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Greenbrier Companies Inc (GBX) Q3 2019 Earnings Call Transcript

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Greenbrier Companies Inc (NYSE: GBX)
Q3 2019 Earnings Call
Jul 2, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to The Greenbrier Companies' Third Quarter of Fiscal Year 2019 Earnings Conference Call. Following today's presentation, we will conduct the 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 Greenbrier Companies, this conference call is being recorded for instant replay purpose.

At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin.

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

Thank you, Justin. Good morning, everyone, and welcome to our third quarter conference call. On today's call, I'm joined by Greenbrier's Chairman and CEO, Bill Furman; Lorie Tekorius, Executive Vice President and COO; and Adrian Downes, Senior Vice President and CFO. They will discuss the results for the third quarter and provide an outlook for Greenbrier's fourth quarter of fiscal 2019. Following our introductory remarks, we will open up the call for questions.

In addition to the press release issued this morning, which includes supplemental data, additional financial information and key metrics can be found in a slide presentation posted today on the IR section of our website. Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2019 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

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

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

Okay. Thank you, Justin. Good morning, everybody. In the third quarter, Greenbrier's core North American business produced strong revenue and margin gains. Third quarter revenue grew by 30% compared to the second quarter, and we achieved our highest consolidated gross margin of the year at more than 12%, an increase of over 400 basis points from last quarter. Manufacturing performance led the way with a gross margin of 13.3%, as Greenbrier achieve these gains in our core business.

The momentum we expected in manufacturing during the second half of the fiscal year is materializing, led by improved operating efficiencies and increased railcar deliveries. Another highlight of Greenbrier's third quarter included solid railcar activity, which we spoke to you in the press release, and which Lorie and Adrian will touch on this morning.

We expect our strongest earnings per share of the year during the fourth quarter of fiscal 2019, as accordance to -- in accordance with earlier guidance.

Greenbrier's bottom line results in the quarter were impacted by non-cash goodwill impairment within our railcar repair operations, and that unit is continuing to undergo a top to bottom review and reorganization. In a moment, Lorie Tekorius will speak to our specific actions to return the repair operations to sustain profitability.

Our Brazil joint venture also experienced an operating loss this quarter. We have been rightsizing the Brazil operation to reflect normalized demand, and see this quarter, as an anomaly. We expect deliveries to improve in Brazil beginning in the current quarter, as the Brazilian rail concession renewal process ramps up, we expect deliveries to increase substantially in 2020 and beyond.

Clearly the results from our first nine months will result in lower earnings per share for fiscal 2019 and previously guided. I believe much of this is timing and some due to preoccupation with earlier publicly announced events. Definitely we got a bad start in Europe, but we are -- aggressively have been pursuing that we think that we've turned the corner over there. We've been addressing the conditions -- in summary, that has led to these results.

We are seeing monthly improvements in Gunderson, in our European operations, reorganized in the second quarter, and before that, an improvement in its operations will serve as a tailwind throughout the fourth quarter and beyond. In fact, those forces that have caused us to have a less than expected year should be turned into tailwinds or headwinds in the -- I'm sorry, tailwinds in the coming quarters. So Adrian will discuss our full third quarter financial results, and our current financial guidance in more detail during his remarks.

Our announced acquisition of ARI's manufacturing business is proceeding through regulatory review, consistent with our expectations. Acquisition-related activities in the third quarter demanded management attention and this also impacted our ability to focus on other priorities in the quarter, affecting financial results. We are confident that ARI will be highly accretive to Greenbrier, once operations are fully integrated, serving a geographic diversification goal and goal of scale, and protection of our North American core manufacturing engineering business. This is the extent of the comments we're able to -- we are able to provide today with respect to the ARI transaction.

Turning to overall economic data, US economy is growing at a slower rate than last quarter, still on a pace greater than 2% GDP growth, as May core inflation continues at the same -- about the same rate. The next interest rate move in the US Federal Reserve, as most of you are aware is more likely to be a cut, as opposed to a hike, and most people are forecasting as many as two cuts in the coming year. Overall, low inflation and a more accommodative monetary policy in the United States should allow for GDP expansion through the remainder of this current year, and into 2020. Major risks here in the economic sphere continue to be external shocks and trade or political uncertainty.

Turning to our sector year-to-date through June 22, volumes for all of the North American Class 1 railroads taken together have decreased 2.5% year-over-year. This is due to in part to flooding throughout the Midwest, impacting grain shipments, in additions to declines in coal, intermodal and non-metallic minerals, some of which related to trade.

The change in the number of railcars online has been roughly in line with the change in loadings volume. That is good for builders, as we prefer to see it track together. The Canadian railroads however are a bright spot posting year-over-year loadings better than those of the US counterparts. For example, breaking down the North American loadings by country reveals the difference. Volumes for the US Class 1 railroads have declined 3.7% year-over-year, while volumes for the two Canadian railroads have increased 2.6% year-over-year, led by Canadian Pacific's 5.7% volume growth.

