Greenbrier Companies Inc (GBX) 2007 Q4 法說會逐字稿

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  • Operator

  • Hello, and welcome to The Greenbrier Companies fourth quarter and fiscal year end 2007 earnings release 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 The 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.

  • Mark Rittenbaum - SVP, Treasurer

  • Good morning, and welcome to our fourth quarter conference call.

  • After I review our earnings and make a few comments about the quarter that just ended and the outlook for 2008 and beyond I will turn it over to Bill Furman, our CEO.

  • And then we will open it up for your questions.

  • As always, matters discussed on this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

  • Throughout our discussion today we will describe some of the important factors that could cause our actual results in 2008 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

  • Today we reported our fourth quarter GAAP earnings of $0.82 a share on revenues of $351 million.

  • These earnings include a special charge of $0.14 per share with no related tax benefit associated with the closure of our Canadian manufacturing facility.

  • Our Q4 financial results reflect a continuation of the operating momentum that we realized in the third quarter.

  • As anticipated, all three business segments, manufacturing, refurbishment and parts and leasing and services, performed well during the quarter with manufacturing performance exceeding our own expectations.

  • As we enter 2008 our fiscal year end new railcar backlog remains strong at 12,100 units valued at $830 million.

  • About 6000 of these railcars in the backlog are scheduled to be produced in fiscal 2008.

  • Our marine backlog was a record 12 vessels, valued at $110 million with this backlog stretching into our fiscal 2009.

  • After year end we reported a new railcar multiyear order from GE for 11,900 new tank and covered hopper cars to be delivered over an eight-year period, with delivery commencing in the first quarter of 2009.

  • I will now provide some color and highlights for the quarter.

  • Then I will give some qualitative guidance for our fiscal year 2008.

  • First turning to manufacturing, you will note that the revenues were virtually flat for the quarter when compared to Q4 2006.

  • New railcar deliveries of 2400 units were down 800 units from the 3200 units delivered in Q4 of 2006, while marine revenues were up almost $10 million compared to Q4 2006.

  • The significant change in the railcar revenue per unit is due to a change in the product mix this quarter.

  • This quarter we shipped a higher quantity of conventional railcars and a lower quantity of intermodal railcars than the prior period.

  • Conventional railcars have a higher unit value than intermodal railcars.

  • As well, within our conventional railcars our mix also changed as this year we were producing our Auto-Max railcar, which has the highest unit value of any car in our productline.

  • Our manufacturing margin for the quarter of 12.9% represents continued sequential margin improvement.

  • These margins benefited from a favorable product mix and production efficiencies.

  • As well, beginning in Q4 manufacturing margins were no longer impacted by our Canadian operations, which ceased production in Q3.

  • As I'll touch on a little bit more later, we still are incurring some overhead and other costs up in Canada and some of those costs are included in G&A expense.

  • As I touched on earlier, our marine refurbishment and parts and leasing and services businesses which generated about $540 million of revenue in 2007 also continued to perform well, and we anticipate this momentum will continue in 2008.

  • The leasing and services segment includes results for our own leased fleet of 9000 railcars and our managed fleet of 136,000 railcars.

  • Leased fleet utilization was 98.01% for the quarter compared to 98.06% in Q3, so you can see that our long lease utilization is still very strong.

  • In Q4 of '07 included gains on equipment sales of 2.6 million compared to 0.3 million in Q4 of 2006 and 5 million in Q3 of 2007.

  • When you pull out the gains on sales for both Q4 and Q3, the margins are comparable at 48% of revenues.

  • We also expect this trend to continue in 2008.

  • I want to elaborate a little bit more on our Canadian facility.

  • It is in the process of being disposed, and we will complete the disposal this fiscal year.

  • In Q4 2007 we incurred an additional $2.3 million of closure costs, which are included in special charges.

  • And these are costs specifically related to the closure.

  • In addition, we do have some G&A and overhead expenses of $2.6 million.

  • And these were included in G&A expense.

  • Indeed, when you look at G&A expense for the quarter being up about $7 million about over $2 million of this is related to the overhead expenses related to TrentonWorks and when I referred to G&A being up by $7 million that is compared to Q3 of this year.

  • But also there were some items, some costs related to some integration of our recent acquisitions, professional fees and consulting fees, all that hit this quarter, many of which we do not expect to be recurring.

  • And we expect a run rate in '08 for G&A expense to be closer to $21 million or so.

  • But as I'll talk in a minute, we also will be looking to bring those expenses down.

  • Minority interest represents our 50% partner share of the earnings or losses in our Mexican manufacturing facility, Greenbrier-GIMSA.

  • You will recall that we do consolidate this entity for financial purposes and then we back out our 50% partner share of the earnings or losses.

  • And Q4 was really the first quarter of the startup of this operation and the JV produced a loss that had about a drag on our earnings after the minority interest of about $1.5 million.

  • While the startup has been a little slower than expected, we are seeing operating improvements and are very keen on this facility.

  • Turning to taxes, the Q4 taxes do not include a tax benefit associated with the special charges or other costs as incurred in our Canadian operations; as again up in Canada we do not have tax loss carrybacks or current taxable income to offset these charges.

  • The tax rate on earnings including our Canadian operations was 42%, in line with historical ranges.

  • Now looking forward to 2008, as we noted in our release and as noted by other industry suppliers, we are seeing a moderation in demand of new railcars in North America and a softer rail environment.

  • There is no doubt that our recent strategic initiatives diversify our revenue and earnings base and to shift our manufacturing to lower-cost facilities will benefit us in the current operating environment and well into the future.

  • In fiscal 2008 we will have the benefit of a new rail car backlog which includes 6000 units to be produced in '08.

