The Greenbrier Companies (GBX) Q1 2022 Earnings Call Transcript

The Greenbrier Companies (GBX 1.20%)
Q1 2022 Earnings Call
Jan 07, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to The Greenbrier Companies first quarter of 2022 earnings conference call. Following today's presentation, we will conduct a question-and-answer session. Each analyst should limit themselves to only two questions. Until that time, all lines will be in a listen-only mode.

At the request of the Greenbrier Companies, this conference call is being recorded for replay purposes. At this time, I would like to turn the conference over to Mr. Justin Roberts, vice president and treasurer. Mr.

Roberts, you may begin.

Justin Roberts -- Vice President and Treasurer

Thank you, Eiley. Good morning, everyone, and welcome to our first quarter of fiscal 2022 conference call. Today I'm joined by Bill Furman, Greenbrier's chairman and CEO; Lorie Tekorius, president and COO; Brian Comstock, executive vice president and chief commercial and leasing officer; and Adrian Downes, senior vice president and CFO. Following our update on Greenbrier's performance and our outlook for fiscal 2022, 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 calls 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 factors that could cause Greenbrier's actual results in 2022 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 the call over to Bill.

Bill Furman -- Chairman and Chief Executive Officer

Thank you, Justin, and good morning, everyone. Fiscal 22 is off to a good start, driven by strong commercial performance, disciplined management of our production capacity and continued growth of our railcar and lease fleet. Momentum in our business is being sustained. First quarter of fiscal 2022 continued our strong ordered trajectory.

As a result, Greenbrier posted its fourth consecutive quarter with book-to-bill ratio over one times. New railcars orders and actually were at 1.5 for this quarter. New railcar orders of 6,300 units were worth 685 million, were across a broad range of railcars. We ended the quarter with a backlog of approximately three billion, the highest level about three years.

Our order intake for the first quarter alone represents 35% of new orders received during all of fiscal 2021. Our recent partnership with U.S. Steel Corporation and Norfolk Southern Railway to design and launch new high strength steel gondolas having multiple environmental benefits demonstrates this momentum. In addition, in a moment, our chief commercial and leasing officer, Brian Comstock will share more about this and some other exciting customer focused initiatives.

And I should mention in terms of backlog do we have booked another 200 million of rebody work which is sizable but not counted in our backlog. We are now ramping up '21 active production lines in North America and approximately eight internationally. Importantly, we are harnessing our flexible manufacturing footprint to extract more production from each line. We expect this to increase in deliveries to increase over the course of the year.

Meat production requirements we recently expanded our global workforce by about 10%. Intensive management of safety, hiring and supply chain issues continue. Continued success in these areas is key to maintaining our strong start to the year, specifically on the supply chain, our global sourcing team continues to do an exceptional job of mitigating disruptions to support increased production. Our wheels repaired parts business is now known as Maintenance Services.

The new name doesn't change the back of this business unit endured a challenging quarter. Labor markets and supply chain direct disruptions have both impacted its profitability. Naturally, this lowered our consolidated margins which were below our expectations to begin with. As we speak to the changes, we're making to improve the performance of our Maintenance Services business unit.

Greenbrier leasing continues to perform very well. Our investment activity has considerably outpacing initial targets. Asset utilization, a key performance metric for the leasing business is high at 97.1% for the portfolio that is well-diversified across car types and strong lessee credits as well as maturity ladders. Additionally, we exceeded the initial investment target for GBX leasing by $200 million to a portfolio of $400 million in only nine months of operations.

This reflects the strong momentum in the business and our core manufacturing markets in North America. I'm sure there may be questions on this or other comments by management, but be sure to read the footnote in our press release, having to do with leasing supplemental information is very informative. The Omicron variant of COVID-19 were suddenly following the end of the quarter. As a result of well-established safety protocols, our operations have not been significantly impacted at present by the rising cases globally and in North America, but we are closely tracking the rapid community spread of this variant and we're taking all appropriate precautions.

We continue with safeguard protocols and we will enhance these as dictated by best practices as well as adhering to local health authority requirements in the locations where we operate. In the U.S. and Europe, it appears this wave might peak in the coming months. There are indications that the current variant carries milder symptoms than previous versions of the virus, particularly for those who are double vaccinated and those with boosters.

Nonetheless, we must remain vigilant. After two years, the full contours of the pandemic remain dynamic and unpredictable. Our resolver is effectively to manage Greenbrier through evolving COVID challenges and that resolver remains steadfast. Our outlook remains unchanged except that we believe it is growing to be much more positive.

We maintain a positive outlook for the fiscal year for a variety of reasons. These are supported by industry metrics as well as operating momentum, driven by a strong order book, demand backlog and manufacturing ramping. For example, a portion of idle railcars in North America decreased to 32% in July to just below 20% by December. Industry forecast for 2022 and 2023 are very encouraging, as Brian Comstock will share with you.

All this suggest that industry fleet utilization is nearing 80%. And again, Brian Comstock will add more on these points in a minute and we can talk in questioning and answering. Lorie Tekorius who will be Greenberg's CEO in March takes the helm in very important and exciting time in the long history of Greenberg. Before I turn the call over to Lorie, I'd like to provide some closing remarks on where Greenbrier stands today.

