The Greenbrier Companies (GBX) Q2 2018 Earnings Conference Call Transcript

The Greenbrier Companies (GBX 2.77%)
Q2 2018 Earnings Conference Call
April 6, 2018 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to The Greenbrier Companies Second Quarter of Fiscal Year 2018 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 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 -- Treasurer and Vice President

Thank you, Angelica. Good morning, everyone. And welcome to our second quarter 2018 conference call. On today's call, I am joined by Greenbrier's chairman and CEO Bill Furman and Lorie Tekorius, executive vice president and CFO.

They will discuss the results for the quarter and will provide an outlook for the rest of fiscal 2018. Following our prepared 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 2018 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

Before the call, Bill challenged me to identify three key messages for you to take from today's call. As I'm always up for a challenge, I've identified four. First, Greenbrier has strong operating performance in all business units for the quarter, driven by the creativity and focus of our employees. Secondly, we are going to meet or exceed our guidance for the year, setting aside the tax [Inaudible].

Next, our international expansion is gaining traction with nearly 50% of Greenbrier's year-to-date order originating from outside of North America. Finally, growth and respect for capital. We are going to continue to grow the company in a capital-efficient manner over the long term.

Bill, with that, the call is yours.

Bill Furman -- Chief Executive Officer, Chairman and President

Thank you, Justin. That's a good job framing some of the big things moving this quarter. We might be hearing more from you. Thank you, Justin, [Inaudible] should just be able to deliver my commentary pretty soon.

Well, good morning everyone. Greenbrier did sustain a positive momentum in the second quarter of our fiscal 2018. Our strategy of protecting and enhancing Greenbrier's core markets in North America, while expanding internationally for diversification, has led to growth and strong performance. As mentioned in today's news release, almost half of all orders in fiscal 2018 have come this far from international customers and about 20% of Greenbrier's total backlog originates from outside North America.

Similar to the North American market, international activity will expand over time but will not be linear. Revenues and deliveries are on track to achieve full-year targets and combined with the lower tax rate. Greenbrier is on a trajectory to report annual earnings of approximately $5 per share. Leading indicators remain positive.

Railcar utilization increased. Railcar loadings continued at high levels. And the global economy has sustained its momentum. Industry forecasters and analysts have recently published upward revisions to their 2018 North American annual railcar delivery forecast within ranges between 49,000 and 52,000 railcars and even some a bit more.

Although continued pressures on new and used railcar lease rates remain, these are headed in the right direction and this brings credence to a more optimistic view of the market. Additionally, current railcar loading activity supports the view that the industrial economic industrial growth produced by that 2017 tax act as working in a federal infrastructure program if it comes to pass, will also produce an uptick in industrial railcar demand.

Competition does remain robust, particularly in North America. Greenbrier's strong balance sheet and liquidity enables us to take a disciplined approach to the new and used railcar market and truly provide a solid platform for growth. This long-term approach enables powerful business performance not simply over the balance of this fiscal year but also well into the future.

Through our international joint ventures, Greenbrier is participating in the earlier stages of the railcar renewal cycles in Brazil and parts of Europe and Eurasia. Greenbrier Astro Rail is progressing well in Europe on integration activities since its June formation. And as the largest freight car builder in Western Europe, it's well positioned to address a resurgent railcar market in Europe and in coming years. It is also a very solid platform for export there coupled with our factories in Brazil and the United States and our growing factory presence probably soon in Eurasia.

Greenbrier-Maxion in Brazil will be enjoying a strengthening Brazilian economy and renewal of railroad concessions that are forecast to produce $11 billion of U.S. dollars of infrastructure investment during the next decade. Recent political events in Brazil also signal stability for upcoming elections. Greenbrier is also encouraged by the long-term prospects of markets in the Gulf Cooperation countries.

We expect several nations in the region to expand rail freight infrastructure over the next several years but also Turkey and Eurasia. We recently sent a team to buy for the regional trade show there and throughout the region and including in Africa there is considerable interest in U.S. technology and U.S. export programs from a network of facilities as Greenbrier currently enjoys.

The strength of the global economy is a positive driver for Greenbrier. The U.S. has been more active on trade policy in recent months than it has been in recent years and this includes an extended NAFTA renegotiation and recent tariff activity. I'd like to just make our position very clear on those two things.

First NAFTA, a successful NAFTA renegotiation that supports Greenbrier's business model is a likely outcome. However, the company is prepared to adapt as needed to changes in trade law. We, along with many others in the industrial sector and agriculture throughout the United States, are following the progress on NAFTA and we are actively engaged in free trade advocacy with similarly impacted parties like the Class I railroads, including aggressive stances like KCS, Kansas City Southern railroad, which has been a leader given its north-south platform and also Union Pacific which recently had a very long article in the New York Times clearly stating its position on NAFTA.