Average Class 1 railroad velocity has increased less than 1% in the trailing 12 months, less than many people seem to believe. This measure railroad performance has risen steadily over the year. Terminal dwell time is lower this quarter, with average train velocity ticking up over the past three months. Car demand still remains strong across many car types.

Precision railroading or PSR to-date, we have not seen significantly identifiable impacts stemming solely from the adoption of this system. It is receiving a great deal of attention by industry analysts, and of course by every freight car builder and leasing company.

Intermodal shipments have been lower in part due to uncertainties in trade policy, weather impacts and the softer spot rate market for truck shipping.

More recently, the transportation analytics firm, FTR, lowered its North American railcar delivery outlook for 2019 by over 11,000 railcars to 51,396, an amazingly precise number, anticipated deliveries. FTR also lowered its 2020 railcar delivery projections by approximately the same amount to 51,100 deliveries. Nonetheless, there is a strong primarily replacement demand cycle over the next 18 months. And historically, Greenbrier has performed well in this type of market. We believe the FTR reductions may be an overreaction to concerns about the economic cycle and trade-specific concerns that we're not certain about either.

We just had our June Board meeting in Washington, D.C. We're tracking a number of very important issues on trade, including issues concerning China. And the Board affirmed the Company's strategy, which is working. Revenue has increased significantly and our drive for scale, one of the four pillars of our strategy is working. We are strengthening our core North American business with the ARI acquisition. Our international diversification will pay-off despite recent hiccups.

The results reported for our current quarter, as mentioned earlier, less than we originally forecast, will of course impact our annual totals. However, the fundamentals of our business are strong and are improving, and our strategy is sound. As Lorie will describe, our core North American manufacturing business has emerged from two of its more challenging quarters in recent memory, we're positioned for strong performance ahead.

Improvements will begin to produce tailwinds in the fourth quarter in future periods. We have a strong balance sheet, strong financial ratios, even after the ARI acquisition, and we have returned substantial dividends to shareholders with a 3% yield at our present prices. At these prices Greenbrier is definitely undervalued by the market.

We're very grateful to all of our colleagues and industry friends, our customers, who are working hard and support Greenbrier's performance. We look forward to keeping you updated on our progress.

Lorie, over to you.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Thank you, Bill. Good morning, everyone. I'll briefly provide some more details on Greenbrier's operating performance, before Adrian addresses the financial details and outlook. We delivered 6,500 railcar units, and received orders for approximately 6,500 units, valued at $730 million. Orders in the quarter were for a broad range of railcar types, including tank cars, covered hoppers and boxcars.

Our diversified backlog as of May 31, totaled 26,100 units, with an estimated value of $2.7 billion. I'll highlight the moving pieces in what was a mixed third quarter. As for the positives, as Bill reminded you, we announced the pending acquisition of the manufacturing assets of ARI in a transaction valued at $400 million. The production improvements predicted for the second half of the year began to materialize in the quarter, with a 40% plus increase in deliveries, primarily in North America, and strong margin performance. And improvements in Europe and Gunderson occurred in the quarter with stronger performance expected in Q4. On the flip side, the railcar repair business continue to struggle operationally, and the Brazilian operations had a challenging quarter with minimal deliveries as a result of weak demand environment.

Now, I'll give a little bit more color on each of our operations. Our North American manufacturing had a strong performance this quarter. I'd like to take a moment and thank the GMO team, led by Alejandro Centurion, for the hard work and successful production activity this year. We've increased production rates, while managing several production line changeovers. Several hundred employees were added safely across multiple locations. This is a testament to the strong manufacturing organization that's been built at Greenbrier over the years.

In Europe, a meeting of the Supervisory Board was held in mid-June. The new management team led by William Glenn in close collaboration with Martin Graham from our GMO operations, laid out their plan to improve production and procurement efficiencies, as well as a revised commercial plan. We're executing on this plan, and expect the headwinds from this operation to turn into tailwinds in Q4, and continuing into 2020.

In our Wheels, Repair & Parts operation, the evaluation and optimization of the railcar repair network continues. Since regaining direct control of our 12 legacy locations last August, four shops have been close based on a review of the market being served and the ability to be profitable. A combination of the smaller network and operating performance triggered the goodwill impairment this quarter.

As part of the network optimization, we continue to focus on how we can best serve our customers and improve the profitability of the remaining locations, remain optimistic about the value of the repair network to our integrated business model, and we expect to have the network solidifies with improved operating performance by the end of 2019.

The Wheels & Parts operations were also positive contributors to the performance of this segment during the quarter. Seasonally, the wheels business is stronger in our fiscal Q2 and Q3 due to winter weather and spring restocking, and the parts business continues to have good demand and operate efficiently.

