The Greenbrier Companies (GBX) Q2 2022 Earnings Call Transcript

The Greenbrier Companies (GBX -1.31%)
Q2 2022 Earnings Call
Apr 06, 2022, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, and welcome to The Greenbrier Companies' second quarter of fiscal 2022 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 Roberts -- Vice President and Treasurer

Thank you, Chuck. Good morning, everyone, and welcome to the call. Today, I am joined by Bill Furman, Greenbrier's executive chairman; Lorie Tekorius, CEO and president; 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 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 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'm going to hand it over to Mr.

Furman.

Bill Furman -- Executive Chairman

Thank you, Justin, and good morning, everybody. This past month has been an eventful time in the world and at Greenbrier. On March 1, Lorie Tekorius assume the role of Greenbrier's CEO. Last week, our board of directors appointed Lorie as our newest director.

As we begin today's call, I want to first congratulate Lorie on the new positions at Greenbrier. And we're proud of the board's development of Greenbrier, how we have managed this very important transition. I'm pleased that I now serve as executive chairman through the remainder of our fiscal year and as a board member and investor until 2024. With Lorie's appointment, we've expanded our board's gender diversity, four of our 11 directors are female.

Further, three of the directors identify as people of color. I'm confident that diverse representation at all levels of Greenbrier leads to better overall business performance. Omicron is still a factor in our operations, as you will hear today, but things are getting much better. Just so those impacts begin to add, the war in Ukraine has impacted the economies everywhere we operate.

We are witnessing a true tragedy and I pray for a swift end to the conflict and to all of the human suffering. While the war creates challenges for everybody in the near term, it also provides opportunities for major shifts in freight corridors and transportation roads that will enhance Greenbrier's business as the world enters a reordered state. History demonstrates the integral role of railroads to support civilian life and economies and a heightened manner during wartime. The current war in Europe has created direct pressure on the availability and cost of commodities ranging from minerals to food, to fertilizer, to crude oil as well as coal and natural gas.

Railroads and railway suppliers will help meet the challenge of keeping civilian life and economies functioning during the crisis. The commodity markets are traditionally leading indicators for expansion in rail freight. Most commodities shipped by rail are experiencing upward pricing pressure from demand constraints due to either sanctions on Russia or reduced production from Russia and in the Ukraine. We expect rising global commodity prices and shifting trade patterns to elevate railcar demand in North America and Brazil and elsewhere in the world.

Already changing energy policies in North America and Western Europe are creating opportunities for rail transport of oil, ethanol and other products. The impact will be similar in fertilizers and other items needed to produce food. Finally, the rising cost of diesel creates a distinct opportunity for model shift from road to rail. Freight rail is one of the most sustainable and fuel-efficient modes of surface transportation.

U.S. freight railroads with diesel-electric power generation are three to four times more fuel efficient than trucks. Think about that for just a moment. One ton of freight can be moved by rail almost 500 miles per gallon of fuel.

Additionally, moving freight by train instead of trucks reduces greenhouse gas emissions by up to 75% per tonne travel and it reduces congestion on wear and tear on bridges and byways. As more freight ships to rail, in many cases, this will induce longer railcar dwell tough times and lowered railroad velocity. In turn, railroad congestion causes the need for more railcars to make railroad service more efficient, notwithstanding the increase in demand we expect in major commodities like fertilizer, food steps, and other products. We recognize the role and responsibility our industry must play in times of crisis and as the geopolitical landscape shifts.

The cruel irony is this war in Ukraine is that there will be ultimately beneficiaries. Now we can't choose the exogenous factors that affect our business, but we have almost always have to be ready to meet the challenges and opportunities that come with them. Greenbrier has proven the ability to thrive on adversity and seize opportunities. I'm sure this legacy will continue for years to come under Lorie's leadership.

With that, I'll hand the call over to Lorie to discuss our strong performance during the quarter. Lorie?

Lorie Tekorius -- President and Chief Operating Officer

Thank you, Bill, and good morning, everyone. Before I discuss our results for the quarter, I'd like to express my gratitude to Bill and the rest of the Greenbrier Board for the opportunity to serve as CEO. We have an outstanding team at Greenbrier who works hard and smart every day. While it's difficult to predict the specific opportunities or challenges that may arise, I know that Greenbrier team has the experience, knowledge, and tenacity to make the most of any situation with a focus on increasing shareholder value.

