Greenbrier Companies Inc (GBX) 2005 Q1 法說會逐字稿

Hello and welcome to the Greenbrier Companies First Quarter 2005 Earnings Release Conference.

Following today's presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

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

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

Mr. Rittenbaum, you may begin.

Good morning and welcome to our first-quarter call.

I will make some comments about the quarter and then turn it over to Bill Furman, our CEO.

First, some remarks and then we will open it back up for your questions.

As always, matters discussed in this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of '95.

Throughout our discussion today ,we will describe some important factors that could cause Greenbrier's actual results in 2000 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

Today, we are reporting our first-quarter net earnings of 5.4 million, or 35 cents per diluted share, on revenues of 218 million.

These quarterly earnings were up nearly 30 percent from the prior year's first quarter and we realized improved results across the board in all our major business segments.

Our combined European and North America new railcar backlog as of the end of the quarter was 10,300 units valued at 620 million.

This strong backlog provides good financial visibility in fiscal 2005 and into 2006.

Our manufacturing revenues for the quarter were 200 million.

In North America and Europe, we delivered 3,200 cars in the first quarter of '05, up 68 percent from the 1,900 cars delivered in Q1 of '04.

We expect to deliver about 13,000 cars for the fiscal year as a whole.

Our manufacturing margin for the quarter was 8.8 percent comparable to the margin for fiscal 2004 as a whole of 8.9 percent and consistent with our guidance on our last conference call.

For fiscal '05 as a whole, we anticipate operating in the 8 to 9 percent manufacturing margin range as margin is greater in the second half of the year.

We expect to see efficiencies of long -- continue to see efficiencies of long production runs partially offset by the continuing effects of the strong Canadian dollar and Polish zloty, which have continued to strengthen.

This puts a dampening effect on margins for products produced out of our Canadian facility and out of our Polish facility.

We expect our margins to be weakest in the second quarter due to line changeovers and the effects of inclusion of our Mexican operations, Gunderson Concarril, and consolidated results.

At the end of the first quarter, they were still included as equity in a nonconsolidated sub.

Gunderson Concarril is currently operating below our average company-wide margin.

Now that it is under our control, we expect that Concarril's margins will improve during the year, particularly in the second half of the year.

Our leasing and services, marine manufacturing and rail services businesses continue to provide a stable revenue base and positive contribution to earnings and cash flow and were all up for the quarter.

Turning to leasing and services, revenues for the quarter were 18 million in Q1, flat with Q1 of '04.

Leasing margins were 41 percent, up from 39 percent in Q1 of '04.

There was virtually no gain on equipment sales in either of these two quarters.

For fiscal '05 as a whole, we still anticipate a margin of around 45 percent from our leasing operations similar to fiscal of '04 as a whole.

The increase in the margin is compared to the first quarter this year and is expected to come from additions to the lease fleet and increases in our fleet utilization and railcar trading activities.

Our lease fleet utilization is now at 97 percent on lease rate which is up from 96 percent at the end of the fiscal year.

Subsequent to quarter end, we continued to make progress on leasing out the few remaining units which were off-lease.

Our fleet consisted of 11,000 owned units and 123 managed units -- 123,000 managed units.

We added on another 1,000 managed units during the quarter.

Our (indiscernible) lease portfolio continues to provide a natural hedge against rising manufacturing inputs.

G&A expense for the quarter was $12 million, consistent with our expectations and the same as our quarterly average for '04.

G&A for this quarter that just ended included $.8 million or 3 cents per share after-tax, .8 million pretax, or 3 cents a share after-tax of professional fees related to litigation responses to allegations from our former Chairman, Alan James.

We expect that we will still have some costs in the second quarter this year but do not anticipate them to be as high as the first quarter.

For the fiscal year as a whole, we expect our G&A expense for the year as a whole to run slightly higher than it did in '04.

Since we're delivering the -- forecasting the delivery of more new railcars in '05 and Concarril is now being consolidated, then obviously G&A as a percentage of sales will decline this year.

Interest and foreign exchange increased by .5 million for the first quarter compared to Q1 of '04.

The current period included an exchange loss of .3 million or the prior period included a gain of .5 million.

So the interest expense was running a little bit lower for the quarter as we had paid down debt.

We anticipate this line item to run around $3 million to $3.25 million per quarter for the balance of the year.

The line item equity and loss of unconsolidated sub reflects the Company's 50 percent investment in the Mexican new railcar facility and 33 percent investment in the rail castings joint venture.