  • A fully booked marine backlog, a full-year of our Meridian and RCA acquisitions and the refurbishment in parts sectors and a leased fleet which is performing well.

  • While we will not provide earnings guidance for 2008, I will provide color on many of the key drivers.

  • As always, there are a number of moving parts.

  • First, turning to manufacturing, as always it is hard to predict the timing of new railcar orders which in turn will determine new railcar production rates and length and efficiencies of production runs.

  • However, based on what we see today, we anticipate new railcar deliveries to be down moderately from the 8600 units we delivered in fiscal '07 to around 8000 units in fiscal '08.

  • The deliveries are expected to be of a less favorable product mix than '07 and also we are operating today in a less favorable pricing environment for new railcar orders; again some of which will be delivered in our fiscal 2008.

  • We will no longer have the drag of a negative margin in our TrentonWorks operations and anticipate our new JV in Mexico will be breakeven to moderately profitable in '08.

  • Our Canadian facility TrentonWorks is in the process of being disposed.

  • And until the disposal is completed, there are still some costs which we are incurring.

  • And these costs will be included in special charges and G&A expense.

  • And again, there will be no tax benefit associated with these costs.

  • We are aggressively seeking to minimize these costs in '08 and to accelerate the disposition timeline.

  • Marine, refurbishment and parts and leasing and services revenues are anticipated to approach nearly $600 million in '08 compared to the $540 million in '07.

  • Most of this revenue growth is expected to come from refurbishment and parts, but we also expect that marine will be up to in excess of $60 million of revenue in '08.

  • We anticipate solid results from these units.

  • There may be a bit of a change in the mix of refurbishment and parts that can bring margins down slightly.

  • But again, we expect a strong performance here.

  • The most difficult part of these three business units to forecast is gains on equipment sales as these are generally opportunistic in nature, and the result of value we create through transactions we generate.

  • Today we see these gains being down by a fair amount from the 2007 amount.

  • But again, this can change quickly just as it did in 2007 when we exceeded what we had initially budgeted at the beginning of the year.

  • We expect the tax rate excluding be Canadian operations, when we back out any charges for the Canadian operations, to run about 40 to 42% in '08, similar to 2007.

  • In this challenging operating environment we will aggressively look to reduce our manufacturing overhead and G&A expenses and to bring down the G&A from the levels that I previously mentioned.

  • We will also revisit our manufacturing and refurbishment and parts CapEx budget to reduce discretionary CapEx.

  • Two areas we will continue with our CapEx programs are at our GIMSA facility in Mexico where we will be adding on a tank car line and making an investment for that tank car line for production to commence about a year out.

  • And we will also turn on the spigot on our leasing CapEx.

  • We typically do this in the current -- in operating environments like the ones we are currently in.

  • We deploy our leasing arm more aggressively and plan to do so again.

  • We expect our net leasing CapEx to run about $60 million this year compared to virtually neutral amount in '07 and $93 million in 2006.

  • So this is really about the average of the prior two years and what we have considered within the range of a reasonable and recurring run rate.

  • D&A expense should run about $35 million.

  • In sum these are many of the qualitative factors which will drive earnings in the near-term.

  • Similar to fiscal 2007, we expect the first half of the year to be weaker than the second half, with Q1 being our weakest quarter.

  • Remind you that while the first half of 2007 was weak, the year ended on a strong note just as we had expected.

  • While the current operating environment is more challenging, we remain optimistic about the long-term fundamentals of the rail industry, and we believe we are well-positioned both in the near and long-term to operate in changing environments all as a result of the strategic decisions that we have been making recently.

  • I will now turn it over to Bill and then we will open up for your questions.

  • Bill Furman - President, CEO

  • Thank you, Mark.

  • While we are pleased with the quarter just ended and we are looking forward to an exciting and interesting environment in 2008, while not reflected in our year-end backlog due to timing or in our quarter, our new relationship with GE Equipment Services is an excellent opportunity for Greenbrier.

  • This is a strong vote of confidence from one of the largest owners of railcars in North America and from one of the world's premiere companies.

  • And although this order was spread over eight years, we have firm commitments for the first two years of actual production.

  • So this is a very good baseload for entry into the tank car business, which we will do in Mexico.

  • This project brought our affected backlog in the quarter or near to the quarter's end close to 24,000 rail cars.

  • To put that into perspective the total North American backlog of new freight cars as of October first was 67,000 units.

  • This quarter we completed a year with many milestones as summarized in our press release, and we won't go back and repeat all those.

  • We are continuing on a path to develop a strong integrated network of manufacturing, engineering, leasing, repair and freight car management services.

  • And this will be our strategy for the future.

  • Let me talk about a few things which we need to execute on in 2008 and beyond, and also about the economic environment and our plans to deal with this environment.

  • First, our strategy.

  • We will continue to grow our repair and refurbishment network along with the growing parts business associated with that network, and related to our parallel network of global sourcing.

  • Our growth will be both organic as was the case this year with new facilities which we began in Topeka, Kansas and in Florida, along with smaller acquisitions, such as our recent deal with GATX in Mexico.

  • We will want to strengthen our service capabilities in the north to transportation corridors because we believe the future of this trade as so well articulated by Kansas City Southern is very bright.

  • Secondly, we will continue to improve efficiency in manufacturing.

  • Through lean and other initiatives, which have been successful thus far improving our manufacturing base.

  • Third, we will continue integration of existing acquisitions, and we will look at larger acquisitions if the market opportunities in a more uncertain economy present good opportunities as we believe they well.