Greenbrier posted strong results this second quarter. And while not all of our operating segments performed as expected, our business is highly diverse and in the aggregate, performed very well. In the quarter, we delivered 4,800 railcar units, a 17% increase from the prior quarter, driven by our core North American market. Our lease fleet utilization increased to 98% and our leasing team generated robust cash proceeds and gains through regular lease fleet optimization and monetization transactions.

Our leasing business is operating ahead of our expectations as we achieve growth at scale. Our strong quarterly performance was achieved as the omicron variance of COVID-19 reached peak levels in the United States. Sadly, in February, Charles Wallace, a longtime employee in our maintenance services group passed away due to COVID. Charles is survived by a son and four sisters.

We send them our condolences for their loss. Further, we experienced significant absence here another quarter as approximately 12% of our workforce contracted the virus. Recently, the infection rates have declined, and we're hopeful the worst of the pandemic is now behind us. Our manufacturing gross margin percentage was below our expectations in the quarter, impacted by supply chain and labor issues.

Our global sourcing team continues to do an exceptional job of mitigating severe disruptions to support increasing production rates and simultaneously minimizing production delays. We have avoided any line shutdowns across our network due to material availability. Additional expenses were incurred in connection with sourcing spot materials and expediting delivery. Operating momentum is increasing, and we expect improved performance in the coming quarters due to improved pricing and overhead absorption on higher production.

In Europe, the situation is fluid. The period leading up to and the subsequent war in Ukraine has created a highly disruptive environment for many European manufacturers. Our operations have been impacted by rapidly rising energy costs and now finished steel and components in our supply chain. Ukraine and Russia are among the biggest suppliers of iron ore, finished steel, and wheelsets to European mines and welders.

As Bill mentioned, railroads are integral to supporting the economy during wartime. Our management team is working together with our customers and suppliers to maintain production and ensure the best outcomes for all parties. Our maintenance service business continued to be impacted by higher material costs and labor shortages during the quarter with the omicron variant having an outsized impact on the network of smaller workforces. We are beginning to see improving financial results on the action plan implemented to mitigate these headwinds in Q1.

We expect to sustain our momentum in the second half of the year as we remain focused on executing our plans while also looking for additional opportunities to reduce costs and improve margins. Our leasing and management services group had another strong quarter, driven by increased fleet utilization and regular asset optimization and monetization transactions. Our owned fleet has grown by over 25% from the end of fiscal 2021 to around 11,000 units. And in addition to managing our lease fleet, our management services, or GMS group, continues to provide creative railcar solutions for over 25% of the North American rail freight fleet.

Within GMS, we're launching an initiative to redevelop the service platform used to manage equipment and data. One of the goals with this important initiative is to ensure scalable support for our leasing and syndication business as well as our external customers as we continue to execute on our leasing strategy. Looking ahead, we see strong operating momentum continuing throughout fiscal 2022 and beyond. We've been able to maintain our market-leading positions through disciplined execution and by maintaining our strong liquidity position.

These were hallmarks of our management team's plans at the start of the pandemic and they continue to service well. There is no doubt that the market backdrop will remain dynamic, particularly with the war in Europe. Inflation, supply chain issues, and the continuing human impact of pandemic will persist for some time. We are managing the business accordingly and maintain our optimistic market outlook.

We expect our operating metrics to continue to improve as we move through the next several quarters and beyond. As we've said before, the market recoveries won't follow a straight line, and there will be challenges along the way. We're managing our business to get ahead of these challenges wherever we can to continue to provide solutions to our customers and ultimately, deliver value to our shareholders. As I said before, our leadership team has the experience, knowledge, and tenacity to make the most of any situation.

And with that, I'll hand the call over to Brian Comstock to provide an update on current railcar demand environment and our leasing activity.

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

Thanks, Lorie, and good morning, everyone. Greenbrier's secured new railcar orders of 8,500 units valued at $930 million. With deliveries of 4,800 units in the quarter, the book-to-bill increased to 1.8 times. Orders through the first half of the year are already over 85% of fiscal 2021 activity.

New railcar backlog of 32,100 units has a market value of $3.6 billion and provides multiyear visibility. This is Greenbrier's largest backlog in six years. Historically, when our backlog reaches this level, it includes several multiyear orders. In this case, there are a few multiyear orders, which illustrates the strength of the overall demand environment.

