Greenbrier Companies Inc (GBX) 2003 Q4 法說會逐字稿

Hello and welcome to the Greenbrier Companies' fourth quarter and year end 2003 earnings release conference.

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.

At this time I would like to tun the conference over to Mr. Mark Rittenbaum, Senior Vice President and Treasurer.

Sir, you may begin.

Good morning.

Welcome to our fiscal fourth quarter conference call.

After we review our earnings release and make a few remarks about the quarter that just ended and the outlook for 2004 and beyond, we will open it up for your questions.

As always, matters discussed in this conference call include forward-looking statements within 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 2004 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the company.

Today Greenbrier announced profitable results for its fourth quarter and year ended August 31, 2003.

For the year the company reported net income of $4.3 million, or 30 cents per diluted share on revenues of $435 million.

All the earnings were for continuing operations as Europe was virtually break even for the year, and Europe is classified as a discontinued operation.

The company anticipates continued profitability for fiscal 2004 as the result of higher production rates, improved margins, and operating efficiencies.

During fiscal 2003, the company received orders in North America and Europe for over 12,500 railcars.

The company's combined European and North American new railcar backlog at August 31, 2003, was 10,700 units valued at $580 million, up dramatically doubled from our prior year end, which was 5200 units value at $280 million.

Our North American backlog now stands at the end of August at 9,000 units valued at $440 million.

European backlog was 1700 units valued at $140 million.

Turning to the quarter itself, Greenbrier reported net earnings of $3.3 million, or 23 cents per diluted share on revenues of $108 million.

Earnings from continuing operations were $1.8 million in Q4 of '03, compared to $2.8 million in Q3 of '03 and $2.1 million in Q4 of '02.

The current quarter included higher G&A expense associated with with strategic initiatives and certain employee-related costs.

As well, the current quarter's interest expense included a foreign exchange loss of approximately $300,000 whereas the prior quarter included a gain of approximately $300,000.

For the year, our foreign exchange gain or loss was less than $100,000.

Earnings from discontinued European operations were $1.4 million for Q4 of '03, up from $0.2 million in the prior quarter of '03 and a loss of $4.3 million in the prior year's fourth quarter.

The increase in European earnings, as compared to the prior quarter, was principally due to higher manufacturing margins.

Turning to North American manufacturing operations.

Our manufacturing revenues were $93 million -- $91 million rather.

During the quarter, in North America we delivered 1800 cars, up from 1500 cars in the prior quarter and 1200 cars in Q4 of '02.

If you look at the revenues, it is worth noting again that about 300 cars during the quarter were shipped out of our Mexican manufacturing subsidiary.

This subsidiary is not consolidated and, therefore, those deliveries are not included in the consolidated revenues; but they are included in the delivery figures for the quarter whereas in the prior quarters while that plant was -- had been temporarily shut down, the prior comparable quarters did not include Mexican deliveries.

As well in the current fourth quarter, our product mix was a lower average unit sales value and, thus, the change in the unit sales price, average unit sales price.

Looking at deliveries for the year as a whole, we delivered 5600 cars compared to 3300 in the prior year in North America.

And it is also worth noting that in the third and fourth quarter of this year we produced 600 cars that are shown as inventory and deferred revenue, about approximately $30 million of assets in inventory and deferred revenues for which the customers accepted delivery for the railcar and has paid for the railcar.

But there is a contractual contingency that until that contingency is removed that it remains on the balance sheet and, again, the revenue and the margin are deferred.

We anticipate our 2004 deliveries could approach 8,000 railcars.

And, again, our North American backlog is 9,000 railcars.

Our manufacturing margin for the quarter was 10.5%, up from 8.9% in the prior quarter.

The margin was favorably impacted by higher production rates and operating efficiencies.

In 2004 we expect margins to be closer to our Q3 levels of 8.9% rather than the 10.5% in the fourth quarter as double digit margins are still difficult to sustain in this marketplace.

Our leasing and services, marine manufacturing, industrial forge and rail services business continue to provide a stable revenue base and positive contribution to earnings and cash flow.

Turning to our leasing was and services revenues for Q4.

They were $18 million, similar to the prior quarter.

And our margins on the leasing and services business remained around 38%, and we anticipate similar margins for '04.