  • We will increase our asset creating business, recognizing that weaker economic cycle is a good time to look for values in, for supplementing our leasing fleet and to connect potential purchases for our lease fleet with reengineering and remarketing opportunities, a core capability that Greenbrier began with so many years ago and has retained.

  • We also intend to improve our information technology and strengthen our management team through aggressive succession planning.

  • Turning to the environment, we expect the long-term environment and outlook for rail transportation to remain very positive.

  • The drivers both in energy, global sourcing and in currency remain very positive and the commodity business is expected to be affected positively by all of that.

  • And the intermodal phenomenon, we continue to believe will be very strong overtime.

  • In the near-term in 2008 we are concerned about a potential weakening economic environment, as others are.

  • We are concerned about the reductions in rail loadings related to those uncertainties and some technical forces that operate both on our industry having to do with velocity in that affect our specific markets, especially for double stack cars.

  • We have been planning for a softer market environment for orders in 2008.

  • And I want to point out that our strong backlog will give us additional protection and also tools which we can use to manage opportunities across our business lines and to improve our competitive position with customers.

  • Greenbrier market share has typically risen in terms of softer freight car demand due to the tools we can bring to the table with our diversified service model.

  • If industry demand slips below 55,000 car level as some expect it might, we expect our market share to strengthen.

  • Also, our diversification as Mark has indicated in the marine, repair, wheel services and other less cyclical manufacturing and parts, should serve us well compared to our more purely manufacturing peers with whom we compete.

  • Nonetheless, we will be affected by the weakening railcar market, and will have some pressure on margins and mix as others will in our space.

  • For the first time in the recent past, the order rate in the industry in the quarter ended -- in the reporting quarter just ended at the first of October fell short of the production rate by a significant number of cars in the industry.

  • And when that occurs, backlogs fall; our production rates must be modified.

  • We expect to manage through this environment well as we have in the past.

  • And actually see the current environment as one which favors Greenbrier because it presents an interesting array of opportunities.

  • For double-stack cars there is a pause in the demand for new cars, and we are more pessimistic about the need for new orders in 2008 until supply and balances are restored.

  • Large numbers of double-stack cars are stored, but many of these remain in less efficient configuration than is required by the railroads in the current operating environment.

  • This raises the possibility for modifying cars in our rail services shops in lieu of new builds as we are doing today at Gunderson and in Portland and in our various Greenbrier rail services locations.

  • Cutdown work is a viable option for Greenbrier and in this need we are uniquely capable of filling.

  • We are fortunate to have three years of double-stack production at lower production rates to help us ride out any uncertainties, which do play out.

  • One thing we should note and monitor throughout the year is the progress of Auto-Max, which is also an important contributor to Greenbrier's manufacturing gross margin.

  • Turning back to the opportunity with General Electric, I would like to just say that this opportunity extends to other car types and other kinds of collaboration with a very fine company such as installing the GE VeriWise technology for car monitoring and access to other technology engineering and manufacturing capabilities, as well as the global sourcing power of this industrial leader.

  • Obviously this is a value base for load of business for startup of a tank car line, and tank cars and covered hoppers are car types which are expected to be in strong demand over the next five to ten years.

  • With 75% of the backlog in these, industry backlog in these car types today.

  • So this move gives us a more diversified manufacturing product offering from which to compete in our manufacturing segment, and that segment will continue to be important to Greenbrier.

  • In assigning this project to GIMSA, our newest facility, we are demonstrating our strong confidence in our partners there and our management team in Mexico, and in the future of manufacturing trade with Mexico.

  • We do expect Mexico to be a base of growing importance to North American manufacturing and trade given anticipated global economic trends.

  • With that, I will turn this back to Mark for questions.

  • Mark Rittenbaum - SVP, Treasurer

  • Thank you, and operator we will go ahead and open it up for questions, please.

  • Operator

  • (OPERATOR INSTRUCTIONS) Peter Nesvold, Bear Stearns.

  • Peter Nesvold - Analyst

  • Can you talk maybe about your gross margin expectations for 2008 putting aside the leasing business, [schemes] on sale, as Mark mentioned, difficult to forecast but perhaps on the other business areas.

  • Mark Rittenbaum - SVP, Treasurer

  • Peter, I also in my remarks I think on the refurbishment and parts side of the business the comment was that there could be a little bit of a change in the mix that could bring margins down a little bit.

  • But we still would expect margins probably in the midteens but probably down 200 to 300 basis points from where we ended the year.

  • That would be a kind of a range.

  • On the new railcar side I would be more reticent to give specifics here because it will partly be due to the mix and the production rates in there.

  • I think when you cut through it we would be hard pressed right now to see margin growth from where we were in '07, even when you take out Trenton we talked about our Canadian operation -- or I'm sorry -- our new GIMSA facility being closer to breakeven this year.

  • And when you look at the mix and all that, that is where I think that might be on the upper end of things of what we might realize.

  • Peter Nesvold - Analyst

  • Why not give an EPS guidance range then based on manufacturing margins being flat year-over-year?

  • Because it seemed like the reasons you extended the guidance earlier this year was because of the manufacturing issues we've seen be behind you plus the Canadian disruptions.

  • Mark Rittenbaum - SVP, Treasurer

  • I think the answer is because there are a number of moving parts and while these would be our, what we might see today, we talked about a number of the factors that would create the moving parts and the volatility from any range that we might give here.

  • Peter Nesvold - Analyst

  • Okay, and Mark I think you touched on this in the opening comments, but I didn't quite catch it.

  • On the SG&A, why did it bump up so much in fiscal fourth quarter excluding the impact of the Canadian closure?

  • And how soon do you expect it to get back to that $21 million quarterly number you cited?