From an operations perspective, this means that a greater portion of our backlog is scheduled to enter production in the short term and translate to revenue sooner. Also, as production space becomes more valuable, we expect multiyear orders to follow and pricing could continue improvement. As a reminder, our new railcar backlog does not reflect 3,200 units valued at $180 million that are part of Greenbrier's refurbishment program. Because of the large scale and nature of this activity, this work occurs at our manufacturing facility that absorbs production capacity while contributing to overhead absorption.

Our refurbishment program is an important part of ensuring rail remaining the most environmentally friendly lot of surface transport. I'm excited about this growing partnership with our customers to sustainably repurpose North America's aging railcar fleet. Turning to leasing. Fleet utilization ended the quarter at 98%.

Lease pricing and terms continue to improve sequentially, and we are seeing strong demand for new and used leased equipment. As part of our enhanced leasing strategy, GBX Leasing, closed our inaugural asset-backed securitization by using -- by issuing $323 million in investment-grade rated notes with a blended coupon rate of 2.9% and an anticipated repayment date of January 2029. Our capital markets team executed well this quarter and syndicated 1,400 units, the highest level of activity in nearly two years. Syndication is an important source of liquidity and profitability, and we expect to continue strong syndication activity in the second half of the year.

As many of you know, syndication and asset disposition are important activities for leasing that will continue to grow into the future. Looking ahead, I remain optimistic about the momentum that has been building, especially in light of the strong demand environment in North America. Greenbrier is well-positioned for a period of strong growth. I believe the combination of market forces, the ability of our focused management, and experienced management team to capitalize on them will deliver results in its early phase of this railcar cycle, which is substantially better than we've seen in previous cycles.

With that, I'll turn it over to Adrian to provide more color on our Q2 financial performance.

Adrian Downes -- Senior Vice President and Chief Financial Officer

Thank you, Brian, and good morning, everyone. Quarterly financial information is available in the press release and supplemental slides on our website. Today, I will discuss highlights from the quarter, and we're also affirming guidance for fiscal year 2022. Second-quarter highlights include revenue of $683 million, deliveries of 4,800 units, which includes 400 units from our unconsolidated joint venture in Brazil.

Aggregate gross margins of 8% reflects continued effects from ramping of new railcar production, the impact of the omicron variant, mitigation of supply chain, labor shortages, and an additional warranty accrual for certain older railcars. Selling and administrative expense of about $55 million was higher sequentially, reflecting increased employee-related costs, consulting, travel, and legal expense from higher levels of business activity. Net gain on disposition of equipment was $25 million. This activity was part of our ongoing optimization and monetization of our leasing portfolio.

Non-controlling interest provides a benefit of $1.6 million, primarily resulting from the impact of line changeovers and production ramping at our Mexico joint venture. This improved sequentially, and we expect our Mexican JV to be profitable in the second half of the year. Net earnings attributable to Greenbrier of approximately $13 million or $0.38 per diluted share, and EBITDA of about $52 million or 7.6% of revenue. In the quarter, we recognized $2.1 million of gross costs, specifically related to COVID-19 employee and facility safety.

This expense increased almost 75% sequentially and was our highest level in the last 12 months. Greenbrier's liquidity increased to $804 million at the end of Q2, consisting of cash of $587 million and available borrowings of $217 million. Because of the strength of our balance sheet, we are well-positioned to navigate any market dynamics. We expect to receive a large portion of our $106 million tax receivable in fiscal Q4, reflecting delays in processing with the IRS.

This refund will be in addition to Greenbrier's available cash and borrowing capacity. In the quarter and shortly after the quarter, Greenbrier entered additional interest rate swaps to fix long-term floating rate debt for the next several years, reducing the risk of increasing interest expense and a rising interest rate environment. At the end of the second quarter, effectively all of our outstanding leasing debt was at fixed interest rates and approximately 90% of our corporate non-leasing long-term debt was fixed. Together with executing on over $2 billion of new and refinanced borrowing facilities over the past year, including the ABS lease financing completed in Q2, this positions Greenbrier quite well as we move forward.

