Greenbrier Companies Inc (GBX) 2009 Q1 法說會逐字稿

Hello and welcome to The Greenbrier Companies' first-quarter earnings release conference call.

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

Until that time, all lines will be in a listen-only mode.

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

At this time, I would like to turn the conference over to Mr.

Mark Rittenbaum, Executive Vice President, Chief Financial Officer, and Treasurer.

Mr.

Rittenbaum, you may begin.

Thank you and good morning and welcome to our first-quarter fiscal 2009 conference call.

On today's call we will discuss our results and make a few remarks about the quarter that ended on November 30.

We will then provide an outlook for 2009 and beyond, and after that we will open up the call for your questions.

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

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

Today we reported a net loss for our first quarter of $3.3 million, or $0.20 per diluted share on revenues of $256 million.

We also announced that we were reducing our dividend from $0.08 a share to $0.04 a share.

Turning back to the quarter, the results include a non-cash charge of $1.2 million pretax, $0.6 million after-tax, or $0.04 per share.

This relates -- the background on this is that as the normal course of our business we have a policy of hedging our currency exposure over in Europe to lock in our margins on foreign currency sales.

We have been doing this since we've acquired or entered into the European operations 10 years ago.

All of our hedge contracts and all of our hedging is economically effective.

But during the quarter, we determined that a small number of our contracts, for technical reasons, did not meet all the requirements to be designated as for hedge accounting treatment under GAAP.

Therefore, we are recorded required to mark those specific contracts to market through the income statement; and this resulted in a non-cash charge to interest and foreign exchange of $1.2 million.

Effective in January, these contracts will meet the requirements for hedge accounting treatment; and at that time we are no longer required to mark these contracts to market through the P&L.

Turning to liquidity, and our revolving debt balances have declined by $40 million since the quarter end, and we have additional committed borrowing availability of approximately $138 million.

That includes our -- and on top of that, our cash balances -- or in addition to that, our cash balances of $19 million.

We believe we have adequate liquidity to manage through this downturn, as both Bill and I will address in more detail.

In downturns such as this, our focus is on liquidity and cash flow.

We are making and will continue to take aggressive measures to pay down debt, remain liquid, and rationalize the sizing of our operations and cost structure to reflect the current environment.

I will now turn the call over to our CEO, Bill Furman.

Then he will turn it back to me, and after that we'll open it up for some questions.

Thank you, Mark, and good morning.

On today's call, I'm going to make some remarks about the quarter that just ended, Greenbrier's competitive position, the current industry environment, and the steps we are taking to improve our performance and liquidity in this difficult environment.

Finally I will provide some qualitative outlook comments for the year ahead.

Turning to our first quarter, naturally these results are disappointing; but our first-quarter results which Mark just summarized reflect the very difficult economic environment in which we and other companies in America are operating.

This is particularly true in new railcar manufacturing, a segment which continues to have a substantial revenue base for Greenbrier.

The less cyclical parts of our business, which include Refurbishment & Parts, Marine Manufacturing, Leasing & Services, along with our European operations, helped dampen the effects of operating in this environment.

However, as was reflected in our first-quarter results, none of our businesses are immune from that environment.

Our Refurbishment & Parts business was impacted by lower scrap prices and an unfavorable mix and lower volumes of work.

Scrap prices have started to rebound, which will benefit this unit as the pipeline clears from older materials and surcharges that have somewhat distorted the quarter for that unit.

Revenues for the segment still grew 27% over Q1 of 2008.

Our Leasing & Services business was affected by lower lease rate utilization and lower gains on fleet railcar sales.

However, our owned lease fleet of 9,000 cars and the management services for an additional 137,000 cars provides us with stable earnings and cash flow.

Our Manufacturing business was most impacted.

It was impacted during the first quarter due to lower production rates, a less favorable product mix, higher cost materials purchased earlier in the year.

Additionally, a loss contingency of $500,000 was recorded on railcars currently in backlog as reserves reported in fiscal 2008 were adjusted based on current expectations, reflecting lower run rates and the mix just described.