I became the CEO, when we were founded, when my partner and I cofounded a small asset leasing business in 1981. We entered manufacturing with the acquisition of Gunderson in 1985 and have continued to build on those two foundations. Today's manufacturing is our largest unit, comprising about 80% of our total annual revenues. But manufacturing is both driven and complemented by a robust commercial and leasing business, as well as asset management services.

Today, our asset management maintenance services touch about one-third in the North American fleet. It's been a remarkable journey for me and for the company. Greenbrier steadily grown industry footprint and today is the leading railcar manufacturer in North America, allowing us to operate and scale. We also now operated in four continents serving global railcar markets worldwide, with similar market shares issue this.

All of this has been accomplished through the hard work of remarkable people without guidance through their capacity for innovation, discipline management, and unyielding focus on the needs of our customers, as well as our workforce, and other stakeholders. We've purposely built the company to grow at scale across business cycles. Under Lorie's administration, she plans to do more of that along with some new initiatives of row. As global railcar markets emerge from a cyclical trough, one that was really exacerbated by the pandemic.

I'm proud of what the Greenbrier team has accomplished and the market leading positions we've achieved. I'm also proud of the significant value we've created for our shareholders. I expect that this will continue for many decades to come. As Greenbrier continues to drive innovation as an industry, broaden its footprint globally and by product line and expand this leasing and services business.

I will take just a brief moment as others may do later to welcome our two newer directors subject to the vote of our shareholders today James Huffines and Ambassador Antonio Garza. Both are highly qualified and we welcome this step for Broad refreshment. I also would like to congratulate two directors who served throughout almost the last 18 years to 20 years on our Board, Duane McDougall and Donald Washburn. Next week, we'll put out a brief congratulatory note marking this milestone, but I want to assure them that we remember them.

They're always welcome to visit and we thank them for their strong contributions over the years. I'll now turn the call over to Lorie Tekorius, Greenbrier's incoming CEO. I no doubt the Greenbrier will flourish under her administration. Lorie next time, you're going to be running this call.

So, thank you, and congratulations.

Lorie Tekorius -- President and Chief Operating Officer

Thank you, Bill. Good morning, everyone. And before I get into the details on the quarter, you may have noticed and I think they'll reference that renamed two of our reporting segments. We'll prepare in parts segment and now maintenance services and leasing and services is now leasing and management services.

The new names more closely reflect the customer solutions we provide and have no impact on the financial results. Greenbrier's fiscal Q1 reflected continued labor challenges in the United States, competitive pricing from orders taken during the depths of the pandemic troughs, and production and efficiencies from line changeover and ramping of capacity. I am proud of our employees around the world that continue to perform well, even as uncertainty about. It is certainly an understatement to say that increasing headcount safely by several thousand employees, and increasing production rates by 40% to 50% is challenging.

So with an experienced leadership team, we'll meet this opportunity to scale our operations all up keeping our workforce healthy and safe. Safety across our organizations has been and will continue to be our number one priority. And the quarter just ended, we delivered 4,100 units, including 400 units in Brazil. Deliveries decreased by about 9% sequentially, which primarily reflects the timing of syndication activity, and line changeovers in North America.

Our global manufacturing continues to take a measured approach to increasing production rates and activities as they work through orders taken during this process. Our global sourcing team continues to perform minor miracles on a regular basis, ensuring we avoid significant production delays. Our maintenance service business was significantly impacted by labor shortages exacerbated by the COVID pandemic. These shortages impact throughput, billing efficiencies and profitability.

We've made a number of changes to our hiring and training practices, and we're seeing improved retention rate that maintenance cycle times can be 75 to 90 days. So it takes some time for the benefits of these changes to flow through the operation. Further, this business was impacted by lower real change our volume. I do believe the team has made the necessary changes that will lead to positive results over the course of fiscal 2020 and our maintenance services.

Our leasing and management services group had a good quarter with strong fleet utilization and the integration of a previously disclosed portfolio purchased in September. Between the portfolio assets and origination from Greenbrier, GBX leasing grew by approximately 200 million in the quarter. And as of quarter end, that fleet is valued at nearly 400 million, nearly doubling in value across the quarter. Importantly, this growth reflects a continued disciplined approach to portfolio construction, underwriting and credit quality standards.

We are not pursuing growth at all costs. Our strategy remains to create repeatable revenue and stable tax advantage cash flows that will take the edges off the dips and new railcar demands that are well known by all on this call. In addition to managing our lease fleet, our Management Services or GMS group continues to provide creative railcar assets solution for over 450,000 railcars in the North American freight industry. When other positive developments subsequent to quarter end, is that our leasing team successfully increased the size of our 300 million nonrecourse railcar warehouse facilities by 50 million to 350 million.

Our capital markets team executed well this quarter, and we expect syndication activities to grow throughout the year, similar to our overall cadence of delivery. Syndication remains an important source of liquidity and profitability for Greenbrier. Looking ahead, we see strong momentum for fiscal 2022 and beyond. We have talented employees and experienced management who are focused on driving results and shareholder value.

I'm very excited about the long-term opportunities for Greenbrier. And now Brian Comstock will provide an update on the current railcar demand environment.