There was $100,000 in pretax income from sale of leased assets both in Q4 of '03 and in Q4 of '02 and virtually none in Q3 of '03.

So pretax income from sale of leased assets continue to play a minor part of our earnings.

Our lease fleet utilization remains at 92%.

And our fleet consists of 12,000 owned units and 115,000 units that we provide management services.

This 115,000 units includes a recently announced back-office contract with Burlington Northern and Santa Fe which is included in our services business to back-office maintenance services.

G&A expense for the quarter was $9.1 million, up $1.1 million from the prior quarter.

The increase is due to increased professional fees associated with litigation and strategic initiatives.

Also, there were some one-time employee-related costs during the quarter.

We expect G&A expense will run about 8 to 8.5 million per quarter in '04.

The tax rate has continued for the last several quarters to run around the 42% to 43% range, and we expect that that rate will continue in fiscal '04.

Commenting on liquidity, our cash balances have grown to $76 million.

And over the past two years there have been reductions in senior and term debt and payments of participation under our Golden West Service Program that have exceeded $90 million.

And during this current and in fiscal '04, we expect the payments of another $45 million will be made in these areas.

We anticipate modest usage of our revolving credit lines in '04, and that we will maintain our strong liquidity and balance sheet in virtually all of our $110 million of lines of credit in North America.

Our Capex in '03, when you look at it on the net basis defined as capital expenditures minus proceeds from the sale of assets, was actually negative $14 million.

That is that we sold more assets during the year than we made additions to our lease fleet or manufacturing expenditures.

In '04 we intend to more aggressively deploy capital and leasing assets and anticipate a net Capex of an outflow of about $25 to $30 million as we add equipment.

Depreciation for the year ran about $18 million, and we expect it to run similar $18 to $19 million in '04.

And finally turning to the discontinued European operations.

We continued to show marked improvement as a result of cost containment and other measures taken in '02, as well as a market improvement and lower interest rates and favorable exchange rates favorably impacting these operations.

We have made substantial progress on the recapitalization and remain committed to completing this recapitalization during the first half of '04.

With that, I will turn it over to Bill Furman, and then we will open it up for your questions.

Thanks, Mark.

Just a note on capital expenditures.

The $20 to $30 million that Mark talks about in connection with our leasing activities it is important, I think, to differentiate this from our manufacturing Capex.

Our leasing business is run in a way that is based on syndication and asset management.

We have substantial cash resources, and we are interested in getting those cash resources deployed.

However, the leasing that we do in regard to this Capex will be highly liquid and can be syndicated and turned to cash if we have a need to cash in the future.

So we will still have a very liquid asset in the leasing side.

And those of you who are following Capex and looking at free cash flow, I would urge you to look at that closely because in many respects the leasing Capex is a wash to the degree that we are able to immediately liquify that asset when we need to have access to liquidity.

I'm very pleased to see the second consecutive quarter of profitability after a very dry period in the manufacturing industry generally and in the railroad supply sector.

I want to just go back to basics for a moment.

I'll keep my remarks brief and talk a little bit about our strategy and then leave some some time for questions.

I'll also talk about a couple of the major initiatives that we have announced this quarter that I think are notable in the area of our servicing agreements with the BNSF and our supply investments in the castings business.

Just going back to our basic strategy, during the recent economic downturn Greenbrier has pursued a strategy of managing the business for cash flow and protecting its core North American markets.

We have take a decision to divest or recapitalize our European operation to conserve cash and in so doing, we realized over $21 million of net cash benefits to the company.

This has been an environment where manufacturing generally in America has suffered greatly with 30 consecutive months of employment decline and 1.7 million jobs lost permanently.

But the impact on our sector has been even more profound with reduction in the revenue base for new freight car construction declining to levels below 1/3 of only a few years ago.

We have been in our industry buffeted by two forces.

A surplus equipment bubble that was caused by railroad mergers.

And as these railroad mergers took place, they followed a natural cycle of inefficiency at first to a greater efficiency later which brought higher utilization of assets, increased velocity, and improved equipment utilization and requirement for fewer cars later on.

This equipment bubble coupled with the manufacturing segment decline in the industrial decline, generally, hit our sector with a double whammy, if you wish, and we are just now seeing the segment respond and come out of that.

It is pleasing to me to see our positive manufacturing margins.

I think that we, among our peers, have done a very good job in our manufacturing segment of producing not only positive cash flow but reported profits.

