Greenbrier Companies Inc (GBX) 2002 Q3 法說會逐字稿

Hello and welcome to the Greenbrier Companies Third Quarter Earnings Conference Call.

Following today's presentation we will conduct a question and answer session.

Until that time, all lines will be in a listen-only mode.

At the request of Greenbrier Companies this conference is being recorded for instant replay purposes.

Should you have any questions you may disconnect at this time.

At this time would I like to turn the call over to Mark Brittenbaum, Senior Vice President and Treasurer.

Mr. Brittenbaum, you may begin.

Good morning.

Welcome to our Third Quarter Conference Call.

After we review our earnings release and make a few comments about the quarter that ended and the outlook of 2002 and beyond we'll open it up for your questions.

As always, matters discussed in this conference call include forward-looking statement within the meaning of the Private Securities Reform Act.

Throughout our discussion we'll describe factors that could cause Greenbrier's results in 2002 and beyond to different materially from any formerly forward-looking statements made by or on behalf of Greenbriar.

I'll make some comments about the quarter that just ended and then I'll turn it over to William Furman, President and CEO and as I said we'll open it up for questions.

Today Greenbrier announced our third quarter results. We reported a net loss of $2 million and revenues of $91 million.

This compares to net loss before special charges, net operating loss before special charges of $4.6 million in Q2 and $5 million loss in Q1 of this year.

As a reminder in Q2 the company recorded special charges of $19.2 million pre-tax, $12.2 million after-tax.

Our European operations accounted for the bulk of these special charges as we took a $14.8 million writedown of intangible assets and a $3 million restructuring charge for previously announced downsizing.

In addition, included in that $19.2 million pretax charge was $1.4 million special charges related to workforce and other reductions in North America.

Consistently throughout the year and as we've been in the rail market downturn we continue to manage the company through liquidity and cash flow rather than book to book earnings, and we believe that is reflected in our balance sheet and in our cash flow statements.

Our back log group for the first time, quarter over quarter in nearly two years is now 2,700 units valued at $140 million.

This compares to 1,900 units at $100 million at the end of February.

Turning to our manufacturing operations, revenues were $72 million for the quarter, compared to $129 million in Q3 of the prior year.

During the quarter we delivered 700 cars, and for the year and the prior year third quarter we shipped 2,000 railcars.

For the year as a whole, we expect to deliver about 4,200 cars.

This compares to 8,500 cars in the prior fiscal year.

Obviously, we are operating at very reduced production levels given the market downturn and the lower quarter rates out there.

We realized that the manufacturing margin of 4.2% during the quarter, which is quite an accomplishment in this marketplace.

These positive margins are helped by our marine, and forge, and railcar repair and refurbishment business, which continue to provide a steady source of revenue and earnings.

While we have realized this positive margin, the market remains intensely competitive.

We anticipate modest margins for the balance of the fiscal year.

Manufacturing EBITDA before special charges is a positive $6.2 million year to date.

Our European operations continued to have a loss during the quarter.

We lost $1.5 million.

We are seeing improvement as a result of our profit attainment plan now at the beginning of the year and these losses are down by $1.1 million compares to Q2, again excluding special charges and down $2.7 million as compared to Q1.

Our leasing and servicing business continues to perform well.

We expect it to continue to provide stability to our revenues and earnings.

Our revenues for the quarter were around $18 million.

We expect a similar amount in Q4.

Our margins did dip during the quarter to 34% from previous percentages that have been in the low to mid-40% range.

We have seen our margins come down some, both due to competitive pressures and the maturation of our finance lease portfolio which just by the mechanics of the finance lease account thing caused the margin percentage to go down.

But as well, we had certain items occur during the quarter that we do not expect to repeat, and we would expect the margin to come back up to the -- to around the 40% or low 40% range in Q4.

Our pretax income from the sale of leased assets was $300,000 during the quarter.

This compares to $23,000 in Q3 of 01.

Our lease [league] utilization is maintained at about a 90% level.

Of our 49,000 units in our fleet we own 14,000 and we manage 35,000.

As a result of implementing tax-planning strategies associated with the economic stimulus package, we continue to realize tax benefits related to all of our operations, and we -- we're estimating as a result of this planning that, to date, we've realized about $7.7 million of benefit and $1.6 million which was realized during the quarter.

Our cash balances continue to be strong at $66 million.

This is up $16 million from the prior quarter.

We paid down an additional $8 million of debt bringing year to date over $52 million.

We continue to focus heavily on reducing costs and improving efficiencies.

We still are targeting that our GNA expense will come in below $40 million, which was the stated goal at the beginning of the year.

