that with the fact that you just help to consolidate the industry further and then rationalize your capacity, so is that why we're seeing more pricing discipline in this down cycle relative to that down cycle, these steps are starting to see benefits?

Bill Furman

You have an excellent point on pricing relating to the sizing of capacity. We've been chronically in a situation in this industry throughout most of the time I've been in it with overcapacity. And arguably with flex manufacturing being the new buzzword -- railroads have buzzwords, we have flex manufacturing in our industry. I expect our colleagues at -- our friends that Trinity to continue to make their facilities more efficient and to size their facilities if we understand their plans. They do have a very good focus on leasing, but they're excellent manufacturers as well. There's a lot of things that go into this. I think the customers recognize the need for a strong supply industry. It's not just the car builders who are at the tip of the iceberg, but it's the smaller component manufacturers. They get hammered by a downturn like this. So I expect the railroads, the shippers to take opportunities to be in the market. And if they're wise, they won't push everybody to breakeven pricing on cash, which can sometimes happen. I think that they will allow and I think that sensible pricing policies will prevail on the sell side to allow a margin that will allow the industry to keep its strength during this downturn.

In addition, we're working on legislation that can address this issue very aggressively. We have a lot of cars stored, but it's not as bad as it looks. We had a frictional level of storage even in 2018 of almost 280,000 cars. If you look at the coal cars, the under capacity covered hopper cars that make that up, now the sand cars, almost 50,000 sand cars that go into that number. It doesn't take much to -- improvement in or a decline in velocity -- velocities of -- it is probably 150,000 railcars locked up in the temporarily high-velocity that's below traffic in the industry as provided to everybody. As that snaps back, it snaps -- it can snap back very rapidly. So one of the reasons we're more optimistic is that underlying theme.

Operator

Thank you. Our next question comes from Bascome Majors of Susquehanna. Thank you. Your line is open.

Bascome Majors

Hey, good morning. I was hoping that you could give us at least a directional look into a couple of other items that hadn't been discussed yet where you would seemingly have some visibility into or discretion in managing. And that would be any timing of further syndication activity or even a reduction in some of the finished railcar inventory that's not on lease, that's on the balance sheet, gains on railcar sales. And maybe on top of that, the relationship of the non-controlling interests and how that relates to manufacturing processes? That seems to look more favorable under this temporary arrangement with GIMSA. Thank you.

Justin Roberts

Yes, Bascome. So, from a syndication perspective, we will continue to syndicate railcars in our fiscal Q4 and into our fiscal 2021. Much of our syndication product is driven by the car types in demand in North America. So if -- so that will be kind of a governor going forward as we progress into 2021.

Lorie Tekorius

And I would just add in there that, as we've talked about in the past, we are -- we have great lease origination capabilities and so through the third quarter, and we expect it to continue this quarter and going forward, we will continue to originate leases, build the railcars, which will go into our railcars held for syndication and feed into that model that Justin was referring to.

Justin Roberts

And then with regards to gains on sale, we would expect that to move down into a more historical number going forward into fiscal 2021. Just as a reminder, this is the final year of our kind of agreement or alliance with Mitsubishi on that front. It was a three-year agreement to kind of work on our lease fleet and refresh it for reimburse purpose, but also to allow them to build it out. So while we continue to have a strong ongoing multiyear agreement with them from a new railcar perspective, we would say that our historical gains on sale is a little more realistic going forward and we'll be more opportunistic based on activity in North America.

Bascome Majors

And the last piece about non-controlling interest in GIMSA. That looked a bit more favorable versus your overall profits this quarter. Trying to understand how durable that is? Thank you.

Adrian Downes

Yes. We had indicated in our last press release that we would have a benefit of $0.25 for the back half of the year. So you did see that pace in Q3 and should see continue into Q4. And then we will also have a benefit for the first six months under this arrangement next year and that will be at a lower rate. So we had indicated $0.40 over the 12-month period of the arrangement, $0.25 in the back half of this year. Part of that delivered in Q3 and then about $0.15 for the first half of next year. That's assuming various production levels.