We expect Concarril will be profitable starting in the second half of the year when it is operating at higher production rates.

Castings should continue to be about breakeven.

After Q1, the Mexican operation will be included in the consolidated results, and as I said earlier, we expect that Mexico will operate -- now that it is under our control, will have improved financial performance.

The tax rate for the quarter was 37 percent, similar to Q1 of the prior year.

For the year as a whole, we expect it to run around 35 to 37 percent.

Our quarterly depreciation continues to run at 5.3 million for the quarter and should be about 23 million for '05 as a whole.

Net CapEx is expected to run about 30 to 35 million in '05, as we continue to aggressively deploy capital in our leasing assets and our leasing business.

We define that CapEx as being our gross capital expenditure minus sales from our lease fleet.

Any assets that we do put in our lease fleet are very liquid assets and can be monetize whenever we choose to do so.

On the balance sheet side, we remain very liquid.

Our unused lines of credit are $90 million.

The decrease in the cash during the quarter is principally due to build-up of inventory and working capital needs associated with higher production rates, as well the inventory during the quarter includes and the increase in the inventory includes $6 million of effective exchange rate changes since the end of the year.

Stated another way, our assets at our foreign operations translate back to $6 million higher inventory balance due to the change of the exchange rate and the weakening of the dollar.

Over the past several years, we have pay down $150 million of debt and participation and subsequent to our quarter-end, we paid down another 17 million of participation.

In sum, let me state that we anticipate another strong fiscal year with our earnings weighted more to the second half of the fiscal year and our second quarter being the weakest quarter.

This is similar to the way it played out our last fiscal year, although certainly I'm not implying that we expect our second quarter to be about breakeven.

Indeed, we expect it to be profitable but not as profitable as the first quarter.

Similarly, we expect receipt of new railcar orders and we expect this to be weighted to the second half of the year.

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

Thank you, Mark, and thank you for joining our conference call this morning.

Greenbrier is beginning the calendar year in 2005 with almost an identical order of book of 620 million given the same time last year but with three important differences as it relates to our forward outlook.

First, the market momentum is very strong in our core intermodal product mix.

With year-over-year loadings ending up almost 10 percent from the previous year, this is a different picture from last year and we look to continued strong products -- prospects for this product and for this level of growth.

Industry supply is being kept in balance and this bodes well for railroad capital budgeting plans and decisions affecting production in 2006, probably on a cycle -- decision cycle much similar to last year.

However, this is all a much different picture from the beginning of last year and much more positive.

Second, earnings momentum is stronger than last year with the benefits of long runs now being recognized at our production facilities in the manufacturing segment.

Much improved situation with respect to supply chain and an expectation of growing intermodal pipeline for orders with many of last year's supply issues now much more stable.

Third, our strategic adjustments to our supply chain and production base carried out last year and including the acquisition of our Mexican facility will change the efficiency of our production as we adjust to the weaker U.S. dollar and peso, compared to the Canadian dollar, as we see the outlook during most of 2005 in currencies.

A note on currencies with respect to Europe -- this is, in some respects, positive and in some respects a negative.

On balance, we are pleased with some of the fundamental growth and prospects in the European internal markets.

In 2006, we expect to continue Gunderson as our flagship intermodal facility, looking out into a year from now, and to make Mexico our second double-stack facility with at least one main line there on double-stacks and another line free for other products.

This will also free Canada for other projects late in 2005 and improve the efficiency of our operations in the second half of the current fiscal year.

During the year, we made major strides in improving our global supply chain.

We have multiple strategic partners in this effort.

We continue to work to make that network a linchpin to reduce costs in North America and to better serve our customers and shareholders and to maintain a strong market position in intermodal and other products.

I'm especially excited, very excited about a new relationship with Zhuzhou Rolling Stock Works in China.

This is part of China's South rail and is a very large and important railcar builder in China with strong technical capabilities, which we hope to turn first to improving and continuing to improve our competitiveness in the North American market.

Beyond that, however, it makes possible for us to explore ways, along with Zhuzhou, to take part in the exciting domestic and global markets where, in China -- domestic in China and other global markets where ZRSW is well positioned.

Looking into 2005 a bit more on the strategic front, as earlier announced, we continue to pursue strategic opportunities.

During 2005, we intend to continue to find new ways to enhance our leasing and services businesses, including repair services and our manufacturing business in North America.