Greenbrier will also successfully navigate issues that result from U.S. tariffs on steel. We're working closely with suppliers and customers to proactive manage sourcing requirements through a global sourcing model that is flexible, nimble and drives tremendous amount sources from U.S. suppliers.

Most of our content, particularly in Mexico and even Brazil, comes from the United States. Tariffs lastly can be an effective mechanism to reset relationships between trading partners. The Trump administration wisely is doing this. Nobody should be overly surprised as Secretary Ross recently mentioned by these policies.

Greenbrier supports, in particular, the tariffs announced on Tuesday for some finished rail products from China. The tariffs are a step in the right direction to address unfair competition by state-owned enterprises across a range of industries, including our own. Dumping practices in China and unfair subsidized investments by state-owned companies need to be controlled, and Trump administration is doing that. We need free trade but we also need fair trade, not subsidized trade, dumping materials and finished products into the United States to gain an unfair advantage.

We commend the administration for moving aggressively in that area.

Looking ahead, Greenbrier is confident about cash generation from operations. Greenbrier had a mandate, has a mandate, from its Board of Directors just confirmed a few days ago to target course for growth and also a strong course for building a talent pipeline and for a succession of key senior managers. Accordingly, we expect we will redeploy capital to maximize returns over the cycle and to pursue investments that offer good ROIC potential but not just ROIC and strong return on investment in the short run, also in the long run.

As a measure of confidence in Greenbrier's operations and ability to generate positive cash flow, the Board of Directors has approved another return and a commitment to return capital to shareholders. The Board also recently affirmed our commitment to diversity and service to our customers and to the communities in which we operate, evidenced by strong community involvement. The first half of our fiscal year has gone very well. Greenbrier has good momentum entering the second half of the year.

Assuming the global expansion continues and holding the constant potential of political or military shocks around the world and geopolitical sphere, you can expect continued good performance from us. Greenbrier is a different business and a better company, both operationally and financially that has been in previous economic cycles. With award-winning products, unique service offerings, distinct manufacturing capabilities and dedicated workforce, combined with an excellent Board of Directors and disciplined approach to the market, Greenbrier is poised to achieve its goals in fiscal 2018 and beyond.

Lorie, I will now turn it over to you for some financial commentary.

Lorie Tekorius -- Chief Financial Officer and EVP

Thank you, Bill. Thank you, Justin. Good morning, everyone. Thank you for joining us.

As Bill mentioned, we did finish the first half of our fiscal year with strong results and are positioned nicely to achieve our 2018 guidance, a testament to our strategy of enhancing our North American business while expanding internationally. For the second quarter, we realized higher revenue, gross margin and diluted earnings per share compared to the first quarter. Operationally, we delivered 4,900 units of which about 25% were international deliveries.

Highlights for the quarter included adjusted EBITDA of $79.1 million and earnings of $61.6 million or $1.91 per diluted share on second-quarter revenue of $629.3 million. These results include $0.89 per share related to the tax act enacted in December of 2017. The tax benefit in the quarter consisted primarily of two pieces. First, the one-time remeasurement of deferred income taxes on the balance sheet, partially offset by the transition tax on reinvested foreign earnings.

The net of these two items generated a $70 per share benefit. And then because our fiscal year ends on August 31, our U.S. tax rate for 2018 is a blended rate of approximately 26%, which is a reduction from the previous rate of 35%. This generated an additional $0.19 per share benefit in the quarter.

We'll receive the benefit of the full year of a lower 21% U.S. tax rate in our fiscal 2019.

Second quarter orders totaled to 3, 400 railcar units and valued that over $265 million. These orders comprise a broad range of railcar types, including intermodal, tank cars, hoppers, and flat cars. The order value in the quarter included a higher proportion of intermodal and other car types, which have lower average sales prices. The North American market continues to be competitive and non-linear.

Order activity in the quarter demonstrates the benefit of diversifying our business geographically through international expansion with nearly half of the 6,600 units ordered year-to-date being for markets outside of North America.

Backlog remains a key indicator of future earnings and cash flow generation. Our quarter end diversified backlog was 24,100 units with an estimated value of $2.3 billion. Based on current production rate, our backlog gives us clear visibility through 2018 and into 2019 and beyond, and allows us to exercise discipline in this competitive pricing environment.

