That's right. That's right. Well, theoretically.
It's the goal.
Yeah. All right, well, here we go again. This time, rather than a panel, we have a fireside with The Greenbrier Companies, which is certainly integrated with, although somewhat tangential to traditional transportation, and does link in very nicely to our previous panel about nearshoring and manufacturing because you guys are a manufacturer, and I'm not going to steal your thunder, so Justin, maybe could you give just for everybody a little background on who Greenbrier is and what you guys do?
Yeah. Greenbrier is a global, I would say, freight transportation company. We build freight rail cars. We lease them, repair them, and have operations in the United States, Mexico, Brazil, and Europe. We're one of the largest builders of freight cars in the world. And the easiest way to think about what we build is we don't build anything that requires power. So no engines, no passenger. We try to avoid moving people as well. And at the end of the day, we participate in every aspect of the market in North America, similar in Europe, and then it's a smaller operation in Brazil. So we have gone through a little bit of a generational shift with our founder CEO retiring about two years ago.
And then we have a new management team that's kind of been in place for about two years now and really kind of shifting the focus from growth, growth, growth to a balance between growth and efficiency. And you've seen that through our results as we've been improving our operating margins, improving our return on invested capital, and really just kind of trying to, I would say, stabilize and right-size the company coming out of the pandemic. My name is Justin Roberts, by the way. I actually used to be VP of Corporate Finance and Treasurer, but that changed last week. I'm now VP of Financial Operations and working a little more directly with the business. To my left is Brian Conn. He's a Senior Managing Director of Structured Financial Products, which.
That's right. Yep.
My voice went up at the end like it was a little bit of a question, so please tell us a little bit about what you do, Brian.
Sure. I've been here 15 years with that title, by the way, Justin. So I'm glad about your new title. It's good for the company. So as Justin said, I manage our capital markets group. And over the 15 years or so, we've managed to create investor pools where we take the leased products that we build, we put them on lease, we put them into investor pools, manage those investor pools over the life of the rail car. Rail cars are very low-tech relative to some of the other products you'll be hearing about today. They last about 50 years. So it's a long-term play that generates a lot of fee income. We've done about $6.5 billion of that business since I've been here. And it's just another distribution channel for our products.
So the end users are railroads, shippers, and a lot of folks like to invest in leased rail assets because the underlying source of repayment is usually investment-grade quality. You don't have technological obsolescence facing you each day. There are tax benefits associated with owning rail cars, and there are a great hedge against inflation, a 50-year asset that's remarketed every 5-7 years on average, so you get the mark-to-market basically where interest rates are driving the industry.
Great, so my first question will actually stick with you. Maybe you guys have different answers, so when you guys think about your company, Greenbrier, is it a manufacturing company or a leasing company? Because I know that in the industry that has been changing even amongst your competitors.
Yeah. That's a great question, and I'll start, and then Brian can decide if he wants to agree with me or not. I would say that we are a manufacturing company that has a leasing arm, and we have been working to grow our on-balance sheet lease fleet over the last three years, but I would say for $3.5 billion of revenue, we're $3 billion- $3.2 billion of manufacturing and maintenance work, so I mean, we're, I'd say, very much a manufacturing company that has a strong leasing presence, but our leasing business is robust. We are a strong originator, but if you think about the size of the lease fleet, we're relatively small from that perspective, and we're working to grow it in a disciplined manner, but we're not going to build it into 100,000 cars. We're heading into the 20s ultimately and kind of see how that goes. I don't know if.
Yeah, I agree with you, Justin. If we were to keep those assets that we've syndicated on balance sheet over the years, we would be a rather substantial, large operating lessor. But the design, given our size, our capital base, that was the strategy was there to find investor pools that have more efficient capital costs. So agreed. But also, we've stated publicly, too, that our goal is to lessen the cyclicality of our earnings by increasing our investment in areas where there's repeatable revenues, leasing being one of those areas.
So, maybe I should have asked this just before, but lately, your margins are going up. The stock price has been going up. But it doesn't feel like we're in a cyclical bull railroad market. We're flat at best.
I would agree. Yeah. Definitely doesn't feel that way.
Right. So what's been driving the improvement if it's not macro top line?
Yeah, that's a great question, and I think I would go back to kind of starting with a shift in focus, a shift in leadership. We've really been working to drive profit, have more of our revenue flow through. Part of this is improving our operational efficiency in manufacturing, really improving the margins there. We have a variety of projects that have occurred over the last 18 months. Some of them have been as simple as we're hiring. We're making sure that we retain people because it's about efficiency of your throughput, experience of your workforce, being able to find and stabilize your production rates, which is very helpful for us because we came out of the pandemic, ramped up quite a bit, but it was almost a little too much, felt like we were stressing the system a little bit.