  • Mark Rittenbaum - SVP, Treasurer

  • Right.

  • There were -- so there was an excess of $2 million associated with Canada overhead type expenses; some of those will recur but at much lower level going forward.

  • And then we also had some principally consulting and professional fees related either to the integration of recent acquisitions or some of our information technology projects.

  • And then there is also incentive compensation accruals in Q4, as well.

  • So on a more normalized level we would expect in Q1 and Q2 for those to be down closer to what we saw in Q3, somewhere in the maybe around the $21 million range.

  • And as we talked about, we will be aggressively looking to bring those amounts down over the course of the year.

  • Bill Furman - President, CEO

  • Peter, we also had some fees related to investment banking and other costs associated with strategic efforts that we did not follow through on in that quarter.

  • Peter Nesvold - Analyst

  • Okay.

  • Bill Furman - President, CEO

  • That was significant.

  • Peter Nesvold - Analyst

  • And then last question and then I will jump out, you talked about how there was a favorable mix in the quarter manufacturing wise for margins.

  • I understand it on the Auto-Max on the top line but I always thought a favorable mix for margins meaning Intermodal, but that doesn't seem like that was a big factor in the production in the quarter.

  • Mark Rittenbaum - SVP, Treasurer

  • We produced a number of car types in the quarter but we also had long production runs from those car types.

  • The three principal ones we produced were covered hoppers, our Auto-Max car and the double-stack railcars.

  • And again, all of these long runs I don't want to get into margins by car type, but that was the mix for the quarter.

  • Peter Nesvold - Analyst

  • That makes sense.

  • Thank you for the time.

  • Operator

  • Brannon Cook, JPMorgan.

  • Brannon Cook - Analyst

  • Nice gross margin performance in the manufacturing arena.

  • I guess you talked about the three areas that drove the upside there with the long production runs, the favorable mix and the lack of a negative impact from the Canadian operations.

  • Just trying to get an order of magnitude from the perspective of the impact that those three factors had on the upside in margins; was it pretty equally distributed, or did shutting down the Canadian operations have an outsize impact on that margin?

  • Mark Rittenbaum - SVP, Treasurer

  • No.

  • I think the shutting down Canada was not the main contributor here.

  • You cannot -- again there were about $2 million of overhead expense that if we were producing would have been in cost of sales rather than G&A.

  • But even with that you would have seen margin growth quarter-over-quarter.

  • And so we specifically broke out the overhead expense related to Canada, and you can do the math on that.

  • But clearly the operating there was considerable operating momentum, as well.

  • Brannon Cook - Analyst

  • Okay.

  • Looking to the first quarter would one expect similar longer production runs to continue, or will that moderate?

  • Mark Rittenbaum - SVP, Treasurer

  • That will moderate.

  • We both have changed our production rates.

  • And if you will recall, the comments that we expect our first quarter to be a softer quarter which would also imply that much of that change would come in the manufacturing side of the business.

  • Bill Furman - President, CEO

  • If I can just add to that following up on what Peter said earlier, our double-stack rate of production and double-stack margins are important to our manufacturing performance.

  • So is Auto-Max, and so is our covered hopper car lines that we are running.

  • Those are the three main buckets.

  • We have talked about imbalance in the supply and demand of double-stacks, and we are affecting the rate of double-stacks.

  • And that rate, we have backlog for next year, but we are making tactical decisions now on run rate.

  • So that rate is likely to change from levels that we have seen near the end of this year.

  • We will see that in the first half.

  • Brannon Cook - Analyst

  • Okay.

  • I didn't hear you talk about much about the European railcar business.

  • Can you talk a little bit about the demand environment there, the order activity?

  • Bill Furman - President, CEO

  • Demand environment in Europe is very robust.

  • We have a solid backlog.

  • We have not been able to bring that backlog to the bottom line because Europe has gone through a similar adjustment to supply forces that we had in our industry a couple of years ago when our cycle moved up, particularly having to do with critical parts of components.

  • We've also had a number of technical issues which caused us to change the management team out there.

  • We are expecting a rather flat earnings performance for Europe next year.

  • And we are continuing to look at the future of that part of the business.

  • We don't expect it to be a meaningful contributor to earnings in 2008.

  • Brannon Cook - Analyst

  • Okay, and then final question.

  • Maybe you mentioned this already, but did you give guidance for manufacturing CapEx in fiscal '08?

  • Mark Rittenbaum - SVP, Treasurer

  • I did not.

  • I did make the comment that we are looking at discretionary CapEx.

  • The current year it was around $20 million, and while that might be considered the type of rate we might realize in an environment such as '07, we will be looking, examining those amounts for manufacturing and refurbishment in parts for '08, to see whether or not we will either defer or suspend some of those CapEx programs.

  • Brannon Cook - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Frank Magdlen, The Robins Group.

  • Frank Magdlen - Analyst

  • Good morning.

  • Bill, when we look at Europe, what is the backlog in Europe?

  • You have 6000 units for the year in '08, and how much of that is in Europe?

  • Bill Furman - President, CEO

  • Good question, Frank.

  • Give me a second, Frank.

  • I'm not allowed to respond to that question.

  • That is Mr.

  • Rittenbaum.

  • Frank Magdlen - Analyst

  • Okay.

  • (multiple speakers)

  • Bill Furman - President, CEO

  • I'm just not allowed to respond to it.

  • Mark Rittenbaum - SVP, Treasurer

  • We have about a little over 2000 units in our year-end backlog were related to Europe.

  • And in our, and we are anticipating that deliveries in Europe in our '08 will be somewhere around 1500 units, which would be a little bit higher than what we realized in '07.