On a more positive note, commodity prices have declined considerably in recent months, in turn lowering input costs on new freight car construction.

And this may lead to some bargain hunting by customers.

We do expect our new railcar backlog to benefit from a more favorable product mix and lower input costs for the remainder of the year.

Our new railcar backlog is 15,900 units, of which 2,900 units are currently scheduled for delivery in fiscal 2009.

As is to be expected in this environment, all customers are pushing back and seeking concessions and/or cancellations with their suppliers.

We are certainly doing this with our suppliers and renegotiating costs on components, given the very large swings in commodity prices and the variability in those prices and weakness in those prices today; and our customers are doing it with us.

Subsequent to quarter end, we had one order canceled for 300 new boxcars to be manufactured at our Gunderson facility in Portland.

This order is excluded from our November 30 backlog as reported.

The customer will be responsible for our costs and inventory associated with that order, so the effect on cash and liquidity will be neutral after that settlement is made.

We are also in discussion with other major customers.

However, we believe our railcar sales contracts to be sound for the large bulk of our backlog, and we believe that the Company is adequately protected in the event of attempted renegotiations or cancellations of contracts.

I might say that this situation is the product of many, many stored cars and excess equipment in the system during the current part of this business cycle, and we don't expect this to continue -- this kind of environment to continue indefinitely.

Turning to our competitive position, our management team and Board of Directors have been through many such downturns and have a proven track record managing through business cycles.

While we believe the current recession will likely have a larger or longer than average duration, we remain confident in our ability to manage through this one as well.

Later I will provide more details on how we specifically plan to do this.

However, the strategy which we pursued over the past few years to diversify revenue and earnings has and will stabilize earnings and cash flow and has improved our competitive positioning.

We remain optimistic about the longer-term fundamentals of the railroad industry and about our competitive position in it and our business model.

Turning to the market environment, and before I go into more detail about Greenbrier and the steps we are taking to combat the downturn, I would like to frame the current operating environment.

To begin with, rail loadings are a leading indicator of the health of the economy.

North American railcar loadings are currently weak and have been for a while now, but particularly have been affected by the massive commodity swings and weakness in commodities in recent months.

Loadings of commodities in North America were down 9% in the fourth quarter of 2008 as compared to Q4 of 2007.

Car loadings for forest products and automotive -- car types in which we have a strong market presence -- have been even harder hit.

While we are also strong in double-stacks, intermodal loadings were down 7% Q4 2009 versus Q4 2008.

As a result of the decreased loadings, tens of thousands of railcars are currently being stored by customers and moved to the sidelines.

Not all car types are affected equally; but this phenomenon is natural in a downturn, and we have seen it before.

Furthermore, customers are deferring capital spending and in many cases opting instead to store damaged cars rather than to repair them.

Nonetheless, we feel that our GRS Repair and Refurbishment unit will be a strong performer during this part of the business cycle.

We are happy that we have expanded that segment to now account for the bulk of our profitable revenue, along with Marine and other parts businesses for Greenbrier.

Demand for new railcars in North America is being hit hardest, and industry forecasts are for 30,000 to 35,000 railcars to be built in each of 2009 and 2010, rebounding in 2011 to a more normalized level.

All of this compared to about 60,000 units expected in the final numbers for 2008.

However, I personally believe these forecasts for new orders and deliveries, for 2009 in particular, may prove to be on the high side.

The scenario I just described is not uncommon to our industry.

I would like to remind everybody, and particularly our long-term investors, of that fact.

We have seen it many times during cyclical downturns.

As the economy recovers, there becomes a shortage of the serviceable railcars.

Velocity changes, and all of our business units will benefit quickly and dramatically.

However, in the short term, while we are mindful of the opportunities and the requirements to limit CapEx, there are opportunities to buy railcars cheaply in the market, repair them through our system and our network, and lease them out.

And when the market recovers, the market value of any assets we put into such programs will increase dramatically.

