Q3 2023 Greenbrier Companies Inc Earnings Call

Participants

Adrian J. Downes; Senior VP, CFO & Principal Accounting Officer; The Greenbrier Companies, Inc.

Brian J. Comstock; Executive VP and Chief Commercial & Leasing Officer; The Greenbrier Companies, Inc.

Justin M. Roberts; VP of Corporate Finance & Treasurer and IR; The Greenbrier Companies, Inc.

Lorie L. Tekorius; President, CEO & Director; The Greenbrier Companies, Inc.

Bascome Majors; Research Analyst; Susquehanna Financial Group, LLLP, Research Division

Jacob Moore

Justin Trennon Long; MD & Research Analyst; Stephens Inc., Research Division

Kenneth Scott Hoexter; MD & Co-Head of Industrials and Basic Materials; BofA Securities, Research Division

Matthew Youssef Elkott; Director and Transportation, OEMs & Technology Analyst; TD Cowen, Research Division

Unidentified Analyst

Presentation

Operator

Hello, and welcome to the Greenbrier Companies Third Quarter Fiscal 2023 Earnings Conference Call. Following today's presentation, we will conduct a question-and-answer session. Each analyst should limit themselves to only 2 questions. And for that time, all lines will be in a listen-only mode. At the request of the Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would now like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts, you may begin.

Justin M. Roberts

Thank you, Anthony. Good morning, everyone, and welcome to our third quarter and fiscal 2023 conference call. Today, I'm joined by Lorie Tekorius, Greenbrier's 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 in Q3 and our outlook for fiscal 2023, we will open up the call for questions. In addition to the press release issued this morning, additional financial information and key metrics can be found in a slide presentation posted today on the IR section of our website.

Matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2023 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier. And with that, I will hand the call over to Lorie.

Lorie L. Tekorius

Thank you, Justin, and good morning, everyone. I hope everyone's enjoying the start to summer. Yesterday, hopefully, you saw that we announced that Pat Meyer will join the Greenbrier Board of Directors. I'd like to publicly welcome Pat to our Board and look forward to working with Pat to get his perspective on the freight rail market as well as his insights into the U.S. Mexico activity.

As many of you know, Greenbrier hosted our inaugural Investor Day on April 12. For those of you who are unable to attend in person or via webcast, the replay will be available on our website for a short period of time, and the full presentation will be available forever at the SEC website. And during the 3-hour event, we touched on 4 areas: first, our leadership position in our markets, second, our diverse manufacturing capabilities and a long track record of innovation; third, our strong lease origination capabilities and differentiated syndication model; and lastly, the consistent improvement in our financial performance across economic cycles.

We also laid out Greenbrier's strategy to increase margins in our Manufacturing segment, grow our recurring revenue base through lease fleet investments and follow a capital allocation strategy focused on returning value to shareholders. And while it's only been 2 months since the Investor Day, I'm pleased to share the progress we've made in each of these areas. In some cases, we're ahead of our own internal schedules and in others for laying the foundation to execute our strategic plan. And as I briefly recap results for this quarter, I'll highlight some achievements towards these goals with the important caveat that we do not expect our progress to be linear, and our strategic plan and targets contemplate a 5-year time horizon.

So turning to the quarter. We generated revenue of $1 billion. Our deliveries totaled 6,600 units, down from Q2 due to the timing of syndication activity. And while revenue dipped slightly compared with the prior quarter, aggregate gross margin improved by 190 basis points to 12.3%. Increasing our aggregate gross margin to the mid-teens by fiscal 2026 is one of the targets we provided during the Investor Day, and we're pleased to report the progress on that front.

Gross margins in manufacturing of 9.6% increased 260 basis points compared with the prior quarter and some of the efficiencies we discussed during the Investor Day materialized more quickly than expected. And while there will be unforeseen issues that occurred during some quarters, we're confident that many of the efficiencies achieved thus far will continue. In particular, supply chain issues that have been a recent headwinds seem to be largely in the review mirror. And as we've discussed previously, we're bringing fabrication in-house for basic primary parts and some assemblies as part of our make-versus-buy strategy. The first phase of this work will be completed in the fourth quarter that we're in today, and we expect to achieve our full cost savings target of $50 million to $55 million in fiscal 2025.