  • Frank Magdlen - Analyst

  • And then when I looked at your deliveries estimate, as you currently have it of about 6000 for '08, is that about 40% in the first half of the year and 60% in the second half, if you indicated a soft, first maybe second quarter?

  • Mark Rittenbaum - SVP, Treasurer

  • Frank, to be clear, our guidance was for 8000 units of delivery.

  • Frank Magdlen - Analyst

  • I'm sorry.

  • Mark Rittenbaum - SVP, Treasurer

  • '08, and we said we have about 6000 of that that was in year-end backlog.

  • As far as the sequencing of those deliveries, again if you will give me a minute here, and I am handicapped by not having my --

  • Frank Magdlen - Analyst

  • While you are doing that maybe Bill could make a comment about the cutdown business and how much of that is really in the refurbishment and parts business now.

  • Bill Furman - President, CEO

  • I think the cutdown business is a tremendous opportunity to make some adjustments to our production schedules.

  • And while we may find that that could affect and is included, by the way the numbers that Mark is talking about for the first half, margins as we move through that, we can really strengthen our position in this market by looking at customer requirements.

  • In a time when double-stack cars are being stored we have a good solid backlog of double-stack cars and I think contributing to storage statistics during the nonpeak part of the year is not the wisest thing for a builder to do.

  • We could do it, but if we can get profitable cutdown work and work in the short run for a longer-term benefit strategically and add other benefits to the equation, that is the direction I would like to go.

  • So there is a total number of cutdowns that have not been done yet perhaps as many as 20,000 counting TTX and other car owners that really are not efficient cars.

  • And we should be in a position to participate as we have been doing in that market and perhaps even accelerate our role there.

  • And that fits in quite well with our GRS network and with the needs of Gunderson in the current environment.

  • So one of the things that we're going to be looking at very closely is exactly where the economy is going to go.

  • We have got a very strong backlog to work from and a lot of maneuverability.

  • And I am looking for opportunities beyond 2008 to pursue and cutdowns are definitely one of the things we are very excited about.

  • Mark Rittenbaum - SVP, Treasurer

  • Frank, just to conclude on the split and deliveries, it will probably be somewhere around the 40/60 split between the first half of the year and the second half of the year.

  • Frank Magdlen - Analyst

  • Okay.

  • One last question.

  • What will you be investing in GIMSA in '08?

  • Mark Rittenbaum - SVP, Treasurer

  • Our estimate of that is somewhere around 8 to $10 million, our share of the CapEx for GIMSA.

  • And again, our partner will be making an equal investment.

  • Frank Magdlen - Analyst

  • And does that relate to the manufacturing CapEx of the $20 million we talked about in the prior question?

  • Mark Rittenbaum - SVP, Treasurer

  • $20 million was what we spent in our fiscal '07, and again that would be our share of it.

  • So if you look at the $20 million in '07, that would be our share and the 8 to $10 million that we're talking about in '08 is what we would be reporting as our manufacturing -- as part of our manufacturing CapEx.

  • Frank Magdlen - Analyst

  • All right.

  • Thank you.

  • Operator

  • Arthur Hatfield, Morgan Keegan.

  • Arthur Hatfield - Analyst

  • Mark, you did not talk about interest expense.

  • And in the quarter the interest and foreign exchange line was down sequentially 18%.

  • Can you talk about the change from Q3 to Q4 and how we should look at that number in '08?

  • Mark Rittenbaum - SVP, Treasurer

  • Yes, for '08 we are anticipating that interest will be at a little lower level as we bring our debt levels as we brought our debt levels down.

  • There will be some volatility in the working capital amounts.

  • But overall in '08 we probably anticipate interest expense to run somewhere around $36 million.

  • Arthur Hatfield - Analyst

  • Secondly, on the manufacturing capacity, with some of the changes that have been going on this year can you talk about what your capability is to manufacture cars, the number of cars going forward based on I guess a standard -- I say standard mix.

  • I don't even know what that means.

  • Just roughly what you think is maximum capacity for you in '08 '09?

  • Mark Rittenbaum - SVP, Treasurer

  • In '08 the number would probably be somewhere up around 14,000 units as a hypothetical kind of maximum capacity; if all the stars lined up in '09 that number would increase by adding on the tank car line and on a hypothetical basis maximum capacity would probably be closer to around 15,500.

  • Arthur Hatfield - Analyst

  • Okay.

  • That's helpful.

  • Just a couple quick clarifications about some comments you made earlier.

  • I think I probably misheard you wrong, but in response to Peter's question about the margin, I thought you said -- and help me if I'm wrong -- that given all the moving parts that are going on right now with the mix issues you expect for this year, I think you said you would be hard pressed to get to the margin levels that you saw in '07 on the manufacturing side.

  • Mark Rittenbaum - SVP, Treasurer

  • That is a correct statement.

  • Arthur Hatfield - Analyst

  • Okay, and secondly, on the comments you made about revenue, you said that in 2008 with marine refurbishment services and parts that the number would be $600 million, up from $540 million in 2007.

  • And if I look at the 2007 number the refurbishment and parts line was approximately $382 million.

  • If I read the press release right, that was in -- you had marine revenues of about $55 million.

  • Is that correct?

  • Mark Rittenbaum - SVP, Treasurer

  • Yes.

  • Arthur Hatfield - Analyst

  • So what the differential or just things like your cutdown business and what not --

  • Mark Rittenbaum - SVP, Treasurer

  • Leasing and services.

  • Arthur Hatfield - Analyst

  • Okay, then I misheard you on it.