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

Thanks, Lorie, and hope everybody had a great holiday season as there's a lot to be excited about as we move forward. As mentioned in October, I remain excited about the momentum we are seeing in all of our markets globally. In Greenbrier's first quarter, we had a book-to-bill 1.5 reflecting deliveries of 4,100 units and orders of 6,300 units. This is the fourth consecutive quarter with a book-to-bill ratio exceeding one times and reflective of this strengthening environment.

New railcar backlog of 28,000 units with a market value of three billion provides strong multiyear visibility. These are the type of demand environments where Greenbrier's flexible manufacturing is a vital differentiator. In addition to new railcar orders, we recently received orders to rebody 1,400 railcars, as part of Greenbrier railcar refurbishment program. This program is an important part of our growing partnership with our customers to sustainably repurpose North America's aging fleet, to ensure that rail remains the most environmentally friendly mode of surface transport.

As of November 30th, our modernization backlog included 3,500 units, valued at $200 million. This is a valuable business that is additional to our new railcar backlog and absorbs production capacity. In addition to our railcar refurbishment program, we announced another sustainable initiative, in early December, a collaboration between U.S. Steel, Norfolk Southern and Greenbrier for a new gondola using an innovative formula for a high strength, lighter weight steel developed by U.S.

Steel. Each gondolas unloaded weight is reduced by up to 15,000 pounds. Norfolk Southern will initially acquire 800 of these Greenbrier engineered gondolas. The work done by Greenbrier and our partner promises significant benefits to all three companies and the freight transportation industry as a whole, as we lead the way to a net zero carbon economy.

One item we are clarifying is the $800 gondolas will be part of the Q2 order activity. In December, we also announced Greenbrier's joining of the RailPulse coalition. I'm personally excited about the prospects of this technology with the goal to aggregate North American fleet data onto a single platform. This has a potential to improve safety and operating efficiency, while providing enhanced visibility to customers, reinforcing rails competitive share of freight transportation.

Greenbrier's leased fleet utilization ended the quarter at over 97%. We continue to see improved lease pricing in term on all new lease originations and lease renewals as well as continued strong demand for leased equipment. North American industry delivery projections saw an increase in nearly 49,000 units in 2022 and over 60,000 units in 2023, given the strong reduction in railcars and storage that continue to congestion as the pores, which is impacting traffic and overall economic growth. We believe, these projections are very reasonable and see similar dynamics in Europe.

As you can see from our recently announced initiatives, Greenbrier's global commercial and leasing team remains focused on providing innovative solutions to our customers. Now over to Adrian for more about our Q1 financial performance.

Adrian Downes -- Senior Vice President and Chief Financial Officer

Thank you, Brian, and good morning, everyone. As a reminder, quarterly financial information is available in the press release and supplemental slides on our website. I'll discuss a few highlights and I'll also provide an update to our fiscal 2022 guidance. Highlights for the first quarter include revenue of $550.7 million, deliveries of 4,100 units which include 400 units from our unconsolidated joint venture in Brazil.

Aggregate gross margins of 8.6%, reflecting competitive new rail car pricing from orders taken earlier in the pandemic and labor shortages. Selling and administrative expense of $44.3 million is down 20% from Q4, primarily as a result of lower employee-related costs. Net gain on disposition of equipment was $8.5 million, like many leasing companies we periodically sell assets from our lease fleet as opportunities arise. We had an income tax benefit of 1.4 million in the quarter primarily reflect the net benefits from amending prior year tax returns.

Non-controlling interest provides the benefit of 5.2 million, primarily resulting from the impacts of line changeovers and production ramping at our Mexico joint venture. Net earnings attributable to Greenbrier of 10.8 million or $0.32 per diluted share and EBITDA of 42.2 million or 7.7% of revenue. Moving to liquidity, Greenbrier has a strong balance sheet. Liquidity of 610 million is comprised of cacheable reforms of the ten million and available borrowings of nearly 200 million.

We are well positioned to navigate any market disruptions we expect to persist into calendar 2022. As mentioned last quarter, our cash receivable spends at 106 million as of November 30, and we expect to receive most of these refunds in the second quarter of fiscal 2022. This refund is an addition to Greenbrier's available cash and borrowing capacity. Liquidity is important to support the working capital needs of the business as we significantly increase new railcar production beginning in '21 and into 2022.

Liquidity also enables Greenbrier to invest in growth, as demonstrated by the railcar portfolio purchase in Q1 and the expansion of GBX leasing at a pace exceeding our initial announcement. It has also allowed us to continue to pay dividends throughout pandemic during a time of economic uncertainty. Greenbrier's board of directors remains committed to a balance to find the capital. I believe that our dividends program enhances shareholder value and attracts investors.

Today, we announced the dividends are $0.27 per share, which is our thirty-first consecutive dividend. As of yesterday's closing price, our annual dividend represents a yield of approximately 2.3%. Since 2014, Greenbrier returns nearly 370 million of capital to shareholders through dividends and share repurchases. Additionally, you may have noticed an increase of approximately 70 million and Greenbrier's notes payable balance, when compared to the prior quarter.