Additionally, in the quarter, we completed the sale of Gunderson Marine in Portland as part of our capacity rationalization plan that's expected to result in annual savings of $15 million to $20 million. These are costs that are getting taken out of the system permanently. Gunderson Rail completed its last railcar on May 18, after shipping over 110,000 units since 1985. I'm extremely pleased to share that Gunderson's new owner will retain many of the hard-working production workforce at that facility.

Now moving across the business. Maintenance Services continued the positive momentum seen since the start of the year despite ongoing labor challenges. Their margins continue to improve sequentially on improved pricing, volume and the operating efficiencies we've been focused on establishing over the last 2 years, expecting a strong end to the year from this segment. And as Brian will discuss shortly, we've left the foundation for our expanded leasing strategy. This is an important component of our multiyear plan and is expected to result in the doubling of recurring revenues within the next 5 years. The market backdrop for leasing remains very positive, and we're in a great position to execute our plans.

Our returning to capital to shareholders is an integral part of our capital allocation strategy. I'm pleased to report that our Board increased our quarterly dividend by 11% to $0.30 per share yesterday. Our dividend has doubled since its reinstatement in 2014 and illustrates the importance the Board places on this activity. The broader economic background is somewhat mixed with several factors creating economic crosscurrents. Despite the ongoing economic murkiness, our outlook in North America remains unchanged with railcar deliveries to be at or near replacement levels for the next few years.

In Europe, there's softness in demand for intermodal accents, but this is being more than offset by the bulk rail freight sector, where we continue to see strong demand across liven types. Factor of aside, at the company level, we continue to take actions to create a stronger, more sustainable Greenbrier. We're confident in the long-term strategy we set forth during our Investor Day and our team's ability to execute on that strategy, which is focused on the things we can control and not reliant on an overly optimistic demand scenario. I look forward to sharing our progress toward the targets on future calls. And now I'll turn it over to Brian to discuss the rail car demand environment and our leasing activity.

Brian J. Comstock

Thank you Lorie. Greenbrier secured new railcar orders of 4,600 units worth $650 million. Subsequent to the end of the quarter, we received orders for 7,900 units valued at $975 million. Orders continue to be broad-based and diverse across most railcar types with the exception of intermodal. As of May 31, Greenbrier's global backlog was 23,400 units valued at $2.9 billion. This figure excludes the 7,900 units ordered after the end of the quarter. As a reminder, our new railcar backlog does not include 1,000 units valued at $85 million that are part of Greenspan's railcar conversion program.

Despite weakness in freight volumes, the railcar demand environment remained stable due to pent-up replacement demand and tight supply. And we continue to see healthy railcar inquiries and orders for a variety of railcar types. We are pleased with the performance of leasing and management services in the quarter. Our lease rates on renewals are increasing by double digits, and we are extending lease terms while maintaining a high fleet utilization of nearly 99%.

In terms of the underlying leases, the durations are staggered to both mitigate the impact of cyclicality and create upside potential through favorable renewals. We do have a high volume of renewals in 2024, resulting from the portfolio we purchased in September of 2021, and we are actively working to renew these leases ahead of their expiration. As we described during the Investor Day, we intend to grow more steadily over the coming years. and we have committed to invest $300 million per year for each of the next 5 years on a net basis. We remain focused on railcar types that will maintain a balanced fleet portfolio and reduce concentration risk. I want to emphasize that we will only invest in the right assets with the right lease terms in counterparties.

During Q3, we funded $54 million of debt from our nonrecourse leased railcar warehouse facility, backed by $72 million of assets and have funded a total of about $120 million through the warehouse over the last 2 quarters. As you may have seen in our press release this morning, we recently upsized our warehouse facility to $550 million from the prior $350 million borrowing capacity to support our growth plans. The terms of the upsized facility are unchanged.