During 2005, we will also focus -- continue to focus on increasing liquidity in Greenbrier stock as measured by its float and to strengthen our balance sheet.

As reported last week, exploration of Founders Charitable Trust increased our float significantly and much of that stock traded with reflecting in some of the heavy volumes near the end of the year.

We are continuing to look for ways to deploy capital in our company and creative ways to improve our manufacturing and leasing network and leasing of efficiencies.

I'm very positive about the year.

I'm positive about the coming quarter.

With that, we will open it up for questions and turn it back to Mark.

Mark?

Operator, if you can please, we will now open it up for questions.

(OPERATOR INSTRUCTIONS).

Wendy Caplan of Wachovia Securities.

Good morning.

In your press release, you talked about negotiations that were underway for spring and summer orders.

Can you give us some color on those in terms of not necessarily customers unless you wish to, but anything on pricing, car types, what your degree of confidence is that these orders will come through?

Yes, Wendy.

Banks.

The intermodal order cycle this year won't be materially different from last year.

We expect much of the activity to come as the railroads look forward and look at material order dates, which will allow lines to continue running.

That will come in the first -- that planning cycle will come in the first three months of this year.

The railroads, of course, are facing an industry which has a much heavier backlog position than last year.

That should put some pressure on earlier decision-making.

On the factors that will affect some of this, our commodity uncertainties and particularly crystal-ball gazing with respect to steel pricing in 2005 and looking out into 2006.

We are having a planning session with the usual customers who are in this market and a couple of other interesting and unique customer opportunities with respect to double-stacks as well.

So I would expect that -- I suppose I hope that is responsive to your question.

Thank you.

You mentioned commodity uncertainties.

As you looked at the margin erosion year over year in the quarter, could you talk about please how much of that was -- help us understand the split of how much was pricing, etc.?

If you could break that out for us please?

It is Mark.

I guess two things -- you're correct that our margin for the quarter as compared to Q1 of last year was down, but we also had an exceptionally strong quarter in Q1 of last year and compared to the year as a whole last year, we were right in line and right in line with what we did for last year and right along with our expectation and guidance for the quarter.

We did have the end of some -- we did have some production during the quarter of some older backlog that was fixed-price backlog that did not have the adjustment clauses or the reflects of steel, so that would have had a little bit of a dampening affect on the margin.

That is washed -- that has now been produced and out of the production cycle.

So, that is perhaps again not a direct answer to your question, but we had maybe a third of our production that did not have a more updated pricing environment in it.

The line that includes your casting joint venture in Mexico for this quarter was minus .7 million.

We should assume, just to clarify, that the castings joint venture was breakeven and the loss was roughly all of Mexico?

That is correct and of course, that implies, for the next three quarters, that we would expect that equity and unconsolidated line to be around breakeven.

Right.

Finally and then I will let someone else have a chance, when we look at the mix of car types, could you give us some indication, both in terms of the deliveries and backlog, how much was intermodal?

Before Mark answers that question, let me to speak for a moment about Mexico so there's no confusion about that.

The way we have been running Mexico has not been particularly an efficient way in partnership with Bombardier.

In addition, given the nature of that relationship, we have been reluctant to book orders there.

Finally, we have one order in Mexico that has -- is coming to its production completion.

That particular order had lower margins as a result of a number of factors which are not necessary to go into.

As we concentrate production and as we move into the next production run in Concarril, we expect Mexico to be, particularly in the second half, a much stronger contributor to positive earnings.

In the future, we expect to tune our Mexico strategy so that that will be a strong element of our total production plant.

That certainly will continue as long as the relative mix between the U.S. dollar/peso and the Canadian dollar goes on.

Mark, why don't you move to the second question?

Wendy, in terms of backlog and deliveries, about two-thirds of our deliveries were intermodal and the balance non intermodal.

Our backlog is roughly the same, maybe a little bit higher, on skewed towards intermodal.

Frank Meglin (ph) of The Robbins Group.

Good morning, gentlemen.

In the first quarter, how many production days were there and how many production days should there be in the second quarter?

That's a question but right at hand, let us go (indiscernible) to the calculator here.

Okay.

I'm just trying to get a feel for the second quarter if you are talking about being lower but it's going to be both a function of revenue and margins being lower.

Mark, I think you said you had -- your margins were 8.8 and you're expecting them to be greater in the second half of the year?

Can you repeat -- can you repeat -- (Multiple Speakers)?