This non-cash increase is a result of Greenbrier adopting a new accounting standard, which simplified accounting for convertible notes and no longer requires the calculation of debt discount and associated equity components. We believe the standard provides better transparency to how the convertible notes appear on our balance sheet. And to be clear Greenbrier did not incur any impact of liquidity or cash flows as a result of this adoption. Based on current business trends and production schedules, we're adjusting Greenbrier's fiscal 2022 outlook to reflect the following.

Increase deliveries by 1,500 units, now to a range of 17,500 to 19,500 units, which includes approximately 1,500 units from Greenbrier-Maxion in Brazil. Selling and administrative expenses are unchanged and expect to be approximately 200 million to 210 million for the year. Gross capital expenditures of approximately 275 million in leasing and management services, 55 million in manufacturing, and 10 million in maintenance services. Gross margin percent is expected to steadily increase over the course of the year from high-single-digits in the first half to between low-double-digits and low-teens by the fourth fiscal quarter, as railcar's orders during the pandemic trough are delivered and conditions in the maintenance services business improve.

We expect deliveries to continue to be back half waited with a 45%, 55% split. As reminders in fiscal 2022 approximately 1,400 units are expected to be built and capitalized into our lease fleet. These units are not reflected in the delivery guidance provided. We consider a railcar delivered on a lease Greenberg's balance sheet and is owned by an external third-party.

As mentioned in the commentary earlier on the call, momentum continues to build in our business. And I'm excited about what the future holds for Greenberg. And now we will open it up for questions.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] Our first question today comes from Justin Long with Stephens.

Justin Long -- Stephens Inc. -- Analyst

Thanks and good morning. I wanted to start with a question on manufacturing gross margins. I know on the last call, you were very clear about the timing of 1Q and that being the low point of the year. But I also know you were hoping for double-digit manufacturing gross margins and we were a bit below that.

So can you help us kind of bridge what happened on that front relative to expectations? And any way you can help us think about the sequential progression of manufacturing gross margins moving beyond in the next few quarters?

Lorie Tekorius -- President and Chief Operating Officer

Do you want to go Bill?

Bill Furman -- Chairman and Chief Executive Officer

No, you should add.

Lorie Tekorius -- President and Chief Operating Officer

So, you're right, we always have very high expectations. I think that our manufacturing folks did an excellent job in the first quarter. And it actually exceeded some of our expectations. But we did run into some headwinds in certain areas as they work through, as we said, orders that were taken during the downturn.

And some of the overhead absorption during the ramping just wasn't quite as robust as we would have expected. So those were the issues. And then we continue to face labor difficulties, particularly here in the United States to our facilities here in Portland, Oregon, as well as our operations in Arkansas. So, it's not only the impact of COVID, but it's also attracting and retaining the labor to be able to be efficient in our shops.

Bill Furman -- Chairman and Chief Executive Officer

I'll only add that we have maybe just a bit of delay here. The momentum in the second half should be strong. To the degree that our margins were to lag, we expect has been indicated in guidance that our production rates will increase significantly than earlier guidance. So, I think it will certainly be offset.

Justin Long -- Stephens Inc. -- Analyst

OK. And so, as we move into the second quarter, would your expectation be that manufacturing gross margins can get back to the double digits? And when we think about the full year, would you say that your expectation for margins is better than it was three months ago given the production guidance increase or are the labor issues offsetting some of that?

Lorie Tekorius -- President and Chief Operating Officer

I think the labor issues are offsetting some of that. We are optimistic. I don't want to get into quarter by quarter specific guidance on margins. Our expectation is as we move across this quarter, I mean, sorry, across the year, margins will improve and get to that double-digit area.

Sometimes the second quarter has a headwind of it's just you got more holidays and some more difficulties. We've seen what's happened with COVID cases popping up, weather and others difficulties. So, I would say that, we always have high expectations, but I don't want to get into that quarter-by-quarter guidance.

Bill Furman -- Chairman and Chief Executive Officer

I think the second half should look stronger for a variety of reasons. The operating momentum should drive the expectations, but I think the timing is really what's happened here, Justin. It's just been there's a little bit more of a lag than what we might have thought before. But again, we're going to have higher volumes than we expected before.

And things are going well in manufacturing so there is a bunch of glitches is really ramping up, and I've already said earlier, that's not a seamless matter by just going very, very well.

Justin Long -- Stephens Inc. -- Analyst

Understood, I appreciate the time.

Bill Furman -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Matt Elkott with Cowen.

Matt Elkott -- Cowen and Company -- Analyst

Good morning. And thank you for taking my question. I want to ask you about on the pricing side. Lorie and Brian, I think you mentioned, the cars that were taken during the 2020 through, were the deliveries and the first full quarter were mostly those orders? Or if not, what percentage of the deliveries were orders that were taken during a very depressed pricing environment? And also, how many of those cars are still to be delivered in this fiscal year?

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

This is Brian. It's great question. Your analysis is correct. At the end of the day, we had a bit of a tail on orders coming out of the 2020 that moved into Q1.

Looking beyond Q1, we don't have many of those orders left in the backlog. So, we start to get into what I call the newer price backlogs in Q2, Q3 and Q4. So, not a lot of tail beyond Q4, but certainly there was quite a bit of tail going into Q1, on some of the legacy price deals in the trough of the market.

