Greenbrier Companies Inc (GBX) 2008 Q3 法說會逐字稿

Hello and welcome to The Greenbrier Companies third quarter of fiscal year 2008 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 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, Executive Vice President, Chief Financial Officer, and Treasurer.

Mr.

Rittenbaum, you may begin.

Good morning, and welcome to our fiscal third quarter conference call.

After we review our results and make a few remarks about the quarter that just ended, we will provide an outlook for 2008 and beyond, and then we will open it up for your questions.

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

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

Today we reported our third quarter fiscal results.

Our GAAP net earnings were $0.49 per share on revenues of $382.1 million, compared to net earnings of $0.81 per share on revenues of 386.6 million in the third quarter of 2007.

We remain very liquid as we are in the process of amending one of our loan agreements, and we will have 160 million of additional borrowing capacity, under the various terms and financial covenants once this amendment is completed.

Our refurbishment & parts, leasing & services, and marine businesses continue to perform well, and we anticipate this momentum will sustain.

Including our recent acquisitions, these businesses are expected to generate over $770 million in annual revenues on a current run rate basis, exceeding those generated by new railcar manufacturing in North America and Europe.

The increased contribution from our refurbishment & parts and leasing & services businesses has improved overall gross margins by 14 million sequentially over the second quarter of 2008.

The strong performance of these business units, offset a sequential decline of 4 million in manufacturing margins, which resulted from the increasingly competitive new railcar environment and rising raw material costs.

Focusing specifically on the refurbishment & parts segment, we have made two acquisitions this year, on top of the two we made last year, and are extremely pleased with the performance thus far.

Revenue from this segment now are at a run rate which exceeds $600 million per year.

In addition, margins continue to expand, and reached 21% during the third quarter.

This segment has benefited from higher scrap prices, which provides a natural hedge to rising raw material costs in new railcar manufacturing.

We anticipate growth for this business will continue, and believe that margins in the upper teens are sustainable.

The leasing & services segment includes results from our own leased fleet of 9,000 railcars, and managed fleet of 138,000 cars.

Lease fleet utilization for the quarter was 96.1%, compared to 97% last quarter.

The current quarter includes 5 million in gains on equipment sales, flat with the gains realized in Q3 of 2007, and compared to 1.2 million in Q2 of 2008.

As we have previously stated, equipment sales are hard to forecast, as they are opportunistic in nature.

Recently, we have been taking advantage of high scrap steel prices by scrapping some of our older railcars, rather than keeping them in leasing service.

The remaining fleet has also benefited from increases in steel pricing through higher residual values.

When you pull out gains on equipment sales our margins for this segment were 46.7% of revenues this quarter, similar to the margins for the last two quarters.

Turning to remanufacturing, we booked four additional barge orders during the quarter, and our backlog grew to 158 million.

Annual revenues for this operation exceed 60 million, and again we anticipate continued growth in this sector, and the outlook is bright.

Furthermore, our entire marine backlog allows for a pass-through of material cost increases to our customers.

New railcar deliveries for the quarter were 2,200 units, compared to 3,000 units in the third quarter of 2007.

Our backlog as of the quarter end was 17,500 units, and we expect to deliver 1,400 of these units in the fourth quarter this fiscal year based on current production plans.

We made progress during the quarter at our Mexican joint venture, our Greenbrier GIMSA Operations with improved efficiencies and financial results.

Manufacturing margin for the quarter continued to be pressured by rising steel prices and surcharges, lower production rates, and a loss reserve on certain future production and backlog.

In the near term, we believe these forces, along with an extremely competitive market and softer demand, will continue to put manufacturing margins under stress.

About 1/3 of our current backlog contains fixed price contracts, due to rising raw material costs, the current estimated cost to complete some of these fixed price contracts is expected to exceed the contractual sales price.

In response we have accrued $5.3 million during the quarter for estimated loss contingencies on a portion of these contracts.

There are about 1,000 fixed price railcars in our backlog, for which the anticipated loss is not yet estimated, and a loss contingency has not yet been approved.

We are aggressively working to mitigate all of these exposures on various fronts, that we will further address later on, and are working very diligently to mitigate or reduce these exposures.

Our Selling & Administrative expense increased $2.4 million sequentially from the second quarter 2008, but this really doesn't tell the story, as there are a number of things going on in that increase, and we are aggressively working to cut our overhead in G&A costs and current environment.

A number of factors included in the noise during the quarter include there is 1.3 million of severance costs related to cost reduction initiatives, a $0.7 million increase in professional fees related to strategic initiatives, which should discontinue after this quarter, 0.6 million of integration cost and increased G&A related to our two acquisitions during the quarter, and 0.8 million increase in incentive compensation related to higher earnings.

So we anticipate a sequential reduction in these costs in our fiscal fourth quarter, and again are working to reduce these costs overall.

Last quarter, we mentioned that we expected the tax rate to run about 63% for 2008.