And we expect that with the backlog we have that our reported -- both our reported profits and our cash flow will be positive throughout the 2004 into 2005 period with a great predictability.

So we have tremendous visibility given the backlog that we have.

Finally, in connection with our current market share, in this downturn our market share has doubled from 15% which more closely parallels our total share of industry capacity to 30% of the total market share.

We are examining ways to continue to maintain market share.

In the past when the economy has recovered, we have tended to gravitate down to lower shares because we don't have the manufacturing capacity in early deliveries that our customers require.

We are expanding our capacity in the context of more efficient relationships, including concentration on new methods of supply chain management and new alliances.

An example of a new alliance that we are very pleased with is the alliance in Alliance, Nebraska, in the castings industry.

This is the second castings investment we made with the ACF organization.

We are both major consumers of railroad freight car castings.

And in connection with the castings needs that we both have we have teamed up with ASF, a part of Amstead Industries, which is the major railcar freight castings supplier in North America.

We expect that this move will stabilize supply in the industry.

The supply chain has been buffeted even more severely than the railcar manufacturing segment, and stability is required.

Certainly, in our case we are seeing the results of these prudent investments.

We expect them to be very accretive to earnings during the year.

And they're meant to be both opportunistic because they are a good investment at a good time in the cycle, but they are also meant to be protective so that we can maintain higher levels of production.

With that, I'm going turn just briefly to the new agreement we have with Burlington Northern Santa Fe.

We are very pleased to have this.

One of the things that has occurred over the past year is that Greenbrier has gravitated from a fleet that was more balanced between ownership and management to a more largely managed fleet.

As the Golden West Service Program with Union Pacific has matured, the number of owned cars in our fleet has declined from about 20,000 cars a few years ago to only near 12,000 cars today.

As Mark said a moment ago, we are going to continue to invest our core leasing fleet, particularly this year.

However, we are continuing to expand our asset management business and currently have revenue which is serviced and managed and collected by Greenbrier amounting to $150 million a year.

Since this is service revenue, we collect a fee, provide a variety of services, and have integrated efficiencies that help our other businesses.

But this revenue does not flow through our financial statements.

Nonetheless, it is a significant source of business to the company.

In the future we expect to continue to focus on this outsourcing opportunity in the rail industry, both in our maintenance services business with Gunderson Rail Services and with our newly formed service company that does the kind of business that we're doing with BNSF.

With that, I'll turn it back to Mark and be happy to answer any questions.

Thank you.

And, Operator, if we could open it up for questions, we'll be pleased to take them.

Thank you.

At this time, we will begin our question-and-answer session.

If you would like to ask a question, press star 1 on your telephone touch pad.

If you are using speaker equipment, you may need to pick up your handset prior to pressing star 1.

If you wish to cancel your question, or your question has already been answered, simply press star 2.

Once again, that is star 1 to ask a question.

Our first question comes from John Rogers.

Good morning.

Hi, John.

Hi.

A couple of questions.

I guess Mark's comments relative to fiscal '04, you mentioned 8,000 deliveries and expect margins, I guess, similar to what you saw in the third quarter which were just under 9%.

The 8,000 deliveries, are those out of your Canadian and U.S. operations?

And how much of that is out of Mexico?

That would include all of North America, John.

And for competitive reasons, we really haven't broken out by facility.

I had drawn attention to it this quarter because it was a bit of a -- it did explain part of the blip, but that would include all of our North American facilities.

Okay.

And then in terms of the railcars that went into the inventory in the fourth quarter, you said 600 cars for the third and fourth quarter.

Right.

How much was in each quarter?

It was a little more weighted towards the fourth quarter.

If you give me just a --

I'm just trying to get a sense, rough revenue that was shifted from out of the fourth quarter.

Actually, I stand corrected.

It was pretty even between the quarters, John.

Okay.

But 300 cars --

Right.

-- at $50,000 or so a car, some where in that range?

Right.

That's an approximation, yes.

Okay.

And then in terms of the leasing operation, you -- with the fleet that you manage now at 115,000 cars.

Is there a significant difference in the revenue that you will be generating per car with the BNSF than with your other operations, or is it about the same?

With our other services business?

Yeah, with the other services.

