Greenbrier Companies Inc (GBX) 2008 Q4 法說會逐字稿

Hello, and welcome to the Greenbrier Company's fourth quarter and fiscal year end 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 thank you operator, and thank you all for joining our fourth quarter conference call.

On today's call we will discuss our results and make a few remarks about the quarter that just ended and provide an outlook for 2009 and beyond.

And I am joined this morning by Bill Furman, our CEO.

After that we will open it up for questions.

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

Throughout our discussion today we will describe some of the important factors that could cause Greenbrier's actual results in 2009 and beyond to differ materially from those expressed in the forward-looking statement made by or on behalf of Greenbrier.

Today we reported fourth-quarter net earnings of $0.45 per share on revenues of $362 million.

I'm going to provide a little bit more detail on that later on in the call, but first I would like to turn it over to Bill and then turn it back to me and open it up for questions.

Thank you, Mark, and good morning, ladies and gentlemen.

On today's call I am going to talk about our markets, our strategic position and the outlook and just a few backward looking comments about the year just ended.

And I'm going to go back to Mark to discuss our financial results in more detail.

We are pleased to report net earnings of $7.4 million or $0.45 per diluted share for the quarter.

Obviously these are very unusual times, and much of our financial performance this quarter was driven by solid performance in refurbishment and parts business, our leasing and services segments and improved performance from our European operation.

We also have increased our backlog in our Marine operation, and that business is performing well.

Looking back on fiscal 2008, it was a year of a number of challenges and certainly nothing more challenging than what we've all seen in the financial markets, the global economy during the last 30 to 60 days.

Despite current turbulence, Greenbrier is in a very strong liquidity position.

We especially are happy to not have a rollover issue with any of our significant domestic credit lines.

We have a small exposure in Europe, but we have positioned the company with its capital structure to weather this current economy and the turbulence in that economy.

However, it is certainly has the cycle for the commodities going way up, coming way down certainly creates a number of issues and a number of interesting opportunities.

Our basic strategy in 2008 and beginning in 2007, was diversification into less cyclical businesses, but businesses which were very integrated to the life of a freight car, which we continue to manufacture.

Greenbrier has three manufacturing facilities in North America and Concarril in Mexico, our new GIMSA joint venture in Monclova, Mexico, and we have our core facility here in Oregon at Gunderson, Inc.

We also operate out of a manufacturing business in Poland, Marine Manufacturing business at our Gunderson facility.

Particularly the nonmanufacturing businesses, with the exception of our Marine business, which is quite strong, the nonmanufacturing businesses are continuing to deliver strong performance.

As a result of the strategic diversification efforts that we've made over the past several years, almost half or over half of Greenbrier's revenues and most of our margins are now derived from business outside of new rail car manufacturing.

Refurbishment, parts, service, all operate on an installed base of freight cars in North America which is aging in a time when demographics for railroads are improving.

This installed base can follow the life of freight of a 40-year asset, to provide services, repair work and other management services on that fleet.

And that is why we need to continue our footprint in manufacturing.

Looking forward, we believe that the rail and Marine transportation markets will compare favorably to other modes of transportation.

Fundamental problems of highway congestion, environmental impacts of trucking and deteriorating infrastructure will continue to drive traffic to rail and Marine and being a supplier to these industries remains an exciting opportunity.

It has been a difficult year in our manufacturing segment.

Two of our major product areas, forest products and double stack markets have declined.

We have substituted other freight cars; we are currently building boxcars and doing repair work at our Gunderson facility in Portland.

And in Mexico we are manufacturing our Auto-Max automobile carrier car, gondola cars, covered hoppers and a wide variety of products for the European market, which has in recent -- in the past six months developed an interesting resurgence.

We have no doubt that this year, the coming year 2009, will present challenges in manufacturing.

However, there are also very good opportunities; our rail car backlog remains healthy.

Our SIMSA startup operation and the introduction of the tank car line should bring strength in the second half of the year.

And we have a backlog of about 16,000 units on the order books valued at $1.4 billion.

Based on current production plans, about 3900 of these units only will be delivered in 2009.

Our Marine backlog is also strong at $200 million, stretching into 2012.

We expect margin and revenue growth from this business.

As we go forward to diversify our business and work with the integrated model that we have recently evolved in the last two years, we expect to see a continued shift in revenues and margins away from manufacturing.

And while we anticipate rail car manufacturing will be a difficult business in the near term, this segment as I've said earlier, is a key component of our model and produces very attractive terms during the growth phase of the economic cycle.

The economy, we believe, will recover and demand for new freight cars will return to more normalized levels.

Lower steel pricing and other component pricing in particular are now tempting buyers to come into that market, and we are pleased to see a shift in new order interest on the new freight car side.