We have implemented strategies to more efficiently manage our tax rate in different geographic jurisdictions, and have made significant progress during the quarter as our tax rate was 50%.

We expect a slightly lower rate in Q4.

Looking ahead, D&A expense should run 35 million, manufacturing CapEx should run about 30 million, but again this is primarily related to our plant expansion in Mexico, for which our partner picks up half of the expenditure, we are not doing much manufacturing CapEx beyond that in Mexico.

Our refurbishment & parts CapEx runs about 10 million, and again most of that is discretionary CapEx, and our leasing CapEx this year is about 30 to 35 million on a net basis.

As I mentioned earlier, we remain very liquid, and expect to have 160 million of additional borrowing capacity based on our financial ratios, and during the quarter we completed a $50 million leasing term loan on very favorable terms.

Our near term financial focus remains on cost reductions consistent with the current macroeconomic trends, paying down post-acquisition debt, and strategies to continue to reduce our effective tax rate.

While the current operating environment is 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 successfully compete as a result of our strategic decisions.

I will now turn it over to Bill Furman, our CEO, and then we will open it up for your questions.

Thank you, Mark.

Well as Mark indicated in the press release, demonstrates our financial results have improved considerably this quarter, and we are pleased about that.

This is due mainly to increased momentum and volume, margins, and our refurbishment & parts segment, but is also supported by a strong leasing and marine manufacturing set of fundamentals, and increasing marine backlog.

Consistent with our diversification objectives over the past two years, and the goals of our integrated business model, the revenue and margins from these areas should continue to shift away from manufacturing during the present, and more economic, and more difficult economic environment.

Manufacturing for new cars on a standalone basis, we believe will continue to be a very difficult business in which to make money in the near term, however it fits in well with our integrated model, and it gives the Company considerable upside in more normalized economic times.

During the past several years, the demand for new railcar manufacturing was relatively robust, but this business has always been cyclical.

Moreover, it has commodity aspects to it in the current climate, with strong customers, a consolidating supply chain, and a larger number of car builders, creating overcapacity during economic down cycles and times of uncertainty, as we are certainly operating in today.

Manufacturing however, can be very valuable during the more normal economic times, and in the present economic environment, it also creates value for Greenbrier as a platform for other businesses and services.

The primary advantages in that platform are in engineering, design capability, and mechanical know-how.

Greenbrier has been diversifying its business to take advantage of this platform, and will continue to do so.

In the past two years we have made major acquisitions of the repair and parts businesses, all with good franchise value and complimentary geographical networks.

We have enhanced our repair and parts segment through acquisition of favorable pricing multiples in these businesses, in combination with the rest of our network of products and services, should significantly outperform and balance our manufacturing segment, during the current economic period of uncertainty.

The reason for this is that with railroad traffic, especially in many commodities continues to be robust, and the competitive case for railroading versus other modes of transportation, along with marine, remains very robust.

Velocity has improved in the railroad system, and freight cars and service are working harder and they are still aging.

With high steel prices, it is difficult for railroads to justify replacement with cost of new equipment today, and existing equipment compares very favorably to the cost of new builds, due to the cost of steel and the components and scrap surcharges.

Accordingly, the need to repair and extend the life of railcars and to replace parts, should continue in our opinion to be very strong.

Our diversified business areas include not only refurbishment & parts, but leasing, management services, as well as the thriving marine business, all supported by the technology of our engineering and design teams in the manufacturing units, and all favored by many of the same forces that are making manufacturing less attractive in the present environment.

As we integrate the additions to our network, and we add even better value enhancements through organic growth, we should continue to see the benefits of this strategy, as we have in the numbers reported in the quarter just ended.

I want to summarize what Mark just touched on many of these, a few of the operational strategic highlights from the quarter just ended.

As Mark has mentioned, we closed on two previously announce the refurbishment & parts acquisition, with annual revenues of 100 million, and EBITDA of approximately 16 million on a run rate basis.

We received significant marine barge orders, increasing our marine backlog to a record 158 million.

All of our barge backlog contains pass-through provisions for cost increases on steel and other commodity inputs.

Our marine backlog is indexed to protect us, in the event specifically of further steel pricing variations.

Our GIMSA manufacturing facility in Mexico made efficiency improvements, and should prove to be a very cost efficient facility, along with our other facility in Mexico at Concarril, however in the present environment, even these low cost facilities are struggling with the pricing and commodity cost issues, besetting most manufacturing companies today.

Another important point is we had an extensive review of the merits of a possible business combination with a respected manufacturing competitor, also a partner in some parts businesses, controlled by investor Carl Icahn, following an investment in Greenbrier by Mr.

Icahn and his affiliated companies.

Our financial results during the quarter reflected the costs associated with that process, as well as the distraction that such evaluations always involve.

I will comment briefly on that a little along in my remarks.

We improved our reported tax rate as Mark has suggested, and we continue to work on our foreign income and losses, through restructuring and other means, which will continue we hope to affect the tax rate favorably.