Bascome Majors

Thank you, Adrian. And last one from me. Bill, congrats on officially marking the path to retirement here. You had made some comments earlier about, I think, quoting Carl Icahn, when things are tough, you want to look for good opportunities. Was this referring to you seeing value in your company shares here or were you actually suggesting that Greenbrier could go on the offensive and perhaps be more acquisitive in this downturn? Thank you.

Bill Furman

It was not the latter. It's the -- I think the stock is -- given the franchise that we've grown, the team has grown and the way things are clicking over here. We're really focused on the right levers right now. And I think we can create really strong cash flow. I bought 100,000 shares in the last opportunity. I'm -- I have reached an understanding, if you read the agreement, to fixed stock in lieu of cash. I may still continue investing. I'm pretty bullish on Greenbrier. I've seen this cycle go in earlier times. I know that the industry can flip around. It's baffling to people who are not immersed in the industry, but it is, while a cyclical company, a very, very strong company. We have strong reliable competitors. We don't have the type of overcapacity that existed in earlier eras. I really believe that we can drive cautiously, of course, value opportunities. We are contracting our footprint and consolidating. We're not looking at new acquisitions in any way, shape or form at this point in the crisis.

So as soon as we're through our phase one which is liquidity, capital preservation, cost reduction, we can look at meritorious growth. But the first goal is not to run out of cash in a business like this and we are going to have a good level of cash. We're going to exceed our goals way beyond the $1 billion goal. And we're going to be able to deploy capital sensibly, including continuing to consider the returning cash to shareholders through the dividend policy and we may revisit stock buybacks as that opportunity might exist. But right now it'd be too early to get into all that. But it's certainly -- I just think the company is undervalued at its current price.

Operator

Thank you. Our next question comes from Steve Barger with KeyBanc Capital Markets. Sir, your line is open.

Steve Barger

Hi. Remembering back to the wind down of the shale plays, your earnings were more resilient than some people expected. So do you think this down cycle will be the same? And just generally speaking, given all the cost cuts, what you see in backlog syndication opportunities international, would you expect a big decline in earnings next year versus this year or could that be stable plus or minus?

Lorie Tekorius

I think it's a great question. Again, there is a lot of uncertainty and I appreciate you pointing out the resiliency that we saw and how many didn't think that we would be as resilient as we were. I think if you look at expectations from the folks who cover Greenbrier, you can see, it is a very, very wide range. I would expect us to be more in the area where you're seeing groupings of those outlooks. I do expect -- I mean, we are going definitely into a period of time where we'll be delivering fewer railcars, but I don't think we're -- I don't expect us to be in a period where we're reporting losses, but maintaining modest margin and continuing to be focused on keeping our cost level appropriate.

Steve Barger

So even if you expect a reported loss in a specific quarter, you wouldn't expect that for the year?

Lorie Tekorius

That would be my expectations, yes.

Bill Furman

We -- I don't think we would want to be quoted as saying we expect a loss in any quarter. That requires our foretelling the future and there's plenty of pundits out there who can foretell the future one way or the other way and probably none of them are correct. So I think we're going to be a disciplined machine focused on what we've told you we're focused on and we'll let the future unfold as it will. I am optimistic about the future for many of the reasons I've expressed and many more that we don't have the time to get into. If you look at the demographics, you look at FTRs recovery rates, they're going back to 2022 to replacement plus levels of demand.

And again in this industry, because of the demographics of velocity and the stored demographics, it can really flip back quickly. So it's just so hard to tell. And that's why we're not going to give guidance. And by the way, we don't give guidance in the third quarter. Anyway, we always wait till the fourth quarter if we're going to give guidance, which I doubt we will, unless things change dramatically in the future like the next few couple of months and everybody's really happy and COVID-19 has gone away and we have a vaccine and there is plenty of things to look forward to. This is nothing compared to what has gone on before, nothing. It's just unfortunate but we can all get through it.

Steve Barger

Got it. And to your point on small increase in velocity could unwind cars in the storage pretty quickly. I'm curious if you think the industry needs to see a backlog contraction like we saw in 2009 or is there enough specific car type catalyst that the backlog doesn't need to get down to those kinds of levels?