On March 31, Greenbrier's board of directors declared a dividend of $0.27 per share, our 32nd consecutive dividend. Based on yesterday's closing price, our annual dividend represents a dividend yield of approximately 2.3%. Since reinstating the dividend in 2014, Greenbrier's returned nearly $380 million of capital to shareholders through dividends and share repurchases. Based on current business trends and production schedules, we're affirming Greenbrier's fiscal year 2022 outlook to reflect the following: deliveries of 17,500 to 19,500 units, which includes approximately 1,500 units from Greenbrier-Maxion in Brazil.

As a reminder, 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 when it leaves Greenbrier's balance sheet and is owned by an external third party. Selling and administrative expense guidance is unchanged and expected to be approximately $200 million to $210 million.

Gross capital expenditures of approximately $275 million in leasing and management services, $55 million in manufacturing, and $10 million in maintenance services. Net of proceeds on equipment sales of $150 million, leasing capex is expected to be $125 million. Gross margin percent is expected to increase sequentially in Q3 and Q4 with Q4 margins between low double digits and low teens. To close, I want to add that I shared with you as expressed by our colleagues earlier.

Specifically, Greenbrier will successfully navigate the challenges we face in the second half of the fiscal year. Greenbrier's highest backlog in more than half a decade, ample liquidity, and a strong balance sheet make this possible. Despite delivering effects of the multiyear pandemic and the impacts of war on a stressed global supply chain, we are better positioned than at any point in time to achieve our ambitious goals. And now we will open it up for questions.

Questions & Answers:

Operator

[Operator instructions] And the first question will come from Justin Long with Stephens. Please go ahead.

Justin Long -- Stephens Inc. -- Analyst

Thanks. I wanted to start with a question on Manufacturing gross margins, and I was curious if you could give any color on how that metric is progressing on a monthly basis, even into the month of March, if that's possible? I'm guessing you started the quarter at a lower point than where you're running right now. So I just wanted to get a sense for that ramp? And then any updated thoughts specifically around Manufacturing gross margins in the back half? Thanks.

Lorie Tekorius -- President and Chief Operating Officer

Sure, Justin. Good morning. This is Lorie. I would say that we're -- kind of interesting to think about now we're going from quarterly projections to monthly projections, but we are seeing continued momentum month to month as we build on the momentum that we've achieved in Manufacturing as we worked through older orders.

We bring our workforce back. They get into a steady group of building at higher rates. So we are seeing that progression and we expect that to continue through the year.

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

Yes. Justin, this is Brian. Just to add to what Lorie said is, also keep in mind that Q2 was kind of a period where most of our ramp-ups were in process as well. So a lot of those -- we just visited the plant last week with some of our board members, and a lot of those ramp-ups are now well underway and so the efficiency should kick in as well.

Justin Long -- Stephens Inc. -- Analyst

OK. Got it. And secondly, maybe just a quick one for Adrian. Curious, what you're expecting for gains on sale in the back half given the number we just saw in the second quarter? And then, Lorie, I know you're new to the role, we're about a month in, but would love to get your thoughts on strategic priorities for the business.

There are a lot of moving pieces with the geopolitical events with questions about the freight cycle. How are you thinking about the best company-specific opportunities for Greenbrier going forward?

Lorie Tekorius -- President and Chief Operating Officer

It's a great question. We've been talking a lot about that, Justin. As Bill mentioned in his remarks, while no one would wish for war, certainly the things that are going on in the Ukraine and Russia are going to be tremendous opportunities for transportation of both commodities by rail. That's going to not only be beneficial, we believe, in Europe, but also in North America, we were fortunate enough to be with a bunch of shippers a few weeks ago, talking to them exactly about what they're transporting and how they're dealing with the situation.

And while it's difficult to predict exactly how those transportation lanes are going to change, everything seems to come back to -- It should improve the transport of goods on the rail. So that's going to be fertilizers. It's going to be grains. It's going to be crust rock.

It's going to be petroleum products. It's across the board that we're going to see that sort of pickup. And while the railroads themselves can be very efficient, sometimes these increases in traffic. It takes a little bit of time for them to catch up, which tends to drive demand for more railcars.

So there are good things that can come out of war, we believe that our industry is one that will benefit. And I'll turn it over to Adrian to answer your first question. Sorry for jumping in.