Matt Elkott -- Cowen and Company -- Analyst

OK. And Brian, the orders that are coming now, can you talk about how the pricing dynamic differs from the orders that you actually deliver today, adjusted for commodity cost obviously, coal pricing?

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

Yes, I would say, it's markedly improved.

Matt Elkott -- Cowen and Company -- Analyst

OK. Now, I mean, the industry landscape looks really different from a couple of years ago. It's a lot more consolidated. You guys and Trinity have maybe about 75% or 80% of the manufacturing landscape.

So, should, if you do have a robust up cycle in the next couple of years, could we see materially better pricing? And if so, what do you guys think the kind of peak margin at the peak of a cycle could look like in a couple of years? I know your gross margin peak in 2016 was 22%, but that was a highly anomalous time, deliveries from the crude by rail will probably not be repeated. But any color on what margins could look like at the top of the cycle? Was it deliberated the highest number of cars?

Lorie Tekorius -- President and Chief Operating Officer

Matt, it's a great question. And I think that's one of the things that keep many of us in this industry for a long time, because you never know what's going to happen. So, we certainly think that there is a lot of opportunities over the coming years. And our manufacturing team continues to impress us with what they are able to achieve and you are spot on with as we get to higher production rates.

And you get to see the benefit of that overhead being absorbed across a broader group of cars. So, a lot of it depends on mix, we have had a really disciplined approach to how we're taking orders and thinking about things. So I could see margin getting into the upper teens, be excited if they were in the mid-20s, but a lot of that does come down to mix. And while our competitive landscape here in North America has changed a bit, we also have some very strong customers that pay attention to what they're investing and these are long lived assets.

So you can only have that balance. I think the other thing is we have the benefit of having our leasing platform. So, we also look at how many cars we want to build and sell versus we're building cars, and we can put them into a fleet, where we will see that repeatable revenue and cash flow over the coming year. So, it's a nice layering effect, and it's a good blend of different activities that we have here at Greenbrier.

Matt Elkott -- Cowen and Company -- Analyst

And Lorie just one last follow-up to this question based on the all the dynamics together are seeing now. When do you think this production peak might occur actually, could it mid calendar 2023, late calendar 2023 or earlier?

Lorie Tekorius -- President and Chief Operating Officer

I think you're right. We're probably mid 2023. I think some of us going to depend on supply chain. It's going to depend on the labor dynamics.

Making certain that we can continue to operate across the North American market and getting some of the supply chain issues shook out. We have been fortunate to not really have any of those impacts us significantly. But it's definitely something that gets managed every day.

Bill Furman -- Chairman and Chief Executive Officer

Maybe Brian or Justin could talk to the data that supports 2023 and even beyond. Just in terms of the industry forecasts, I think we can do remind everybody what those industry forecasts look like.

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

Yes, I think that's good Bill just to kind of remind everybody that is as you look at the projections, in 2023, they're projecting 60,000 railcars will be billed. The other interesting dynamic, as you think about where the future is headed for rail is that the North American fleet continues to contract. I think we're in the 21st month of contraction, which means that there's a heavy, heavy scrap rate that is going on even while new cars are being injected into the system. So as you know, as we think about the future, as the chip situation resolves itself as supply chain starts to become more fluid, you're going to see more and more pressure in demand on the railroads to ship more and more products.

So, 60,000 right now is the industry's best guess, but you can see that extend beyond 2023, as well as demand comes on as we think it will.

Justin Roberts -- Vice President and Treasurer

And just kind of move this to a little bit bigger picture and longer term also. Rail freight is the most sustainable form of transportation. And as the world continues to focus on carbon neutrality, zero emission goals things like that, we continue to believe that there will be a medium to long-term growth in the fleet because there has to be a shifting of modal transportation. And that's not based on anyone's numbers or forecasts or anything at this point.

So, we continue to believe that what we see for the next few years is great and it's going to be a great market. But there's also some long-term tailwind that are going to be dynamic that we haven't ever dealt with before.

Bill Furman -- Chairman and Chief Executive Officer

And that's especially true in our second largest market, which is in Europe, where we have significant industry momentum to move to net carbon zero goals much earlier and removed congestion is reason, government mandates are really pushing this. So we see much stronger demand environment over there.

Matt Elkott -- Cowen and Company -- Analyst

Got it. Thank you guys very much. I appreciate it. 

Operator

Our next question comes from Allison Poliniak with Wells Fargo.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Hi guys. Good morning. I kind of go home that next, so I want make sure I understand sort of your industry view. So you're saying '23 that 60,000 industry view would basically just be a catch up to replacement with potential for real growth or net growth of the suite in '24? Is that the way to think of it?

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

Yes, I think, this is Brian. I think that's a good way to think about it today. Again, think about the contraction you've seen as a fleet and how many cars are being added. There's a scrap rate, probably somewhere in the 40,000 car range per year.

And so when you think about 60,000 cars, it's almost, depending on how many cars are scrapped a year, it really has almost just replacement to them versus organic growth. And, again, keep in mind that is today with a very light footprint in auto, because of the chip shortages. There's tremendous demand in the auto sector. And when that starts to free up, it's going to put more pressure on railroads and velocity and just moving equipment.