Fourth quarter fleet activity in the warehouse facility will continue to be leveraged at a 75% debt-to-equity ratio. We are regularly evaluating our financing strategies as we prepare to meaningfully increase the size of our lease fleet with the goal of more than doubling recurring revenue in the next 5 years. As you heard during the Investor Day from William Glenn, who head Greenbrier's European operations, we are building a leasing capabilities in Europe. Our entry into the European leasing is well ahead of plan and the pipeline for leasing deals is robust, including finalizing our first syndication agreement.

Our capital markets team syndicated 800 railcars in the quarter, a decrease from Q2, reflecting the timing of production schedules. This market remains liquid and a strong appetite for the asset class and our team is preparing for another busy year in 2024. Within management services, we continue to shift our commercial focus and business development efforts towards customers whose needs are more closely aligned with our core competencies as we seek to deepen relationships within our customer base. This is an exciting time for Greenbrier as we work to optimize our manufacturing capabilities and grow the leasing and management business.

We have been clear with our growth initiatives, and I look forward to updating you on them as we execute on our strategic plan. With that said, I'll hand the call over to Adrian, who will now speak to the financial highlights in the quarter.

Adrian J. Downes

Thank you, Brian, and good morning, everyone. Before moving into the highlights of the quarter, I would like to remind everyone that quarterly financial information is available in the press release and supplemental slides, which can be found on our website.

Our performance in the quarter was strong across all business segments with improved aggregate gross margin and adjusted EPS in Q3 compared to Q2. Following the highlights of the call, note for the quarter include second consecutive quarter with revenues of $1 billion or higher, deliveries of 6,600 units was the second highest quarter for deliveries since the fourth quarter of 2019 and includes 200 units from our unconsolidated joint venture in Brazil. Aggregate gross margin of 12.3% was 190 basis points higher than the prior quarter, resulting from stronger margins in the Manufacturing and Maintenance Services segment attributed to improved operating efficiencies in both segments and higher pricing and volumes in the Maintenance Services segment. We expect the operating momentum will continue as a result of the initiatives described during the Investor Day in April.

Selling and administrative expense of $63 million is 7% higher from Q2 primarily attributed to an increase in employee-related costs due to higher incentive compensation expense as a result of increased profitability. We had a pretax charge of $17 million related to the sale and exit of our Gunderson Marine business in Portland. The consolidated tax rate of 12.9% was primarily a result of favorable discrete items in Mexico. Excluding the impact of the Gunderson loss on sale and exit related costs, adjusted net earnings attributable to Greenbrier of $34 million generated adjusted EPS of $1.02. Additionally, adjusted EBITDA for the quarter was about $97 million or 9.3% of revenue.

Turning to liquidity. Greenbrier's operating cash flow turned positive on a year-to-date basis due to a strong third quarter and -- sorry, due to strong third quarter results of nearly $98 million, reflecting improvements to operating performance and working capital efficiencies. Our liquidity was $665 million at the end of Q3, consisting of cash of $321 million and available borrowings of $344 million. The primary use of our cash during the recent quarter included the repayment of $95 million of short-term borrowings on our domestic revolving credit facility as well as $32 million of share repurchases.

As we finish 2023, we expect Q4 liquidity levels to remain strong as operating momentum and working capital efficiencies continue to improve. As highlighted during our Investor Day in April, one of Greenbrier's strategic initiatives as a balanced approach to capital allocation. An integral part of this strategy is to return capital to our shareholders through dividends and share repurchases. During the third quarter, Greenbrier repurchased 1.2 million shares for $32 million. Between the second and third quarter, Greenbrier repurchased a total of 1.7 million shares for $49 million, of which $3 million was part of the prior authorization program.

Under the current share repurchase program, we have $54 million remaining of the $100 million authorization that extends through January of 2025. In addition to significant share repurchase activity, the Board increased the dividend by 11% to $0.30 per share, representing our 37th consecutive dividend. Based on yesterday's closing price, our annual dividend represents a yield of approximately 3.7%. Since 2014 Greenbrier returned over $470 million of capital to shareholders through dividends and share repurchases. Our board and management team remain committed to a balanced deployment of capital designed to create long-term shareholder value.