Turning to our Leasing segment. The leasing revenue in the quarter was robust, reflecting high levels of syndication of externally sourced railcars. As a reminder, to meet the demand from our syndication partners, some syndication product is sourced from outside of our own manufacturing operations. This activity generates positive returns, but is dilutive to gross margin percentage for this segment. Excluding this activity, the gross margin in Leasing & Services was about 43%.

Greenbrier Management Services, our proprietary railcar management provider continues to grow, both service -- both services provided to existing customers and its customer base, with the addition of multiple new customers in this quarter.

In Brazil, our customers operate under a concession issued by the government. The renewal of existing concessions and issuance of new concessions has been ongoing for the last several quarters. These delays in the issuance of the concessions impacts customer's ability to finance and purchase railcars. The benefit of these delays in issuing the concessions is the creation of substantial pent-up demand. We've seen modest improvement in order activity thus far in Q4, with further improvements expected into fiscal 2020. We have rightsized our operations for the current demand environment, while remaining nimble for when rail demand improves, as expected in the near future.

In summary, our core North American operation continues to perform well. We've identified problematic areas of our business and are executing on specific changes to improve operationally and financially, building on the momentum achieved in Q3. Our team is strong and dedicated to growth over the long-term. We're making the right strategic and structural decisions for the business, and I'm excited about our future.

Adrian, will now discuss our third quarter performance and provide updates to guidance.

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

Thank you, Lorie. Good morning, everyone. Quarterly financial information and metrics are available in the press release and supplemental slides on our website. Given the discussion so far, I'll focus on a few additional details in the quarter, and then provide additional information on our fiscal year 2019 guidance .

Highlights for the third quarter include net earnings attributable to Greenbrier of $15.2 million, or $0.46 per share, including $10 million, or $0.30 per share, a goodwill impairment at the railcar repair operation, and $4.3 million net of tax, or $0.13 per share of costs related to the ARI acquisition. Excluding these items, net earnings attributable to Greenbrier are $29.6 million, or $0.89 per share.

Adjusted EBITDA of $84.4 million was 9.9% of revenue. Revenue grew 30% to $856.2 million, our strongest quarterly result ever. Deliveries grew over 40% sequentially, reflecting the strong performance in North American manufacturing. Approximately 13% of our 6,500 units delivered were outside the North American market, with minimal activity occurring in Brazil.

Internally produced syndication activity was strong again this quarter with 1,500 units delivered in the quarter. Approximately 10% of the 6,500 unit orders in the quarter were from international markets. Aggregate gross margins of 12.4% significantly improved from Q2, led by a substantial increase in manufacturing gross margin to 13.3%. We expect gross margins to continue to improve in Q4. Manufacturing gross margin increased 640 basis points from Q2, and were almost 200 basis points higher than in Q1.

We generated over $500 million -- I'm sorry, we generated over $50 million of operating cash flow in the quarter. Greenbrier's balance sheet continues to be strong and flexible, with nearly $360 million of cash. Upon the closure of the ARI acquisition, we expect to continue to have strong liquidity.

Revisiting the subject of working capital, although higher sequentially, inventory level started to decrease during the quarter, reflecting the stabilization of production rates, and reduction of the outsourcing of lining for certain cars. We expect inventory levels to modestly decrease in the fourth quarter, reflecting the completion of the outsourcing work.

We believe our approach to capital deployment that emphasize this cash flow generation and return on capital employed will continue to create long-term shareholder value. This is supported by our history of steady dividend increases over the last several years. Today, we announced a $0.25 per share quarterly dividend, our 21st consecutive quarterly dividend. We have already paid dividends of over $123 million to shareholders under our current dividend program.

Moving to our outlook. Due to the many moving parts this year so far, we are providing Q4 guidance instead of annual guidance. Based on current business trends, we expect Greenbrier's fiscal Q4 to reflect Q4 deliveries to be approximately 7,000 units to 8,000 units, which includes about a 100 units to 200 units from Greenbrier-Maxion in Brazil.

Q4 revenue will be nearly $1 billion. Q4 EPS will be $1.30 to $1.50, excluding any ARI acquisition costs or benefits from the ARI acquisition. We expect Q4 to be the strongest operating quarter of the year.

Further for the fourth quarter of fiscal 2019, we expect a positive Q4 operating cash flow, Q4 G&A expense of $50 million to $55 million, which excludes any additional ARI acquisition costs. We expect Q4 gains on sale of about $5 million on $25 million of proceeds from those sales. We expect to invest about $15 million in our fleet in the quarter.

Q4 capital expenditures of $40 million in Manufacturing, and Wheels, Repair & Parts. Combined with our fleet activity, our net capital expenditures will be about $30 million. Q4 depreciation and amortization is expected to be about $20 million. With the challenges in Brazil in the third quarter, we now expect a Q4 loss of $1 million to $2 million in our unconsolidated affiliates line item. We expect Q4 2019 earnings attributable to non-controlling interest to be about $20 million. Our Q4 consolidated tax rate is expected to be about 25%.