As we all know in difficult times cash is king.

The entire world is turned upside down with many, many companies whose credit was in doubt now in jeopardy.

As I've said earlier, we believe Greenbrier took steps years ago to install a conservative capital structure in light of our heavy activities in equipment leasing.

So we have leverage appropriate to our business and all of our maturities are out in the future.

We don't have a rollover issue with expiring lines of significant material amounts in North America.

And we believe our credit is much more worthy these days than many credits were in doubt a short while ago.

We have a long an excellent long-time relationship with Bank of America, our lead commercial bank under our $290 million revolving credit facility which matures in 2011.

And we have roughly $175 million of unused committed borrowing capacity.

Of course, with that strategy and with that background we need to remain focused on execution, integrating our growing GRS business, the repair business with 39 new facilities, additional emphasis on integrating parts into that business.

And finally, I would just like to say that we have a management team and a board of directors who have been through cycles such as this before, and we know the things that have to be done in cycles of this sort to be successful.

We appreciate the support of our shareholders, our suppliers, our employees and with those general comments I am going to turn the mic back to Mark.

Thank you, Bill.

And now I will go into a little more detail.

As Bill highlighted our refurbishment and parts and leasing and service business units continue to perform well and drove our results for the quarter.

And we anticipate this trend will continue in 2009.

These two business segments now generate about $700 million in annual revenue for more than half of our total revenues.

Turning specifically to refurbishment and parts, we've made four acquisitions over the last two years, and we are extremely pleased with how they are performing.

Revenues for this business unit now exceed $600 million on an annual basis and generate 44% of our total revenues in the quarter, an increase over the fourth quarter of 2007 when only 33% of our revenues were contributed from this segment.

In addition to seeing revenue growth, we also have seen growth in our margins, which exceeded 20% in the fourth quarter.

We expect that margins from this unit will continue to be solid.

But as we stated in the past, we do expect them to abate somewhat back into the midteens as a result of a change in product mix and declines in scrap value and scrap prices.

Now turning to manufacturing, as you know the current environment has proved to be a challenging one for this segment, particularly in our North American new rail car business.

I am sure you've noted that we had a negative gross margin for this quarter, principally resulting from this weak market environment in North America.

On a positive note, however, we saw substantially improved performance from our European operations and are optimistic this unit will perform better in 2009 than it did in 2008.

We also remain excited about the fundamentals of our Marine business, and we expect that we will see revenue and margin growth from this business in 2009.

We have received orders that we previously disclosed from the unit of Crowley Maritime, our earlier in the year for 10 barges.

This extends our backlog into 2012 valued at $200 million.

All these barges are the same configuration, and we would expect that we will realize production efficiencies from a continuous product run.

Turning back to new rail car, our deliveries for the quarter were 1800 units compared to 2400 units in the fourth quarter of 2007.

There was a change in mix, as well during the quarter we slowed down production and after the quarter end, we slowed down production in fourth quarter on one product line and the first quarter of this year, we've slowed down production on a second product line.

Our manufacturing margin for the quarter continued to be pressured by rising steel prices and surcharges and an unfavorable pricing environment.

The slowdown in production rates I just referred to, loss reserve on certain production and backlog.

And then finally, we are incurring startup costs for our tank car line down at our GIMSA joint venture facility where we will be delivering our first cars under our GE multiyear contract either late or in Q1 of the fiscal year or in Q2, or early in Q2.

In the near term we believe these forces will continue to put manufacturing margins under stress.

As we've stated in the past when we see a slowdown in demand we adjust our production rates in order to preserve backlog, while in the short run it is better financially to operate at higher production rates, we have made the analogy it is more akin to running a Marathon and is quite costly to burn through our backlog and be forced to shut down on product time.

Thus, we will continue to monitor our backlog and production rates.

As previously disclosed, at the end of the company's third quarter there were 1000 cars in our backlog, for which a loss had not yet been estimated and a loss contingency had not yet been accrued.

Subsequent to quarter end we reached a negotiation with our customer whereby 300 of these cars would be canceled by mutual agreement.

We are in the midst of building the remaining 700.

And along with other current production in cars being currently produced we have taken a loss contingency of $3.9 million.

We believe that there are no other cars in backlog for which we will need to book a loss contingency and of course, at this point in time and of course we will be looking at this point believe that our reserves are adequate.

Turning to our leasing and services segment, we own 9000 railcars, and we have a managed fleet of 137,000 cars.

Our fleet utilization for the quarter was 95.2% compared to 96.1% last quarter.

This quarter's results include $1 million in gains on equipment sales compared to $5 million in the third quarter, $5 million in the third quarter of 2008 at $2.6 million in the fourth quarter of 2007.