One last comment I would like to make regarding the market environment has to do with the potential for an economic stimulus package or packages in the form of increased government support and spending on infrastructure, tax credits, or other programs such as this.

If passed, this legislation could also stimulate demand for railcar types needed to support such programs, which in turn could benefit all segments of our business and other businesses in the railroad supply industry.

We will be closely monitoring the status of federal legislation; and the first important piece is a stimulus tax bill, which we understand to be presently on a very fast track in Congress.

Our management and Board continually conduct scenario analysis of our industry and the economic environment and its impact on our business.

At present, we believe we have a strategy in place to operate through these difficult times -- one, a strategy that positions Greenbrier to succeed under various operating scenarios.

Throughout the balance of 2009, we have several important objectives, and let me turn to those.

Most importantly, we will manage the company for cash and liquidity, as we have done in earlier downturns.

We will continue to take measures to improve liquidity, increase efficiency, reduce our operating costs, improve our balance sheet and conserve cash, all appropriate to the current environment.

Last year and the first quarter of this year, we slowed down production rates and eliminated $10 million of annual costs.

We will aggressively continue this theme this year on multiple fronts.

Specifically, number one, we will reduce our 2009 capital expenditures appropriately, at least by $25 million from 2008 amounts.

We have the ability to go deeper as conditions may warrant.

Secondly, we plan to improve our working capital utilization by $50 million.

Part of this is natural, as inventories run down and receivables run down with lower levels of operations.

However, we have put into effect over the past five months a very aggressive review and re-organization of our business methods to improve the efficiency of our working capital.

Third, we will continue to adjust production rates and consolidate production.

If the outlook does not improve, we will likely shut down or temporarily close one of our new railcar facilities until the market conditions do improve.

Fourth, we will continue to adjust our cost structure to the current environment.

We will take out at least an additional $5 million of overhead and G&A cost as a first step.

Turning to the overall outlook, while this economic picture is rather gloomy and while visibility is somewhat limited, we anticipate the balance of the fiscal year to be better for us than the first quarter, and that we will be profitable both as a result of the internal measures I previously discussed and external factors.

Let me discuss those external factors in greater detail.

Raw material costs have dropped significantly, which should help our new railcar manufacturing operations.

We have also started to deliver the first railcars under our GE contract.

These cars have been accepted.

And the contribution from our Marine operations, aided by a very strong backlog in that operation at Gunderson, is expected to grow throughout the year.

Scrap prices have started to rebound off of first-quarter lows, which will help our Refurbishment & Parts business and reverse the throughput adjustments that clearing the pipeline with older costs has brought to that unit in the first quarter.

Volume in our Repair & Refurbishment business, particularly in wheels, remains strong.

We have been awarded a significant new wheel contract in the Southeastern part of the United States.

We believe that higher material costs and surcharges, will largely be flushed through the system by the end of our current quarter or by the end of the quarter we are in.

So these factors, along with an expected more favorable product mix, should help improve margins.

I will remind you that the first quarter has traditionally been our weakest quarter due to product mix and that the year is back-end weighted.

Looking longer-term, we continue to believe rail and marine transportation will compare favorably to other modes of transportation, driven by a number of factors.

We expect these to include increasing highway congestion prospects longer term, although not immediately; or a weakening US dollar which will favor railroading and commodities and exports in the United States; an aging railcar fleet; the lower-cost infrastructure build; and a higher emphasis on environmental factors under the new administration and Congress.

So in sum, we remain confident about our business model, our strategy, and our ability to navigate through this downturn.

We have specific plans in place, which I have enumerated, which adjust to the current operating environment, and -- as Mark will discuss in more detail -- adequate liquidity to operate in this environment.

As a result of these plans and the external factors I previously discussed, we expect near-term results to improve.

Our competitive position is strong and our business model cannot be easily duplicated.

Longer term, we do remain optimistic about the marine and rail industries and our competitive position.

I will now turn the call back to Mark.

Thank you, Bill.

As both Bill and I have mentioned, we believe that we have adequate liquidity to manage through this difficult environment, and our focus is on cash flow and maintaining liquidity.