To sum up, we had a mixed Q3 with strong momentum in North American manufacturing, along with some headwinds. We acknowledge our Q4 outlook represents a reduction compared to our previous full-year delivery in earnings guidance. As Bill and Lorie have mentioned, these changes primarily reflects the impacts during the year of Brazil repair, Europe as well as a few production disposition changes or delays. As we discussed, remedial action has occurred or is well under way in all cases, and we are optimistic that we will turn these headwinds into tailwinds, as we finish fiscal 2019, and head into fiscal 2020.

Justin, now we'll open it up for questions.

Questions and Answers:

Operator

(Operator Instructions) Our first question is from Justin Long. Go ahead. Your line is open.

Justin Long -- Stephens Inc. -- Analyst

Thanks and good morning. And maybe...

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

Good morning, Justin.

Justin Long -- Stephens Inc. -- Analyst

...good morning. Maybe I could start with the orders in the quarter. I think they were probably better than most people expected, just given what we've seen with rail volumes and some of the macro uncertainties. Can you give us a little bit more color on the order environment is what we saw a pickup in demand sequentially, or is it more related to Greenbrier getting market share, and then any thoughts around the order environment going forward as well?

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

I'll let others comment. But we had a mixed grouping orders throughout different car types. Obviously, some areas of the -- car portfolio are benefiting better -- stronger than others. So the petrochemicals and tank cars is still a strong demand, and even autos continue to have -- show some strength. But I understand the view that the business is affected by the declines in loadings. Actually, we have a different approach to market and we still see strong visibility in the demand for railcars across our railcar portfolio.

Lastly, I'd say that while we did have an adjustment in Europe and in Brazil, we do expect those franchises, which we believe to be very valuable to turnaround, and so we're going to get some good tailwinds in the future, I think from both of those markets. We're well on our way to fixing the European model and the orders we're taking there have strong margins in them.

Why don't you -- If you want to give more color (multiple speakers)

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

No. I think that's great color, Bill. Thank you. Yes. Just to emphasize, there was broad-based demand across all different car types led a bit by the petrochemical industry. But we saw demand I think in every quartile.

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

And Justin, just tack on to what they've said is, I mean, there is a lot of activity around and a lot of discussion around PSR and railroads owning fewer cars. But again, as we've talked about before, that's not necessarily new news, but it does mean that shippers and lessors will need to own more cars. And so we're seeing a -- seen a little bit of that benefit as well.

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

That's really a great point, Justin. On that point, I want to just speak to Greenbrier's strategy model as it relates to this question. And all of you have been watching the public comments of other companies, recognize that Greenbrier's trajectory is somewhat different. We are a manufacturing, engineering, origination and asset management company. We also have a strong aftermarket service business bundled together with all of that. We are in business to support our customers. Our customers include some very strong leasing companies; companies we've done business with for years and years. And we expect to continue to hold out product and -- to give product to those companies. We're very positive about the fact ARI has strong relationship with GATX with whom we've dealt in the past. The industry needs to be able to not only -- we need not to compete with our base of customers. In our case, we don't intend to do that. We intend to serve these customers and it serves us very well by feeding the machine and the integrated business model. So I just wanted to add those two comments. I think we're getting some halo effect from that.

Justin Long -- Stephens Inc. -- Analyst

Okay. That's all helpful. And it sounds like going forward your expectation on orders is that they should be relatively stable sequentially. Is that fair?

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

I think that is a fair statement with -- while we're not disclosing orders received during the fourth quarter, we have seen robust activity and expect that to continue.

Justin Long -- Stephens Inc. -- Analyst

Okay, great. And then secondly and I'll pass it on. The build rate has been increasing sequentially every quarter, this year. But I wanted to see if you had any initial thoughts about the production levels, you'll be targeting as we get into fiscal 2020. So if I look at that fourth quarter guidance for 7,000 to 8,000 builds, is that the rate of production we should be thinking about for early next year as well?

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

Nice try on an effort to get guidance for 2020. I surprised...

Justin Long -- Stephens Inc. -- Analyst

I have to try.

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

...you want it since we kind of good at the guidance for '20 -- for 2019. But we are -- we do have a very good momentum under our model for -- on the commercial side, commercial relationships with customers, producing good products at a high rate of reliability. These things generally paid off. I don't agree with FTR that there's going to be that big of a shift certainly by 2020. So there is still momentum in our model for next year. And I will define what we do. We've given you some visibility for this quarter in that regard. And I'm afraid that's about all we're going to be able to say about it.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Well, I wouldn't -- it wouldn't be a Greenbrier calls; you and I didn't have a bit of a conversation back and forth. But...

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

That's certainly true. Yes.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

...I would just remind you guys all know, our production rates is very dependent on the car types that we're building, and the timing of when our customers want those cars. So depending on that need, that will moderate or could moderate some of our production rates.