With that I'll turn it over to Bill, and then we'll open it up for questions.

Thank you, Mark.

I'll comment briefly and open it up for questions.

First comments on operations and our back log for the quarter.

Our present strategy in the current economic climate and industry climate year and in Europe and the outlook moving forward in 2003.

Turning first to our order book and our backlog, over all the North American railcar market for new manufacturers remains weak and remained weak through the first six months of calendar 2001.

The second quarter industry statistics have not yet been released but, as referenced for the first quarter ending March industry orders were only 2,637 cars and industry backlog had dropped to 6,443 cars.

This, again, is for new car construction.

Over half of the industry orders during the first calendar quarter were for tank cars which Greenbrier does not build in North America.

There continues to be demand for tank cars, and we do build tank cars in Europe. For the third fiscal quarter ending May 30, as Mark had reported, Greenbrier received orders for 1,500 units in which more than 1,200 were for the North American market.

A firm backlog increased to 2,700 units, company-wide, of which over 80% is for the North American market.

Subsequent to our quarter end the company received additional significant orders for its European operation, some of which are still being documented.

With [aid] and activity to customers increased significantly during the quarter in both markets, but pricing in the present market in both Europe and North America remains extremely competitive.

However, it does show signs of firming in recent months.

During the quarter, the company maintained market share of approximately 25% of total North American industry backlog.

A higher percentage of actual orders placed during the quarter.

Market share in Europe is estimated to be between 15% to 20% of 2002 production for the western market.

Total production for that market in 2002 will be down, but we expect recovery also in 2003 for that market.

The company's current strategy is to maintain liquidity in market share during the present economic downturn and through the inevitable recovery, while achieving positive cash flow in new orders.

Management continues to focus on cost reduction and GNA expense for the quarter was reduced to approximately $5 million or 37% from the comparable quarter last year.

Year to date, GNA expense has been reduced $10 million down 26% year over year.

It's interesting to note that, while revenue declined both year over year and quarter to quarter were greater than 26% our year to date number in cost reductions the revenues and cost reductions are in line for the current quarter with a 37% reduction year over year against a 40% decline in revenue.

We will continue to attempt to keep costs in line with revenue as we are working through the weaker new railcar manufacturing environment.

On a more positive note the company is concentrating on its profitable marine manufacturing, railcar repair and services, and leasing businesses.

We've received meaningful orders in each of those businesses during the current quarter, and as Mark has indicated these provide strong core revenue base which is increased in relative importance to total revenue during the downturn for new freight car construction.

As well, we remain highly focused on the reorganization of our European manufacturing operations pursuant to plans earlier announced.

The company has retained KPMG to assist with its European plan.

As mentioned in our news release we've successfully reduced European losses for each of the successive fiscal quarters of the current fiscal year.

While the outlook for the balance of 2002 is, both -- is more optimistic in both the North American and European markets recovery in the manufacturing sector accompanied by increased margins is not expected until late in the year or until 2003.

U.S. economic stimulus legislation in 2002 is expected to drive bargain hunting for new freight cars accompanied by replacement demand later this year and has assisted the company in improving cash flow and tax rates during the current year.

In recent years the railroad industry has undergone major structural shifts with mergers, system rationalization and change in service design.

Equipment utilization and efficiency has improved on most Class 1 railroads and the effects on car supply has been significant, with fewer cars required to carry the same volume of traffic.

However, many of the forces operating in that market in the past two years are now moving toward restoring balance between supply and demand, particularly in inner-modal traffic, we're seeing a very much stronger inner-modal traffic for the first part of this year, and we're seeing surplus equipment in the inner modal area decline.

There's an aging railroad fleet, a tendency for railroads to rely on leasing companies to supply their fleet, and we think that both of these forces will bode well for Greenbrier in the 2003 time period.

We'll be happy to answer any questions that the group has.

Back to you, Mark.

Operator, if you can go ahead and open it up for questions, we'll be happy to take them.

Thank you.

At this time we are ready to begin the question and answer session.

If you would like to ask a question, please press star 1 on your touch-tone phone.

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To withdraw your question please press star 2.

To ask a question, once again, please press star 1 now.

Our first question comes from John Rogers from D.A. Davidson.

Good morning.

Hi, John.

Hi.

Bill or Mark, you made some comments about what the order outlook was for the remainder of the year.

I think Bill, you said it looks like you will receive additional orders in Europe.

What about in North America?

What are the railroads tell telling new terms of their needs or requirements?

Well, as I indicated, the order inquiry activity level has increased.

Yeah.

There seems to be some strengthening in certain markets, unfortunately, some of those we are in such as tank cars.