Turning to our guidance and business outlook. Based on current trends and production schedules, we are raising Greenbrier's fiscal 2023 guidance, which includes the following: our fiscal '23 delivery guidance has increased to 25,000 to 26,000 units, including approximately 1,000 units from Greenbrier-Maxion in Brazil. We are also increasing our fiscal year 2023 revenue guidance to be between $3.8 billion and $3.9 billion. Selling and administrative expenses at approximately $230 million to $235 million, and gross capital expenditures of approximately $280 million in leasing and management services, $90 million in manufacturing and $15 million in maintenance services and proceeds of equipment sales are expected to be approximately $76 million. Consolidated gross margin is unchanged, and we expect full year consolidated margin percent to be in the low double digits.

In closing, I'd like to reiterate a few points. We are confident in our long-term strategy, as highlighted at our Investor Day and believe the best is yet to come. Our management team is incredibly experienced with a demonstrated track record of success. We are supported by a robust backlog, which provides strong visibility and stability over the coming years. Our liquidity and balance sheet strength allows for opportunistic growth. And as we look to strongly finish our year, we are well positioned to drive shareholder value in 2024. Now we will open up for questions.

Question and Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) Again, we ask that analysts limit them post to only 2 questions. At this time, we'll pause momentarily to compile the roster. Our first question will come from Matt Elkott with TD Cowen. You may now go ahead.

Matthew Youssef Elkott

Thank you. Good morning. Lorie, can you maybe first a quick clarification. What was it specifically that made it possible to achieve those manufacturing efficiencies ahead of plan?

Lorie L. Tekorius

A great question, Matt. I would say it's tremendous hard work and focus by the men and women in our manufacturing operations. As you'll recall, last quarter, we talked about second quarter, we talked about the headwinds that we were struggling with, with supply chain and our focus on how to reverse that trend. This is one of the areas where we're seeing improvement ahead of what we thought internally we would be able to achieve as not just Greenbrier, but as many companies have seen over the last several years, supply chain can be one of those things that can be a persistent headwind or it can pop up. So I'm just pleased with the focus and attention and execution in our manufacturing group.

Matthew Youssef Elkott

Got it. And then were there any big orders from a single customer in the 4,600 in the quarter or the 7,900 after?

Lorie L. Tekorius

I will let Brian chime in, in a minute if he like. But actually -- I mean, yes, we have several large orders, but nothing that was really a multiyear or something that drove it that was strong diverse demand across a number of customers, car types, commodities and a nice healthy combination of lease originations as well as direct sales. Brian, is there anything you'd like to add?

Brian J. Comstock

No, I think you hit it, Lorie. Matt, basically, it's kind of the normal blocking and tackling. We had several large orders, not just 1 or 2, but also we had kind of the diversity of what we see every day. Some of it was pent up from earlier in the quarter, which we thought would come in, in Q3 and in the previous quarter is now coming in now. but it's just kind of the run of the mill, no multiyear orders, just your kind of standard fare as part of the order cadence in order diversity.

Matthew Youssef Elkott

Thanks. That's good to know, Brian. And there was a 10% sequential step-up in the ASP. How much of this was mix versus other factors? Because after the -- for the 900 after Q3, I think the ASP goes back down to being 4% below 2Q.

Brian J. Comstock

Yes. I think the mix is -- it's a better mix. We're starting to see a little bit more automotive products as well as tank cars into the mix. As you know, one of the focuses I think the industry has been to continue to move pricing into a better place as well. And so I think you're seeing a combination of a better mix as well as continued uplift in pricing.

Matthew Youssef Elkott

Okay. And just one last one, if I may. More often than not, your first fiscal half is lower for everything basically deliveries margins, earnings. Do you expect this to be the case for fiscal '24, even as this really is a highly anomalous cycle?