Allison Poliniak -- Wells Fargo Securities -- Analyst

And on the leasing side, obviously, growing quicker, which is good better than you expected, fleet leverage at 65%. I think you're targeting it could be wrong and this is 75%. I guess what do you anticipate exiting difficult '22 in terms of fleet leverage this year? Is it sort of up at 65% or is it expanding?

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

I think we would expect it to continue to increase as we put more assets into the GBX leasing warehouse out of kind of the legacy fleet and then out of our order book as well. So you'll see it kind of moving closer to that 75% rate.

Allison Poliniak -- Wells Fargo Securities -- Analyst

And then you think Brian, you had mentioned 200 million of modifications that in manufacturing that aren't part of like your deliveries? Is that all for fiscal '22 or is that spread over a multiyear kind of aspect?

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

Yes, another great question. Most of it is in 2022 does have a tail into 2023, based on our fiscal year lays out that a lot of it is calendar 2022.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Got it. Ok. Thank you.

Operator

Our next question comes from Ken Hoexter with Bank of America.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Good morning. And Lorie, good luck as you as you transition to the CEO role. Just want to follow up on that question on pricing where we talked about a great market. It looks like the order book went up about, 9%, 10% year over year in terms of price per car.

Can you talk about kind of mix as you normally do? Is there any demonstrable change in that mix? Or is that can we consider that, a real impact on pricing on a year-over-year basis? And is that more a factor of looking at your labor costs going up?

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

So I can handle the mix side of that equation. I've said this before and it continues to ring true, is that, the mix is the most diverse I've seen in my 41 or 42 years in the industry, which does not date me as a real man. But it's just the baby, just the baby when I started. But, it really is a little bit of everything, which is a fantastic for us growing our lease fleet as well from a diversity perspective, credit profile perspective, and just lease maturity perspective.

But it is everything from multiple types of covered hopper cars, auto, intermodal, gondolas, box cars, very, very, very diverse. There is no single particular area that is creating the demand cycle this time, which normally would be an ethanol boom. It would be crude boom. It's not the case this year.

It's very, very diverse.

Lorie Tekorius -- President and Chief Operating Officer

And the other thing I would say that, it is obviously impacting ASP. It's going to be we do have commodity price and labor costs have gone up. So, those are flowing through and being reflected in those higher ASP.

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

That's a good point to remember. We are doing a great job on hedging things like interest rates in our leasing products and also commodity prices. It is essential protecting ourselves in that sense.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Thanks for that. And then, can you just address the refurbishment business as this really begins to scale on a car basis? Are you doing this at the existing facilities with this add-on business because of the ARI acquisition? Maybe talk a little bit about how that impacts the margin? Is that reflected in the managed services? Is that in manufacturing kind of, where should we see the, given the scaling and growth of that? Where do we see the impact of that and what should we expect as far as a margin contribution from that business relative to the incumbency?

Lorie Tekorius -- President and Chief Operating Officer

Great question. And we are doing, because these are very large program and based on our customer needs, we are going to be running this work through our manufacturing facilities, because that kind of repetitive work that we think that we can do very efficiently and effectively at those facilities from a margin percentage perspective, it's going to flow through in manufacturing is what you are going to see on your financial statements. And it's going to be beneficial, because these are competitively priced transactions, and the work that's going through the facilities is going to add to the overhead absorption. So, we don't see it as a drag on manufacturing earnings.

It's also not going to be something that's going to skyrocket at the other way. It's a nice blend with other new car work that's going on.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

It's interesting to note that, this is a fairly deep market given the modernization capabilities of the aging fleet. And both Trinity and Greenbrier are finding that, this modernization is becoming the ESG goals as well. So, I think it's a very attractive future market is going to go through this cycle. We are pretty much along the lines of what you talked about, that you might clarify your views on it, Brian?

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

No, it's absolutely correct. This is not something that is a short-term phenomenon. This actually is something that as you see, scrap car rates go up and you see the value in repurposing components. You are going to see a long life process here that will extend for multiple years.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Great. Appreciate the thoughts. I guess just one round it there, Lorie, you kind of mentioned accretive so I just want to understand, is that going to be accretive to existing margins to the upper teens you were talking about long-term potential? I just want to, are you putting a kind of factor on that?

Lorie Tekorius -- President and Chief Operating Officer

I've heard that too many people. Yes, it's going to be, I think, it's going to be positive for our overall margins. Obviously, we don't look to take work into our shops, that isn't going to be positive overall, for Greenbrier and for our shareholders.

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

Just look at it this way, another 200 million of backlog. If you look at it that way, but we're not calling the industry convention and we're including it in our manufacturing backlog is being done in our manufacturing plants, not principally in our repair facility system. It's really new car type work of major project nature.

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

I appreciate the time. Thanks.

Operator

Our next question comes from Bascome Majors with Susquehanna.

Bascome Majors -- Susquehanna International Group -- Analyst

Brian, you talked a few times about the 60,000, 2020 delivery projections for some of the industry forecasters. When you take a step back, is that something that you feel like you have conviction in and can manage the business too based on your conversations with customers and railcar management and leading indicators? Is that really just here's what the experts say, so that could happen type situation?