Now, turning to our business segments. Greenbrier achieved an aggregate gross margin of 16.7% with all the business units showing improved margin activity. The quarterly gross margin in our manufacturing business was 16.2%, driven by product mix shift and increased syndication activity. Wheel and parts quarterly margin was 9%, reflecting increased volume and operating efficiencies.

And our leasing and services gross margin of 51% in the quarter was primarily attributable to higher management fees and interim rents.

In the same segment, gain on sale of equipment was $5.8 million and reflects continued lease rate rebalancing activity. Greenbrier's balance sheet continues to be strong. At the end of the fiscal second quarter, cash balances and available borrowings on our credit facilities are nearly $980 million, including cash of $586 million. Greenbrier's net funded debt is at historic lows, providing ample flexibility and optionality to grow the business.

Our capital allocation strategy remains focused on cash flow generation, return on capital employed and creating long-term shareholder value. Our confidence and with Greenbrier's long-term growth and strong cash flow generation is evidenced by the 9% increase in the quarterly dividend of $0.25 per share. This is the fifth dividend increase since we reinstated dividends in July of 2014.

As mentioned in the press release, subsequent to quarter end, our $190 million or 3.5% convertible notes converted into equity as expected. The shares that were part of this conversion have already been included in diluted EPS calculations and in guidance. If the conversion had occurred at the quarter end, total equity would have been $1.4 billion on an asset base of $2.4 billion, a substantial increase from just a few short years ago.

Based on current business trends and production schedules, we're confirming our guidance on deliveries and revenue for the full fiscal 2018 as follows; deliveries of approximately 20,000 to 22,000 units, of which about 10% will be from Greenbrier-Maxion in Brazil; revenue will be approximately $2.4 billion to $2.6 billion and we're increasing our full year guidance for diluted EPS to $5 per share; the increase is primarily driven by $0.89 per share in the second quarter of which $0.70 was a one-time impact and the benefit of a lower tax rate for the second half of 2018.

As we previously have guided, the cadence of deliveries and earnings is expected to be modestly weighted to the second half of the year based on current production schedules and setting aside the one-time tax benefit from the tax act. Further, we expect G&A to be about $185 million for the year; gains on sale will range between $35 and $40 million as a result of our fleet rebalancing activity; gross capital expenditures continue to be estimated at $195 million with $150 million of proceeds from the sale of leased assets; again, higher volume as we rebalance our lease fleet; depreciation and amortization is still expected to be $75 million; and earnings from unconsolidated affiliates reflect our share of the results from operations that are not consolidated, primarily GBW and our Brazilian operations.

We are encouraged by the recent results in Brazil, although challenges remain at GBW. At this point, we're expecting earnings from unconsolidated affiliates to be closer to breakeven in the second half of the year. We expect 2018 earnings attributable to non-controlling interest to be $25 million to $35 million. As a reminder, we consolidated results of two significant operations that are not fully owned, Jensen in Mexico and Greenbrier-Astra rail in Europe.

The non-controlling interest represents our partner share of the results of these operations. Our consolidated tax rate for the second half of 2018 is expected to be around 27%. As a reminder, our rate may fluctuate due to the geographic mix of earnings. So summarizing 2018 into just a few words; increased deliveries, higher revenues and higher earnings in 2017.

And now we'll open it up for questions.

Questions and Answers

Operator

[Operator Instructions]. The first question comes from Matt Elkott from Cowen. Sir, your line is open.

Matt Elkott -- Cowen & Co.

So at the end of calendar 2017, you guys had 38% of the North American backlog. And as you just mentioned thus far in this fiscal year, 50% of your orders came from international markets. Help me understand this. Does this imply that your orders thus far this year are about 20% of the orders that the North American market received? If I am thinking about this correctly, can you help me understand why the discrepancy between your share of the backlog and orders exist? Are you trying to be less aggressive in pursuing the North American market?

Bill Furman -- Chief Executive Officer, Chairman and President

I am not sure I follow the math, because I think our order success while it may have fallen slightly from 2017 is higher than what you suggest. I have to defer to financial people. We are trying to exert frankly discipline of course. The market is competitive and the mix of order opportunities that has perhaps affected our total market share.

We've been able to maintain over the past couple of years very high margins and very high ROIC. And given that we expect the market strengthens, we prefer not to allocate our really marginal orders to our factories and fill them up, because we expect margin opportunities to grow in the second half. We can get back to you though on specific market share and if you still want to follow it may be in the more specific description of market share and our strategy.

Matt Elkott -- Cowen & Co.

And staying on the margin front, are you suggesting that the gross margin outlook for the second half of the year could actually be better than the first half of the year?