Bill Furman

Again, it's very hard to tell the future. Typically in this type of cycle, you'd see the backlog decline. We all have tactics that we use to counter that. Greenbrier generally does much better because of its commercial go-to-market strategy in a downturn. We have some really great accounts for multi-year orders, particularly, very strong companies that are committed to multi-year relationship. So it's very difficult to say. I would prefer not to -- I'd prefer not to give you any specific guidance. Great question. You guys are always trying to guess -- to give you guidance, but we're slogging through this very much like a prizefight. We're just -- and we're in the ring, and we're doing what the right thing is. And we're going to -- we're going to get out at the other end and I think we're going to win.

Steve Barger

So, just one last follow-up to that. So, Bill, you've seen a lot of cycles. Is the primary thing you're looking at to kind of make you feel better about where we are just traffic levels or is there anything else that you would look to as kind of a leading indicator to moving into a more comfortable position?

Bill Furman

Well, I think the general economy -- we've taken a real hit to the economy, a 5% GDP decline 2020, probably just consensus roughly maybe a little under consensus. But then if you look at the stats for that and you look at the 4% growth under moderate scenarios, look at -- just look at the facts, look at the projections from reputable economists. Unemployment claims have gotten in March from 6,800 to a projected -- or all the way down to 1.8 billion in May, when we are able to reopen the economy despite the ups and downs of the COVID-19, that's going to produce more income. The government subsidies have been very helpful. More is probably on the way, depending on your political preferences, maybe a lot more, maybe probably certainly more, maybe not as much under one administration or the other, one type of Congress than the other.

And so you look at these things and you just see that while we've taken a tremendous hit to the economy and to the health and probably confidence of the consumer, it's all about the math. And it's -- the FTR has us recovering at 50,000, 60,000 cars, '22, '23. Our own projections are a little more optimistic than there is in 2021. So it just depends again on the math. Carloads are recovering, we expect them to recover in 2021. They're down 8%, but that's a lot better than being down 12% in '17 and earlier in 2020. We expect very rapid recovery in the carloads as soon as the economic fundamentals are restored.

Lorie Tekorius

Yes, I think just to add on to that, Bill, it's looking at what's going on in the overall economy and then getting the manufacturers back up, the service providers that are going to transport goods on the rails, right, and getting that going again and that will then start compounding that rail traffic recovery, which will then result in increased demand again.

Bill Furman

Yes, we have an industry coalition that is promoting and working with Congress on a Railcar Act. It would be an incentive and future stimulus to scrap and take out the inefficient cars in the storage statistics as just tons of frictional cars could be taken out. That would be a very attractive program. We've got wide parties of support for that. Whether that will get through this Congress in that form, hard to say, but we do expect the infrastructure build to come in. That will be a boost and if we could do something to help shippers and railroads address their obsolete cars, the stored cars, it would make the railroads and the shippers more efficient. It would help the economy, it would be green. It would be a socially good thing to do. And we've got a real strong team, interdisciplinary team through our supplier associations to address that. So there's plenty of things that can be done to address these things that are quite rifle shots, specific. And I'm optimistic that we'll see better times in these, sooner than others think. It depends a lot, however, on COVID-19 and what's happening right now is not encouraging with spiking back.

Operator

Thank you. Our next question comes from Allison Poliniak of Wells Fargo. Ma'am, your line is open.

Allison Poliniak

Hi, guys, good morning. Some nice efficiencies coming through on the Wheels, Repair & Parts business. Making the assumption that the worst in traffic is now behind us, how should we think about EBIT margin? Is that a decent one to build from or there are some nuances there that we need to be mindful of, going forward?

Justin Roberts

Yes, Allison, this is Justin. I would say, I think it's a good starting point and I think if traffic continues to improve, we believe that we would see improvements in that going forward. But I would say that, that is a business that has the most explicit exposure to traffic immediately. So, to the extent traffic kind of is volatile or moves up or down, that's what we would expect to see.

Lorie Tekorius

And it's that view of referring specifically to the wheel side, but it's also repair side where we want to see cars not going into storage but asset owners being interested in repairing their cars and that's where our management team is working very closely. And the management team of the repair group working very closely with our management services team, where Bill indicated, we manage a quarter of the North American fleet. And so it's looking at how can we capitalize leverage, that relationship we have of our customers who need their cars repaired and doing that in some of our shops if we can do it in an efficient and quality way.

