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Greenbrier Companies Inc (NYSE:GBX)
Q3 2020 Earnings Call
Jul 10, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to the Greenbrier Companies Third Quarter of Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] 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 M. Roberts -- Vice President, Corporate Finance and Treasurer

Thank you, Christie. 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.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

Thank you, Jason, and good morning everyone. As we begin this morning, let me express my continued gratitude to our workforce who have 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 have 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, the 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 and 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 have 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 task.

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 have occurred 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 the COVID-19 pandemic reached our shores. We can draw hope from the recent despair and participate in 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 fact and experience embedded in our culture. In addition, we strive to do what is right. It's just the right thing to do and is productive thing to do. Dozens of studies on productivity over the last 100 years have demonstrated that 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 ingrain efforts to combine -- to combat social inequality -- 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 see 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 I detailed in 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 have moved through a phased and measured response, a balanced response appropriate to the conditions we face. We are focused on liquidity, cost reduction, capital preservation, respect for capital and all of this is beginning to show in the numbers. But in the quarters ahead, depending on how circumstances go, certainly if current circumstances continue and there is no major improvement in our sector or 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 plantswide 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 have 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, SG&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 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 an 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 longtime flagship facility in Portland, Oregon. The third quarter also side 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 receives severance benefits tied to their length of service, fully now reflected in the financials that 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 been unacceptably delayed 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 downcycles and national emergencies over the course of our 35-year ownership of that operation dating back to the FMC and 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 learned 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. Believe me, 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 the quarters to come, will preserve its financial stability, build a large pool of liquidity to deploy sensibly in capital opportunities in the future prudently and we 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 L. Tekorius -- President and Chief Operating Officer

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've 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 in the quarter and this mix did impact the average sales price of order activity. Our backlog remains strong at 26,700 units, valued at $2.7 billion. Our multi-year manufacturing backlog continues to be the source of stability in difficult times and provides us with the resilience and a bridge to an industry dynamics and economic conditions improve.

We don't expect demands to recover overnight and the number of cars in storage represents the highest level of railcars stored on record. But we are 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 standard, we have maintained momentum and there is a reasonable amount of current activity that's subject to documentation and final confirmation, that's 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 continue 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 I 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 it's 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 & 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 Great Rail network.

Our Leasing and Services group performed well in the quarter even with traffic and commodity-driven headwinds. The earnings of the group was negatively impacted by a $4.3 million charge related to a few financially distressed sand company. A portion of the charge was driven by the new lease accounting standards. 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 have reduced capital expenditures by $50 million. We've reduced annual overhead expenses at our facilities by $65 million and we've reduced annualized selling and 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. I'll turn it over to Adrian.

Adrian J. Downes -- Senior Vice President, Chief Accounting Officer and Chief Financial Officer

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 hundred syndicated units. Aggregate gross margin of 14.1%, selling and administrative expense of $49.5 million is 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 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 current foreign exchange rates, we expect a lower effective tax rate in the fourth quarter.

Net earnings attributable to Greenbrier are $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 drawdowns. 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 moderates, working capital reverses and Greenbrier generates substantial cash.

At May 31, Greenbrier cash balance sits at $735 million and additional borrowing capacity of $137 million. In combination with the spending reductions outlined by Lorie, we've achieved our liquidity targets 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, a 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. Christie?

Questions and Answers:

Operator

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

Justin Long -- Stephens, Inc. -- Analyst

Thanks, good morning and congrats on the quarter.

Lorie L. Tekorius -- President and Chief Operating Officer

Thank you, Justin.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

Thank you, Justin.

Justin Long -- Stephens, Inc. -- Analyst

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 in the next couple of quarters. So I was wondering if you could give us some kind of rough sense of how deliveries should shake out the next couple of quarters based on your backlog.

Justin M. Roberts -- Vice President, Corporate Finance and Treasurer

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 very fluid in the worldwide railcar network.