Bill Furman -- Chief Executive Officer, Chairman and President

I don't think I am prepared to comment. I think that if you look at the total production capacity in the United States and a prospect for 52,000 car year, the issue here is that's the replacement demand average market and we have capacity in North America in the car building side between all of the competitors that exceed that. Regrettably, some competitors are having to drive pricing to get orders to keep their factories running. In many cases, one particular competitor is pricing below contribution margin and actually losing on each transaction they book.

This is not a sustainable long-term situation, and we're just trying to avoid following that kind of threat. So I think that this is part of the cycle where you see this behavior. And as things strengthen, given the stronger economy all over the world, we really would prefer to book orders and pay attention to those markets where the capacity issues have been addressed and not chase pricing that is not attractive. Many customers will recognize that over time they need the builders in the market we have lost the capacity, I think that time is coming.

Matt Elkott -- Cowen & Co.

And just one final question, Bill. Given your discipline on the margin front, the pricing front and what's going on in the North American freight market, what's you are seeing internationally and now that we're more than halfway into your fiscal year 2018. When you look out to 2019, is earnings and revenue growth, is it a plausible target?

Bill Furman -- Chief Executive Officer, Chairman and President

As you know, it may be a little premature for us in our cycle to talk about 2019. If you can tell the future and I do read the accounts reports, I just read the recent one and it's quite accurate and a little more bullish than some of the other folks if you guys are watching the market then probably you know as much as we do it as far as the elements of blocking and tackling. All of us have to worry about a secular shock to the global economy. The global economy is very strong in Europe other parts of the world Latin America, South America as we see the trade issues sort out, currencies will be adjusted.

So I continue to be optimistic, but of course, I've been accused of being optimistic before. I will remind you however, we exceeded the expectations of many of the skeptics who were probably listening in to this call when we said we would make $4 per share target this year. We are pretty firm about it. And as you can also see, we're on track to achieve that even if you take out any noise on the tax builds and again as we will certainly take the benefit of the tax rate.

So I would say it's a very positive environment basic economic environment, therefore, I'm optimistic but probably you guys know all geopolitical issues that have to be taken into account.

Matt Elkott -- Cowen & Co.

So borrowing any major changes to the current pace of how North American freight markets and international markets are advancing. Do you see anything like could get in the way of potentially improving on 2018, on fiscal '18?

Bill Furman -- Chief Executive Officer, Chairman and President

So I would tell you what. It's hard to tell the future. We see many things that could get in the way, but we see more positives and negatives. We get great momentum in international and we've got many opportunities and many continents at this point.

We've been working at this for several years. We've got an established base and it's time to really get some flavor on those investments. They're working out very well. And North America, it looks to me like the North American, we should be able to see a variety of reasons, stronger pricing, more orders and those of us who fill up our plans with cheap products respond to that we'll be regretting it.

If we look out and see big orders coming in and there is not as much competition for. So this is just basic car building round one-on-one and I'm very optimistic about the future of Greenbrier. We couldn't be in a better shape to play a role in whatever opportunities present themselves. 2019, 2020, 2023 my goal or my job is to leave this company on a very sound foundation and it has got a very sound foundation with a very good [Inaudible] director and the great management team.

Operator

Thank you. Next is Justin Long from Stephens. Your line is open.

Justin Long -- Stephens

Maybe to start with pricing and following up on some of that commentary. I know new railcar pricing can vary a lot by car type but if you just look at the blended average in the industry, how would you say that pricing in North America today compares to what you were seeing a quarter ago?

Bill Furman -- Chief Executive Officer, Chairman and President

I don't think it's that differentiated. It's mix, mix, mix. We have to constantly remind even our board members that a railcar is not a railcar, is not a rail car. Our tactics and strategy on blocking space are very relevant to all this but in terms of pure market, I'd say things are strengthening not getting worse.

So they're better this quarter than they were last quarter. Read that report and I think you'll see that that basic temperature of an entire cross-section and I agree basically with that report that just came out a couple of days ago.

Justin Long -- Stephens

And then maybe shifting to the international piece, you mentioned that's becoming a bigger piece of the order book. Could you just provide some updated thoughts on how you're thinking about the progression of international railcar orders from here? And then also just give some updated commentary on the mix. How will a higher weighting toward these international orders affect RPU and margins going forward?

Bill Furman -- Chief Executive Officer, Chairman and President

So I am going to not answer that question directly, I'll come back and if you want to ask and clarify it, try to hold me for more clarification I will but let me tell you about our international strategy. We have seen railcar markets in North America, particularly in the United States come and go. Over my years in car building business, this is a very clear picture of grace, euphoria and then overcapacity in car building where the wheel turns to the favor of either the customer on the one hand then back to the car builder and the other. We are taking a long-term view of our business.