Adrian Downes -- Senior Vice President and Chief Financial Officer

Yes, and thanks for the question. We're not going to give specific guidance on gains on sale. We'll be looking at that based on the markets. So I think it's a little early to tell.

Justin Long -- Stephens Inc. -- Analyst

OK. Fair enough. I'll leave it at that. I appreciate the time.

Operator

The next question will come from Bascome Majors with Susquehanna. Please go ahead.

Bascome Majors -- Susquehanna International Group -- Analyst

Yes, Adrian, you talked about getting the margins up in the fourth quarter to mid-double-digit/low-teens range. Can you clarify if that was a consolidated comment or manufacturing comment? And if that was consolidated, what's the Manufacturing assumption that's underlying there? Thanks.

Adrian Downes -- Senior Vice President and Chief Financial Officer

Yes. I was talking about consolidated margins. And as you might imagine, we would expect a strong improvement in manufacturing to drive that.

Bascome Majors -- Susquehanna International Group -- Analyst

OK. And going back to the January call on some of the intra-quarter comments, I believe you said that you think the business gets to the upper teens, maybe even back into the 20s over time, at least on the manufacturing margin. Can you talk a little bit about -- do you still have line of sight into that? And what needs to happen to unlock that potential that we've seen from war?

Lorie Tekorius -- President and Chief Operating Officer

And, Bascome, I'll take that because I think I'm the one that was saying that because I think I was seeing -- really trying to look forward if we were to see sustained demand in the 50,000, 55,000 railcars per year basis here in North America. And if we were able to enjoy that sort of sustained demand, we would expect our manufacturing margins to get that. Right now, I think it's a little bit too early to say exactly when that might occur, but I know based on what I've seen out of our Manufacturing operations as well as our other business units, that is definitely achievable.

Bill Furman -- Executive Chairman

Yes, I would say -- this is William, I just chime in as well as one of the key metrics that we really look at as well aside from larger percentage -- margin percentage is important as there is any knows. But at the end of the day, it's really about margin dollars per day. And so if you think about the additional volume that we have going through the facilities and the margin dollars that we'll be creating, that's really what we're focused on right now. And we see substantial increase in the margin dollars coming out of the operating units.

Bascome Majors -- Susquehanna International Group -- Analyst

Thank you.

Operator

The next question will come from Allison Poliniak with Wells Fargo. Please go ahead.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Hey, guys. Good morning. Just want to go back to -- omicron, it sounds like a pretty significant headwind for you guys with 12% of your workforce out. I guess, one, can you quantify the impact to margin that you think came from that? And I would say along with that, you had talked about, I think, reaching 21 line running in by Q3.

Did that delay any of those start-ups for you guys?

Justin Roberts -- Vice President and Treasurer

Hey, Allison. This is Justin. That's a great question. So Adrian spoke to direct costs that we incurred of about $2.1 million, and those are what are readily measurable or identifiable the underlying -- as you illustrated, the underlying impact of the ramp-up is very hard to identify.

It definitely impacted our plans and our ability to bring people back effectively, and it did slow things down modestly. But it's really challenging to figure out based on what we were thinking, how much is driven by just normal ramping activity versus people in and out. And when you think about 1,500 to 1,700 employees out in kind of a four- to six-week period, it's a pretty material impact in the quarter.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Understood. Understood. And then are you guys at the 21 now line start-up -- lines going at this point as were to Q3? Or are we a little less and still getting some impact from those costs?

Justin Roberts -- Vice President and Treasurer

We're actually north of that at this point. It still have some -- all of the lines are active that we have brought back and then it's a matter of continuing to increase the rates.

Adrian Downes -- Senior Vice President and Chief Financial Officer

I just interject something, Allison. I think Brian could speak to the operating momentum in the numbers of cars per day. As Lorie said, we were just down in our facilities in Mexico around to ARI. The volume is going to drive margin, and you can talk anecdotally at least about the number of cars.

It's increasing every quarter.

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

Yes. As Justin said, we're north of 21 lines at this point. We have all of the transitions are well underway, and we see that we'll be increasing production somewhere in the last neighborhood of between 90 to 110 cars per day once we get our full stride here this quarter.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Great. And then last question for me. Any color on percent of backlog that is expected to produce for the balance of the year? Orders were strong. I'm assuming, are they sort of this year production? Or are they getting pushed into '23 for you guys?