So we backed off and have found a better balance. We saw some immediate margin improvement just as our workforce is able to perform better. There's less stress on the system. Now, in I think two months, we're finishing one of our largest kind of insourcing projects where we've historically outsourced the fabrication of certain components. We're insourcing. Some of that has started, but the biggest piece of it is finishing up in March. That will literally take tens of millions of dollars of cost out of our process annually. It's a very short-term, very high-return, short-term payback project for us, which is the kind of thing we target as a manufacturing company.
Ultimately, it's as we're going to the leasing business, higher margin, repeatable revenue. Really, as you said, yeah, this has been a relatively flat replacement-level market in North America. So for me, I've been around the company for 18 years. The concept that we almost hit $5 per share of earnings last year in a 40,000-car build year in North America is pretty amazing because last time we saw those types of earnings levels, it was in the crude- by-r ail boom of kind of 2014 to 2015. For us, this is about just improving our blocking and tackling and just doing the basics that maybe may not be as exciting, but it is very valuable and beneficial. That's really kind of what this management team is focused on.
Now, I know that the rail companies almost universally are talking about growing their business. They've been talking about that forever, and they've not been very successful at it. But to the extent that, I don't know, be it reshoring or maybe a tighter trucking market enables a little bit more modal shift or whatever, where does the industry stand with respect to availability of carload? Is there some sort of something out there that could potentially improve the macro environment in addition to sort of the blocking and tackling that you were talking about?
Yeah. I mean, I think ultimately it's if traffic can grow and can grow consistently, if the rails really can grow their business outside of price increases, that would be a pretty substantial game changer for us macroeconomically from a demand perspective in North America. We saw something similar to that in Europe where there was a significant period, probably about 12 years, where there was just underinvestment as the European fleet ownership profile was changing, as investment was changing. And then eventually, you just get to a point where you have to invest in the fleet. And so that's what we saw starting in 2018. It's going through a little bit of a softer patch right now. But even as the European economies were stagnating, the rail investment was growing.
So what we're seeing now is just replacement-level demand. But ultimately, if there is continued growth in traffic, if there's continued adoption and improvement in service, it's just got to happen because there's not a ton of excess capacity that is usable, I guess, ultimately. There's an eye-popping number of rail cars in storage, like 300,000 cars in storage. The majority of those don't really have economic or useful life. They might be out of regulatory compliance, coal cars, small- cube covered hoppers that were primarily focused on sand. So at the end of the day, there's not a lot of excess capacity for tank cars, intermodal things that are actually used regularly and in kind of typical service.
In keeping with that, with respect to the 40,000 that the industry is producing now, is there a focus behind sort of what people are wanting to build, any color that you can give on sort of what's being manufactured, where demand's at?
Yeah, and it's been interesting for us because many times when you see a stable market, there's certain car types that are stronger than others and certain commodities that are stronger, but it's been balanced, which has been, I would say, pretty atypical for us as an industry. Usually, there's one thing or another driving it, and now it's a little bit of everything.
So again, to me, this is just that, and we say replacement a lot, but it's that replacement cycle where it's box cars are aging out, grain covered hoppers, automotive, certain types of tank cars. And then when you have a little bit of intermodal growth, that kicks in, so it is a little bit of everything right now. There's certain car types that aren't heavily in. There's not a lot of use, small- cube covered hoppers. There's not really any demand. We've got excess capacity there. But outside of that, you're in pretty good shape from a kind of level, stable playing field.
If I could add.
Always.
As Justin said, you know while our stock may not have a beta of one, our business sort of does. If you look at this room, I bet you every piece from the glass you use to drink out of lighting, everything, at one point, that came on a rail car, and there are so many different kinds of rail cars that attach themselves to so many different kinds of commodities, and what we've seen in the last couple of years is just basically every type of rail car getting some sort of replacement demand, so as we just sort of keep up with an aging fleet, and if industrial production and consumption increases, that's when we'll see a pop.
That's when we'll see a particular car type all of a sudden accelerate demand for and production. And so it's an easy business to understand when you think about everything that you look at, and you can accept the fact that at some point, it was transported to. It's manufactured at some point, and a rail car was a part of it.
Brian, from the perspective, from a leasing perspective, can you maybe talk through a little bit just sort of what the environment looks like? Where are you seeing demand? Has it changed? Where is competition? I know it's a pretty tight-knit, not as tight-knit as manufacturing, but it's a pretty tight-knit group of financiers that provide a lot of the leasing there. Is there, I don't know, as you guys are looking to grow your leasing business, what does the competitive environment for that look like?