We're investing in products for the future of the company, for the future of our income streams in 2019, 2020, '23 and beyond. Where we are operating in the GCC, they're thinking out to 2030. We must in international arenas be cognizant of the long-term play. The short-term is paying off in income and in margins but it's really a longer game.

What we'd like to do is have a very large platform around the world, presuming that over time free trade will be a fact of life and if not, and we won't be so dependent on the North American economy. So that's our goal and that's the goal of the Board of Directors. Now you can just ask specific follow-on if you'd like.

Justin Long -- Stephens

And I guess maybe just getting more into what you're anticipating in the order book over the back half of this year and into 2019 would be helpful and then any commentary on the mix impact from international orders.

Bill Furman -- Chief Executive Officer, Chairman and President

Well, through the balance of this fiscal year, I think it's pretty much covered under our guidance. We're looking at 20,000 to 22,000 cars for all markets. For competitive reasons, we don't like to break down individual countries. We have mentioned Brazil because we're proud of the progress going on there but we've also had a great contribution from Europe and other parts of the world.

So our focus is on creating value and pricing is one piece of all that but not all of it, and certainly not all of it in the short run or quarter-by-quarter. I'm not able to address your actual mix question but I think it's consistent with the guidance that you've been given and I think you can calculate our pace in North America in the quarters and what that might imply for the international orders.

Lorie Tekorius -- Chief Financial Officer and EVP

And maybe I can just add, Bill. I don't think what you have said before our international expansion is the long-term play. And I don't think any of these jurisdictions that we've expanded into having any more normality to the rhythm of orders than what we see in North America. It is non-linear.

We've got a great backlog going into the second half of fiscal '18. So really our production lines are full for 2018 and now we're booking out into 2019.

Bill Furman -- Chief Executive Officer, Chairman and President

We are booked out already in 2019 around the world with the exception probably of Brazil. Don't get me wrong, I am very excited about the profitability and the potential of profitability of these operations overseas but to give that granularity is not good for competitive purposes. It's a duplicate of the North America and microcosm around the world, but advantage of that platform is you can reach places you could never reach before and the value of that platform is optionality, because we've seen how optionality in these international markets can be incredibly valuable and we just want international footprint to take advantage of that.

Operator

Thank you. Next question is from Ken Hoexter from Bank of America Merrill Lynch. Your line is open.

Ken Hoexter -- Bank of America / Merrill Lynch

Can you just maybe, Bill, dig into your dumping commentary a little bit more? Were you just talking about impacts to steel or were you talking about China getting more into some railcar competition, maybe just dig into that? And then sticking on the international side, I appreciate the answer there before but is the Saudi order completely done within that number? So now when you talk internationally, you're talking about the full holistic international business, right?

Bill Furman -- Chief Executive Officer, Chairman and President

Yes, the full holistic business. And in particular the Saudi order carries through our fiscal year and into, at least into our first quarter and we're soliciting other orders for 2019 but let me be more clear about my comments about tariffs. As you probably know, two people at senior levels in commerce, you might recall, were on Board of Directors. They've been fairly transparent around the United States about what their concerns are in Trump administration.

They are concerned about China dumping steel. I agree with policies that we can't allow China to dump steel in the United States. They have been and they will continue to do so. They're not prevented from doing it.

And I think these policies are targeted quite aggressively at China and for good reason. In our sector, you have seen and we have seen, China sweep the market by establishing footprints in North America and dumping steel in the form of fabricated products and subsidized investments. And these are state-owned companies. These are nationally owned companies.

However, we have the advantage of operating throughout the world and we see an aggressive policy by China of buying markets through dumping and subsidies. Their policies are to offer huge subsidies to a country and then secure franchise as they build out infrastructure they have cash, a lot of conditions to it. And one of the conditions is that they get awarded physical products.

It's very hard for American companies to compete in that kind of environment and they are attacking the United States. I think the administration is very wise to be concerned about this it's quite complex of course but in general, we've seen the establishment of the company here in the United States. And it's not fully transparent and simply it's been topic and if we allow that to happen, you can see a lot of domestic industries very much threatened. So that would be my commentary on your question.

Ken Hoexter -- Bank of America / Merrill Lynch

I guess, Bill, just to follow-up on a completely different subject. We have heard a lot of discussion about rail congestion, particularly the auto sector and the need for more auto cars and obviously the rebounding and crude by rail and the rail is hearing overly expending capital on tank cars and getting into the business again, if it may disappear but can you throw maybe some thoughts on car types and given how important mix is to that yield and not necessarily profitability but shifting pricing dynamics. Your thoughts on focus for railcars now, demand on the auto side and tank side?