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

True.

Justin Long -- Stephens Inc. -- Analyst

Okay, fair enough. I'll leave it at that. Thanks for the time.

Operator

Our next question is from Matt Elkott from Cowen. Go ahead. Your line is open.

Matt Elkott -- Cowen & Company -- Analyst

Good morning. Thank you, guys. Just a follow-up on the delivery question. Did you guys tell us how much of your current backlog is for fiscal 2020 deliveries?

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

So, Matt, -- this is Justin. It's -- right now, we're heading -- we are sitting with about 60% of 2020 activity in our backlog. Please don't try to triangulate further, because it will only get muddier. But that's kind of what we're prepared to say at this point. So we're entering 2020 in a very good situation again.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

And I would just clarify that, Justin. Entering 2020 is based on a May 31, number.

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

Correct.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

So we still have another quarter to go of commercial activity to bolster our production schedules. And as you guys all know, we love -- at Greenbrier, we love having flexibility. We don't enjoy being fully booked up, because it doesn't give us the opportunity to take care our -- take advantage of near-term or short-term demand.

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

But Matt, I'd like you -- and thanks for joining us today. I'd like you to focus on the remarks I just made. We are in the middle of what is essentially a differentiation in the -- between the major car builders, those who lease, which we do, those who serve customers an engineer, those that are potentially moving toward more of leasing content. We will benefit from this differentiation, because those leasing companies with whom we've had strong relationships and others like GATX, we hope to have strong relationships in the future, need to make commitments for product, and they need someone who's reliable to produce that product for them. We intend to be that company for those customers with whom we've had a strategic relationship. This will be a factor that you can't read about really in the literature on economics or industry forecast. Yes. I think it's going to be a differentiating factor for Greenbrier. And there's multi-year orders that are coming up in that regard.

Matt Elkott -- Cowen & Company -- Analyst

That's very helpful commentary. And I know the ARI acquisition has not closed yet. But to go back to the order front, do you guys think that some of the order activity that you got in the quarter, which was very strong, was influenced by the fact that people know that you're going to be ARI as well in the future? In other words, had you not announced that ARI was going to be your company, you would not have -- maybe you would not have gotten this many orders?

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

I don't believe -- personally, I don't believe that. I think the reaction from customers has been universally -- almost universally positive because it diversifies our product. And it's a parallel product line, giving us geographic diversity. I think it strengthens our position to serve our customers. I think our customers are happy about that. I propel my earlier remarks a few minutes ago.

Matt Elkott -- Cowen & Company -- Analyst

Got it. No, I mean, I don't disagree with that, Bill. I was just wondering, if customers know that you're going to be ARI, so they're placing orders with you -- knowing that you're going to have that capacity going forward for tank cars. And just one final question. There are -- as you noted in the prepared remarks, there are many weak spots in rail traffic and everything is pretty much down except for petroleum products. Intermodal, grain is going to be weak for the foreseeable future. Frac sand has basically declined significantly. Is there any -- I mean, are you getting any calls from your customers about potential deferment of grain cars or frac sand cars or intermodal equipment?

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

Lorie?

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Matt, this is Lorie. I would say that you're spot on that there are some areas of weakness. What I would add, just for some additional color is when we've had customers who are seeing -- who have placed orders and are seeing weakness in particular car types, we will work with our customers to find a way to make it be a win-win situation for both Greenbrier, and our customers, where because we have such a broad product mix, we can sometimes work with the customer to shift, let's say they've ordered a particular car type and when they would prefer something else, because they're not seeing the same strength that they thought they were going to see. So I do think that there is the potential for that over the rest of calendar 2019. But we believe that we have demonstrated that we know how to work with our customers, and we try to find that solution is beneficial for both.

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

So we are having at least one conversation with a customer -- prospective customer on that score. We also have -- in the intermodal area, that's been hit with the intermodal loadings down, and trade affecting intermodal. So we have -- had very positive discussions, redeploying some of our capacity to do freight cars in exchange of the capacity types. But not any -- not to our financial detriment at all.

So we -- as Lorie said, we're very flexible. These long-term customers produce long-term revenue streams and cash flow for us. We have to keep them happy. That's the nature of the business. And it's -- there is a limited number of these big players in the marketplace, so we have to pay close attention to them. We also have very strong and solid competitors, National Steel Car, Trinity, freight car and others -- Union Tank Car. So we have to keep on top of our game, that means satisfying our customers.

Matt Elkott -- Cowen & Company -- Analyst

Great. Thank you very much.

Operator

Our next question is from Mike Baudendistel from Stifel. Go ahead. Your line is open.