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

After you back out gains on sales for each of the comparable periods our gross margins for this quarter were 47.7% of revenue.

This is similar to gross margins for the last couple of quarters.

Manufacturing segment suffered from higher commodity prices during the last several quarters; our refurbishment and parts and leasing and services business both benefited from these price increases, increased revenues, higher residual values and enhanced gross margins.

Now the commodity prices are coming down, it should benefit and will benefit our new rail car business.

And as discussed earlier, it will have the adverse reverse impact on our refurbishment and parts margins.

Selling and administrative expense decreased $2.9 million sequentially from the third quarter and is closer to the run rate in the first and second quarters of this year.

This decrease reflects the positive impact of our cost reduction initiatives, and we expect this to carry into 2009.

Our tax rate for the quarter was around 50% due to the geographic mix of earnings.

And we are looking forward to a lower tax rate in 2009.

As Bill discussed earlier, our near-term financial focus remains on managing for cash on liquidity with a focus on cost reductions consistent with the current macroeconomic trends, paying down post acquisition debt and paring back our discretionary and CapEx.

On this or virtually all of our leasing CapEx is discretionary, and as well most of our CapEx in manufacturing and refurbishment and parts is discretionary.

We will continue to make capital investment for the startup of our tank car line and some modest CapEx for efficiency improvements in these two segments.

In addition, we are investing in our future with ERP projects for both of our manufacturing and refurbishment and parts operations.

On the acquisition front, we do not -- we are not looking at anything major this year.

We may look at some very small bolt on acquisitions in refurbishment and parts business.

Similar to fiscal 2007 and 2008 when we look at the outlook we expect the first half of 2009 to be weaker than the second half, with Q1 being our weakest quarter and possibly being weaker than last year's Q1.

The reasons for the seasonality on the earnings is related to our product mix.

It also relates to certain production in each of the last several years, which is being built earlier in the year and will be sold second later in the year.

In the case of this year all of the production that we are building we do have a customer for, there is just a timing difference between production and delivery.

And as well, on the refurbishment parts side there tends to be a reduction in CapEx at the end of the calendar year that then is by our customers that has been replenished early on in the next year.

I do want to remind you as we talk about the seasonality in our earnings that just as the first half and second half of 2007 -- and just as the first half of 2007 and 2008 were weak, the second half were strong and this is how we expect the current year to play out, as well.

In addition, on the financial front we are focused on three specific areas of improvement.

One is to improve the efficiency of our manufacturing business.

That tends to be a great focus.

Second to continue to realize the synergies of our integrated business model.

And third as talked about earlier is balance sheet management focusing on working capital and paying down debt.

We realize the current operating environment is challenging.

We are optimistic about the long-term fundamentals of the rail and marine industries and we believe we are well positioned both in the near and the long term to compete in a changing environment as a result of the decisions we've made.

That concludes our prepared remarks, and now operator, I would like to turn it back to you to open it up for questions.

(Operator Instructions) Wendy Caplan, Wachovia.

Bill, can we start with the refurbishment business?

Can you help us understand how much of the margin gain either year over year or sequentially was related to the higher cost of steel?

Rather than the higher cost of steel, I suppose that we would relate it -- simplifying the answer for a moment, the rising cost of steel in a rising market has hampered our manufacturing margins inevitably on the new car side.

But on the refurbish and repair side, it isn't steel pricing so much as it is scrap itself, which can be, tends to move together but isn't precisely.

I would defer to Mark and give you guidance on that; we had a lot of reclaim materials in the scrap business and it certainly was a very significant item.

We've also were fortunate to renegotiate some of those contracts during a time of relative prosperity.

We have some floors on some of the major contracts where we continue to enjoy good steel pricing.

Mark why don't you try -- I think that is a general response.

Wendy, we don't break it out somewhat for competitive reasons, too.

I will say that when we gave guidance back to this year that we expected our margins to be closer to the midteens, that our guidance for this year is a reflection of our current outlook for the scrap market, as well as the renegotiation of the contracts that Bill just referred to.

I will also say on a related note that looking at it differently about $32 million of the revenue growth that we saw this year was related to the acquisitions we made this year.

And most of that was in the wheel services business.

But again, we don't break out separately what portion of our margin is specifically from scrap.

But it is fair to assume that as we look at scrap prices kind of going in the other direction in 2009, that's part of the reason that you are suggesting that that mid-teen margin in refurbishment is the right place for us to assume?

That is correct.

Okay, and then in the -- typically you've said over time that as demand dropped for new rail cars that Greenbrier captures share by an aggressive marketing campaign.

Should we expect that this time, or given your refurbishment leasing and barge business, marine business -- should we expect that won't happen this cycle?