Bill Furman -- Chief Executive Officer, Chairman and President

And our pipeline, I mean for our forward-looking pipeline for potential orders, it's a surprising number of tank cars, in particular, not all of them, however, go out by rail. I think that oil by rail, given the times and the strength of the oil industry in America and right and increasing oil prices over the levels of the year ago, are all positive. So we think we agree with the commentators who are reporting strength in those two areas. Auto is a little more complex and quite a lot more complex, because they are affected by service policies, pricing policies, acquisition policies and what kinds of cars they will allow on their rails.

I just attended an FDA, National Freight Conference between railroads and shippers. It was very interesting to talk to both railroads and shippers on this subject. Some railroads and some of the bigger railroads are being very aggressive about safety and the types of cars that they will allow upon in service and they are putting a lot of pressures in shippers to provide those types of cars, they are going to pay a lot for it, or they won't even provide the service. So there is a lot of turmoil going on around that and it's not just railroading, it's another hazardous cargo.

We were active early on in the safety, safe railcar movement for tanks and we think that's finally going to bear fruit. We also believe the shippers are very strong, will find accommodations with the railroads. Velocity and service design, we all know that when the train runs slower more equipment is needed, so that's certainly going on.

Operator

Thank you. Next question is from Willard Milby from Seaport Global Securities. Your line is open.

Willard Milby -- Seaport Global

Wanted to ask about the scrap pricing and if you all can parse out benefit you're seeing maybe on the wheel and parts business from higher scraps pricing and any other benefits you might be seeing in other areas.

Bill Furman -- Chief Executive Officer, Chairman and President

First of all, we have a natural hedge as you just suggested in scrap pricing for materials increases. This is all even exciting time in the market and of course down the side of tariffs as it drives up at least temporarily the pricing in the United States. We just had a special report to our Board of Directors meeting by Whitehall, our global sourcing guru, who has received a recent promotion in operations to add to his global sourcing role. We believe we're on top of the supply chain.

We're passing on pricing. It's quite tricky in a climate like this where there's still pressure on margins because customers will ask for fixed pricing. When we can do back-to-back trades so we know that we can protect that fixed pricing even if it's higher than flexible pricing, we'll do it but we aren't going to get caught in a trap, and there's a clear trap that exists here and some builders are falling for it, of fixed pricing where steel prices are somewhat volatile. And having said all of that, the rail margins that are reflected in the quarter for our position show the natural hedging opportunity and there's an amazing amount of scrap that we generate throughout our network even in the manufacturing business as one of those wheels.

Lorie Tekorius -- Chief Financial Officer and EVP

And I would just add on to that that our wheel crew actually saw an increase in the volume of activity this year. So, it's not just higher scrap pricing that was benefiting that segment but also higher volume and they've been very focused on their efficiencies, driving improvement in gross margin as well.

Willard Milby -- Seaport Global

When I look at scrap pricing versus volume increases, is there a good split to think about like what's driving that margin 50-50 and 75-25? Any kind of help there?

Lorie Tekorius -- Chief Financial Officer and EVP

No, I would say it's just a combination of the two. We don't get down into the specifics of splitting it out like that...

Bill Furman -- Chief Executive Officer, Chairman and President

I think on units, it's in our market for job, allocating capital, organizing factories with respect to the capital and some of the efficiencies we're getting out of that are also reflected in the margin strengthening, that's pretty good margin 9% to 10% for that business and the ROICs have also gone up to respectable levels for that business.

Willard Milby -- Seaport Global

And if I could shift back to manufacturing and gross margin again. If I look back the last call, you'll make a couple of comments surrounding fiscal year '19, thinking that deliveries could be somewhat similar to '18 and that margin was sustainable in this, call it mid-teen range. I was wondering if those thoughts were still similar if there have been some changes in that arena?

Lorie Tekorius -- Chief Financial Officer and EVP

I will refer back to what Bill said earlier, we'll be giving our fiscal '19 guidance when we do our fourth quarter earnings release. We are excited about all the growth and what we have seen within the company and we do have a broad product mix between our manufacturing group and our leasing and services group driving efficiencies and generating margin based on the hard work of our commercial group, maintaining pricing discipline. We are optimistic we're positive about the outlook for 2019, 2020 but we don't have any specific guidance at this time.

Bill Furman -- Chief Executive Officer, Chairman and President

If you're asking is it going to be at least as good or better as this year, of course, that's our goal and we'll have more detail and granularity. We've got a lot of different ways to make that happen and we have some things that we, of course, worry about, we always do, we protect the downside and build the base. There are different platforms we're building around the world have tremendous potential for exciting things.