Finally, we produced improved financial results despite absorbing unexpected losses on steel and scrap surcharges of 5.3 million.

We continue to actively manage our exposure in this area, which is due largely to multi-year transactions, which had fixed pricing components year-to-year.

We were forced to fix the prices during the current year, and were caught in the process of that by some significant price increases, which were not expected in steel as others have.

We also absorbed some declining margins in our European Operations, due to a lapse in currency hedging and exposure to the Polish Zloty, some of which was also absorbed in the earlier quarter.

We have a policy to hedge against such risks.

Unfortunately, the Zloty moved unexpectedly against the Euro, and we have had other issues with significant contracts in Europe.

We have been working this quarter to revise our strategic plan in Europe, and we continue to work on that during the quarters to come.

Looking at the competitive landscape, notwithstanding the current economic uncertainties, we believe that rail and marine will continue to compare favorably to other modes of transportation, especially in the current economic environment.

The current fundamentals of high gas prices, highway congestion, environmental impacts of trucking, deteriorating infrastructure, along with a weak dollar, should be very favorable to rail and marine in the longer term, particularly for the transport of specific commodities.

Greenbrier's manufacturing operations have been particularly affected by the downturn in the housing market, and by a softening international import of demand, which has affected intermodal loadings, however intermodal over the longer term is expected to continue to be a backbone of the economic system, and we believe as the economy normalizes, and returns to more prosperous time in years ahead, that the Company will therefore have a great deal of upside by maintaining a manufacturing platform.

Considering the Companies merits, and some of the changes that we have made, our strategy, and the integrated business model, we believe we are well positioned to deliver shareholder value across the business cycles, and we believe we have a competitive advantage over other car builders, who are pure car building plays.

We recognize we must deliver on the promise and the opportunities of the changes we have made over the past two years at Greenbrier, particularly in the areas of integration and cost cutting, as Mark also mentioned.

And we are dedicated as our Board is dedicated to achieving that goal.

Looking at M&A specifically, our investments in the refurbishment & parts business have transformed the Company considerably over the last two years.

These investments have been not only timely but profitable.

We have grown this business in parts and repair and refurbishment, from about $100 million of revenue in 2005, to a run rate of over 600 million annual revenues at the current time.

This growth has occurred both organically and through strategic acquisitions, although more heavily balanced on the strategic acquisition front, and most notably with American Allied and RBI during the quarter.

In addition to Railcar America and Meridian Rail Holdings, both in 2006.

We now have the largest independent shop network in North America, with 39 locations to provide our customers seamless , high quality service, close proximity to our shop network, and quick turnaround times.

This network can also be used as a platform to distribute parts, and to enter other businesses that lend themselves to a retail location, which would take advantage of some of the current economic environment, particularly in salvaging assets, and increasing scrap yield from our normal operations.

While we are integrating our recent acquisitions, we also remain focused on continuing to grow this business, particularly in organic ways.

This quarter we plan to add another shop to our network, with a Class 1 railroad providing a base load of business.

In addition our parts businesses provide exciting other growth opportunities.

We currently sell approximately 15 different railcar parts for a variety of railcars, and we import through our global sourcing network as many as 50 different parts and sub-assemblies, for the use of our own businesses.

I want to talk briefly now about two things, 1) commodity prices and the conclusion of our recent conversations with American Railcar Industries.

One of the key factors facing all manufacturers today is commodity pricing, and the uncertainties surrounding that pricing, caused by surging global demand, supply constraints, and the weakening U.S.

Dollar.

Currently, we are facing the dual effects of not only a weak demand for railcars, but high input costs in the manufacturing segment, and we are not alone.

We are managing this aggressively, and in the past this would have had a very significant adverse effect on our business.

Today however, the effect is muted in large part to our diversification efforts described earlier, and in our public documents.

These efforts have provided a natural inflation hedge and commodity hedge, to not only weaker demand for new railcars, but also rising input costs having to do with with commodity increases, as we salvage parts and other pieces from railcars, which we process through our shop network.

While the new railcar market remains soft, we will have our GE covered hopper car and tank car contract beginning in 2009, and we are protected on this contract with pass-through of steel cost increases.

Finally I want to turn to the conclusion of our discussion with American Railcar Industries.

As I have said before, this is a very well respected company, a company we have done business with, and have an active joint venture with, along with another supplier in the industry, in the castings business.

Ultimately, we determined in congenial discussions with Mr.

Icahn's organization, and with him, that we could not come to an agreement that favored both parties.

His focus, I am sure, and our focus for sure, was on a business case that made good sense for our shareholders, and in this particular arrangement we were unable to come to mutually beneficial terms, which we believed and our Board believed would achieve that goal.

With our business model and identified market opportunities, we feel that we are well positioned to take advantage of the current economic climate, we have worked hard to do that, and in a way, we would be doubling down in a manufacturing segment, by merging in the railcar manufacturing business today.