I want to go into that in a little more detail, and then after that I will go into our performance a little bit more, but not do a deep dive and that is -- a lot of that information is contained in our earnings release.

First, the focus on our financial focus, managing for cash.

As Bill mentioned, we have a number of measures in place to reduce our borrowings and improve cash flow.

As we are in this uncertain environment we do have limited visibility.

Therefore, we have been and continue to stress-test our forecasts under different scenarios for various financial and financial covenant impacts, to ensure we take appropriate measures to run the business and maintain the liquidity.

Currently, we have very little in the way of near-term debt maturities.

This year, we have less than $32 million maturing relating to our European operations, which we believe we can adequately manage through.

Our $290 million revolving line of credit for North American operations matures in November 2011; and the earliest potential significant maturity of any of our notes payable occurs in May of 2013.

This relates to our Convertible Bonds outstanding of $100 million.

We are in compliance with all of our financial covenants.

Furthermore, we have an excellent relationship with our lead bank, Bank of America, and long-standing relationships and excellent relationships with many in our bank group.

Now let me add some color on the quarter.

First, while Refurbishment & Parts helped to lessen the impact of weak manufacturing during the quarter, it too was affected by the difficult environment.

As such, we are taking overhead costs out to reflect lower refurbishment volumes principally and a less favorable mix of repair and refurbishment work.

Secondly, as Bill mentioned, our wheel services business was impacted by a precipitous drop in scrap steel prices.

As Bill mentioned, we are seeing a pick-up there which, along with cost reduction initiatives, should aid results in the future.

Turning to Leasing & Services, our fleet utilization was 93.3% during the quarter compared to 95.2% in the end of our fourth quarter.

The current quarter includes $0.3 million gains on equipment sales while the prior year's first quarter included $0.8 million of gains.

We do expect increased trading activity in the last three quarters of the year, so that our gains on sale for the year as a whole will run higher than the current quarter's run rate of $0.3 million.

Now turning to Manufacturing, as a reminder, during the quarter we were still building railcars for contracts and backlog which contained fixed prices and for which higher priced materials were already purchased.

Therefore, substantially a lot of our production was run through that scenario, we had an unfavorable product mix.

And as Bill mentioned, based on our current expectations for any of those contracts that are still in our backlog we increased our reserves by $500,000 for such contingencies where our costs exceed our sale price.

We did not accept any new fixed-price orders during the quarter.

We do have profitable work in our backlog.

As Bill discussed, the market is very competitive right now, and any orders that are being bid are being aggressively priced with little or no margin, with a focus on cash in these bids.

And making contributions to fixed overhead is principally what we are seeing out there, which is also normal in this environment.

On a more positive note, we are now delivering our first tank cars under our GE contract, the first tank cars that Greenbrier has built for the North American marketplace.

We are very pleased by this, obviously.

Now commencing with those deliveries, along with lower input costs, continued momentum in Marine, and stability in Europe, this should all aid our Manufacturing performance.

We expect our Marine revenues to approach about $75 million this year, nearly a $20 million growth from the prior year, and we have a strong backlog.

Our cost reductions initiatives will stay in place.

Our G&A expense, after you take out less recurring items, is on a $17.5 million run rate.

That includes the $10 million of cost reductions realized in 2008, and we have plans to drive this down further with the initial step of reducing G&A and overhead by $5 million and further, and contingencies for more reductions if warranted.

In our working capital management plans, we do have specific metric targets, all with the goal of improving working capital utilization by at least $50 million.

We've reduced our CapEx by $25 million from last year, still with our CapEx of about $40 million.

$20 million of that is leasing CapEx; that CapEx is discretionary and can be throttled back if conditions warrant.

We will now open it up for questions.

Operator, if we can turn it back for you to do that, please.

(Operator Instructions) Frank Magdlen with The Robins Group.

Good morning, Bill.

Could you give us a little more guidance or help in trying to understand the significance of steel scrap pricing or proceeds that you get in your Refurbishment & Parts business?