Willard Milby -- Seaport Global

And if I could sneak one last one in. I was just curious if you would be willing to talk about the margin profile North America versus Europe and necessarily looking for forwarding guidance on the orders on the margin of the orders you're booking right now but in general, the margin of European operations or that order book versus in general North America?

Bill Furman -- Chief Executive Officer, Chairman and President

Well, there's like three ways to answer your question. I know and I can't tell you. I don't know and I'm going to get back to you and there may be one other but I know and I am not going to comment further on the question. So thank you for the question.

Operator

Thank you. Next question is from Steve Barger from KeyBanc. Your line is open.

Steve Barger -- Keybanc

Bill, I understand the way you just answered that last question but just so we can all think about our models, I am going to take another stab at the international mix. If production were to skew toward more than half international in any quarter, say in 2019. Would that result in average car price that's lower than what you are running right now and would that be accretive or just dilutive to gross margin that you see in the first half?

Lorie Tekorius -- Chief Financial Officer and EVP

I will jump in here and I am sure Bill will have some comments to add but since we've expanded our product base in both North America and Europe with the doubling of our European footprint, we've got a broader base. So we have such a broad mix. It's hard to say that that shift in international deliveries was skewing overall. We're very pleased with how we're operating here in North America, as well as how we're operating in Europe.

Bill Furman -- Chief Executive Officer, Chairman and President

So I can give you a general answer and there is a lift in the market in Europe, which should be generally positive for next year's margin anticipation. We're very pleased with the integration of Europe. The partners that we've acquired during the acquisition are actively involved in the business, it's a real plus. We have a number of very attractive factories now over 50% of the market and we should be able to obtain pricing responsibility in that market.

Similarly, in Brazil, we're constantly improving the manufacturing footprint. We're pleased with what's going down there. And I think the margins are good as they are in the United States and maybe not. I don't know, it's hard to measure the future.

So we're pretty optimistic about the international footprint. And we just have to get solid orders in 2019 and more relevantly multi-year orders for 2020 and 2021.

Steve Barger -- Keybanc

So the revenue per car ordered this quarter was lower sequentially than last quarter. That's not a function of lower car prices structurally in Europe or Brazil. Is it just mix?

Lorie Tekorius -- Chief Financial Officer and EVP

Exactly, it is mix because we have a larger proportion intermodal orders here in the United States. And as you know from prior quarters whenever that intermodal order activity spikes up that can bring down the ASP.

Bill Furman -- Chief Executive Officer, Chairman and President

And in general, in Europe, the ASP is greater than the standard over here, because they are specialized and highly engineered wagons sometimes similar in Brazil. And so the mix would affect the average sales price. All factors being equal European orders, particularly might affect the higher mix but we'll give more guidance at the end of the year and we'll get more granular about this kind of stuff. We get this as useful to last year what your concerns are, we do know you have to do modeling, just model some optimism in and you probably would be OK.

This works for me.

Steve Barger -- Keybanc

And one last quick one, operating cash flow is running below last year's first half. Should we expect a big positive swing in the back half like we saw last year and would you expect higher operating cash flow this year than FY '17?

Lorie Tekorius -- Chief Financial Officer and EVP

I would say that we do expect it to turn a little bit in the second half. As you noticed on the balance sheet, railcars help for syndication and that balance has increased in the first half of the year as we've built some cars on to the balance sheet that we expect to be syndicated in the second half. I don't see anything that shows any major shifts in operating cash flow between '17 and '18. Again, as we have improved earnings, we would expect it to be modestly accretive or beneficial to operating cash flow.

Operator

Thank you. Next question comes from Matt Brooklier from Buckingham Research. Your line is open.

Matthew Brooklier -- Buckingham

It sounds like maybe you're little more positive on the international side of things. Any change in terms of your expectations for Astra accretion this year? I think you talked to $0.15 to $0.30 range and I think the last call, it was maybe toward the lower end of that. I'm just curious if there has been any change in your thoughts on Astra's contribution to this year?

Bill Furman -- Chief Executive Officer, Chairman and President

Let me take a shot and then I have Lorie. I'll let Lorie speak to it and you get still pretty much as we've talked about next quarter. In 2019, we should get a lift from Astra Rail. I think they're really getting their act together.

We have three factories in Romania, two factories in Poland and integrating all that team certainly as the market was a little more sluggish looking backward now the market is lifting up. So over there, I think we're expecting now I've done it she doesn't want me to give any guidance for 2019. I am pretty optimistic about Astra Rail. I think we've got a great team and we're going to really see some good results from them.