Nonetheless, there were compelling structural reasons for considering an opportunity of that sort.

We remain open to considering ways of improving shareholder value, and we were flattered by Mr.

Icahn's interest in Greenbrier, and we are pleased that that investment worked out well for him.

Before I turn the call over to the Operator for question and answer, I would like to say that I am pleased with how our business model has played out.

We have much to do, and particularly we have a lot of work to do in integration, and recognizing the market potential in the franchise network we have now established.

We need to produce more tangible reductions in our G&A costs, and adapt to the changing economic environment that all of us face today.

Our Board and our team are dedicated to doing the hard work to make that happen, and we hope that we can continue to produce better results as the next year plays out.

With that, I will return the mic back to

Thank you Bill, and Operator, we will go ahead and open it up for questions now.

Thank you very much.

We will now begin the question and answer session.

(OPERATOR INSTRUCTIONS).

Our first question then is is from Frank Magdlen with The Robins Group.

Your line is open.

Good morning, Bill.

Good morning, Frank.

How are you doing today?

I am fine, I think.

But can you go over the loss contingency a little bit more?

You have 1,000 cars.

Is that for delivery this year, or next year?

I will let Mark address that.

Right, so Frank, as you are recall, we did have a 5.3 million accrual this quarter, and we also noted that there are 1,000 cars in backlog, for which we believe there could be a loss, for which we had not yet accrued that loss since it is not estimatable.

Most of that production would be in fiscal '09, some of that production would take place in our fiscal fourth quarter

Now when you accrued it, does that mean that it went through this quarter's P&L.

or is it sitting on the balance sheet?

No, included in cost of sales is 5.3 million of loss contingencies, on production that would take place in future quarters.

And so that did hit the P&L through cost of sales.

This quarter and some more to come.

Correct.

Okay.

And then could you tell us how many barges are in total backlog, and what marine revenue was, or deliveries in the quarter?

Let me come back to that, Frank, as to the number of barges, if you can just give me a --

I would be happy to, and then are you willing at this time to give us a figure, as to what the confirmed backlog is for '09?

Are you talking about barge backlog, Frank?

No, railcar.

On railcars.

Or both, I will take both.

Well in answer to your barge question, Frank, there are 13 barges in backlog, in answer to your question on how many were delivered, we account for these on a percentage of completion method, but it is roughly one plus barges that are reflected in the revenue figures, so one complete barge and a partial barge that would be reflected in the revenue figure for the quarter.

As far as deliveries of railcars in 2009, we have not broken that out yet.

That would in part depend on production plans, but we is haven't broken out the backlog for the press release.

All right, I will jump back in queue.

Thank you.

Our next question is from J.B.

Groh with D.A.

Davidson.

Your line is open.

Good morning, guys.

Good morning.

I just wanted to get a little more detail on Frank's question on this 5 million plus or minus accrual.

You said you have 1,000 cars where you don't know what the number is going to be.

How do we look at the 5 million in terms of how many cars does that represent, and you said you had some material price protection on some, so I am just trying to get a gauge, get a feel for how big the potential could be, is that 5 million the whole enchilada X the 1,000, or how should we look at that?

Sure.

So the 5.3 million that we accrued this quarter is roughly on 900 railcars that are in backlog.

Okay.

And then there is an additional 1,000 cars in backlog, for which we believe that we have exposure that we have not yet accrued.

I think directionally, based on the information that we have today, that you can interpolate from the 900, and say that that is within the range, kind of bigger than a bread basket, to give you the size, or perhaps the magnitudes that we could be looking at on the 1,000 cars.

And Frank, I am sorry, but let me add that what we are doing with these accruals is we are booking what we believe are certain losses that we could identify because of pricing , a committment that we have not been able to change, to deliver the cars, and committed steel inputs.

We are obviously going through a mitigation process to address all three of those variables in the backlog that has not been adjusted, so I wouldn't want you to read into Mark's comments any more than we have taken a hit on losses that we can reasonably identify, and we are continuing to work on the issue, in any remaining exposure as aggressively as we

Okay, but you may do better.

Just because you have accrued, you could do better than that if those cost initiatives come in better than you expected?

Yes.

It would affect more what we took your question to mean, was is there more of this to come?

If we believed that it was certain that more was to come, we would have booked it.

We are trying to follow a very conservative policy, and strict compliance with GAAP, but we are trying to mitigate it, and it's possible we could claw back something that we have already booked, if we abruptly change the commitments that we have agreed to.

We, as our customers, this is a hard ball environment, and it is three-dimensional, we have got three parties to it, ourselves and all parties like us who are in this position, the suppliers who are passing on these very unpredictable cost escalations, and then customers who can either negotiate or work or not with the other parties to try to have a win/win situation.

And there are a number of ways we are trying to mitigate it, and we have had a lot of success in the past on this, but this is what we have booked and this is a hit we took this quarter, and we are going to continue to be very objective about this, and if we see that we can't, the expectation we will have a loss, we will book the loss.