Well, we received the excellent quality award for 17 consecutive years.

We have a very high-quality rail car product, and we have been successful when our primary markets are down to quickly penetrate other markets.

For example we have a major market share in box cars now.

I won't disclose the exact amount because I frankly do not know what it is, there are orders out there that haven't been yet disclosed, but it is a very substantial portion of the boxcar market and we are running that car at Gunderson.

Whereas Gunderson in the past when it was a primary flagship factory for double stacks.

With two of these primary kinds of -- and boxcars is kind of an exception now in this declining market.

So two of our biggest manufacturing products, in forest products and in double stacks have been injured.

And we probably have been very successful with our lower-cost facilities in Mexico in entering covered hoppers, we are running a very good program right now in Mexico with our double stack car and we do intend to -- I mean our Auto-Max car and we do intend to penetrate the tank car business.

We have a very strong baseline order which will really kick in financially in the second half of the year.

So yes, we are going to improve our market share.

We are going to be a bit more specific about how we go about it and selective and try to keep car types running in each of these facilities if we can.

So we will go after market share and we will be aggressive in pricing just to keep those particular lines running.

So in those areas we do expect to gain market share.

I don't know if we will be as successful as we have in the past.

The balance of our business has shifted over to an integrated business, and we are seeking a lot of opportunities to connect the installation of a new freight car to services to go with that freight car throughout its 40 or 50 year life.

And one last question and then I will let others hop on.

Just to clarify, you expect to ship, to produce and ship 3900 rail cars in fiscal year '09.

Is that correct?

Wendy, I'm glad you asked for clarification there.

We would expect to produce and ship more than that in 2009.

We won't give a specific outlook but our comments were guided toward is within our backlog of 16,200 cars, that is a multiyear backlog.

And based on current production plans about 3900 of those cars that are in backlog we expect to produce this year.

We certainly intend to get additional orders throughout the year and to add on to that number.

Thank you for clarifying that, Wendy.

That was a misstatement on my part.

Thank you very much.

Steve Barger, KeyBanc Capital.

Just a follow-up on that last point.

In your prepared comments you had said that there appears to be a shift in order interest on the freight car side, if I heard right.

And that 3900 is just what is scheduled right now.

So what is a reasonable way to think about the book to bill ratio?

I know you don't give car guidance, but how should we think about your expectation for book and bill in FY '09?

I'm going to give you a very honest answer to that and maybe I shouldn't, but I'm going to anyway.

This is a very, very unusual time, and it has been going on for about a month.

What I meant by my remarks were that now railroad freight cars can be much cheaper because steel prices are coming down, tracking what Wendy was talking about, scrap prices and other commodities.

So the buying opportunities for those companies who still need freight cars, and there are many who still do, are good.

But I can't really -- I don't have a good enough crystal ball to try to predict that formula.

This is very much a tactical kind of market.

What we are going to try to do is level our production -- to us the production isn't as important as maintaining a strong, steady quality product, maintaining a decent product mix until these other two big products come back.

And running the company for liquidity.

So I just don't have a good enough crystal ball to try to answer that.

Maybe Mark would like to take a shot at it.

I would echo that these are unusual times.

So we just -- it is hard to predict.

Okay, fair enough.

I am thinking about the lease fleet and the carrying capacity of the cars in that fleet.

Are you seeing smaller cars not get renewed in favor of larger cars, and is that a trend that is out there?

And if that happens will that reduce the total number of cars in lease fleets in general?

In general there is a movement by all the major customer types, shippers, railroads and leasing companies to invest in newer, higher capacity more efficient operating cars and shorter train links and better velocity.

So to the degree that that trend continues it would have the effect you describe but that trend has been continuing for quite a while.

Our own leased fleet has been upgraded considerably.

The age of our fleet has been getting younger, unlike the management team, getting younger every year.

And we don't see that as a dynamic that is going to drive the backlogs or the order rates in the industry.

That has driven very much by capital constraints, what the railroad traffic volumes are and how many cars they have stored and just the fundamental supply demand equation.

This business has always been unpredictably cyclical in short cycles but fairly predictable in longer cycles.

We need about 50,000 cars a year to replenish the national stock rail cars secularly.

And whenever we build [80] to 100,000 cars you are kind of taking it out of the future.

So I think that trend will continue and it is a very good question and we probably ought to try to quantify it a little bit more and profile that in a future call.

Just a follow-up to that.

Can you describe what you are seeing in lease rates for renewals right now, especially in the context of shifting steel prices?

I think as compared to six months ago lease rates would be coming down.

It is very hard to specifically say.

It depends on the car type and the commodity and the demand.