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

So, we do our own analysis. Obviously, we take guidance from exterior entities as well. But we've really, for the last few years, relied more on our internal consensus, which is built up by a multiple number of touch points we have with customers, and outreach programs that we have in the industry. And we feel very confident that those numbers look good into the future.

Bascome Majors -- Susquehanna International Group -- Analyst

And to try and deliver that further, Lorie, your comment about as the cycle strengthens. We think we can generate high-teens margins, again, is a 60,000 kind of environment, whether or not that happens exactly in '22 or '23. Is that the kind of backdrop you would need for overhead absorption and pricing assumptions and other things to drive that?

Lorie Tekorius -- President and Chief Operating Officer

I think yes, that's, I think that would be fantastic, that would be great to be at that kind of that 60,000 level and stay at that steady level for a while, because obviously, the ramping up or ramping down or things that can be headwind to efficiencies. So getting to that sort of a demand and delivery environment and then being able to stay there is going to be very beneficial to margin.

Bascome Majors -- Susquehanna International Group -- Analyst

Thank you and not to leave anyone out here. Adrian, you talked about the tax receivable the last couple of quarters. And helping cash flow obviously consumes cash as you ramp up production and invest in the lease fleet. But can you help us think about full year cash flow and some of these things even out.

I don't know if it's an operating cash basis or free cash flow before some of the lease investment. But how do you think about the cash assumption, the business on kind of a sustainable more run rate basis versus some of the quarter-to-quarter volatility?

Adrian Downes -- Senior Vice President and Chief Financial Officer

We'd expect quite, quite positive cash flows in the back half of the year. We're, as you say, your supporting ramp up and our business and our working capital at the moment. We're being cautious there with the supply chain issues. So, that's not maybe as efficient as it would be in normal times, where we're protecting ourselves by having extra inventory on hand.

But I'd expect to see that normalized out as our production stabilizes at these higher levels and back half of the year and our cash flow to be positive.

Bascome Majors -- Susquehanna International Group -- Analyst

And when you say a quite as in the back half a year, just to clarify, are you talking free cash flow or operating cash flow?

Adrian Downes -- Senior Vice President and Chief Financial Officer

Operating cash flow.

Bascome Majors -- Susquehanna International Group -- Analyst

Thank you for the time.

Operator

Our next question comes from Steve Barger with KeyBanc Capital Markets.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Good morning everyone. Brian, you said not a lot of lower margin cars left in backlog, but I believe Adrian said gross margin would be single digit in the first half. So first, did I hear that margin comment correctly? And if so, does that mean we should expect another tough quarter from maintenance and lower sequential margin and leasing in 2Q?

Justin Roberts -- Vice President and Treasurer

Well, I'll answer that one. This is Justin, Steve. I think what we would say is, Q2 was always a challenging quarter for our maintenance business because of weather, typically. I mean, you know, the locations have to deal with inclement weather, snow, rain, freezing temperatures.

And if you kind of look back at years, it's many times, that's our most challenging quarter in our business. So we see that as normal seasonality, we would expect it to be better than first quarter, which was much more challenging than we expected. But with the manufacturing piece, we do see that there's opportunities for improvement and growth in the margin in Q2. And while most of the competitively priced cars are out of it, we are still ramping up various production lines and that's where you see as more of the overhead under absorption that we're trying to be maybe cautious around a little bit.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yes. So I guess, I mean, I hear you on seeing better momentum in some of the lines of business. But the tone on this call seems much more conservative versus the last call, as we think about some of the 1Q tailwinds from tax and equity earnings this quarter, Q2 be down sequentially?

Bill Furman -- Chairman and Chief Executive Officer

Are you getting me really because I thought we were much more conservative last call? Maybe we're just not articulating our story very well. But before I what do you think you make your way more conservative?

Steve Barger -- KeyBanc Capital Markets -- Analyst

I talked about double-digit margin in the first half last quarter.

Bill Furman -- Chairman and Chief Executive Officer

Yes, we did. That's right. And we had a little bit disappointing start in half, but it was dragged down by maintenance and some of the things that I think are self-correcting. But go ahead, I didn't, I don't mean to jump in.

You should ask this. I've just taken aback by that.

Lorie Tekorius -- President and Chief Operating Officer

Obviously, and I would have to go back and I probably shouldn't admit this, but sometimes I have a hard time remembering last week, last quarter's call and what we might have said, but we are a lot more positive. We have come through this first quarter and have performed better than what we expected. When we put together our initial expectations for this fiscal year, we see a lot of opportunities where we are ramping, or adding lines more quickly than what we expected. But we are still doing it at a moderate pace.

So it's time to feel like they were talking out of both sides of our mouth. But we, as Brian had said we're seeing broad demand on a variety of car sites and we're figuring out, how can we address that demand solve our customers problems. And I think that's all going to be positive. Now, does it actually work its way out into double-digit margins in the first half, or is there some bleed over as we move into the second half? Again, that's getting into trying to parse quarter by quarter and that's part of why we try not to get into.

We are running a business day to day. We think that we have got a lot of momentum. We think we are going to have, as we move through this year, it's going to increase and you are going to see the margins improve.