And then on a positive note, on the refurbishment & parts business, that margin at 21%, it seems like every quarter, the bar kind of moves higher, and we keep hearing that the sustainable margin is a little bit lower than what you got in the quarter.

Has the bar moved higher?

I think previously you said kind of mid-teens, and now it sounds like you are saying high-teens, in terms of a margin potential there, am I reading that correctly?

The way I look at it which is probably too simple-minded, or the massive intelligence that os on this call, I honestly mean that, I look at this in a very simple-minded way.

We took a $5 million hit on what ought not to have occurred.

We should the have had this happen, but we got caught as others have been caught.

We are sorry about it, but we are taking the hit.

We took a very big hit this quarter, we have some residual other issues, problems that occurred in our European operations, very ironic because there is a very prosperous environment in Europe and we just have not been able to seem to get it right, so we took some hits this quarter, and we also had some sales of leased assets that caused some noise in the quarter, but the repair and refurbishment business has been very, very strong.

I don't expect that we can sustain those kinds of high margins, but I believe that the margins will continue to be greater than they have been, and the reason I don't expect that those margins can be sustained is just that we are going to have a lot of pushback in this elbow swinging environment that we are in, we have got a good model and it is working very well, but whether we can keep that kind of margin, I don't know.

But even if we can't, we have once we get to a normalized run rate, we have got a lot of slack in there, where we could give up some of of that margin, if we are not screwing up on steel and other things, we should be able to do much better than we have in the past.

And finally Mark, do you have an organic growth rate for the refurbishment & parts business, or what the acquisitions contributed?

Yes.

I think the organic growth rate as Bill mentioned, there are a lot of things in our integrated business model that we are working on, that has a lot of upside potential, but our organic growth rate today is probably less than 5%, with a lot of upside potential to it.

Okay.

Thanks a lot.

Our next question is from Wendy Caplan with Wachovia.

Your line is open.

Thank you.

Hello?

Hi, Wendy.

We thought you had gone off to great things.

You are still paying attention to us.

Actually, I have to say her line just disconnected.

(laughter)

I will move on.

Paul Bodner with Longbow Securities, your line is open, sir.

Hi, how are you guys?

Hi, Paul.

Quick question here, on the overall pricing of the railcar environment.

Obviously it is a difficult scenario.

Our contracts, are they looking to buy at fixed rates, or are you able to kind of get escalators in there, and then two, is the pricing if you do adjust it for where steel is going between plate, is it just really unattractive to buy new, until you buy new cars?

You want an honest answer to that question?

The environment stinks.

The pricing environment stinks, the demand stinks.

There are a lot of surplus cars.

It is just not a very pleasant time to be manufacturing new cars.

It comes and goes.

We think it is a great place to be.

We have got low cost facilities, we are making some real progress there, but the customers have a lot of leverage, because there aren't that many deals out there, and there are a lot of surplus cars laying around ,because of the improvements in velocity, so at the same time you can not predict what your costs are going to be, unless you have got multi-year steel contracts, and I don't know very many people who have been able to negotiate with the steel companies.

So it is very very difficult, but we are insisting as others have insisted, we got tempted in the last half of the year to take some contracts that turned out to be not so good.

We are stuck with multi-year agreements, we are working those off, so we are, as far as we are concerned, we are going to stick to a pass-through on cost of steel and our future behavior, and if we can't get that, we are just not going to build the cars and sell them.

We will maybe lease them or something.

Glad to hear that part of it.

The other aspect is just on Europe.

I mean, is that a business, I know you said you will take another look at it.

Are you looking at potentially exiting, or are these issues that can be resolved?

Well, I think all things are on the table.

We had in the last two quarters a very unfortunate thing happen with movement of currencies.

We have had some issues there on a major contract, and the supply chain as we have had in the United States.

One positive is that they have been able to get better pass-through agreements on steel, that seems to be something that is absorbed over there, and the market has consolidated unlike the United States, or North America, where there are still a lot of builders, the western market in Europe is whittled down to only a few.

There is a booming environment in Russia and other parts of the East.

I think we have put a lot of money in over the last decade in Europe.

We have had spotty results to say the least.

We really have to examine whether it is worth the candle, but we haven't concluded that it is not.

Our goal is to get it to profitable position, or at least breakeven in the very, very near term, quarter-to-quarter, and I think that we can do that.

We made some management changes, and we believe that we are just going to have to evaluate that, and see what our options are.

It has been very disappointing, I agree.

Okay.

And then lastly, you mentioned this, and maybe I misheard you, is that if you had some contracts that were fixed, and they were fixed at the start of the year on some of the deals, is that how that worked on some of the backlog?

Mark, why don't you explain how that works?

Yes, that is correct, and the only other comment I would make to that is part of that is a multi-year contract, and part of that is the market that we were in, and the competitive marketplace, if we wanted transactions, we were forced to take them on a fixed price basis, and in retrospect, that did not turn out well.