To the profitability and trying to smooth out the gross margin contraction that occurred in the quarter.

There was quite a contraction in particularly scrap steel pricing, while we had -- and we receive a yield from scrap steel pricing the way our business model works, in particularly the wheel business and repair and refurbishment.

We sell just in that unit approximately 10,000 tons of scrap steel each month.

On a gross revenue basis, you can calculate what a $10 change can do in the average price of scrap.

So, looking in simple terms, a $10 reduction or increase in scrap can mean $1 million in the time frame that we are talking about per month.

However, it is not quite that simple, and it has to do with the surcharges that are built into inventory, and the costs of inventory.

So particularly in the first quarter, there are a lot of moving parts.

We expect at scrap prices stabilize and increase, which they have been doing, you have to distinguish between the domestic and international market in that regard when you are looking at scrap, and you have to distinguish by region.

Nonetheless, there is a pronounced drift upward in scrap steel.

This will have salutary effects on that unit.

So we think we took the principal hit in that unit in the first quarter.

The other business that we have been awarded should generate between $10 million and $12 million of gross revenue.

Of course, that will not all come to the bottom line.

So those are some of the moving parts relating to scrap.

Basically the outlook in steel is more positive than it was a few months ago in scrap, but still a fairly weak commodity market.

All right.

Frank, let me just clarify one.

Every $100 -- just a slip of the tongue.

Every $100, if we are shipping 10,000 tons a month, then approximately every $100 equates to a $1 million move.

I'm sorry, I did have a slip of the tongue there.

So it is a significant item, but the kinds of movements -- and it has affected us over each month probably in this particular downturn by at least $3 million to $5 million.

For the quarter?

For the quarter, I mean, yes.

$3 million to $5 million in the quarter?

Then, what -- would we go back to prior guidance of something in the neighborhood of 14%, 16% margins on that business in ordinary times, and I don't know what ordinary times are, but if you didn't have the big volatility in scrap?

Frank, let me clarify that number.

Because you've got a pricing of fact and you've got a cost effect; but probably the total effect of clearing the pipeline and the price decreases in this quarter was what, Mark?

Maybe $11 million to $12 million.

Correct.

Which pricing would be a component of that, but costs as we clear higher inventory surcharges through the sales units would contribute to that as well.

So we took a significant hit in the first quarter from just the commodity pricing down.

As that swings back up, we will have a similar benefit in coming quarters.

To the second part of your question, Frank, on the margin outlook, yes, earlier in the year we did give -- or at the end of last year quarter we gave guidance in the mid teens.

We are a little bit more cautious on that, in part on the Refurbishment side of the business.

As we mentioned before, we are seeing deferments in capital spending, and so the product mix on repair and refurbishment side is a little weaker.

And scrap steel did drop down precipitously.

It is coming back up, but we are a little bit more cautious probably on our view of the average price.

We would probably take it more down to the lower teens rather than the midteens.

Okay, then just two other questions.

How many cars are left that are fixed-price for production this year?

Less than, I believe it's about 1,000 that are left in the pipeline.

But we have reserved for all of those, and we believe that we are adequately reserved for all of those at this time.

All right.

I will jump back in queue.

Thank you.

Wendy Caplan, Wachovia.

Thank you.

Good morning.

The internal actions that you have been talking about, do you think that they will allow you to stem losses in Manufacturing this year?

Or are we really counting on the lever of Refurbishment & Parts to improve the prospect and to become profitable for the full year as you described?

I am going to let Mark address that and I might add some comments, because Manufacturing, particularly with the momentum in our GIMSA facility, will have a different profile than is apparent from these quarterly results.

Mark?

I think the answer is more the latter, Wendy, for the year as a whole, and for the quarters going forward once you include G&A expense and operating cost below the gross margin line, that it would likely not be profitable.

We do see improvement in our margin, which is now a negative margin, to something closer to breakeven or modestly or low single digits.

So it would be the other parts of our business that would principally be the contributors.