Bill Furman

Allison, I appreciate you taking -- bringing it up, I just want to plug in for Lorie here. She has been in charge of that business unit along with Rick Turner for a year now. When she was promoted, she took that very challenging assignment on. We had given her one of the hardest assignments that existed and she and Rick have really turned it around. We've got new team in place, we have rationalized the network. Our repair business is actually making money now, which I didn't think I would see in my career, the way it was going. But the poor thing took a lot of hits and she has righted the ship and I got to congratulate her. I think more good things are going to come out of that in the future.

Allison Poliniak

That's great. And then just one, I guess, clarification on what -- one of the questions Bascome asked in terms of GIMSA. I know you talked about $0.25 in the back half of this fiscal year in terms of the restructured agreement. Is that weighted toward Q3 or is it more balanced between both? Just trying to understand in terms of modeling.

Adrian Downes

Balanced between both.

Allison Poliniak

In both. Okay, perfect. Thank you.

Operator

Thank you. Our final question comes from Ken Hoexter of Bank of America. Sir, your line is open.

Ken Hoexter

Great. Good morning. Can we dig -- Bill, maybe dig into pricing a bit more? Your backlog fell from about $103,000 average per car to $101,000, but if I look at the new orders booked, it drops all the way down to $81,000, down from about $107,000 on average ASP per car. So maybe you can talk a little bit about mix change that's going on, or is it this environment, you really do get a bit more aggressive on pricing to keep the lines working? Thanks.

Lorie Tekorius

Yes, this is Lorie. I'll take that. About half of our orders this quarter were generated in Europe, where the price -- the mix of that car type is what brought the average sales price for orders a bit lower than what we've seen recently, but I think it's a testament to our strong backlog and our strong pricing discipline that our overall backlog ASP only moved it a bit.

Bill Furman

Right. Also, just basic statistics, we learned in business school, bad sample size, not really characteristic of maybe the next we expect going forward. 800 cars, a mixed 50-50, Europe domestic, probably not characteristic of anything in particular.

Ken Hoexter

So, is it more Europe-U.S. or North America than it is the type of car, or are you saying the type of car in Europe is typically a lower margin or lower -- maybe not margin, but maybe just lower ASP type of build?

Lorie Tekorius

The cars that were ordered during the third quarter in Europe, half were of a car type and had a lower average price, just like if you think about years and years ago when there was heavier intermodal demand and in those periods of time, depending on mix, it could bring your average sales price down. So it wasn't being overly aggressive on pricing, it was just the specific car type in Europe that has a lower ASP.

Ken Hoexter

Okay. That's helpful. And then, Adrian, maybe jumping over to the finances, it looks like -- I know in the large moves you've made to get to that $1 billion target, it looks like days sales outstanding dropped from 47 days to 30 days. Have you changed payment plans with customers -- with your major customers? Is that another trigger you're looking at to kind of keep cash on the books?

Adrian Downes

It's more syndication that would have driven that change. So we did not change terms, in other words. It's just a mix of direct sales versus syndication activity in the quarter versus what you had seen in prior quarters. But we had less syndication activity.

Bill Furman

A high percentage of our customers have actually credit ratings. They have followed admirable discipline and they haven't stretched their payables. So, I think that's a significant factor too and we've been spending more time focused on collections and so on.

Adrian Downes

Yes.

Ken Hoexter

No, it makes sense. I mean given you have larger obviously major customers who are well capitalized. Yes, I just wanted to see if you were putting the screws on that, but it sounds like just a change in where the cash is coming from for the quarter. Alright. That's great, thank you very much.

Justin Roberts

Thank you very much everyone for your time and attention today. And if you have any follow-up questions, please reach out to myself Justin or Lorie Tekorius. And have a great weekend. Thank you very much, everyone.

Lorie Tekorius

Thank you. Stay safe.

Operator

Thank you. This does conclude today's conference. You may disconnect at this time and have a good day.