Good question. So if you look at the primary market, new cars, it's around $6 billion a year. So it's not very large compared to, say, other transportation sectors like commercial aviation and the like. Secondly, if you look at the underlying end users, that's the A team of industrial players. They're investment-grade, highly rated entities that have been either here in the United States forever, or they're subsidiaries of multinational corporations that are very embedded in our economy.
So you have, I don't want to say an incestuous kind of relationship with all your but if you look at the end users, there's probably the top 200 represent maybe 80% of the business. And so financial institutions have really focused on those companies for a variety of their business lines, rail being a part of that. There is a heavy component of asset risk when you're investing in the rail space, so you look at those financial institutions, and you whittle that down even further for those that have the expertise to understand that component of our business.
So over time, it's been a small part of the overall transportation market. It's been very niche-y. It doesn't generate a lot of credit risk, some asset risk, and there's been consolidation in the business, so a smaller group of investors even getting smaller, but they like the business because, as I said, it's not a home run when you're investing in rail leasing, but it's a damn near sure single or double, so it's part of the asset class that's very appealing to some larger organizations for the reasons I had mentioned: asset quality, the lack of credit risk, and the like, the dependability. It's a fixed asset, a fixed income asset that has a fair amount of upside.
I was going to say maybe, and we've seen pretty substantial strength in the leasing market over the last kind of three years coming out of the pandemic. I think you would hear some of the public operating lessors talk about a return to more historical lease rates and an improved performance. And you've just seen lease rate renewals continue to perform in the double digits, high teens, low 20s, kind of on a year-over-year-over-year basis. And what we're seeing is that's sticky. And it's been a very strong environment. The lease rates have improved substantially. And from our perspective, you've got a very good visibility for the next several years on that.
And if you're looking for a data point, think about the pandemic and look at the ABS market and the pricing of those bonds. And if you look at the various asset classes, rail performed as one of the better investments during a really difficult time. So that's the market telling you right there that the underlying safety of the business is something that prevailed during times when folks thought the world was coming to the end. So yeah.
So for the on-balance sheet portion of the leasing business that you guys do, how does Greenbrier compete with the likes of a Wells Fargo or someone who is much lower cost of capital? I mean, do you need to go for that 20% of the business that is maybe smaller and maybe doesn't have the same credit quality? Or are there other ways to sort of lean into it in order to make the returns work?
We believe we are the largest generator of leased product. And so as that is distributed through the secondary market or through our syndication channel, those are folks that are good partners to us because they do have low cost of capital. But ultimately, where does the product come from? It comes from our commercial team. And I think that's one of the greatest values of our company is our customers. And those commercial representatives of Greenbrier that have long-term relationships with these great customers, they are the ones that generate the business.
So we're a provider of that business, not so much competing against low cost of capital. And obviously, as a manufacturer, we have an embedded advantage over someone who's buying it from us. So if we choose to build our lease fleet, inherently, there is a cost advantage from our perspective in that manufacturing and transferring an asset from one subsidiary to another is way more cost-effective than, say, bank deposits funding.
Retail, effectively.
Yeah, yeah, sure. So I've waited, what, 30 minutes or 20 minutes now for the elephant in the room here. It's changing by the minute, but tariffs are a big thing. And you guys manufacture in Mexico as well as the United States. What is the latest and greatest? I don't honestly even know what to ask specifically just because I haven't read the Wall Street Journal this morning, and I don't know what the latest round of tariffs looks like. But maybe talk through your strategic outlook and how that has changed or looks the same with tariffs?
Yeah. I think I would start with saying that we have a strong, experienced leadership team that has been in the space for decades. And so they're used to dealing with kind of whipsaws and crises and navigating uncertainty. And so that has prepared us for kind of what we're dealing with now. I mean, we had to navigate tariffs in the first administration, and we set up a lot of our contracts to be able to pass that through to our customers, and it's not ideal, but trying to kind of protect our ability to produce cars profitably has been a focus.
We are staying very close to our teams in D.C. And although we are a small player and not the largest manufacturer out there in the world, we are part of a large manufacturing consortium based in Mexico that can get attention in the United States and in D.C. when needed, so I think that there's going to be a lot of involvement. There's going to be a lot of clarity in the next few weeks. But right now, what we're doing is continuing to communicate with our customers, communicate what we know, how we understand it, and then really just kind of work to be able to understand what we need to do to run the business well while kind of letting the storms kind of proceed and navigating those. I don't know if you have any thoughts, Mr. Conn?