Mike Baudendistel -- Stifel -- Analyst

Thank you. I just wanted to ask you on your updated delivery guidance. I'm just looking back in my mind, it looks like it was about a 1,400 unit delta versus sort of what I had before. And I'm just trying to understand sort of what happened there. I was sort of under the impression, you sort of knew what you were going to build and what build slots, and there was more visibility there.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Sure, Mike. I'll answer that question. As we've encountered at different times, when we enter a year, we do our best to provide guidance and expectations based on the visibility we have. There are times when the timing or disposition of production activity can shift. So that's what you're seeing is a shift in primarily that disposition activity, as well as a little bit of weakness coming out of our international operations, Europe and Brazil. That being said, fourth quarter will still be a very strong delivery quarter, and we expect it to be a very strong earnings quarter.

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

And I just have to step-in and say with respect to that weakness, which we tend to look at, sometimes we tend to look back, we've got to look forward to the quarters to come, and the years to come. We think both Brazil and Europe are great franchises. To have a good franchise and build a franchise, you have to lose some games. In Europe, we booted it. We made a management change that new management, William Glenn coming in -- just came back from and Amsterdam Board meeting, they are really doing a great job, reorganizing. And I think that good things are on the way there. So we just have a blip, and I think it's largely timing of that franchise kicking in.

Same thing at Brazil. Brazil has got some really good opportunity there. When these concessions are awarded in Brazil, the concessionaires have to buy new equipment, invest heavily as part of the government mandate. So they put billions of dollars in each of these concessions. Now, Rumo has received its concession or is about to; the others are going to be tracking closely behind. And the problem down there for them will be that there is a limited car capacity in Brazil. It will be for a period of time to summers market. But the question is when. It certainly in this quarter. We had -- I think, we've built 15 cars an anomaly. I think in future quarters, we'll see gradual improvement. Soon as the concessions are awarded, that thing will turn around with visibility in the next four to five years.

Mike Baudendistel -- Stifel -- Analyst

Got it. That's helpful. And just also wanted to ask you, I know you said you don't want to say much on ARI. But just wanted to ask you to make sure that the -- sort of the statistics you said at the last call on that in April that being a 20% accretive, the $30 million in synergies time -- timing, especially close by the end of the year, early next fiscal year. All those things are all still relevant?

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

Yes. All of that is still relevant. That's what we believe.

Mike Baudendistel -- Stifel -- Analyst

Got it. That's all I have. Thank you.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Our next question is from Matt Brooklier from Buckingham Research. Go ahead. Your line is open.

Matt Brooklier -- Buckingham Research -- Analyst

Hey, thanks and good morning. Any sense as to how much of a margin or profit headwind? Some of the hiccups that you had in Europe were on the quarter. I'm just trying to think of sequential progression in terms of the margins here.

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

That's a great question. Laurie is prepared to answer that question, or Justin or Adrian, or me if they fail to answer it. Owes a lot.

Justin?

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

So the European impact was about a 100 to 150 basis points in the -- in Q3. The -- we would actually expect to see another step-up in our margins in Manufacturing in Q4, as Europe starts to return to a little bit more of a normalized level. So kind of in line with what we've been saying all year, continue to see the stair-step progression. And we'll see quite a bit of strength as we have our current run rates for the entire quarter, especially in North America.

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

Manufacturing revenues will step up in Q4, and also the margin will step up. So we'll get a double benefit.

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

I think -- what we might be looking for is just an order of magnitude in terms of the headwinds that we had in the quarter. I think the number is something like between Europe and Brazil, which we think will not repeat, and will turn into a tailwind relatively speaking, and this cost -- it was close to $10 million, supposed to.

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

Yes, that's correct.

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

Right.

Matt Brooklier -- Buckingham Research -- Analyst

Okay. That's all inclusive headwinds in fiscal 3Q with everything.

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

That is just for those two parts, but repair was another big lumps. So as we work off and we're well under way in repair in Europe to they -- to normalcy, and Brazil is little more of a wildcard, but is not going to be the aberration than it was in this quarter, at least we hope knock on with. So if we get this from a relative perspective, the quarter was quite noisy with unexpected residual legacy issues after we announced a write-off in the last quarter. We thought we had this pretty well corral, but dogs and cats get coming homes, and we think we've got most of those corral now. But that's what we think. And we're expecting a -- relatively speaking, a positive from these areas as it relates to the drag we were carrying in the Q3.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

And just to be very, very clear, from a gross margin perspective, if you take into consideration, repair operations Brazil and Europe, you are talking about, about $10 million.

Matt Brooklier -- Buckingham Research -- Analyst

Okay, helpful.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

The headwinds.

Matt Brooklier -- Buckingham Research -- Analyst

And then with -- second question, with respect to the repair operations, you've closed a couple of locations. What's left to do with that business in order to return it to your targeted margin goals? And would you ever consider potentially selling that asset, if you're not able to hit that target?