Justin Long -- Stephens, Inc. -- Analyst

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 J. Downes -- Senior Vice President, Chief Accounting Officer and Chief Financial Officer

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

Justin M. Roberts -- Vice President, Corporate Finance and Treasurer

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.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

Yeah, I'd like to just add, yesterday, we had extensive meetings on the 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, were pretty much in balance with flow out, 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 again. As Lorie mentioned, we have been very cautious in booking orders. We have a fairly large number of transactions and process about -- I mean it's fairly significant compared to the order and more about the magnitude of 3 times the amount we'd booked in the quarter, about half in Europe and half in the United States. So, I think the things will be less opaque at the end of our coming quarter, but I think we're still looking at a reasonably strong quarter given everything that's in Q4 and everything that's going on.

Justin Long -- Stephens, Inc. -- Analyst

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 L. Tekorius -- President and Chief Operating Officer

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 the like that occurred in the third quarter. This management team is laser focused on making certain that we manage our cost 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 cost right now is there's not a whole heck of a lot of travel going on or entertainment. But we're looking at every single parts of our cost structure and reducing those. But that will go into our fiscal '21 planning. As Justin continues to remind us, we're 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.

Justin Long -- Stephens, Inc. -- Analyst

Okay, I'll leave it at that. I appreciate the time.

Lorie L. Tekorius -- President and Chief Operating Officer

Thanks, Justin.

Justin M. Roberts -- Vice President, Corporate Finance and Treasurer

Thanks.

Operator

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

Matt Elkott -- Cowen -- Analyst

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 you go back 10 years ago and the beginning of 2011, they were in the mid-single-digits after the Great Recession. Looking out for the next three years at the next up cycle and just current downcycle, given the company looks much different now, can you give us some updates on the range, the cyclical range of the gross margin?

Lorie L. Tekorius -- President and Chief Operating Officer

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 will 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 -- Cowen -- Analyst

And, Lorie, what about in the current downcycle? Do you have like an internal floor that you'd 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 L. Tekorius -- President and Chief Operating Officer

You know, it's a good question, Matt. Again, we have a strong team and we're focused on reducing our cost. I would expect that there is 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 downcycles.

Matt Elkott -- Cowen -- Analyst

Okay. So I guess the targeted floor is high-single-digits for the downcycle?

Lorie L. Tekorius -- President and Chief Operating Officer

I think that's fair. Yes.

Matt Elkott -- Cowen -- Analyst

Okay.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

I think, Matt, I'll just chime in and just say, I think we're all facing the same things. But there is quite a lot of pricing discipline that the major builders are introducing into their plans. I -- we do have a flow of business that makes that look 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 zero in on as you do such a fine job of doing that.

Adrian J. Downes -- Senior Vice President, Chief Accounting Officer and Chief Financial Officer

And Matt, you're right, we're a very different company now. We've got much more diversity of product. So we're always able to service the parts of the market that can be hard even in a down market, 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 lowest should not be as low as what you've seen in our distant past.

Matt Elkott -- Cowen -- Analyst

That's very helpful. 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 you know the -- your competitor with whom you have 75% or more of the market share is really focusing primarily on leasing. So you coupled 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 and less downcycle relative to past downcycle, these stuffs are starting to show benefits?

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

You have an excellent point on pricing there. 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, the new buzzword, railroads have buzzwords, we have Flex manufacturing in our industry. I expect our colleagues at -- our friends at 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 are a lot of things that go into this. I think the customers recognize the need for a small -- a strong supply industry. It's not just the car builders, who are the tip of the iceberg, but it's the smaller component manufacturers that get hammered by a downturn like this.

So, I expect the railroads and 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 are 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.

Matt Elkott -- Cowen -- Analyst

Very helpful. Thanks, Bill and thanks everyone.

Operator

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

Bascome Majors -- Susquehanna -- Analyst

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 M. Roberts -- Vice President, Corporate Finance and Treasurer

Yeah, 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 L. Tekorius -- President and Chief Operating Officer

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 M. Roberts -- Vice President, Corporate Finance and Treasurer

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 multi-year 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 -- Susquehanna -- Analyst

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 J. Downes -- Senior Vice President, Chief Accounting Officer and Chief Financial Officer

Yeah. 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 -- Susquehanna -- Analyst

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.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

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 but cautiously, of course, value opportunities. We are contracting our footprint and consolidating. We're not looking at new acquisitions in any way of shape or form at this point in the crisis.