I'm just trying to get a sense of what sort of a financial impact --

John, they're not directly comparable and we probably wouldn't want to get into the details of it.

But I would say that they're not -- it is not directly comparable to the other revenue pattern.

Well, we --

But we shouldn't -- I mean, the 50,000 railcars approximately under your service operations previously, and now you're up to 115.

Actually, it was 36 -- 36,000 and then it went up to 115; but there is various types of services that we can provide.

Right.

We can provide an administrative service, we can provide an accounting service, a managed maintenance for parties.

And in this area we're providing back-office-type services of processing maintenance, receivables, and payables and auditing those.

And any of these -- so the fees that we charge really can vary greatly depending on the type of service that we are providing a customer.

And as you know in our leasing and services operation, we really do not break out the revenue from our leasing owned assets from the services revenue where we are earning a management fee.

Okay.

I'm just trying to get a sense -- I know you don't want to talk about any one specific contract.

But how much this business is going to grow over the next couple of years from a financial point of view?

The true significance of that business is a bit more complex than even the fee income we realize off of it, John, because we manage quite a substantial amount of cash flow in connection with it and it is part of a growing network of integrated services in leasing.

I think that we would prefer to go back and study that a bit and determine maybe in the next public forum how we might like to handle that, or what kind of information we may want that to give out.

And before you correct me, by the way, on something I said a moment ago, our Alliance operation is in Ohio.

I don't want the Governor to call me and correct me.

I was thinking of the famous wheel shop association in Nebraska.

Okay.

And sorry.

One other question, if I could.

In terms of orders for 2004, what are the railroads or the leasing companies telling you in terms of their expectations for orders this year?

Any thoughts there?

Well, John, I think this business is just as exciting on the way up as it is on the way down.

And I think you go back to what I said a few minutes ago, the two things that caused the downturn were an equipment bubble -- that bubble has been largely worked off -- and the recovering economy.

If you look at loading statistics in intermodal alone with containers growing at 9% year-over-year, as long as we have the fundamental economic circumstances that we have today with cheaper interest rates and a modestly expanding economy, we're going see an acceleration effect in the railroad sector.

So what we are hearing from these guys is completely different than we heard a year-ago, and it is much more optimistic.

You can see how important this is in the effect on the railroad castings industry, where castings capacity used to be in North America enough to handle 50,000 cars or more per year.

Now, without outsourcing to foreign sources, the North American footprint, even with our investments, is not sufficient to provide that type of castings demand.

And yet we are moving back toward a level, toward replacement for the fleet, and I think that we are seeing a lot of inquiries.

And, in our case, we are pretty firmly booked, most of our facilities, through 2004.

And we are looking at ways to be able to respond to our customers.

And so far we have maintained a decent share of the market.

Last quarter we received significant orders that allow us to maintain our market share.

And all of the inquiries and activity we are seeing is pretty optimistic.

Great, thank you.

Once again, if you would like to ask a question, press star 1.

And I show no further questions at this time.

Thank you very much for your participation in today's call.

We appreciate it.

I apologize.

I have one other person, John Rogers, again.

I might as well take a followup then.

We appreciate your interest, John.

There are other people on the line, I promise.

Okay.

I guess in terms of what you're seeing in pricing, how long -- how far do we have to get into the cycle, Bill, before you can see better pricing?

Well, we are seeing better pricing and you can see is somewhat in our margins.

Yeah.

Although a lot of it is efficiency.

I think that is not true of some of our -- I don't think -- I think it is quite clear that some of our other competitors are not getting these kinds of manufacturing margins.

And we are producing cars at a -- on an efficient basis, profitably.

We also have had some modest price increases.

Some of that has been driven by the rubberband effect on the supply side.

Because looking at just castings alone we've seen price increases in that area of as much as 20% or higher.

And the prospects for steel scrap surcharges and other cost increases are going to drive price in increases.

How much of that can be recaptured by car builders is partly -- depends on pricing strategy by the participants.

And each company has a slightly different strategy.

Our strategy has been to charge a fair price and book our factories with positive manufacturing margin.

And it has ban successful one, and we have been able to increase our market share.

Okay.

Thank you.

Again, that is star 1 to ask a question.

If there is no further questions, we appreciate your interest in the company and the call; and we will look forward to the next call.

Thank you for your participation.

Thank you for participating in today's teleconference, and have a great day.