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Sure. So we've just brought our legacy operations back into Greenbrier in August. So while for some of us, it feels like it's been a long time, it really hasn't been that long. And I would say that we're moving fairly efficiently through an optimization and review of each of those facilities, working closely with some of the customers that we service in these geographic areas to see if there is a solution to us becoming more profitable. I think that by the fact that we've closed four out of 12 locations in just nine months, it goes to the fact that we are working quickly if we cannot figure out a way. We've also seen good operating performance improvement at several of the locations.

So we don't get into the details facility-by-facility, but we have set a very tight timeline to come to a final optimization of this network by the end of 2019. And again, we're taking into consideration a lot of things, including how this network or this activity that we provide, how it works with our management services operation from an integrated business model perspective. As you are aware, we manage over 300,000 railcars for the North American fleet, as part of that management oftentimes, we are managing the maintenance activities associated with those railcars. So we're looking at these two activities as it -- they go hand-in-hand.

Matt Brooklier -- Buckingham Research -- Analyst

Okay, very helpful. Appreciate the time.

Operator

Our next question is from Bascome Majors from Susquehanna. Go ahead. Your line is open.

Bascome Majors -- Susquehanna International Group -- Analyst

Yes. Thanks for taking my question. You talked a little bit about positive operating cash flow in the fourth quarter. Can we back it out and look at the full-year, is that swinging in some of the working capital, when you guys go ahead (inaudible) significant enough to deliver a positive operating cash, or even free cash flow number for the entire year, and maybe a little bridge to -- if that's something that could reverse, if not in the next quarter or next year? Thanks.

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

So Bascome, this is Justin. I would say that probably at this point, will be getting close to breakeven on an operating cash flow basis for the year. It's just that with the robust working capital build, including inventories, but also syn -- railcars held for syndication, that will is definitely reversing itself in the back half. But is also -- we don't sell that -- those assets down to zero, as we enter the next fiscal year. We do carry some of that. So we will be expect to have a strong fourth quarter, which will get us closer to breakeven on the operating cash flow, and then will position us well for 2020.

Bascome Majors -- Susquehanna International Group -- Analyst

Okay. And I know you had some questions on next year earlier, and you understand the reluctance to speak to it. But there's certainly a wide range of investor expectations out there, and you've been willing to at least kind of share some directional thoughts on the going year, even one or two quarters early in the past. I mean, from the $3-ish bogey for the full-year that we sit at today, any sense of where this backlog cover gets you for next year? How -- what are the range of expectations in your role, just anything you can give us to help us a little bit, get some comfort with at least the first quarter to next year, I think could be really helpful. Thank you.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Well, I would say that we're excited with the momentum that we've achieved in the third quarter. We expect fourth quarter to continue that growth. We've mentioned that the North American market, which is our largest market, where we service over 370,000 railcars, I was corrected, understating so, sometimes my conservatism can come out, but we're excited. Again, choppy market -- the North American market, so we don't want to be overly aggressive. We also have the fantastic opportunity to close on the manufacturing assets of ARI. So it's going to quickly become difficult to distinguish between what is legacy Greenbrier and what is this combined network, because we're going to be very focused on quickly assimilating and combining these operations, and not continue to run them as distinct unit.

So I would say, and this is saying a lot for those of you that have been following us, I'm excited about what our expectations will be for 2020. And I think that I'll turn it over to Justin or Adrian to see if they want to to moderate my comments.

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

I wouldn't do that because they may -- you may -- they may do so. Look at -- I -- that's a very optimistic positive statement from Lorie. For those of you who know Lorie's history as Chief Financial Officer. I think that we've got a company that has -- from this current guidance you can construct $320 million, correct me, Justin, of EBITDA for the quarter, you can construct what you -- the earnings per share. It seems to me to a bit hard -- will be hard-pressed to do worse than that, but I -- next year with baseline. We have changed the model dramatically. We have some real optionality in the international business, so stuff can churn very quickly. We still have the Saudi Arabian optionality in the mining industry there. They're investing heavily. We are in -- still trying to conclude the joint venture activities over there. So these things can pop and break to the good as well as to the bad.

So we've been beating ourselves up a little bit about not performing as well as we had hoped. But the truth is, we've got a company that's undervalued with high dividend yield, a lot of strength in its balance sheet, a strong cash flow as we normalize production and inventory levels. We just hit record revenues. We're going to hit a record revenue for the quarter. We're running at a $4 billion rate, if we can keep that up.

The industry in North America is declining a little bit arguably, but I think the streets looking for any negative news again in 10-year cycle. But our Company is a lot different and a lot stronger than it was in the beginning of the last downturn. We are all looking for the beginning of the last -- in the next downturn. It just doesn't look like in an election season that, that's going to happen unless there is a shock from the outside. So baseline, I see a very -- will be very difficult for me to see how we do worse. Now, I don't want to curse this by saying that and having something happen. So that's kind of the best outlook we're going to be able to give you, I'm afraid. But I think it's very positive. I agree with Lorie.