Lorie Tekorius -- Chief Financial Officer and EVP

No, I think what you said is spot on. I wouldn't change anything that we said about the contribution of Astra's deal right from the last quarter and I still said it was a bit more sluggish of a market. We are seeing improvement in that activity that we expect to be beneficial.

Matthew Brooklier -- Buckingham

And then post the quarter closing, any color to provide on within the North American market orders or the rail car enquires at this point?

Bill Furman -- Chief Executive Officer, Chairman and President

We had not disclosed it, but we've had continued order flow, meaningful levels of orders during this time after the quarter close in North America and very strong performance in rest of the world.

Matthew Brooklier -- Buckingham

Any noticeable change post the steel tariff announcement, I think maybe there were expectations that customers potentially would try to get ahead of that and new car pricing through the pass-throughs of those incremental costs could be rising. I'm just curious here if you guys have noticed any change in terms of the market.

Bill Furman -- Chief Executive Officer, Chairman and President

Well, there're two kinds of customers, enlightened ones and those who wait until the very last minute to try to get their bargains or always looking for bargains. So I love our customers. They are a source of all value. I think that some have waited too long to catch the wave.

I think steel pricing will catch those folks and there has been on the other hand an enlightened group who are trying to do the very best they can in car orders right now. We're parsing all that and we think, in general, the first half of the population, we're going to see those folks starting to order when they see these steel prices go up. So I think there's a lot of positive stuff going on in the North American economy, just read other reports and the tone at National Freight, the tone at the financial conference in the desert which we had all our folks attend, is up more upbeat than last year clearly. And for us, it's upbeat around the world plus here in North America.

So we're pretty optimistic.

Operator

Thank you. Next is from Allison Poliniak from Wells Fargo. The line is open.

Allison Poliniak -- Wells Fargo

So, on international, your comments there are very positive. And it sounds like in an area that you would want to expand to some of your deployment but I'm not as familiar with the market, but just sort of the opportunity set for you to expand internationally if you wanted to. Where would you find interest and region that's interesting to you?

Bill Furman -- Chief Executive Officer, Chairman and President

Well, all the footprints we have now we are looking at Eurasia, connecting Eastern Europe from platforms in Romania. We, of course, are looking at Eurasia that includes Turkey and Levant, it includes Ukraine, I think the policies for Ukraine have changed but we are looking at targets for opportunities, so one of the goals is to expand internationally but in a prudent way in a measured way and build a global footprint. I don't know that we would allocate massive amount of capital, we love borrowing capacity, if you consider that Greenbrier is part leasing company in the sense that we use, we seem to facilitate our sales railcars and engineering products and projects, it probably is a more global footprint, putting all these pieces together without focusing on a single market. We are going to focus on those countries that require local content so we will be doing operations that are responsive to local content rules.

I still think that all the core business for Greenbrier is manufacturing, leasing, commercial, parts, and wheels. And we'll be making probably our bigger investments in our core business and really paying attention to North America.

Allison Poliniak -- Wells Fargo

And just in general on GBW, I know there are still some operational challenges but are you seeing volume throughput increase there. And I mean in terms of incremental obviously, I would assume we would expect higher incrementals off of that or is it still a little early on that side?

Bill Furman -- Chief Executive Officer, Chairman and President

I'd say that GBW is improving. I think we've had two different management at the GBW. It's fully bought in with our partner Watco running it. Rick Webb who runs Watco is a very true businessman.

He likes to run things a little differently than a public company, but he's got some policies. As far as we are concerned, that business used to be core. If it's not going to make money, it's not going to be core. So we're working with our partner and we think we're going to as earlier, we're going to work out an arrangement with them that will be good for both parties.

Lorie Tekorius -- Chief Financial Officer and EVP

So thank you, everyone. We appreciate everyone's time and attention and listening to our comments today. And Justin and I will be to chat with some of you later this afternoon if you have any further questions. Thanks and have a great weekend.

Bill Furman -- Chief Executive Officer, Chairman and President

Thank you very much. Bye-bye.

Operator

Thank you, speakers. That concludes today's conference. Thank you for joining. You may now disconnect.

Duration: 58 minutes

Call Participants:

Justin Roberts -- Treasurer and Vice President

Bill Furman -- Chief Executive Officer, Chairman, and President

Lorie Tekorius -- Chief Financial Officer and EVP

Matt Elkott -- Cowen & Co.

Justin Long -- Stephens

Ken Hoexter -- Bank of America / Merrill Lynch

Willard Milby -- Seaport Global

Steve Barger -- Keybanc

Matthew Brooklier -- Buckingham

Allison Poliniak -- Wells Fargo

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