So next year it will be fixed at the start of your next fiscal year, or will that come up with the calendar year, or is there another group on that?

No, there is not.

What we have disclosed is what remains, the 1,000 cars what remains and there is nothing left under that multi-year deal, for which we would be exposed.

Okay, thanks a lot.

Thank you.

We will go back to Wendy Caplan with Wachovia.

Your line is open, ma'am.

Thank you, sorry.

Can you hear me now?

We can hear you.

We are just delighted you are back, Wendy.

I am back, yes, a little equipment problem.

I wanted to understand these fixed cost contracts a little better if I could.

The multi-year contract that you had told us about when you booked it, I thought as I recall, we could have walked from that based on pricing, if it had been unfavorable.

Could you talk about, Bill, strategically why you decided not to walk from those contracts?

Yes.

I think, Wendy, you are correct that we have sat on multi-year contracts, that a portion of that contract was subject to contingencies, basically agreement on price, and that is set, the pricing is agreed upon at the beginning of the year, in fact before the beginning of the calendar year, and at the time, prices were just not escalating.

There was an agreement on price, it was a fixed price contract, but it was simply we did not foresee the magnitude of what has occurred, with steel pricing going up over 2/3 in less than eight months, and scrap surcharges doubling over the course of time, and here we are.

And even a more crystallized answer to that, is that each year we had to make a decision, we did have the opportunity to disagree at that point, but when the decision point came, we had to with the index in hand, fix the price for delivery through the balance of that year, and that is what hit us.

Okay.

We did that.

We made that decision to build, it was a good decision it looked like, but the multi-year agreement is a source of much of this.

And we are not saying that we won't renegotiate some of that, or walk unilaterally either, if we can get the other party to agree that that is in our mutual interest, or is tolerable.

Okay.

We have a good relationship with the company, where some of this exposure exists.

Okay, thank you for the clarification.

Given that manufacturing as a whole, the segment as a whole was just above breakeven on the growth margin line for the quarter, and marine sounded quite healthy, just how bad was the railcar manufacturing, and how long do you think it will be, it will continue to lose money here?

Well, of course, that loss contingency we took is in the cost of sales figure, so the 5.3 million is in the cost of sales figure, and that is booking a portion of the future.

Right, but even if we exclude that, it is still only about a low single-digit kind of margin.

Yes.

Which would imply that if marine is doing well, then railcar isn't.

Yes, that is a correct statement.

We don't break the two margins out, based on our comments earlier, we believe that it is still going to be tough sledding out there with the competitive landscape, and the weak demand out there, we believe it is going to be tough sledding for the near term.

Okay, and one last thing, and then I will jump off.

You mentioned Mark, the 160 million in additional borrowing capacity that you had arranged, and you are amending your debt.

Should we be worried about your financial flexibility?

There was no cash essentially on the balance sheet at the end of the quarter.

What should we be thinking about this?

I think we are in good shape, Wendy.

We usually don't have a cash balance.

We are a net borrower, and we virtually most quarters show that we are in our lines of credit, we use that line of credit in part for warehousing of leasing transactions, so 160 million of additional borrowing capacity is plenty of flexibility out there, and this is really very consistent with prior quarters.

Okay, and I am sorry, one last thing.

Your assets held for sale on the balance sheet have gone, are roughly half at the end of this quarter, than they were at the end of the last quarter, prior quarter.

Should we assume then that sales on equipment will be lighter in Q4 than we saw in Q3?

You are referring to the gains on equipment sales, Wendy?

No.

Well, yes, yes, the assets held for sale.

Right.

So it would be the gains would be lower in Q4.

That is my question.

Yes.

We do expect gains on equipment sales will be lower in Q4 than they were in Q3.

Okay, thank you very much.

Thank you, Wendy.

Our next question is from Jim Laventhal, Laventhal & Company.

Your line is open.

Thank you, good morning, guys.

Good morning, Jim.

Just a follow-up question to Wendy's question.

Would you be willing to let us know what your current unrestricted cash balance is, and what the sources of that cash from the quarter end were?

The unrestricted cash.

Is that your question?

Yes.

I mean, just there is sort of a long time period obviously, three months before we are next going to see a balance sheet, so I was just wondering if you'd be willing to let us know something more current than May 31?

Well, are you asking us to forecast our cash balances and revolving debt balances as of the end of the fiscal year?

No, no, no, just anything that you have that is more current than May 31.

Not in the future.

And if you are not willing to, that is fine.

I see.

I don't have that handy.

The revolving notes if anything are in the same range as they currently are today, and it might have gone down slightly.

But it is not materially different.

Okay.

And just on a sort of following up on that, would you guys be willing, you are talking about this change in covenants to your various borrowing facilities that will give you more flexibility.

It sounds like that is pending.

Would you be willing to put out a press release, or in some way make it public knowledge when those covenants are changed?

Yes.