But when you have new railcars provide an umbrella and lease rates on the new cars provide an umbrella for which the rest of the fleet operates, so when new rail car prices come down that is and corresponding lease rates and that is going to bring lease rates on used equipment down somewhat.

And as well when the economy is softer and there is more idle equipment down there.

So we are still running at healthy rates, and we have good stability in our lease fleet.

The direct answer to your question is yes, lease rates are down from where they were.

Two stabilizing factors, though, to the degree we do a lot of service-oriented operating leasing those rate are unbundled in the market.

I am talking about cars we manage and cars that are actually in operating lease in the per diem market.

They tend to stay in service, and they tend to have very stable earnings.

The second thing I would say and it is a really good point to consider when we talk about rollover exposure, and looking at the commercial paper market, if you've got to go out and roll over your debt every 30 days you got a problem in this market.

Similarly, if you had to go out every 30 days and rollover your lease fleet you would be in very deep trouble.

And when times are good and rates are high we tend to go along and our lease fleet we've got a good President of that company, Jim Sharp, he has been very clever in renegotiating rates.

So we don't have the kind of rollover exposure in our leasing fleet that many probably do.

The forest product side, we have some maturities coming up.

We think we can keep those cars in service and so we are reasonably optimistic that leasing will continue to be a decent performer.

Okay, thanks.

That's great detail.

On the refurbishment and parts business, can you talk about cyclicality?

You are integrating some acquisitions right now; we are going into what is probably going to be a tougher OE delivery environment maybe lower car loadings.

How should we think about cyclicality in that business?

I would say that certainly that business is much less cyclical than the new railcars side of the business; while when railcars are running they need to be -- either there needs to be wheel changeouts or the cars have repairs to them.

So we are actually seeing our volumes hold up well.

I think what the question is that in this environment is what will be the CapEx budgets of the class I railroads and the leasing companies to do heavier repairs and refurbishments.

So that is a mix type of issue that would go through our facilities.

We are just at the point when we are in late in a calendar year where people are going through their CapEx budget.

So it is -- that would be more the question is what would be the mix of the work that would go through our facilities.

Freight ton miles decline or languish; there tends to be more stored cars.

Velocity improves, so cars can be pulled out of storage or so maintenance is often deferred in a time like this.

But the cyclicality from that we believe can be offset by two or three tactical moves, we are taking in the current year, one of which would be to add cheap prices for freight cars, invest in heavy maintenance programs with customers and by directly purchasing cars, which we believe would replenish our leasing fleet.

And that is a very good, positive add to the equation.

We do expect some softening in the railroad traffic as we've already seen in the statistics, but railroad earnings have been pretty strong, and their pricing has been strong.

The freight cars are getting older so the basic demographics for freight railroads is very good in America.

And now we have a new administration that is going to focus on infrastructure, and there is going to be billions and billions of dollars in North America.

I am certain invested in infrastructure and I'm certain because Jim Oberstar keeps saying he is going to do it and now he's got the power to do it so I suppose he will.

All right.

Good color, thanks.

And one more and I will jump back in line.

What steel prices were you assuming when you took the loss contingency?

And as you, is that related to inventory that you already have in stock given that we are now seeing steel prices come down?

It is based on -- I won't give you our specific pricing for steel, but yes, that is steel that is either landed or which we have a purchase commitment and the price is firm.

I see.

So there is no possibility that that reverses with steel prices coming down since you already have the steel.

No, that's not true.

We have a mix of -- we have steel tonnage commitments, but it is not unusual in markets like this, everyone renegotiates agreements going up and people renegotiate agreements when they are coming down.

It was a very, very tumultuous market in steel where steel was pricey.

It changed day to day, month to month, week to week and now the worm has turned, so it is more of a buyer's market.

Now whether that will be permanent and against the sellers, it certainly looks like it is going to last for a while.

So we should have some opportunities on the down cycle for those tonnages that we haven't already agreed on pricing.

Or on those tonnages where our, how should I say this delicately, where we were hammered a bit by suppliers.

And so now we have a very small not hammer, but maybe a little small persuasion that we can persuade our steel suppliers to be more cooperative in a time when these prices are coming down.

Okay, and one quick follow-up.

What are you seeing -- can you give us an indication of what spot plain prices are out there in the market right now?

I would hesitate to say that today.

I don't have the number in my head and I should; do you?

No, I think we prefer not to.

It really is changing.

Plain has not come down as much as other steel pricing, but it is levitating and it is going to have to come down.

I don't think it is going to be able to defy the laws of gravity that are and these laws are affecting all commodity prices, particularly scrap and coil and other, and rebar and that kind of steel.

So they will come down, and they are probably a bit higher than they should be today.

Thanks very much, gentlemen.

Frank Magdlen, The Robins Group.

A couple of questions.

On the Marine side, you mentioned that the revenue could increase there.