And of course, just taking the margin from the negative to closer to breakeven or low single digits on Manufacturing.

The tank cars that you are talking about, just so that I am clear.

Of the 2,900 cars that you expect to ship out of the backlog of this year, how many of those are the tank cars?

Given that the production startup -- and what does that say about profitability in that piece?

On the tank car piece, it is less than 500.

I don't have the exact number here, Wendy, but it's right around 500 that would be in there.

I don't want to go into profitability by particular car type, obviously for partly competitive reasons.

Certainly we have learning curve efficiencies and inefficiencies in the startup; but we are also gaining traction in that area.

Finally and then I will jump off and let someone else have a chance, just so that we understand this, we are looking at the P&L, where is that hedging charge that you referenced on the P&L in the quarter?

It's in interest and foreign exchange.

So it is lumped into the interest expense line?

Yes.

Okay, all right.

Thank you very much.

Todd Maiden, BB&T Capital Markets.

Thank you.

Good morning, guys.

I wanted to follow-up.

You had talked about, I think it was 1,000 was the number that you listed for cars in the backlog that are still subject to fixed-price contracts.

However, I just want to kind of clarify this.

Because at the end of -- or on the fiscal Q4 call, the number was 1,000; 700 of which were still outstanding.

I think you came to an agreement with a customer and removed 300 of those cars.

So did that cancellation not happen?

Were there 300 new cars found?

You mention that you didn't take any orders in the quarter that were subject to fixed-price contracts; so I just kind of want to pinpoint that number a little bit, if I can.

I think it's just we did not take any new fixed-price contracts during the quarter.

I was just rounding in both of those comments.

But so no, there was no new fixed-price contracts.

Some of the fixed-price contracts we had in backlog at the end of August, we were producing this quarter; so the number is less this quarter than last quarter.

Okay.

Then that $500,000 reserve adjustment, I believe at the time on that 700 number that was out there in Q4, 700 cars still subject to fixed-price contracts, the amount was -- or estimated loss was going to be somewhere around $3.9 million.

So that $500,000 reserve adjustment, is that added to that $3.9 million?

Yes, it is.

Okay, all right.

Great.

Then I didn't hear, did you give a fleet utilization number?

93.3%

Okay.

Did you give the average age of the lease remaining?

Did not.

We have that in the 10-K, and it is not substantially unchanged -- or it is around 3.3 years, if I recall correctly what we have in the 10-K.

Okay, all right.

Then, any feel for I guess the weighting or what the fleet looks like currently as far as the mix by car type?

We don't break that out, but I will give a little color on that, because it may not be what you would think from what we build.

Certainly forest products cars and hopper cars would be the larger portions of our fleet.

We do not have, as an example, much in the way of double-stack cars, because most of what we build in double-stacks we sell outright.

And we do not have much in the way of the tank cars because historically until the GE contract we have not been a player in that market.

Okay, all right.

Then lastly, just given the current environment, where delivery forecasts have clearly come down, and even where you mention that you think that over the next two years forecasts could trend lower than that, and the fact that you've chosen to cut your dividend.

Has your thinking changed at all about some sort of potential merger, with you being the buyer or the seller?

Has our thinking changed?

No.

Okay, so -- okay.

All right.

Well, that answers it.

Thank you.

Paul Bodnar, Longbow Research.

Yes, quick question here just to go back to Refurbishment & Parts.

In the quarter, what was the organic growth?

What can that business grow organically during this year?

I mean it sounds like you think it can if scarp price is reversing.

As I said in my comments, we had considerable growth year-over-year by 30%, but that wasn't -- substantially it was not organic.

We have 39 locations.

We have added one location with a Class I railroad in Osawatomie.

We have another location in South San Antonio where we are doing new work.

So we have had two specific projects that have hit their stride in this quarter and will begin paying off.

We do have a new wheel contract which is significant, as I just described, with a major customer.

We are not disclosing that customer.

Which will add about $10 million of revenue to $12 million of gross revenue per year.