In the forest products and other inner modal markets there seems to be some signs of recovery, John, and we are quoting a large number of inquiries at a much higher pace than in the previous quarter.

It's very hard to take a crystal ball and predict orders for an individual participant in this kind of a market on new freight car construction.

Sure.

But I would say that there should be a stronger level of activity in the second half of this year than we're seeing in the first in terms of actual orders placed.

Nonetheless, we're still expecting 2002 to come in under 20,000 railcars.

We don't see -- we don't agree with some of the industry statistics for 2002 that are forecasting surging orders near the end of the year.

We do believe, though, in 2003, if the economic climate remains stable and we don't have any other structural shocks to the system, such as you read about in the newspapers that interest rates remain low, and the creek doesn't rise that things are coming back.

Because there's a lot of structural advantages that we can see on the demand side as we look at the railroad industries as they've gotten their act together and as their profits are improving somewhat.

Is there anything specific there relative to car types?

I mean, do we need more double-stacked cars or conventional cars?

Any thoughts there?

In both of the areas that we operate right now with double stacks, boxcars, we've had a long run of double-stack cars, and we're continuing that run into the fall.

I believe there will be double-stack demand in 2003.

There's a balance currently with this being the rush period between supply and demand on the car side, so whatever shortages that have been existing have been worked out and traffic has -- inner modal traffic has been strong.

Some of it will relate to the strength of the dollar in consumer demand.

If consumer demand continues the pace that it's at we expect inner modal demand to be reasonably strong in 2003.

I would say, across our product lines, it is still pretty good news.

Forest products, cars, intermodal cars, in particular.

Ok.

Two other quick questions, if I could.

In terms of your tax rate, then, what should we be looking for?

I mean, is there any way to calculate this the way it moves around so much?

Secondly, Mark, you mentioned margins on the leasing and services coming in somewhere around 40%.

Is that a reasonable expectation going forward or, as some of those long-term leases come off, does that number drop?

Let me just make a comment on that question, I'll let Mark add to that too, in a second.

With regard to the tax rate, the Tax Stimulus Bill was a very positive development for cyclical companies many a CFO and a manufacturing company has no doubt has researched.

It's been a boom to us.

It gives incentive to buyers to buy equipment.

It gives a leasing company, like us, incentive to acquire equipment and to achieve tax benefits when we do it, and it also has given us an opportunity to strengthen our balance sheet and take advantage of some features of the act for European operations.

So, while one of the bigger factors has been that our European losses have gone right to the bottom line and, in the future, we believe that we'll be able to get some recovery of those losses, and we're pleased about that.

Mark?

John, you have pointed out that the tax rate has bounced around quite a bit, and that has to do in part to additional benefits from the stimulus package, but also the relative share of income or losses from domestic versus European operations.

And how much the relative breakouts and then how much benefits we can realize from each of those operations.

So I really don't -- unfortunately, there really is not a good answer.

You know, back when we were just U.S. it was pretty easy to say use a 42% tax rate, and then we were similar when we were in Canada.

But between the Stimulus Act and our European operations, it becomes a much more complicated.

So I really, unfortunately, can't give you crystal-clear guidance on that for the near-term future.

I expect that it is going to continue to bounce around.

Ok.

The current status of the dollar makes that a little interesting, too, because Canadian operations are currently becoming relatively disadvantaged compared to recent years by the strengthening of the Canadian dollar against the U.S.

dollar.

We are, fortunately, situated in three different NAFTA countries so we can work that fairly well.

But there are some complications to our future revenue next that may be related to the U.S. dollar and the strength of the U.S.

dollar as we adjust our production plans for -- to take advantage of currency in NAFTA countries.

John, then your second question, I think, related to gross margin percentages on the leasing and services operation.

And, indeed, we have seen the margin come down this year compared to last year.

Last year, as a whole, we were at the 46% range this.

Year, as a whole, we would expect to be around the 41%.

And again, the two parts of that -- one that you identified as the maturation of the finance lease portfolio.

That will continue into next year.

That would drive the percentage down over time.

Secondly, competitive pressures on lease rates.

Now, when the market firms back up, we should see some of that go away, because we would expect to see some of the improvements in lease rates and lease renewal rates.

But, as the longer term trend, I think the over all would be to replace finance leases or as finance leases mature, then you replace those with operating leases, which would be the more likely -- most likely scenario that you would see that percentage continue to drift down a bit.

Ok.

Ok, great.

Thank you.

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Ok.

If there are no further questions, we appreciate your participation in the conference call and look forward to the next quarter's call.

Thank you very much for joining us today.

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