And it could happen as we expect it to happen very shortly, and we will be happy to put that out.

That would be really helpful.

Thanks a lot guys, and I really like what you are doing in terms of transforming the Company.

Thank you.

Bye-bye.

Bye-bye.

Our next question is from Steve Barger with KeyBanc.

Your line is open now.

Hi, this is actually Joe Radigan in for Steve today.

Hi, Joe.

Hi.

In terms of inventories, what was the makeup of the increase this quarter?

Is that raw materials, or work in progress, or finished product?

Can you kind of clarify that?

If you give me a minute, I will get to that question.

Part of it is raw materials.

The break out is of the inventories is about 150 million of raw materials, and about 90 million of work in process, and that would be in the inventory line on the balance sheet.

Okay, great.

Thanks.

And then you may have touched on this.

Can you you talk about lease rates?

Are you seeing any significant degradation in lease lead pricing?

Lease rates?

The lease rates on new railcars remains a very competitive environment.

Last quarter we commented that in some cases, it was unprecedented low rates so in the new railcar environment, very competitive, there has been some degradation on the used equipment side, just as new railcars provide the umbrella lease rates, but not nearly what we are seeing on the new railcar side, and the used car side has been fairly stable.

Okay.

That is all I have.

Everything else has been addressed.

Thanks, guys.

Thank you.

Our next question is from Joe Ciampi, Southpaw Asset Management.

Your line is open now.

Hi, thanks, good morning.

Good morning.

You briefly touched in the comments, but I was wondering if you could talk a little more about traffic trends, and maybe demand trends in some of the key railcar types you are seeing.

Are you seeing signs of strengthen in any particular car type?

We continue to think that the tank car business will have legs on it.

We also believe that there are isolated opportunities in covered hoppers.

We see continuing weakness in Forest Products cars, with the exception of some very specific car types.

There are stronger fundamentals in the commodities that the cheaper dollar have made attractive for export.

There are some traffic changes having to do even with intermodal cars, so it is really a mixed bag, but you can look at the published loading statistics, and see the difficulty in looking at the demand side though, is that when demand falls, velocity improves on the railroads.

They have really been fine-tuning their velocity, improved their efficiency that normally happens in a downturn anyway, so you need fewer cars to carry the same amount of traffic, and that causes storage, and with storage, when you look at the supply side and the storage statistics, it really muddies up an easy interpretation of what is going on out there.

As the railroads, as others are, are scrapping older cars, this will work itself off, but we estimate that there is just a very large overhang in many car types out there that railroads could deploy, and so it just is not a very positive environment right now on the combined demand and supply side.

Okay.

And then just quickly, this is somewhat related to J.B.'s question, you guys talked about the refurbishment & parts division, if the margins were favorably impacted by increases in scrap steel prices, would you guys be able to give us an idea of how much that accounted for during the quarter?

We don't break out the margins by various parts of the business, or by scrap versus non-scrap.

Okay.

Thank you.

Thank you.

Our next question is from Ryan [Keeley], Keeley Asset Management, your line is open.

Yes, hi, good morning.

Hi, Ryan.

I have a question on the 1,000 orders, the 1,000 cars that you still can't forecast the cost for.

Is that the same order as the 900 with the $5.3 million accrue?

No.

Okay.

It is not.

There are two separate pieces.

Okay, and is the reason why you can't forecast because delivery is not near, so you can't forecast the steel price at that point?

No.

There are a number of moving parts still on that, and given the number of moving parts on that, we have not yet accrued, because it is not yet estimatable.

I see, alright.

Just a more general question then.

The barge production, that was the first time I ever heard you guys talk about how much you produced in a quarter.

Is that chunky, or is that the normalized production?

We have about, we are trying to improve that production and at the current production rates, we have about a two year run rate backlog, unless we can improve the rates.

So we are really pleased about the demand side of that, and we are also pleased that we have been up until now, and continuing to not take a steel pricing exposure in that market.

I think that is great too.

But should I look at you produce one-ish barge every quarter, is that right, or are there some things that are easier to do, some things that are more difficult?

Yes, that is the right way to look at it.

The tonnage is the size of the barge, the size of the barge has a great deal to do with it, but it is more like one plus barge per quarter, as one and a fraction, and depending on the size of the barge, just to get more tangible, right now, the annualized revenue from that segment is about $60 million, and it is a $100 million business.

The challenge for us is without going overboard with capital expenditures, to try to use the footprint of the Gunderson facility, where that is located to divert from rail to marine and improve our throughput, and we are hopeful that we can continue to grow that business, with modest acquisitions and organic growth as well.

Okay.

So in general, you probably have three or four of these in process at any one time?

Is that right to think about?

Yes.

Three, maybe three in the staging, one on the way to be launched, and we have, I know you guys have a big presence in the Company, you should come out and see this tangibly, because it is a fairly impressive operation.

We have a very interesting position in the barge building business for Jones Act work in the West.