Bascome Majors -- Susquehanna International Group -- Analyst

That's Lorie to hear it from you, if your history conservatism, that's good deal. And I'm glad to hear that you guys are optimistic. And we'll wait and see what you have delivered out first in October. Thank you.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Thanks, Bascome.

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

Thanks, Bascome.

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

Thank you, Bascome.

Operator

And our last question is from Steve Barger from KeyBanc Capital Markets. Go ahead. Your line is open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Thanks. Good morning.

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

Good morning.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Good morning, Steve.

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

Hi, Steve.

Steve Barger -- KeyBanc Capital Markets -- Analyst

You've talked a lot on this call about international getting back on track. And just for Europe specifically, can you give us any more specifics on the commercial plan in terms of how you're changing your market strategy? And I'm just trying to gaze market opportunity versus the more recent reality.

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

Yes. We're going to stop doing stupid stuff, number one. All right. That's a quote from the Navy. Admiral Fargo on our Board saying, once you start doing stupid stuff, the easy stuff and a good stuff comes along a lot easier. We have William Glenn was a veteran of our as Chief Commercial Officer. He knows our system. He is working very well with Alejandro Centurion.

So number one, we're screening customers or being much more selective about customers. And we took some really bad contracts under the earlier administration. We weren't watching the store. We integrated well on all of the details, but we didn't pay attention to the business that they took on during the transition when we were seeking regulatory approval. Once they took that business on and they -- then they did a second mistake of deploying too many cart lines in too many factories they should have specialized. William has got and Martin Graham have -- who is an industry veteran, have got both of those areas contain. That itself will make a major difference.

The margins that they're seeing and we had some margins and the legacy contracts that were taken before the deal was approved that are producing 25% losses. And it's really tough to make money, when you've got some major state-owned companies like BB producing a 25% loss. And there is no quarter over there in that environment, if you make that kind of contract, none has given and none has asked. So I think they've made a tremendous difference and they put the -- William used to run Europe. He is very experienced with customers. He is calling on the right customers and I'm optimistic, he will turn this around.

Just looking at Europe alone, the shift from the negative we had to the positive, we expect in the next few quarters will make a big difference in our bottom line. And it will continue to improve. Now, the downside is, Europeans growth is that as -- is kind of flat. There's a lot of trade related issues over there, a lot of noise, Brexit and so on. But we're still seeing a reasonably strong market, and we're booking orders. And more importantly, we're building strong relationships over there with companies that we had neglected to go for some of the big German companies. So that was a mistake. We corrected that mistake as well.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. Thank you. And of the 6,500 orders this quarter, how many were international versus domestic?

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

About 10% international; balance was domestic.

Steve Barger -- KeyBanc Capital Markets -- Analyst

And would you expect a similar mix in fiscal 4Q?

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

Broadly.

Steve Barger -- KeyBanc Capital Markets -- Analyst

All right. And just one last quick one. Bill, you made the case that the stocks undervalued versus all you've done, and all you have going on. But free cash flow has been hard to come by over the last couple of years, as you've made these international investments in the leasing actions. Is it reasonable to say that 2020 gets back to free cash flow generation? Or are there still some investments and headwinds yet to come that will still keep that more depressed?

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

Well, as to the general strategy, I think we have to digest what we've done, if we can get baseline -- top line revenue, make that profitable, at a $3.5 million run rate to $4 million run rate if that could be achieved, that would be great. But we better be sure that the blocking and tackling is all being done. So what does that mean for working capital, we should be able to tightened down working capital, be aggressive about G&A cost, look at capital allocation very closely. We do intend to continue our dividend. But we want to be sure, we have a strong balance sheet for contingencies that are more downside type contingencies as opposed to looking for continued this rapid pace of growth. We're not going to be doing any more international acquisitions in basic plan. But we're open always to opportunistic -- opportunities. But we're just really (inaudible) button things down in 2020, and get the house running in good order.

Steve Barger -- KeyBanc Capital Markets -- Analyst

So unusual leasing things, notwithstanding, you would expect better operating and free cash flow next year?

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Yes.

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

Yes.

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

Yes.

Steve Barger -- KeyBanc Capital Markets -- Analyst

All right. Thanks.

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

Thank you.

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

Thank you very much everyone for your time and attention today. And if you have any follow-up questions, please reach out to me. Have a great day. Thank you. And a happy 4th of July.

Operator

That concludes today's conference. Thank you for participating. You may disconnect at this time.

Duration: 56 minutes

Call participants:

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

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

Lorie L. Tekorius -- Executive Vice President and Chief Operating Officer

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

Justin Long -- Stephens Inc. -- Analyst

Matt Elkott -- Cowen & Company -- Analyst

Mike Baudendistel -- Stifel -- Analyst

Matt Brooklier -- Buckingham Research -- Analyst

Bascome Majors -- Susquehanna International Group -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

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