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

Let me just elaborate on the economics of that, as we look at the backlog and that's really significant factor in our business. We look at the leasing moment. Those are two areas for momentum that are significant. With backlog, we are able to ramp and increase production in every line or many of the lines.

In one case on a car type, we've got a good strong backlog, we're tripling production, that absorbs overhead, as Lorie said. So the timing of it is more problematic, but we are still very optimistic about the year and the financial results for the year.

Steve Barger -- KeyBanc Capital Markets -- Analyst

OK. Thanks. 

Operator

Our next question is a follow-up from Matt Elkott with Cowen.

Matt Elkott -- Cowen and Company -- Analyst

Thank you for taking my follow-up questions. So, shortly after you guys acquired American Railcar, I think in July of 2019. Obviously, the world changed and the production cycle got cut short basically have for the industry in 2020 and stayed at 30,000 in 2021, which is below replacement. So, I guess this production up cycle this year and much more so next year, if you are at 60,000 ARI.

It will be the first time you have a major up-cycle with ARI. Can you talk about how different this could look from your prior extensions for you guys, how the mix will be different, what the impact on pricing and margin will be. And I realized that this could be more at 2023, calendar 2023 dynamics then calendar 2022.

Bill Furman -- Chairman and Chief Executive Officer

Let me try. Just as referenced, Lorie and Brian can address this question. The acquisition of ARI, you're right, the timing, we got hit by COVID. We also had the driving efficiency by the Class 1 railroads so that volume or velocity had gone up.

So, we were hit by a mini recession when that shift occurred and utilization on the railroad, then COVID-19. So, we have been operating in unusual times. ARI is a real asset and we are very positive about the addition that ARI has made to our product portfolio, which is reflected in ability to attract stronger backlog and stronger customers. This expanded our customer base, enhanced our cost efficiency through geographic dispersion.

So, I think that's just a general background for how we see ARI today. We are a U.S. company that gives us a production capability, in the Heartland, and it's a positive thing for Greenberg. But Lorie, why don't you go into the grant, the other things.

Lorie Tekorius -- President and Chief Operating Officer

The other things, you're exactly right. I mean, the timing of that acquisition, what followed on that timing was difficult. I think you've done a nice job managing through the last couple of years. I am excited about having that footprint.

As we go into this uptick in demand, we do have a strong-skilled workforce there. They've got experience, building a variety of covered hoppers and tank cars. They have got a lot of experience delivering rail cars to shipper-base customers that have been a nice addition to our portfolio, and an enhancement of our portfolio of customers. And as you mentioned in the location is great from a delivery and transportation to our customers.

So, these are all things that are going to be positive. You took the opportunity during the downturn and during lower production rates to be able to get into those facilities and take some of the efficiencies that we have grown in the Greenbrier organization and start putting those into the Arkansas facility. So, we actually see that this upturn in demand turning into something that we should see more positive growth got out.

Matt Elkott -- Cowen and Company -- Analyst

From a purely mixed perspective, is it favorable or a headwind?

Bill Furman -- Chairman and Chief Executive Officer

We believe, it's favorable going forward.

Matt Elkott -- Cowen and Company -- Analyst

Got it. 

And then, sorry, if I missed it earlier, guys, but did you say anything about the inquiry and order activity about after quarter ends?

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

No, no. We haven't, this is Brian. I would say, again, very strong order activity, even through the holidays, which is unusual for the month of December, we're continuing to look. I would say our cadence is still in line and strong with what we're projecting.

Matt Elkott -- Cowen and Company -- Analyst

And then just one final question. Bill mentioned, Lorie, you will have existing and new initiatives. Can you maybe talk a little bit about what the new initiatives might be might look like or what lease of fleet?

Lorie Tekorius -- President and Chief Operating Officer

I think you're going to see, we'll get into more detail that as we move a little bit further into the calendar year. But you're going to see us continuing to grow and enhance the foundation that we've created over the years with strong engineering and manufacturing coupled with leasing and commercial. You're seeing that some of this already with the leasing strategy that we have and focusing on how we can continue to anticipate and solve our customers issues in creative manner.

Operator

This concludes our question-and-answer session. I'd like to turn the call back over to Mr. Justin Roberts for some closing remarks.

Justin Roberts -- Vice President and Treasurer

I just want to say thank you very much everyone for your time and attention. And if you have follow-up questions, please reach out to investor relations at gbrx.com. Have a good day.

Lorie Tekorius -- President and Chief Operating Officer

Happy New Year.

Bill Furman -- Chairman and Chief Executive Officer

Happy New Year.

Operator

[Operator signoff]

Duration: 59 minutes

Call participants:

Justin Roberts -- Vice President and Treasurer

Bill Furman -- Chairman and Chief Executive Officer

Lorie Tekorius -- President and Chief Operating Officer

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

Adrian Downes -- Senior Vice President and Chief Financial Officer

Justin Long -- Stephens Inc. -- Analyst

Matt Elkott -- Cowen and Company -- Analyst

Allison Poliniak -- Wells Fargo Securities -- Analyst

Ken Hoexter -- Bank of America Merrill Lynch -- Analyst

Bascome Majors -- Susquehanna International Group -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

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