So as soon as we're through our Phase 1 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.

Bascome Majors -- Susquehanna -- Analyst

Thank you, Bill.

Operator

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

Steve Barger -- KeyBanc Capital Markets -- Analyst

Hey, good morning.

Lorie L. Tekorius -- President and Chief Operating Officer

Good morning, Steve.

Steve Barger -- KeyBanc Capital Markets -- Analyst

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 downcycle 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 L. Tekorius -- President and Chief Operating Officer

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 -- KeyBanc Capital Markets -- Analyst

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

Lorie L. Tekorius -- President and Chief Operating Officer

That would be my expectations, yes.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

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 -- KeyBanc Capital Markets -- Analyst

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?

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

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 -- KeyBanc Capital Markets -- Analyst

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?

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

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% [Phonetic] growth under a MyRisk 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 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 and 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 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 20 -- here earlier in 2020. We expect very rapid recovery in the carloads as soon as the economic fundamentals are restored.

Lorie L. Tekorius -- President and Chief Operating Officer

Yeah, 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.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

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.

Steve Barger -- KeyBanc Capital Markets -- Analyst

That's great detail. Thanks so much for the time.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

Thank you.

Operator

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

Allison Poliniak -- Wells Fargo -- Analyst

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 M. Roberts -- Vice President, Corporate Finance and Treasurer

Yeah, 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 L. Tekorius -- President and Chief Operating Officer

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.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

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 -- Wells Fargo -- Analyst

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 J. Downes -- Senior Vice President, Chief Accounting Officer and Chief Financial Officer

Balanced between both.

Allison Poliniak -- Wells Fargo -- Analyst

In both. Okay, perfect. Thank you.

Lorie L. Tekorius -- President and Chief Operating Officer

Thanks, Allison.

Justin M. Roberts -- Vice President, Corporate Finance and Treasurer

Thanks, Allison.

Operator

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

Ken Hoexter -- Bank of America -- Analyst

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 L. Tekorius -- President and Chief Operating Officer

Yeah, 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.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

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 -- Bank of America -- Analyst

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 L. Tekorius -- President and Chief Operating Officer

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 -- Bank of America -- Analyst

Okay. That's helpful. And then, Adrian, maybe jumping over to the financials. 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 J. Downes -- Senior Vice President, Chief Accounting Officer and Chief Financial Officer

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.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

A high percentage of our customers have actually credit ratings. They have followed admirable discipline and they haven't -- 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 J. Downes -- Senior Vice President, Chief Accounting Officer and Chief Financial Officer

Yeah.

Ken Hoexter -- Bank of America -- Analyst

No, it makes sense. I mean, given you have larger obviously major customers who are well capitalized. Yeah, 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. All right. That's great, thank you very much.

Lorie L. Tekorius -- President and Chief Operating Officer

Thank you, Ken.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

Thank you, Ken.

Adrian J. Downes -- Senior Vice President, Chief Accounting Officer and Chief Financial Officer

Thank you, Ken.

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

Thanks, everyone.

Justin M. Roberts -- Vice President, Corporate Finance and Treasurer

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 L. Tekorius -- President and Chief Operating Officer

Thank you. Stay safe.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Justin M. Roberts -- Vice President, Corporate Finance and Treasurer

William A. Furman -- Chief Executive Officer and Chairman of the Board of Directors

Lorie L. Tekorius -- President and Chief Operating Officer

Adrian J. Downes -- Senior Vice President, Chief Accounting Officer and Chief Financial Officer

Justin Long -- Stephens, Inc. -- Analyst

Matt Elkott -- Cowen -- Analyst

Bascome Majors -- Susquehanna -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

Allison Poliniak -- Wells Fargo -- Analyst

Ken Hoexter -- Bank of America -- Analyst

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