Lorie L. Tekorius

So I'll jump in, and then I can let others join I'm sorry to kind of have a little bit of a chuckle because you're right, we do tend to like in the second half and are a little bit muted for a variety of reasons in the first half, that has not gone without our own acknowledgment of that trend. And we are very focused on how can we make certain that quarter after quarter, we continue continuous improvement from orders, deliveries, margins, cash flow. So you are going to see that sort of focus. Again, it's hard to perfectly predict if there's going to be something that pops up. But we're not planning to have the first half of next year be soft. We're planning for fiscal '24 to be better than 2023, and we're working to make that be continuous improvement quarter after quarter.

Matthew Youssef Elkott

Got it. Thank you very much Lorie. Thanks Brian.

Lorie L. Tekorius

Thanks Matt.

Operator

Our next question will come from Justin Long with Stephens. You may now go ahead.

Justin Trennon Long

Thanks and good morning. Maybe to follow up on that last point you made, Lorie, when you look at the industry projections for railcar production in 2024 on a calendar basis, a lot of those forecasts are down a decent amount. So I'm curious if you could talk about your view on just broader industry production as we move into your fiscal '24. And based on the backlog you have today, including the orders you've just received here in June. Can you speak to your level of visibility to production in 2024 at this point?

Lorie L. Tekorius

I would say for 2024, we've got really good visibility. We still do have some pockets where we have open production but we feel very comfortable about the ability to fill up that space. Right now, what we're seeing in North America is pretty steady production coming out of where we're going to close out the fourth quarter. We don't have any big ramp-ups or any big ramp downs. We'll have some adjustments, but some of the recent orders that we've received really give us great visibility and continuity on a number of our production lines. The other interesting thing that if you're just looking at the North American statistics, you also have to look at Europe, where we're continuing to focus on how we can serve that market and we're focused on ramping up production in Europe as well. It's not quite the same volume as you would see here in North America, but that will be one of the benefits to our deliveries in our fiscal 2024.

Justin Trennon Long

Okay. Great. That's helpful. And I guess shifting to manufacturing gross margins. It was good to see the sequential improvement. Could you speak to how much of that came in North America versus Europe? And then as we think about manufacturing gross margins going forward, what's your comfort that we'll continue to see some sequential momentum moving into fourth quarter and early next year?

Justin M. Roberts

Hey, Justin. This is Justin. I think we saw improvement both in North America and Europe in the quarter. North America has a disproportionate weighting there just from a size perspective, but both operations performed very well and improved sequentially. And then going forward, we would expect that to continue, maybe not quite to the same extent, but we do see improvement in Q4 and into fiscal 2024, which is kind of hard to believe we're talking about already, but such is life.

Justin Trennon Long

Okay. Good to hear. I'll leave it at that. Thanks for your time.

Lorie L. Tekorius

Thanks, Justin.

Operator

Our next question will come from Bascome Majors with Susquehanna. You may now go ahead.

Bascome Majors

Thank you. As we look forward, I realize we're still away from next fiscal year, but do you have a sense of the cadence of when you put cars on the balance sheet and off the balance sheet in the manufacturing business?

Justin M. Roberts

I think at this point, it's -- we're not necessarily ready to get into that much detail. I would say that we will -- we do see a relatively consistent pattern of that each quarter over the next 4 to 5 quarters based on production schedules.

Bascome Majors

And now that most of the supply chain issues in Mexico and the U.S. are behind you, fingers crossed. Is Europe accretive to the overall manufacturing margin? Are those pretty even?

Lorie L. Tekorius

I would say, yes, it is accretive. As Justin said, it's accretive even when you take into consideration the fact of the weighting, I mean North America is one of the largest great railcar markets in the world. So it's going to be hard to -- for Europe to up in that, but they're definitely accretive to our margins.

Bascome Majors

And lastly speaking, can you talk a little bit about the willingness to risk longer-term capital from some of your leasing customers? I know you don't have the same length and duration and size in multi-years of some of your competitors. But just what's the appetite for the leasing companies as we look out the next 6, 12, 18 months? How is that sales channel look? And do you expect that to be supportive of a fairly steady production rate for the industry over the next year or 2?