So while those are modest achievements in the current quarter, a lot of the focus that we have been putting our operating people through is in cash conservation, liquidity.

Because the one unforgivable sin in business is to run out of cash, and we don't expect that will occur at Greenbrier.

Normally in a downturn, a business like ours with heavy manufacturing content will run cash out.

So there is some automatic protection.

We have been stress testing all of our businesses, so there has been some dampening on the organic growth.

Personally, I believe this is the most exciting opportunity that I have seen in the past decade.

I think we have got a really strong network in repair, refurbishment, linking it with our leasing business, and coupling it with the substantial opportunities for arbitraging inefficiencies in the rail system as cars are shuffled and parked and not repaired -- irrationally so -- as capital budgets get set.

This is a segment opportunity that we have really exploited in the past, and we are expecting to release our guys to do that in the future.

We may have to do some specific project financing which will not drain our corporate liquidity to achieve that organic growth.

But we expect that we will continue to open new operations and we will try to create those with base loads as we have been doing with the three that I just mentioned.

In Bill's latter comment about businesses normally -- or manufacturing in this environment running cash out, meaning that the working capital will convert to cash, so we expect at lower production volumes that a lot of our working capital will convert to cash.

It sounds like there that in terms of buying these cars (inaudible) you mean by going and looking at getting a specific asset-backed debt deal or something along those lines to finance a purchase?

Historically, our Company has done --

I know you have never done that before.

We very seldom have done that kind of transaction with debt.

We have joint ventured with merchant banking companies in the past, substantial project work.

The Golden West with Southern Pacific.

The conversion of auto rack cars to TOFC cars and back to auto racks.

These are the kinds of things that we might encounter where we would not want to allocate our capital, but could align with a party that would be willing and interested in investing in the upside in acquiring these assets cheaply, or acquiring an operating interest in these assets cheaply, and arbitraging the inefficiencies of having assets stored that ought to be in service.

So we are not -- and I want to make it crystal clear.

We are not going to use our working capital or our borrowing capacity to go out and make new acquisitions or to splurge at a time in famine.

On the other hand, in this time there are many, many opportunities.

So we do expect to find avenues for internal growth, particularly in our GRS unit.

And if we find those avenues, we would expect to finance them in a responsible way so that we -- with equity financing of a project nature, specific to the transaction and insulated from risk to us.

We have a long history of doing that kind of thing.

It would also give us an opportunity to create a reserve of assets for later refurbishment and sale, as we have done in previous downturns.

So our model has always adjusted in a downturn from emphasis on selling to acquiring assets.

But we don't typically use -- we are very, very cautious about how we use our own capital in doing that.

Thanks.

Then just in terms of looking at what facilities, I mean you mentioned that you could close down some capacity.

What is your thought process on it?

I mean, you may be closing one of the newer facilities?

Just which facilities would you look at?

Or why would you look at one of the newer ones versus the Gunderson facility or something along those lines?

I think it's important to distinguish between these facilities as pure manufacturing plays or hybrid facilities.

I think it is also important to understand the political reality of the environment in which we are operating and the uncertainties in globalization.

We have watched commodity swings.

We have watched currency swings that have hit major companies and brought them to their knees.

We have seen the investment banking business, with so many intelligent people, literally transformed and virtually destroyed as we knew it six months ago.

So I think it's important, as you think about what I have just said, to look at our facilities in two ways.

One of them, Gunderson, is a flagship facility which provides substantial technical support to our global network, not only in the new car side but also in the repair, refurbishment, and leasing side.

The core competency there is engineering.

Gunderson also has the versatility to do repair and refurbishment work itself, and has frequently done that, and is running a heavy marine business.

So Gunderson wouldn't be by itself a candidate because of the marine business alone, and because of the engineering and other capabilities that reside there, for closure.

Although we will aggressively reduce the overhead appropriate to scale at which we are operating.

So, we would be looking at a potential of one of the two Mexico facilities.

I think that leads us to, probably, the Concarril facility as opposed to the GIMSA facility, which is I believe a very, very important cog in our future as we adjust the role of manufacturing in Greenbrier's business model.