Well, one of the things that we discussed previously or just before we started that I didn't appreciate was the latest and greatest on tariffs is steel-related. And can you maybe talk through your sourcing of steel and how that may or may not be impacted by tariffs?
Yeah. That was great to wake up to this morning. So the one thing I continue to, I guess I would say, is there continues to be a lot of lack of visibility on what this means. And so for us, we made a concerted effort starting in kind of 2018-ish to shift the remainder of our supply chain into North America. And so sometimes it's better to be lucky than right. And we navigated the pandemic without having a lot of the supply chain issues that you saw kind of other companies did.
As part of that, the majority of our steel components are actually sourced in the United States and then imported down into Mexico. And so for us, if there's wood up here, I'd knock on it. Right now, this one doesn't seem to be a big deal for us. But again, it's going to be the details. And there's a lot of appendices and lists that weren't published as part of the executive order. So kind of waiting to see what that looks like. But right now, we feel like we're in an OK position from that perspective.
Okay, so I want to open it up for questions, but I got one more, so the other big thing that's been going on has been going on for a little while is inflation, and I think that's probably very helpful to the leasing business in particular to have a lot of legacy assets that were built at much lower prices. But you guys have still, despite the fact that we have been in an inflationary environment, you guys have been able to improve your margins, which is hard to do when your costs are going up so quickly, is that purely just being able to pass those costs through plus some to your customers, or how are you navigating?
Yeah. For us, a lot of it has been when we pass through increases in our kind of raw material components, things like that. There's no markup. It is just dollar for dollar up or down, typically. Our customers and us work very closely together through this. When steel's tripling, it's not a fun conversation. But also when steel falls off and comes down some, they get the benefit from there. We feel like that is an equitable balance. The way that we've been able to offset this is through improved efficiencies and then really a laser focus on taking cost out of our overhead. Coming out of the pandemic, it was about getting our facilities ramped back up, our hiring accomplished in a safe manner, and getting as many rail cars out the door as possible.
But as we were finding better balance and stability in our production rates, it's allowed us to really focus on taking cost out, improving our working capital efficiencies as well. So you've also seen our inventory levels have been kind of right-sizing. And so the system is, it took a while to get the system fine-tuned again, but we're finally kind of there. And then our head of manufacturing is new as well. So he's been around for a few years now. And he sets targets every year.
So if you've got 7%-8% inflation in Mexico, then you need to take out 9% of cost. And how do you do that? And he sets pretty aggressive targets every year. And honestly, I'm excited because part of my new role is working with him on these projects kind of going forward. It's exciting to actually be on the part where you provide value versus just talking about providing value, which I've done the last few years, so.
All right. Well, are there any questions in the audience?
[inaudible]
Yeah, I would say that I've seen similar reports. And my understanding right now is there's enough excess capacity from a coal car perspective. Those would get pulled out and used before there's any type of new demand. And what I've seen from a playbook perspective is many times existing cars could be rebodied before a new coal car gets built.
[inaudible]
I would say that kind of the states that we operate in, so we are in northern and then in two separate states in central Mexico, both are very friendly. We work well and have strong long-term relationships with the governments locally. I mean, I think I would say that we have a good relationship with the federal government overall, but for us, it's really about the local relationships, and the towns that we've located, especially our two largest facilities in central Mexico, we are a part of the community.
We have multiple generations of employees there, and so for us, we take a lot of pride in being able to have strong relationships with the people, the community, the government. And really, there's a lot of, I think, pride and value in being a Greenbrier employee there. And that's part of kind of how our DNA is knit, so we work very well with the governments. We worked very well through the pandemics, and so far, that has only shown that I think we're only going to be improving that ultimately.
[inaudible]
Outstanding. Our Mexican employee base is phenomenal. They are great, great employees. They are from top to bottom. They perform very well, very efficient for us, very effective. And I would say that from all levels of the facility, there is pride in what they do. There's just a lot of, I guess I would just say that there's a lot of pride that they take in their work ethic, what they do. They want to build the best rail cars in the world. And I think that I would say they do, but I might be biased. But ultimately, we send a lot of our other international management down into Mexico to kind of see how they're doing stuff because they are so innovative, so creative.
They are not just, "This is how we do it." They are like, "How can we take cost out? How can we take moves out from an inventory perspective? How can we do things differently to improve throughput and reduce cost?" They are our manufacturing kind of hub, I would say, at this point.
They set a lot of engineering standards for our global manufacturing.
Yeah.
All right. Well, I was going to ask some more, but we ran out of time. So if anybody else has any questions, we probably catch these guys over the course of the day. But Justin and Brian, really appreciate you guys taking time for this. Hopefully, it was constructive for everybody. It certainly was for me. So thank you very much.