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

Yes. We have -- this year's production is bullets flying again, and we are working well into our fiscal 2023 at this point. I don't have those figures in front of me, but a great deal of backlog. We'll continue our momentum into Q1, Q2, and we're even talking to customers about production in late 2023 and 2024 at this stage.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Great. Thank you.

Operator

The next question will come from Matt Elkott with Cowen. Please go ahead.

Matt Elkott -- Cowen and Company -- Analyst

Good morning. Thanks, guys. My question is on the kind of order momentum past the second fiscal quarter. Can you maybe talk about how things have been in March and so far in April? And can we expect this level of order that you had in the second quarter to continue for the next few quarters?

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

Yes. So this is Brian again. And at the end of the day, the pipeline continues to be very, very strong. Order activity is still robust.

We've seen good activity already this quarter kind of on the lines of what we've seen over the last three quarters. And so we don't see anything that has stopped momentum at this stage. In fact, if anything, we're seeing maybe more and more reaction to customers not being able to get immediate space. So that is propelling them to get their orders in the queue.

Matt Elkott -- Cowen and Company -- Analyst

And, Brian, the customers that are trying to get immediate space, what types of cars are they looking for?

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

It is -- I've said this, I think the last couple of calls, and I maintained it, it is extremely diverse. It is everything from wood chip cars, the EEG cars to commodities and all sorts to upstream and downstream chemicals. It is truly a very, very diverse pipeline and demand.

Matt Elkott -- Cowen and Company -- Analyst

Got it. No, I mean, in a way, I guess that it's good to have this diversity into the order, but I guess maybe the flip side of that, is that going to be one of the reasons why you may not be able to achieve optimal gross margins is because historically, all cycles have been driven by one or two types of cars, and then you can adjust your production lines to that. And now you have to do more shifting, and you have to have -- does that involve more costs that would limit the gross margin potential?

Lorie Tekorius -- President and Chief Operating Officer

I think that's a good question and a good observation, Matt. It is prior peaks or prior periods where we were focused on any particular car type. So for example, crude by rail allowed us to really concentrate production in a certain way. While having a broader base demand will be a blending of gross margins across a variety of car types.

As Brian was talking about, we are focused on margin dollars versus percentages and across the time since we were in the crude by rail, we've improved our manufacturing production processes that I still think would allow us to achieve higher margins than we've achieved in the past when we had broad-based demand.

Bill Furman -- Executive Chairman

I'd like to add. Bill Furman, I'd like to add something on the Manufacturing side. We really have streamlined our processes. The acquisition of ARI was very useful in sharing best practices in North America with our Mexican operation and the length of the runs on each of these specialty car types, we have a luxury of the plant capacity to build long runs of similar car types.

Lastly, on that store, we have created the ability to reduce changeovers between materially different car types on a single line down to just a few days, which used to take weeks. So I don't see that myself in the manufacturing side of the business, which I continue to be deeply involved with. I don't see that as a big impediment to bigger margins. Volume drives margins.

As you know, Matt, the more volume you have through facilities, the better you can be, but we're capable of dealing with the smaller quantities quite efficiently at this point after the last five years of improvement.

Matt Elkott -- Cowen and Company -- Analyst

Got it. And just one final question for you or Lorie or Brian. On the autorack set, can you tell us if you have a material number of those in your backlog? Are they at any kind of risk because of the chip shortage? And then the flip side of that question is, when we eventually do have a pent-up production cycle for autos, does the industry have enough autorack to handle a potential surge in auto production once the chip shortages?

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

Yes, this is Brian. It's a great question. It's something I'm really personally focused on. To answer the first question is, we don't have a significant number of auto in backlog relative to our total backlog.

We do have auto in backlog. However, the chip shortage, though, really shouldn't impact any of those orders as well as just the momentum in that industry. The -- with velocity where it is today with the railroads, the autorack fleet, the bilevel fleet in particular, is oversubscribed at this point. So there are already short assets without the chip dynamic solving itself.

Once the chip dynamic solves itself and OEMs start to ramp up production, there is going to be some fairly sizable demand for autorack production. I believe there is enough capacity in the industry to fulfill that demand and that need, but there's also a shift to the high band market as well, which will also put pressure on the railroads and on manufacturing. So I see this as a good long-term sustainable opportunity for our industry, quite frankly. And it's really good that it's been delayed.