Justin M. Roberts

That's a great question, Bascome and I was going to see if Mr. Comstock can handle it.

Brian J. Comstock

Yes. Thanks, Justin, and thanks to Bascome. One of the areas that I think I reported on this maybe last quarter as well as we are seeing an increased interest by the operating lessors. They're traditionally in the market. But over the last couple of years due to COVID and other reasons, there's been a little bit of a pullback. We're seeing more and more confidence on the operating lessor side, which is driving, as you suggest more stability in the manufacturing as well as some of this order pipeline. And we think that's going to continue to build momentum throughout the rest of this year into next year.

Bascome Majors

And from the syndication channel, any comments on that customer? Are they starting to get comfortable with the cost of capital and rising interest rates? Just do you think that is a growth opportunity or at least an opportunity for stability in your business as we look out 6, 12, 18 months?

Brian J. Comstock

And Justin, I can grab this one as well. Yes, we do. The returns are still very strong as you know, interest rate pressures have put a lot of -- really a lot of pressure on that side of the house, but the deals that are coming in, all hurdle have the appropriate internal rate of returns. And so as a result, we're seeing more and more interest. In fact, we're seeing even some new entrants that are inquiring about coming into the space. So we feel pretty good from a liquidity standpoint. And long term, we think the syndication customers are pretty comfortable. Thank you for your time.

Bascome Majors

Thank you for your time.

Operator

Our next question will come from Ken Hoexter with Bank of America. You may now go ahead.

Kenneth Scott Hoexter

Great. Good morning. So if I could just kind of follow on a little bit on Bascome's question there. Lorie, maybe talk a little bit about the balance of the leased fleet versus the build for external sales and manufacturing. It seems like we've got a lot of volatility where maybe you'll get the consistency after you get the ramp up. So are you getting closer to the full ramp-up on that production for the internal build versus external sales? I just want to understand how we should think about that given the build to revenue, your kind of take follows.

Lorie L. Tekorius

Thanks, Ken. Yes, it's a good question. And what's interesting is you have to step back and look at the strength of originations. So the same customers, same car type, same commodity. While we are growing our on-balance sheet lease fleet, it is still a fairly modest fleet and sometimes the size of those orders are such that it would really skew our concentration --

Justin M. Roberts

Hey, Lorie, allow me to interrupt, but your line went quiet for like the first 3 seconds of your answer, I'm sorry to do it, but I'm getting ideas that other people, it went quiet, too. Do you mind just starting from the beginning there?

Lorie L. Tekorius

My gosh, it was the most brilliant thing I've ever thought. So it's probably because every one of our field sales people was hardly calling in because I was complementing our sales -- can you still hear me?

Justin M. Roberts

Yes, perfectly.

Lorie L. Tekorius

So we often can originate some very large leases. So a large number of cars, same customers, same car type, same commodity. While we are excited to grow our on-balance sheet lease fleet, it is still a relatively modest and I'm probably being generous size. Therefore, any of those orders could really skew our concentrations in any number of those areas. So we will continue to work with our syndication partners so that we can diversify and keep that disciplined approach to how we're growing our on-balance sheet portfolio.

Sometimes our syndication partners are not as keen on our fiscal year quarter end or year-end as others might be. So we're going to take those opportunities when they arise, and we're going to close those transactions as appropriate for the business. So that will continue to cause some lumpiness from quarter-to-quarter, but you can understand that the basis is we've got strong commercial lease origination capabilities, and we're keeping an eye on having a very disciplined approach to how we're growing the fleet on the balance sheet.

Kenneth Scott Hoexter

And then I throw at you for my follow-up, a quick numbers question, so I'll follow up with a kind of a follow-on question. But the backlog new orders came in at about $123 revenue per car, down from your printed $141,000 in the third quarter. Is there anything more to that than mix? Because that just seems like an extraordinary shift? And then I guess to wrap up, you said you weren't surprised by anything in the quarter, yet you raised your outlook. So I just want to understand what changed? Was there something in there that did change that led you to raise the outlook.