I think you said -- and not to misquote you -- but I think your gross margin for the first quarter was 8.8 percent manufacturing.

Yes.

And you thought, for '05, it would run 8 to 9 but you also said that the margins would be greater in the second half.

Yes, and part of that is that we expect our second-quarter margin -- our second-quarter manufacturing margin -- to be the lowest manufacturing margin.

So in order to get back into -- to stay within the range that we would expect that we have given guidance on.

That means the second half would need to be stronger.

It is a good time, Frank, to clarify an earlier comment too when I had referred about the second quarter being breakeven.

The second quarter of '04 was nearly a breakeven quarter.

It was modestly profitable.

What I was trying to suggest is the second quarter of this year and similarly the second quarter of last year was our weakest quarter.

We expect the second quarter of this year to be lower than our first quarter, but we certainly do not expect it to be as low as breakeven.

We expect it to be modestly lower than our first quarter.

Okay.

There is probably a more positive way you could have chosen to say that, is what you are trying to say.

It continues -- (multiple speakers).

So you are going to make more money in the second quarter of '05 than you made in the second quarter of '04?

Right.

Your capacity is about 13,000?

I think just the days, the tax rate is going to be -- (technical difficulty) -- forward by quarter.

No, it will be right in the same range.

We expect it to run 35 to 37 percent and it ran 37 percent for the quarter.

I guess, Frank, the last or another question you had asked is the number production days.

We do expect about five less production days this quarter because of holiday shutdowns and of course February being a shorter month too.

Then as well, we have a line changeover that will be going on at one of our facilities as well.

So there's five less days on a base of what, about 63 or some number?

Around 60.

Using an average of about 20 production days per month.

Okay, all right.

Thank you, gentlemen.

Matt Kelleher (ph) of Smith Barney.

I'm just trying to get a feel.

Do you guys have any feeling just for overall industry orders, deliveries for '05?

They have not been released yet.

They will probably be released sometime.

It is traditionally when they come out but as of this morning, they still have not come out.

No, I was not looking for '04.

I was thinking just, going forward, where you think we might be?

What your crystal balls say about how orders and of all that looks for the up coming year?

In terms of industry pundits, some are looking at approximately in the 52,000 plus range.

I think our forecast is stronger than that, closer to 55, 56,000 for the industry versus a forecast of around 44 for 2004.

As Mark says, the 2004 numbers haven't finally closed out.

Given the commodities surge, it continues to affect railroad business.

These numbers may err on the side of being a little low.

There continues to be some capacity constraints but as those constraints -- (technical difficulty) -- and pricing is accepted to being past and past through, the system has the ability to produce more and more capacity.

Some of those constraints may be not affecting the 2005 forecast as much as some of the pundits are expecting.

So it's just another continued growth year?

You think it is going to be up 20 percent or whatever, orders?

These were deliveries statistics that Bill was providing.

I'm sorry.

I though you were asking -- (multiple speakers).

So those are deliveries.

No, I can work off of that as well.

What would cause that?

What would cause that to go one way or the other big?

If the commodity demands weaken?

Looking at just at kind of a benchmark rule of thumb, let's suppose that somewhere around 50,000 cars is an average requirement for long-term replacement of the fleet, some modest very modest GEB (ph) growth and excluding the effects of efficiency driven substitutions.

So a 52,000 car year, which is the lowest projection I think one party has made for 2005, would be a very normalized year.

Hitting your commodity question, the commodities surge that is affecting railroads is quite positive for railroads.

Railroads are responding by trying to improve their margins.

As they do that, to some degree they are constraining access to the system.

To the degree that they address these efficiency issues and utilization issues, their ability to capture not only more margin but more volume is enhanced.

So that could bode very well for the next couple of years for not only efficiency driven and substitution builds but for just a larger than average year.

So these are probably reasonably conservative estimates looking in 2005 and 2006.

Commodities, however, are the big question.

China is a big question.

Lingering in the background of all of this is the higher-than-average steel prices, and what is the new average going to be on steel pricing looking into the next three-year cycle?

That could affect orders and order behavior.

Great.

Thank you.

Good work on hedging your steel prices and good quarter.

Well, it would have been a little bit better if we had not had 3 cents a share in litigation costs and we're working hard to get that kind of thing addressed, so it has been a distraction.

We are pleased that it is not slowing us down too much but we would like to get that earnings drag.