Bill Furman -- Executive Chairman

Brian, just one clarification. When you say there's enough capacity in the industry, you mean manufacturing capacity.

Matt Elkott -- Cowen and Company -- Analyst

Manufacture capacity.

Bill Furman -- Executive Chairman

I know you've really put a lot of personal attention into this, and it's going to be a big market. I think I agree with you.

Matt Elkott -- Cowen and Company -- Analyst

Got it. So, Brian, I guess you do think that there will be a need for new builds. It's not that there's enough capacity within existing assets.

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

Correct. There will be a demand for more builds.

Bill Furman -- Executive Chairman

Railroads are going to be short, and it's the diversity also of the kind of vehicles that might be put into the entities. So we're seeing -- not just us, but our railroad customers and shipper customers are seeing that this is inevitably going to come.

Matt Elkott -- Cowen and Company -- Analyst

Great. Thank you very much.

Operator

The next question will come from Ken Hoexter with Bank of America. Please go ahead.

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

Hey. Great. Good morning, everyone. Just maybe a follow-up on a question before.

You talked about the gains, and Adrian, you said not forecasting it, but I guess does the growth of leasing mean the gains on sale become an ongoing entity? Or is that was that onetime related to this quarter? Just a clarification there. And then my question would be, congrats on the backlog, but thinking about the cycle and you've talked a lot about the different levels in diverse demand, any thoughts on the consumer here? Obviously, that's been a big issue recently. Is there any intermodal thoughts in terms of demand or switching from intermodal to other cars given the presumption that the consumer may slow? Any initial thoughts on that? Or is it still too early for that?

Adrian Downes -- Senior Vice President and Chief Financial Officer

So I'll take the first one, which is we really see gains in sales being a normal ongoing part of being in the leasing business. And we've had gains on sale every year to look way, way back in time. So what we saw here was maybe a little high for one quarter, but over the course of the year and over the course of our business, this is just very normal activity.

Lorie Tekorius -- President and Chief Operating Officer

And I'll just emphasize the fact that we do have a cost advantage in fleet. So we can look at the market and decide when is the right time, when is the right opportunity for us to enter into some of these transactions, but it is something you should see on a regular basis. And then regarding the other question, I do think, Brian, we are seeing a lot of shifts. We're expecting a shift in demand for more intermodal as opposed to less intermodal combined with the expectation whether it's automotive or other bulk commodities.

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

Yes. Yes, that's an accurate statement, Lorie. The reason you haven't seen a big shift in intermodal or a push in intermodal is because of the bottlenecks and constraints that continue to have not only at the port but with chassis and takeaway capacity. As the railroad is resolved, the velocity issues -- which there's a lot of announced programs on that.

And as the ports get more fluid and as the chassis manufacturers catch up on production, you're going to see those bottlenecks go away. When those bottlenecks go away, you're going to see more truck-to-rail conversions, which is going to drive more long-term sustainable moment growth.

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

Great. And then you mentioned kind of the -- Lorie, you mentioned kind of -- sometimes you can benefit out of a war in terms of increasing demand. What about the -- from your Poland production, what -- where are your customers? Are they in Russia, Ukraine? Do you have exposure to ports? And you talked a bit about the supply chain before. Can you talk about your exposure there?

Lorie Tekorius -- President and Chief Operating Officer

Sure. And most of our customers are Western European customers. So no customers in Russia or Ukraine. There are impacts to supply chain with the bulk of iron ore and steel coming out of those areas, Russia and Ukraine, but our global sourcing teams are very engaged and are determining areas where we can source commodities or the appropriate components in other areas.

So that's one of the benefits of having such a strong global sourcing team. So we're not seeing any pullback right now. It is a fluid situation. We're focused on maintaining our production, making certain that we've got the right inventory on the ground to build the wagons and satisfy our customers' needs.

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

Great. Congrats on the CEO role, and thanks for the time.

Adrian Downes -- Senior Vice President and Chief Financial Officer

Thanks, Ken.

Operator

The next question will come from Steve Barger with KeyBanc Capital Markets. Please go ahead.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Thanks. Good morning. Just so I understand the consolidated margin progression in the back half, I think you said sequential improvements in 3Q and 4Q with 4Q between low double digit and low teens, right? So 11%, 12% probably. Should we think that 3Q is more high single digits? Or does that get to low double digit as well?