  • Mark Rittenbaum - SVP, Treasurer

  • So the 540 for this year would be refurbishment, parts, leasing and services and marine.

  • Arthur Hatfield - Analyst

  • Marine -- and then that.

  • Mark Rittenbaum - SVP, Treasurer

  • Of course marine is buried in manufacturing.

  • And then next year we are anticipating the number or the current year we are anticipating the number would come closer to $600 million.

  • Arthur Hatfield - Analyst

  • Right.

  • That's very helpful.

  • That's all I had.

  • Thank you.

  • Operator

  • JB Groh, D.

  • A.

  • Davidson.

  • JB Groh - Analyst

  • I think last quarter you mentioned there was roughly $7 million in remaining special charges, and you took two this quarter so that leaves roughly 5 left, is that correct?

  • Bill Furman - President, CEO

  • That is correct, but that would be special charges and other expenses, including the G&A amounts and G&A.

  • So we had about $2 million in the G&A included in that number.

  • JB Groh - Analyst

  • So between that 5, $2 million G&A and $3 million special?

  • Mark Rittenbaum - SVP, Treasurer

  • We had $2 million in special and a little over $2 million in G&A this current quarter.

  • We are anticipating that the charges, as you said earlier we're going to have some additional charges in the current year.

  • And those, the amount of those charges will ultimately depend on how readily we can dispose of the operation.

  • JB Groh - Analyst

  • Okay.

  • I am just trying to figure out what's left and where it is going to show up.

  • Mark Rittenbaum - SVP, Treasurer

  • Well, in the closure cost we anticipate I guess is a good bogey, JB that might run somewhere about $400,000 to $600,000 a quarter; that would, those closure costs would show up in special charges.

  • And that in the G&A expense those might run about $500,000 a quarter.

  • JB Groh - Analyst

  • Okay, and the length of those is undetermined based on when you eventually dispose of the --

  • Mark Rittenbaum - SVP, Treasurer

  • That's exactly right.

  • JB Groh - Analyst

  • And could you give us an update kind of where you are on the CFO search?

  • Bill Furman - President, CEO

  • You want me to do that, Mark?

  • We've searched and searched and we can't find anybody better than Mark.

  • So I am recommending to the Board today that effective in January, Mark will take over that position.

  • [Lori Leason and Ann Manning] will step up within the department.

  • We will be adding some additional resources, and we expect a more formal press release out soon.

  • JB Groh - Analyst

  • Congratulations, Mark.

  • Thanks.

  • Bill Furman - President, CEO

  • He hasn't been confirmed yet, though.

  • JB Groh - Analyst

  • Okay.

  • Operator

  • Alison Poliniak, Wachovia.

  • Alison Poliniak - Analyst

  • Good morning.

  • Question for you.

  • In your release you guys talked about backlog sort of past '08.

  • You noted that it is subjected to competitive conditions.

  • Can you talk about what those might be?

  • Mark Rittenbaum - SVP, Treasurer

  • Sure.

  • In general terms yes, in any multiyear order there is always a question of how you deal with pricing, both for us as the supplier and for the customer.

  • And so the further out you get both parties are interested in whether or not the pricing is competitive within the marketplace.

  • So after the time periods that we have indicated in the press release, the backlog, the pricing is subject to competitive conditions solely which is in our control.

  • So as long as we are competitive on the pricing, then we realize the backlog.

  • And as I said, that our being competitive in the pricing is 100% within our control.

  • Alison Poliniak - Analyst

  • Okay, great.

  • Thank you.

  • Operator

  • Charles LaPorta, [Arctos Partners]

  • Charles LaPorta - Analyst

  • I wanted to know if the parts and refurbishment business has any link into the manufacturing business, in terms of such that somebody buys a car off of you and you kind of add on a warranty or something like that for parts and service, whatever just like you would for a car.

  • And is that -- would one drive the other, or does anything like that exist?

  • Bill Furman - President, CEO

  • It does have a link with some of our other businesses.

  • But the short answer is not the kind of link you are describing.

  • We have an engineering link that is very important.

  • And we use the manufacturing, engineering capabilities to enhance our service offering on the both the leasing side of the business and on the parts and repair side of the business.

  • Charles LaPorta - Analyst

  • So as cars come in and they have certain kind of damage to them or wear and tear, that sort of information gets fed back to the manufacturing side to reengineer the car?

  • Bill Furman - President, CEO

  • No, on our own plate that would be true.

  • On cars we manage, we don't share that information internally due to client relationships.

  • But we would use our engineering capabilities to enhance the power of our repair business, and it creates a much stronger value add if you have a new car engineering department to help with your repair work because you can actually reconfigure entire cars for the best use application for a customer.

  • So you can turn a car, let's say for example a multilevel car into an intermodal car or vice versa.

  • It is quite a strong -- it is very useful.

  • Charles LaPorta - Analyst

  • Now that kind of activity, would that be part of your refurbishment and services business, or is that -- would those revenues for the activity you just described be part of your manufacturing?

  • Mark Rittenbaum - SVP, Treasurer

  • It would be the former.

  • Would be part of our refurbishment and parts.

  • Charles LaPorta - Analyst

  • All right.

  • Thanks.

  • Operator

  • Steve Barger, KeyBanc Capital Markets.

  • Steve Barger - Analyst

  • I hopped on the call late, so sorry, just let me know if anything has been covered already.

  • Can you talk about the utilization rates and your low-cost plants and maybe talk about the cost differential down there?

  • And how that potentially offset some of the mix issues that you're going to face in 2008.

  • Mark Rittenbaum - SVP, Treasurer

  • Steve, we don't specifically disclose the relative competitiveness of each of our plants.