And I think you've told us historically maybe you've got the capacity of about $60 million a year in revenue in Marine side.

Is that number creeping up?

That was a historic number.

Frank, we have made capital improvements over at our Gunderson facility.

And looked at our manufacturing lay out there.

So we are expecting that number this year to be closer to $75 million, and we would like to see that business continue to grow to something closer to $100 million.

But we are definitely expect to see about $15 million to $20 million of revenue growth this year in that business.

And that business in the last quarter or two as we took on some diversified barge opportunities and worked with our mix, the operating performance didn't lag behind a bit with the backlog growth, and we were not running the same barge over and over again.

Now that we have stabilized that, we are expecting a stronger year from the operating performance of that, so both a very good backlog with good throughput and really very reasonable operating performance for our Marine.

So the Marine is plus side for us particularly when you compare it to the last two quarters.

That would be important if you were trying to figure out how the moving parts are between repair and refurbishment, scrap and what other benefit we are going to get in manufacturing on steel pricing.

But Marine should be performing a little bit better and we are expecting it to contribute more positively than it has in the last half of the year.

And is it fair to say that for '08 it generated around $60 million?

Yes.

So that hasn't changed.

In the backlog your 3900 that you have, how much of that is for Europe?

We are going to build out of the backlog 3900.

(multiple speakers) 16,000 backlog of which -- out of that backlog we are going to build 3900, we are actually hoping to build more cars than 3900 as Mark had --.

But you are getting out of the backlog itself, Frank, we will produce in the current year it is probably if you will give me one more minute here -- I guess it is somewhere around 1000 units, Frank.

Okay, and Europe was it fair to say Europe was profitable in the fourth quarter?

It is fair to say that.

And would it be reasonable to expect that -- I know you've had logistic problems over there.

Has most of that been solved?

We think so.

It is also a better, just it is a better operating environment over there than has been in the past.

We have seen some production efficiencies, and we think one of the positives out of all of this craziness is that the Polish -- our business over there is an export business to other parts of Europe.

And the Polish zloty had strengthened tremendously, which is not good when you are an exporter.

And we've seen that currency devalued about -- it depends on the day of the week, but somewhere 10% to 20% from where it was just a few months ago, which is a real positive over there, and that will help the results, as well.

And we have our head of European operations, William Glenn, who also is Vice President for strategic planning.

He has been spending quite a bit of time there.

Maybe you would like to -- the market is much more interesting than it ever has been, I think.

Would you like to add anything to any of those things, William?

I think the fundamentals are pretty strong, and the zloty is going to be a big help.

I wouldn't predict any great leap forward, but continued good performance, I would say.

All right.

Just two more questions.

One, when you talk about the refurbishment and parts in midteens, you mean 14% to 16% margins?

I think I got that every quarter, and I think that is, that would be pretty good guidance right now, Frank.

Okay, so trending back to a more historic like maybe '07 or something in that neighborhood.

And then do you have any numbers for CapEx at all?

If you give me a minute, yes I do.

And then I will go back to Europe while you are looking for that.

Where are you seeing the strength?

The industry deregulated over there last year, so just a fundamental shift in the competitiveness of the freight sector.

So a bit of a renaissance.

All right.

Also, we believe that commodities are not dead forever and Russia itself is a very wealthy country with lots of commodity movements.

There is quite a lot of interaction between Poland as a gateway into that part of the world, and William is reviewing our business model over there.

It has been a purely manufacturing model.

We don't think that model works so well, and I think he is intending to make some changes.

Our basic strategy this year is to stabilize our cash flows.

We do have some rollover extensions that we need to negotiate there, build our backlog and operate at a profit.

Frank, I expect our net CapEx this year again recognizing the leasing piece is a discretionary piece that we continue to revisit.

I expect our net CapEx this year to be somewhere in the neighborhood of around $50 million, and broken out between each of our three segments.

And also I included in that is about $6 million for our ERP projects.

Break that out between leasing and.

Yes, so.

Maintenance CapEx versus opportunity CapEx of leasing; that distinction is very important.

Right.

So again, about $6 million for ERP.

I would expect our net CapEx on leasing to be about $20 million; again recognizing that we can move the dial on that either way if we so choose.

Right now we see somewhere of about $10 million plus in each of our manufacturing refurbishment businesses.

But as we speak we are evaluating each of those projects carefully to see that they earn their required return and see if there is something that appropriate in the current environment.

As I talked about earlier, the one area that we will continue to invest in is our GIMSA tank car line.

But that is only about $5 million of remaining CapEx associated with that tank car line.

Thank you, gentlemen.

J.B.

Groh, D.A.

Davidson.

I get called a lot of different things on conference calls.