Justin M. Roberts

So Ken, on the ASP question, our ASP on the June order activity is more in line with our Q1 and Q2 activity, and it really is just mix, primarily from that perspective versus the Q3. And I think on the outlook question, obviously, Lorie can correct and chime in as needed. But bear in mind that we -- as we have been working through and navigating some of the supply chain issues, the first 6 months of the year were challenging, and we wanted to make sure that we were able to perform as we expected and deliver cards on time to our customers, and we had some bumpiness in the first part of the year. So now that seems to have sunset, and we are getting our operating momentum and getting our legs under as we are feeling more confident.

Kenneth Scott Hoexter

Wonderful. Thanks for your time. Appreciate it.

Operator

Our next question will come from Allison Poliniak with Wells Fargo Securities. You may now go ahead.

Unidentified Analyst

Good morning. This is Ryan (inaudible) on for Allison. Congrats on the quarter. Most of my questions were taken, but I kind of want to just take a little bit just kind of the smaller market here. So Brazil came in 200 in the quarter. You didn't really raise your delivery there. That implies, by my calc around 100. Is that market kind of just softening? Or is it just a near-term headwind that is like winter.

Brian J. Comstock

So this is Brian. I can jump in, Lorie on that question. Right now in Brazil, you're in a little bit of a -- and I say a little bit, probably over the next 6 months, they're in a bit of a softer period only due to capital restraints of some of the concessionaires in 2024. It looks like things begin to right size as well as a lot of the expansion in Brazil continues to build momentum. There is quite a bit of infrastructure in central Brazil and other areas that are being completed. So we anticipate long term that Brazil is going to continue to grow. However, right now, they're more in a level data play.

Unidentified Analyst

Okay. Thank you. And then I guess one more on the refurbishment side, that backlog has been kind of declining. Are we reaching closer to like an end of like market cycle here or there's not as much activity on those that side of the conversions or whatever it's called. Just any color there would be great.

Brian J. Comstock

This is Brian. I can dive in again. The conversion side is always lumpy, and it kind of moves up and down. There are a number of cars that have been programmed already, and there is kind of a finite shelf life to the conversions. But I still think there is -- seems to be at least several years of opportunity on that side. And then kind of behind the conversions, you've got these re-qualifications of tank cars that are ramping up. So I think what you'll see is just a shift from some of the large conversions to some of the large tank car requalification programs.

Unidentified Analyst

Perfect. Thank you very much.

Operator

Our next question will come from Steve Barger with KeyBanc Capital Markets. You may now go ahead.

Jacob Moore

This is Jacob Moore on for Steve Barger. Thank you for taking my questions. So for my first one, just going back to the cost savings initiatives that you laid out at the Investor Day. Could you talk specifically about the actions that you've already got complete and maybe quantify how much of that $50 million to $55 million you think you've already achieved? And then also maybe just a quick clarification on the $15 million to $20 million in savings from Gunderson exit, is that now fully out of the system moving forward.

Brian J. Comstock

Hey, Jacob, this is Brian. It seems we've lost Lorie. I think they're having some communication problems. I can address -- the first part of that question for you, which is on the $50 million to $55 million of cost savings. We're probably -- we're still in the infancy of implementing that plan. It is ahead of schedule, as you see from the -- as you can see from the -- from this quarter's earnings. But we anticipate that, that will continue to develop really throughout the next fiscal year.

Jacob Moore

Got it. Understood. And then maybe just one is a little bit better suited for you anyway, Brian. For my second question, just broadly, overall rail traffic is down. Freight seems to be holding in there, but lackluster traffic trends are starting to compound at this point. So my question is really now at the halfway point of the year. Could you expand on the earlier landscape comments and maybe provide an updated outlook on rail traffic trends for the remainder of the year?