  • It is that we have been shifting production down to Mexico and into US and taking it out of Canada.

  • What we did talk about is that longer-term, again we are very happy with the footprint that we have.

  • If you look at the quarter that just ended there was a drag from our GIMSA facility, which we talked about, of about 1.5 million as it is in the startup phase.

  • So next year we anticipate that facility will be around the breakeven to slightly positive, and the other comment that we made specifically regarding gross margins with manufacturing due to these variables as well as changes in our production rates, a less favorable product mix and very competitive pricing on any new orders.

  • That today we said we would be hard pressed to realize margin expansion in from where we ended up in '07 longer-term, we are much more bullish about our ability to realize expanding margins.

  • Bill Furman - President, CEO

  • Moving that question up a scale or two, there are two very solid reasons to be in Mexico other than the obvious ones.

  • The first one has to do with the inevitable outcome of some of the global forces which end up suggesting that a strong North American footprint is going to be important and that the circumstances will favor Mexico.

  • Secondly, in the first few years or the first year particularly of a New Mexico operation generally productivity is not as great as in an existing facility in the United States.

  • However, they can move very rapidly up the curve.

  • And so what we are seeing in our facility there today in GIMSA is that it is moving rapidly up the curve.

  • It is doing very well and with -- we are a lot farther along that curve but still could improve productivity somewhat.

  • Steve Barger - Analyst

  • And there is plenty of capacity left in those plants if you take incremental orders in FY '08?

  • Bill Furman - President, CEO

  • Yes.

  • Steve Barger - Analyst

  • Okay.

  • For the marine backlog, average price per vessel came down by about $800,000.

  • Can you talk about mix and pricing in that segment and what you are seeing there?

  • Bill Furman - President, CEO

  • Sorry, Steve.

  • Can you repeat the last part of your --?

  • Steve Barger - Analyst

  • Yes, just mix and pricing in the segment.

  • Mark Rittenbaum - SVP, Treasurer

  • Marine, it is a change in the mix.

  • It is (inaudible) when you look at the backlog figures it is clearly a change in the mix as compared to any pricing pressures; that market remains very strong.

  • Steve Barger - Analyst

  • Are you actually getting positive pricing there for the new additions to the backlog?

  • Bill Furman - President, CEO

  • Yes, we are pleased with the pricing environment.

  • We have a bit more competition than local West Coast builders.

  • But we still see the demographics in that market very strong, and we expect that market to be $100 million business in the next year or two as opposed to the current level, which is building up to 60 million.

  • Steve Barger - Analyst

  • Okay, great.

  • And one other.

  • Can you talk a little bit about the growth in the parts and service business?

  • If we are going into a moderating railcar delivery environment how should we consider or how are you considering growth in the new acquisitions relative to lower utilization rates across the systems?

  • Bill Furman - President, CEO

  • We have to kind of watch the statistics carefully because they can be a little bit misleading.

  • While car loadings may be flat or even declining acceptance in commodity groups, ton miles continue to increase.

  • The railroads continue to have issues with throughput, and they are improving their efficiency.

  • They are doing that by having more efficient cars that are larger and working on trained operating models.

  • So the degree to which the fleet is working is at least constant, maybe improving slightly.

  • So we don't see a moderating need in that market segment at all.

  • We see a strong need in repair refurbishment for integrated network that matches the network of the North American rail footprint.

  • But the customer base is leasing companies, railroads and shippers.

  • And it is a very exciting area because each of these have very strong needs, and they are moving in the direction of outsourcing.

  • So we think the North American footprint we are building is an important part of the equation.

  • And we think that this business will continue strong despite a softer economic environment.

  • Steve Barger - Analyst

  • And in the commentary you talked about growth through organic and potential acquisitions.

  • Are there other sizable properties out there in the parts and service area, or refurbishment?

  • Bill Furman - President, CEO

  • I think the more obvious opportunity there is organic growth, which has a really good EBITDA multiple compared to external acquisitions, so that you can mix the two and have a very good profile.

  • And those are not easy to do on a large scale, but they can be done slow and steady and have a strong cumulative effect.

  • There are one or two other possible acquisitions out there, but the timing may not be exactly right for those.

  • And we are just going to be opportunistic about looking for those.

  • I think that the math favors organic growth, and there is lots of opportunity for that as a bolt-on to our current network.

  • Steve Barger - Analyst

  • All right.

  • Thanks very much.

  • Operator

  • John Barnes, BB&T Capital Markets.

  • John Barnes - Analyst

  • Congratulations, Mark.

  • I have confidence that you will get confirmed.

  • Real quick, on that last comment about acquisitions, when you say the mat doesn't work, do you mean the multiples don't work right now, and that is kind of keeping you out of the market?

  • Could you just elaborate on that a little bit?

  • Mark Rittenbaum - SVP, Treasurer

  • On the last question?

  • John Barnes - Analyst

  • On his question about acquisitions, what other properties available, you indicated that the math favors organic growth.

  • I'm just curious as to what you mean by the math.

  • Is it acquisition multiples or --?

  • Mark Rittenbaum - SVP, Treasurer

  • I think if you look at the predicament of nonregional players in the business, unless they get linked in -- it is very much like an electronic network.

  • Unless you get linked in, you have some disadvantages on economies of scale and service design.

  • So I think we would all feel better about multiples if we knew where the economy is going to finally end up.

  • I think there are going to be very good buying opportunities.

  • They may not be right this minute, but organic growth just if you look at the math of an organic startup as a couple of the ones we've done this year and haven't said too much about, in Topeka and in Hialeah, Florida, we can add a new shop and plug it into our network and really get very attractive EBITDA multiples from that addition on a very small, very moderate investment.