I had a question on your comment, Mark, about weak Q1 relative to last year and I'm hoping that means on a revenue basis, not on an EPS basis.

When you look at the startup of the tank car line, those expenses, the switchover to box cars at Gunderson, and you couple that with maybe some better margins at Marine, and I look at that in the context of the Q4 results excluding the adjustment.

You guys is it possible to have a positive gross margin there in manufacturing with all those things going on?

I think it is possible.

I think that if it were -- right now on the -- you are referring to the manufacturing side of the business?

Correct.

I think the things to remember are that we will still have the startup of our tank car line.

There are several, couple of lines for which we took loss contingencies that were still in production, so there will not be margin on those cars.

Conversely, there won't be a loss contingency, but those would be breakeven, and I refer to earlier we are having some production that is being built this quarter and last quarter that will be sold later in the fiscal year.

So when you combine all of those things I think it really means that the first quarter margin is going to be closer to breakeven on the manufacturing side and as they gear goes along that we will expect to see margin improvement.

And part of that again is a result just of the mix and the timing of deliveries and the fact that we are still in the startup phase of our tank car line.

So for some of those cars you have the expense in Q1, 2, and you get the revenue and the profit in Q3, and 4?

Are you referring to where we build cars in one quarter and then sell them in another quarter?

Right, right.

No, the cost would be hung up on the balance sheet.

It is just to the extent there is margin in those cars, than that margin will be not recognized until later in the year.

And we do expect that there will be margin in those cars and that it won't be recognized later in the year.

I do want to be more clear about the first quarter, since I picked up on it and made the comment.

My comment was directed both at earnings-per-share, as well.

So as to not surprise you is that yes, my comment was driven to revenue and to revenue and to earnings.

You know us.

We don't like surprises.

Okay.

That's actually all I had.

Thanks.

Todd Maiden, BB&T Capital Markets.

Wanted to follow up with a margin discussion on the manufacturing side.

So we could expect breakeven in Q1 and then improving throughout the year.

That is the manufacturing division, both domestically and abroad combined.

Is that correct?

That is correct.

And is that inclusive or exclusive of that, the $3.9 million that is hanging out there on 700 cars?

That would be inclusive.

Or stated another way, the comments are centered around what our reported -- based on reported earnings and manufacturer or segment results.

So just looking at our segment results as reported on a quarterly basis.

All right.

And then changing gears here, refurbishment parts, you've kind of guided on margins there.

What about you mentioned maybe next year; I guess we could expect to see -- you mentioned acquisitions, definitely not as robust next year, kind of more of a cash flow operation versus that of CapEx.

But how should we look at growth in that division?

Is this going to be -- is there room for much organic growth there or is it pretty much going to be acquisition driven?

Your are speaking specifically of which segment?

I'm sorry.

Refurbishment parts.

I think in the current year our primary operating focus is to integrate, continue integrating the large number of plants that we've brought on and internal growth.

We won't rule out any smaller acquisitions or anything for that matter particularly if we could see good equity type opportunities.

And if the financial markets recover so we felt more comfortable about the current liquidity, global liquidity situation.

But our principle emphasis today is to build on the repair shop, program repair, parts in particular and that business has a very healthy growth prospect we believe.

So it would be in those general areas and we are not looking today at any large acquisitions.

In fact, we think until things settle down a bit it would be imprudent to use liquidity in that way.

So now that we've got an installed base, if you will, of a large network and the (inaudible) is a network, we can see lots of opportunities to add to that network with very little out-of-pocket costs or fixed costs.

And one of the reasons we are doing our ERP program is that we really want to be able to and get that more modernized, because we really want to be able to get the benefits of this integrated model and add new facilities through organic growth with very high rates of return on capital.

When Mark talked about the capital expenditures only a small portion of that total capital expenditures when you break that down if people are interested would be, or maybe 50% of the manufacturing and repair and refurbishment would be maintenance CapEx and other CapEx, we do anticipate to use to support growth in that segment.

All right, and last question.

Did you give a number, a units number for your Marine backlog, your barge backlog?

I know there was a tank number for the Crowley order, but I didn't know what the total backlog is.

I will get that for you.

We did not disclose it, but I believe the number is around 12 or 13, and I will get that number for you.

All right.

Thank you.

Young Kwon, Barclays.

Sorry about that.

Two quick questions here, guys.

You have any guidance in terms of working capital for 09 in terms of what we should expect?

Is it going to continue kind of along the last couple of years at levels of slight use of cash, or do you think you could squeeze out a little more cash there?

We are definitely looking to squeeze out more cash.

It has been building up because of the tank car lines and partly because of just rising commodity prices you have a higher dollar value on the balance sheet.