Brian J. Comstock

Yes. There's undoubtedly, when you look at the traffic side of the equation, fleet's improving a bit. There's a number of segments that are down, but there's a number of segments in the rail industry that are still fairly robust. Auto, there's a tremendous amount of pent-up demand. There's a number of new facilities coming online. There are several new plastic facilities that come online in late 2024, early 2025. And biodiesel continues to be fairly robust and a lot of new facilities coming online in that area as well. And then you still have a tremendous amount of retirements of older cars as well as a small number of cars and storage. So while there are some headwinds in the overall outlook, the build cycle still looks fairly level, at least we believe so over the next 18 to 36 months, pending any major change in the economic conditions.

Jacob Moore

Yes, go ahead.

Lorie L. Tekorius

Can you hear us okay?

Jacob Moore

Yes.

Lorie L. Tekorius

So I just want to check and make sure that we're still broadcasting here. So we've had a few technical difficulties. Thank you, Justin, for your phone. Just to touch on your other comment about Gunderson, There'll probably be a little bit of -- we won't have realized all of that permanent savings in our fourth quarter. But as we get into the early part of our fiscal '24, that will be wrapped up because we're just working with the new owners for some transition services.

Jacob Moore

Got it. Understood. Thank you for taking my questions.

Operator

(Operator Instructions) Our next question will be a follow-up from Matt Elkott with TD Cowen. You may now go ahead.

Matthew Youssef Elkott

Thank you for taking my follow up. I think this is for Brian. Brian, the leases coming up for renewal in '24 that you mentioned. If you are able to get them renewed earlier, the market is pretty hot right now, what kind of rate improvement do you think you can get expiring versus renewal, sorry?

Brian J. Comstock

Yes. Good question, Matt. A lot of the renewals that we're seeing in 2024 are related to the purchase that we did back in 2021, the fleet that we acquired. And a lot of those rates were, I would say, submarket rates at the time. And so we believe we're seeing quarter-over-quarter double digits. But in those cases, we should see much larger double-digit increases in the renewals in 2024. At least that's what we're predicting at this stage, Matt.

Matthew Youssef Elkott

And how many cars are those?

Brian J. Comstock

That's a great question. I don't have that at my fingertips, but I'm sure Justin can get back to you on that.

Justin M. Roberts

Yes, I was going to say it's about 2,000 cars.

Matthew Youssef Elkott

Okay. Thanks Justin. And then just maybe one more question for Justin or Lorie. You're pretty close to the mid-teens aggregate gross margin target for 26% this quarter. So first, any updated thoughts on this target? And second, can you remind us what the target is contingent on? Do we have to be in a demand up cycle? Does it work at a replacement level or below placement level demand because the recurring parts of the business should grow.

Lorie L. Tekorius

So good question, Matt, and I would say that the targets are based on more stable demand, so not a boom market. And I think while we're excited about the achievements that we've received in the third quarter, we'd like to get a quarter or 2 of continuous improvement under our belt before we'll consider adjusting those 5-year targets.

Matthew Youssef Elkott

Okay. Got it. Just one last one, I probably should know this, but have you guys said what's going to happen to Gunderson? What kind of -- what use is it going to be used for?

Lorie L. Tekorius

Yes, if that hasn't come through. So it was purchased by a local operation here run by a couple of local Portland people, Oregon green manufacturing. They're going to continue marine activities, but they're going to expand more broadly than we were able to do. And I think they're looking at some other metal bending activities or possibly some other infrastructure work.

Matthew Youssef Elkott

But no railcars are going to be manufactured there anymore?

Lorie L. Tekorius

Yes, I should have been clear about that. No railcars.

Matthew Youssef Elkott

Got it. Great. Thank you very much.

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.

Justin M. Roberts

Thanks, Anthony. Sorry for the technical issues this morning. Appreciate your patience. I hope everyone has a great day. And if you have any follow-up questions, please reach out to Greenbrier either myself, if you have my e-mail or investorrelations@gbrx.com. Thanks, and have a great day.

Lorie L. Tekorius

Have a happy end of end this weekend. Be safe.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.