We would have done better than this in this quarter had we not had that needless distraction.

Still good work.

Thank you for answering my question.

Frank Meglin (ph) of The Robbins Group .

As a follow-up, Bill, where do you think you stand on market share in the intermodal market?

I think we're still standing around 60 percent and we're hopeful of maintaining that traditional market share.

That has been consistent over the past decade.

We have had some years that are better and some years slightly worse, but we have had well over 50 percent market share.

Where do you think you were for '04 then?

Right around 60.

It was really unchanged this past year, Frank.

We were right around 60 again.

Matt Kelleher (ph) of Smith Barney.

One more follow-up -- are you guys at capacity or a little below or where are you on your manufacturing lines?

We are below.

We estimate our capacity to be about 15 to 16,000 cars per annum system-wide.

Again, for the year, that were at 13 (ph) -- we are anticipating delivery of 13,000 units and even some of those units are still coming from partners that we have been working with that have been building cars for us.

So out of our own facility, we are still -- you know, you implied maybe 12,000 out of 15 to 16,000.

We are still at about 75 percent of our theoretic capacity.

Let me elaborate on that.

For our 2004 actual capacity and for 2005 as we have been able to operate, particularly with supply components, we have been capacity constrained.

We have -- for not only pricing reasons and other reasons, we have reached out to outsource so that we can have access to capacity.

In specific car types, we have been overcapacity because some of our lines are equipped for one car type or another and some of our customer commitments cause us to maintain those lines in that product.

So we have been struggling with capacity constraints during 2004.

Some of the production changes that we will be making now, the changes with Mexico, will give us the growth potential that we need to take advantage of our full internal capacity.

Great.

Any idea on the overall industry capacity, what percentage?

How much excess capacity I guess do you think is out there?

That is a very interesting question.

I know that our capacity usually increases dramatically in an economic downturn because of our business model and it diminishes because we do bump up against capacity constraints in an upturn.

We have historically had car building years, as you know, in the 70, 80,000 range.

Right now, it is not practical to support that kind of build still on the component side.

I think that the total capacity has strong -- there is of course the potential for entry back into the business from older plants but those plants which would be brought on would be more marginal.

So effective capacity in the 60,000 car range is possibly a good measure.

Not to say that the industry cannot respond to much more than that but it may not do so as efficiently as otherwise.

Perfect.

Thank you very much.

Wendy Caplan of Wachovia Securities.

Thanks, just two quick ones.

Just to clarify, everything then in the backlog currently reflects higher raw materials prices.

Is that correct?

We have already worked through all the old contracts?

Substantially all, Wendy.

There's maybe a couple of stragglers in there but substantially, substantially all of the backlog reflects the current pricing environment for us in (ph) steel costs.

Okay.

Secondly, the joint venture -- the castings joint venture, you talked about it being breakeven.

Do we expect a small profit in the second half of the year?

Should we expect that?

No.

And that's -- no, you should not.

I think you should expect it to still run around breakeven but obviously there's some implications to when we buy product too, and our cost of sales from the casting venture and from our casting investments.

The casting venture -- Wendy, in terms of its total contribution to 2004/2005 has been highly, highly positive but we don't release that metric.

The way the accounting and the venture was set up, it is likely to produce, as Mark says, a breakeven (indiscernible).

Okay, and one last question since no one else asked it.

You filed a shelf out there.

I assume that your discussions about strategic tried to increase the liquidity in the stock and trying to pursue strategic opportunities, that sort of -- excuse me -- implies to me that, as we have been saying, that we kind of think acquisition is probably in the forefront of those.

Do you care to comment on that?

No we have a shelf, as you know, filed.

We have been consistent over the last year talking about our interest in strategic additions and growth, given appropriate pricing and yields.

We don't want to become a bigger freight car builder just to be a bigger freight car builder if it isn't a profitable acquisition.

But all factors being equal, we would like to be a bigger freight car builder profitably .

So all of the things that we have said that are objectives in management succession planning, improving our manufacturing efficiency, including improving float in the stock, moving towards government standards with a board that would be -- with a majority of independent strong, independent directors with good governance, foundation -- all of these things are linchpins of that strategy.

Of course, we cannot say much more about anything we have not already announced with respect to these plans.

(OPERATOR INSTRUCTIONS).

At this time, I have no further questions.

Okay, thank you very much for your participation in today's call and we look forward to talking to you again next quarter.

Have a good day.

Thank you for participating in today's conference.