So one of our objectives this year is to improve on our working capital management and to have -- as well as when you are operating at lower production rates you would expect to see some inventories come down.

So that is an area of focus, and an area where we are looking to reverse the trend of the last couple of years.

In general there are two major initiatives in that regard.

One is being handled by our chief accounting officer, Jim Cruckshank who is in the room also today.

To really focus on the cash and working capital management.

But I would point out looking at 2007 versus 2008 into the future that the fairly dramatic transformation of our repair and refurbishment business and our other services businesses have brought on businesses that have added to accounts receivable and inventories.

And then of course inventory pricing has been, as Mark mentioned, a factor.

So we are focused on that.

We are also focused on continued cost-cutting.

Mark had a goal of taking $10 million annually in first cut in G&A out, and he has achieved that.

So that is reflected in the quarterly P&L, which we expect to continue to tighten our belts.

And during the current uncertain period.

And also to be prepared to take advantage of opportunities on the up cycle.

This is a time in the cycle when tremendous opportunities can occur.

Okay, great.

And just one other very quick question.

Are there any leverage tests on your debt that you guys have to abide by?

Can you repeat the last part of the question?

If there were any key leverage tests on your debt that you guys need to abide by, and if there are could you.

Covenants.

We have -- we do under our revolving credit facilities, a debt to total capitalization ratio and an EBITDA to interest ratio kind of standard test.

And when we disclosed the number earlier of $175 million of committed additional borrowing it is based on our covenants as of the end of August.

Okay, great.

That is it for me.

Thank you.

Matt Reams, Buckhead Capital.

Hello, gentlemen.

What do you expect D&A to be for 2009?

We expect that, Matt, to be roughly, about roughly about -- I'm sorry, roughly closer or a little closer to $40 million, I was going to say the high 30s, but the number is about $40 million.

Okay.

I know you're obviously working on improving working capital, but do you have any dollar targets for improvement?

That is obviously going to really help if you can get some earnings with D&A improvements in working capital given your CapEx budget to be able to pay down debt.

And I think Bill said that debt reduction was a strategic focus for management.

So that number is pretty important in order to delever and I'm just wondering if you had targets for that or targets for deleveraging for the year.

Matt, it will be partly dependent on our various operations.

I don't have a specific number to say that our target is X million dollars.

What we do have is that we want to improve our inventory turns and are in the process of going through some of that right now, of some specific metrics on the inventory side, which is really the principal area.

We have been focused on looking at payables and receivables management and made good progress there.

And I really think it is going to be on the inventory side.

So by the time of the next call I will be more specific in this front.

At this time what we want to do is -- but it is definitely a goal to improve in this area.

One of the difficulties in setting a specific target in answering that question directly is you've got opposing moving forces here with investment and start up of a boxcar line at Gunderson as was referred to earlier, changes in line mix, and the start up of a major facility at GIMSA.

And as that works through the pipeline we should see working capital come down.

Normally in a downturn manufacturing inventories and working capital improve dramatically because you don't have as much inventory.

But we have these other forces going on so it is hard to answer that question specifically.

But we do have a very specific targeted plan which Mr.

Cruckshank is working on with Mark.

We will have more color on that for that in the next quarter.

Great.

Good luck on that.

But what about debt reduction?

You mention that in your strategic comments.

I am just wondering if you intend to reduce debt by a certain amount.

That will in part be due -- I'm sure what you are doing now, Matt, is going through your model and you are putting in D&A, you are putting in CapEx, and then earnings expectations and then the other pieces, the working capital management.

So to fully answer that question is going to be dependent on our success on the working capital management.

One thing that is clear is that we are going to pair our CapEx and we are not looking at anything significant on the acquisition front.

So the ultimate answer will be on the working capital piece, but absolutely we are looking to bring down debt during the course of the year.

Okay, great.

So if you have taken roughly $10 million out in SG&A, then you are probably at about $17 million to $18 million run rate per quarter.

Is that right?

I think Bill's comment is reflective; what you see in the fourth quarter is reflective of those reductions because at the same time we've had those reductions going on, of course, we've had some acquisitions, too.

So when you see a run rate that is about $20 million award or $20.5 million, that reflects those G&A cuts.

Okay, so it is going to stay similar to fourth-quarter levels is what you are saying?

Yes.

Okay.

Do you have a sense of what your parts and refurbishment business run rate for revenues is?

I think what you are seeing about $150 million a quarter is a pretty good number now.

Okay, great.

Thanks, that's all I had.

Good luck.

Thank you, and good luck to you.

Thank you.

Thank you; that concludes today's portion of the Q&A session.

Thank you very much for your participation in the call.

We appreciate it.

Have a good day.

Thank you, that concludes today's conference.

You may disconnect at this time.