  • So I am not against additional growth if we can have a strategic bolt-on and even bigger deals if we can find the right ones.

  • And right now, maybe prices are still being a little bit influenced by the kind of climate we were in where pricing was a lot higher, and now things have adjusted and maybe pricing will come down a bit.

  • John Barnes - Analyst

  • That makes sense.

  • I just want to make sure I've got the numbers right.

  • So right now, you're saying inclusive of the GE order that you received, you've got a total of 24,000 units in your backlog.

  • And 6000 units are going to hit in '08, with about 1200 of those units being in Europe and the balance being North America.

  • Correct?

  • Mark Rittenbaum - SVP, Treasurer

  • Correct, yes.

  • John Barnes - Analyst

  • And can you give us an idea of what '09 looks like in terms of just a total number of units aimed for '09?

  • Mark Rittenbaum - SVP, Treasurer

  • We don't break out the backlog by year, other than for the current fiscal year, and we would prefer to keep it that way.

  • John Barnes - Analyst

  • Okay.

  • Then I just want to -- in terms of the mix of business going forward, can you give us an idea of where you think parts and service becomes as a total percentage of your revenue -- I know it's going to fluctuate year-to-year depending on the total number of cars being built.

  • But in a pretty consistent year, kind of where as a percentage of revenue do you think parts and service falls out?

  • And am I correct in assuming that the larger the percentage of revenue derived from parts and service, the more favorable impact it has on your margins?

  • Mark Rittenbaum - SVP, Treasurer

  • John, I will try to take a crack at that.

  • Rather than in terms of percentages, I might think in terms of dollars because the percentages, as you mentioned, will depend ultimately on manufacturing and ultimately on where the overall growth in the Company comes.

  • Bill talked about that we would like to continue to grow our refurbishment and parts marine leasing and services, and continue to make them a bigger part of the total.

  • But today if you back into it, we would see refurbishment and parts being about 425 to $250 million of our revenues.

  • And through organic opportunities, we don't believe that we've maxed out at that dollar figure.

  • So with organic opportunities, we could take it to an even higher level.

  • Where it goes from here really just depends on, again, how fast we are able to grow that business and what kind of either bolt-on acquisitions or other acquisitions we are able to realize.

  • You are correct that generally speaking, refurbishment and parts has a higher margin and a more stable margin than our manufacturing business.

  • Bill Furman - President, CEO

  • We are not against significant acquisitions in that business, as we've demonstrated this year.

  • We just don't want to get involved in silly pricing in the current climate.

  • We think there may be some interesting opportunities, and we probably have to pay for the really quality opportunities.

  • But we're going to have to mix that with organic growth.

  • So I'm even more optimistic than $500 million.

  • I think that we can get this business rapidly through a combination to a significant portion of our total business.

  • But when you look at the combined non-rail manufacturing components, a good target looking at the mix of revenue had this last year would be 50% revenue from other sources, would be a good near-term goal.

  • John Barnes - Analyst

  • Okay, very good.

  • Nice quarter.

  • Thanks for your time.

  • Operator

  • Peter Nesvold, Bear Stearns.

  • Peter Nesvold - Analyst

  • Just a quick follow-up.

  • Looks like the tax rate has been trending a little higher here in the last couple of quarters, and I remember -- I think it was maybe a year ago -- there were some headwinds from the EMT in Mexico, and I'm curious is that's what it is into these startup costs or if there's something else.

  • Mark Rittenbaum - SVP, Treasurer

  • No, I think what's going -- it is not as much that, Peter, as again our Canadian operations where we are still having expenses that we do not have a tax benefit associated with those, and that is principally the reason.

  • And then the other, our GIMSA facility, which was incurring losses as well, and there is no tax benefit associated with that operation.

  • So those are the two things that are bringing the tax rate up.

  • Obviously longer-term we believe GIMSA will reverse itself.

  • But in the shorter term that Canada is still going to have this impact until we are able to dispose of it.

  • Bill Furman - President, CEO

  • That is a great question Peter because that is a real manageable this year.

  • We have to work on each of those areas to ensure we got adequate income to not have our tax rate creeping up significantly.

  • So we do have to work in each of those areas.

  • Europe is another pot that can have that similar effect on the higher tax rate.

  • Peter Nesvold - Analyst

  • In terms of RSI data, does the full GE order show up in the next quarter or is it just the committed piece?

  • You talked about committed orders or firm orders in the prepared comments.

  • Mark Rittenbaum - SVP, Treasurer

  • The full amount, and we would consider the GE, as well as our other multiyear deal to be firm.

  • And I think if you would comb disclosures with other manufacturers that have multiyear orders there would be similar types of things to deal with as we disclose in these multiyear orders.

  • But the full amount will be disclosed.

  • Bill Furman - President, CEO

  • Let me be sure there is no ambiguity about these.

  • These are, both major multiyear orders we have are firm.

  • They have to buy the equipment.

  • There are tests associated with complex deals, and those tests are principally relating to competitiveness.

  • But these things have to be a bit complex because of cost of materials and that kind of thing, too.

  • So that is why they typically have a horizon of a couple years in the firm period.

  • And then some moving parts.

  • But they are very significant value adds to the party that has the order.

  • And presumably to the party that places the order.

  • Peter Nesvold - Analyst

  • Thanks again.

  • Operator

  • At this time I show no further questions.

  • Mark Rittenbaum - SVP, Treasurer

  • Thank you very much for participating in the call, and we appreciate your interest in the Company.

  • Have a good day.

  • Operator

  • This concludes today's presentation.

  • Thank you for your participation.