We have a very good niche, and the challenge for us, is to do more with that niche than even we are doing.

We have put some new management on board over there 1.5 years ago, and these guys are really improving the throughput with Lean manufacturing, they are enhancing the market, and working on some technological improvements, and we really believe we can get that to $100 million a year business, but you really have to see it, I mean come to a launch some time if you would like to.

It is really worth doing.

We will send you an invitation.

I appreciate that.

I appreciate that.

Thank you.

Thank you.

Our next question is from Levon Von Redden, Hockey Capital.

Your line is open.

Yes, thanks, my questions have been answered.

Thank you.

Then our next is from Art Hatfield with Morgan Keegan.

Your line is open.

Good morning, guys, this is Logan Stevens in for Art.

I just have one clarification and one question.

Did I hear you correctly that you said that a third of your railcar backlog currently has some fixed price associated with it?

Yes.

Okay so beyond the 900 that you have accrued for, and the 1,000 cars you have talked about there are another couple of thousand cars that have firmed prices, but you are currently still estimating as profitable contracts?

Correct.

And then my question is now that we are about six weeks at the end of the quarter, can you talk about order activity, or inquiry activity since the end of the quarter?

Order activity since the end of the quarter we don't break out, but I think that the ordering inquiry activity is consistent with Bill's overall comments about the market being sluggish, and I would just like to clarify your earlier question.

It is correct.

We have a third of our cars in backlog containing fixed price contracts, included in that 1/3 is the 900 we already accrued for, and the 1,000 that we have identified, just to make sure we are on the same page there.

Mark talked about the moving parts.

One of the moving parts of course is if you look at our inventory position, we are very concentrated on that, and want to manage that, it is a source of cash, and unfortunately , it is somewhat counterintuitive in this market, because if you want to hedge steel pricing, the way to hedge it, if you got a fixed price is to stockpile steel when you can get it, and so that is a way of locking in your profit, or fixing a loss, if you have got a loss position, so our inventories are higher than we would like, but part of that is in reaction to using inventories, as a way of managing this incredibly difficult and unpredictable market for steel pricing and

Great.

Thanks, guys, that is all I have.

Our next question is from Todd Madden with BB&T Capital Markets.

Thank you.

Most of my questions have been answered.

Just wanted to run through the CapEx again, if you could.

I know you said 160 million of additional borrowing capacity, and you referenced your CapEx spending at 30 million for manufacturing, 10 for refurbishment, 30 to 35 for leasing, was there another line item in there?

No, that is all of it.

Okay, all right, great.

Like I said everything else was answered.

I appreciate it.

Okay.

We have time for perhaps one or two more questions.

Thank you.

Our next question is from Chris Beard with Symphony.

Your line is open now.

Thank you gentlemen.

I just wanted to make sure I got this correct.

So of the 17,500 units you have in backlog, you said roughly 1/3 are under fixed price contracts?

Correct.

So that would put you at about 5,800 total units.

Now is some portion of that fixed price contract make up, does that pertain to the actual GE contract?

Yes.

It is, okay.

Yes.

So if you back out the 11,900 units, of that 17,500 it leaves you with about 5,600, and 1,900 of which you said were under fixed price contracts, so the remaining 3,700, are those all pass-through contracts, or are there some fixed price?

So let's try this again.

About 1/3 of the railcars in backlog are fixed price contracts.

We identified about 1,900 of those, that we believe that there is the potential for loss, and roughly 900 of those we took a $5.3 million hit this quarter for a loss reserve, and the other 1,000 we have not yet accrued a loss, as it is not estimable.

The remaining cars of those 1/3 that are in backlog, we do not believe that there is a loss to be realized on those railcars.

Okay.

And then of the remaining, what portion pertains to the GE contract?

Roughly 11,900, I believe is the number that relates to the GE contract.

Got it.

That are all pass-throughs.

11,900 are all pass-throughs?

Yes.

Do you want to clarify what you said earlier about GE contract?

Because you have fixed price, you said that you had the fixed price contract --

Right.

So all of the GE contract is a pass-through contract, and again about 1/3 of the backlog and GE is about 11,900 cars, and then about 1/3 of the backlog is fixed price for which we believe there is loss exposure on 1,900 of the cars, about 900 of which we took a loss contingency this quarter.

Okay, but there are additional units that are under fixed price contract, that could be susceptible to loss, if steel prices were to increase going forward?

There is exposure there.

We don't see that loss today.

Okay.

And then the actual mechanism for the actual pass-through, do you recover 100% of the actual increase, for those contracts that you do have pass-through, or is there some type of lag, or percentage leakage, in terms of the recovery?

No.

It is a straight pass-through.

A straight pass-through, okay.

Well that is all I had.

Thank you, gentlemen.

Thank you.

At this time I would like to turn the conference back to Greenbrier management.

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

If any of you have any follow-on questions, we will be available to take them directly after the conference call today.

Thank you again for your participation.

Have a good day.