Adrian Downes -- Senior Vice President and Chief Financial Officer

Low double digits.

Steve Barger -- KeyBanc Capital Markets -- Analyst

So both quarters? That's great.

Justin Roberts -- Vice President and Treasurer

Steve, it's Justin. Just to be clear, we do expect to see progression in Q4 from Q3.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Understood. OK, so a sequential step up there. Just another question on your European operations. Just given current events relative to -- the location of Poland and Romania versus Ukraine, can you update us on the situation on the ground in terms of operating cost for electricity and natural gas and issues with parts availability and same question on labor? Like just how much disruption is going on there? And can you remind us what percentage of your deliveries are expected to come from Europe?

Bill Furman -- Executive Chairman

I'm going to take the first part of that. Bill Furman, and Steve, thanks for -- you're always being on these calls. We appreciate your questions. Europe, in Romania and Poland, both countries are adjacent to Ukraine, but in both cases, they're adjacent to parts of the Ukraine that are not directly affected by the war -- To the West.

Poland is very, very safe. And so the location is important. There is an effect on customers from the war and the increased costs associated with certain key components and steel. Thus far, we plan to pass those costs on.

And we haven't seen refusals at this point as most of our customers have contracts themselves in the shipping side that require the delivery capacity. Going back to an earlier point, none of the traffic in freight in Western Europe none of it affects our business is east-west into Ukraine or in Russia. So there's no trade effects there. The major effects are going to be in foods and fertilizers, because between Ukraine and Russia, they produce something like 20%, 25% of the fertilizer in the world, and there are 25 countries that rely on combined Russia and Ukraine for half of their wheat and grain production.

It is a fluid situation, and it is dynamic, but both Romania and Poland are NATO countries. We do not expect to see any pollution of the war across borders at least at this stage. And then part of the question, why don't you repeat the second part of the question?

Steve Barger -- KeyBanc Capital Markets -- Analyst

I'm just wondering what percentage of the deliveries were coming from Europe for the guidance this year?

Bill Furman -- Executive Chairman

It's about kind of around 20%.

Steve Barger -- KeyBanc Capital Markets -- Analyst

OK. And I think the window just opened or will soon open to transact the remaining part of Astra that you don't own. How likely is a deal? Or can you just tell us how you're thinking about that given the longer-term dynamics that you're talking about from rail prospects?

Bill Furman -- Executive Chairman

Let me deal with that, also Lorie and I are very close to the situation with our partner. Our partner owns 25% of Greenbrier Astra Rail consolidated. We're actually expecting this to remain a stable partnership relationship. There are certain advantages of having partners in international jurisdictions.

German partner is a very, very valuable asset to us right now. So we're not intending to change in the ownership structure in the near future.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. And then I'll just sneak one last one in. Loan to value on the lease fleet went to 80% from 65% at year-end. I know that's not a huge difference in terms of dollars while the lease fleet is small, but just philosophically, what do you see as the right target range for leverage?

Bill Furman -- Executive Chairman

Well, keep in mind that a large part of this leverage, especially now that we're in the -- we've done the asset-backed securities of very successful issuance. We have fixed rate and it's non-recourse debt. So while it is on our balance sheet, we have certain insulating factors. 80-20 ratio for a leasing company is -- standard is something like 75% to 80%, 85% leverage.

So it's lower than the range. And as we're constantly monetizing now what you guys are calling assets for sale -- asset sales, we're constantly monetizing the suite that's growing, it's diversifying and the leverage is appropriate to the quality of this portfolio and the maturity ladders and diversification. That's all very important in managing a leasing company.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Right. OK. Great. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Justin Roberts for any closing remarks. Please go ahead, sir.

Justin Roberts -- Vice President and Treasurer

Thank you very much for your time and attention today. If you have any questions, please reach out to Investor Relations at gbrx.com. Have a great day. Thank you.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Justin Roberts -- Vice President and Treasurer

Bill Furman -- Executive Chairman

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

Bascome Majors -- Susquehanna International Group -- Analyst

Allison Poliniak -- Wells Fargo Securities -- Analyst

Matt Elkott -- Cowen and Company -- Analyst

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

Steve Barger -- KeyBanc Capital Markets -- Analyst

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