Okay.

One last question just in terms of building out your lease fleet.

I mean over the past three years, you have added pretty significantly there in terms of just the balance sheet.

Looking backwards, it looks like asset prices -- now, I don't know if you bought a lot of those cars new or not -- but were on the higher side versus historic levels.

Is there a chance that coming up here for the next year or two that you say, hey, these car prices are way overstated on our balance sheet and you have to take a big writedown in a quarter?

Is that something that -- I guess you can comment maybe on just the profile of the fleet there.

No, I think we are comfortable with the carrying value of our lease fleet.

Those we have always -- our own -- if you look at our historic gains on sales and our trading activity in there, we have always believed that actually there is embedded equity in our lease fleet, and that that embedded equity does move up or down during various points of the business cycle.

So it's not what it would have been 12 months ago.

But we are comfortable with the carrying value of our lease fleet and I wouldn't see a potential for a writedown there from what we see now.

Okay.

Thanks a lot.

J.B.

Groh, D.A.

Davidson.

Morning, guys.

I had a question, Mark, on the comment of the 2,900 cars included in the backlog scheduled for delivery this year.

I think last quarter that was 3,900.

You mentioned a cancellation.

So can you help me recognize the difference of 1,000 there, netting out?

Yes, some of the cars -- because we delivered 800 cars, so there was cars also built that are hung up on the balance sheet in that railcars held for sale.

And you may recall in particular quarters there is -- in particular quarters we will build cars that will be delivered later on in the year, so they are hung up on the balance sheet.

That is the difference between production and deliveries.

You will also recall that we slowed down.

We made reference in the release and in our comments, we slowed down production.

So some of the cars that were originally contemplated to be built this fiscal year will be built next fiscal year.

So we did actually have orders this quarter.

It's just all those moving factors that lead to that reconciliation.

Okay, thanks.

That helps.

Have you switched over at Gunderson?

Is that doing mostly boxcars now?

Or what is the status there?

We are running one car line, an order for CN at Gunderson.

We had one cancellation.

We have open space in the spring at Gunderson for boxcars and we have yet to settle on the final resolution of the announced cancellation.

We are negotiating with that party, which is typical of this environment, as I have said.

So while we expect that to result in clearing all of the cash we would require, there is still a possibility we would continue to run a box car line there if we find an avenue that is viable and sound.

We are also doing repair work at Gunderson.

We would anticipate that Gunderson is equipped to do much more repair work.

We will allocate manpower to our Marine operation and see if we can get more throughput in the Marine operation during this particular time.

On that topic, I think in the current Congress and the current administration, it would be unsound for us to, as a US company expecting to participate in some of the things that will be occurring in the legislative and regulatory front, to commit to a footprint on manufacturing only in Mexico.

It also would be imprudent for us to do that for political risk and currency risk.

We have seen what has happened in the wild swings of the Canadian dollar; and I think we want to continue to have a US footprint and be a US company in manufacturing during the current political climate.

But I think that the lower cost facility that we will have through the GIMSA operation will be a very positive asset, and we would expect that to be emphasized longer term on Manufacturing and Gunderson to become more of a mixture of Marine, repair, and probably one new car line, with the capacity to go to more throughput if and when the double-stack market comes down.

Gunderson is a very, very efficient on double-stacks, but there is not going to be a requirement for double-stacks at least in 2009, as we see it.

So there was very little double-stack activity in Q1?

Correct.

There was a little bit there.

Some runoff from orders from the prior year.

So there was a little bit of that in the deliveries; and that, we are done with that.

Okay, so none foreseeable for the remaining three quarters?

Correct.

Okay.

Then, Mark, can you help?

You mentioned your run rate on SG&A.

Did I get that right, $17 million, roughly?

$17.5 million.

$17.5 million?

Okay.

Then finally, that interest -- that charge shows up in interest expense, which gives you what?

A little bit under $10 million a quarter on interest?

Is that where we should be thinking?

Or you said debt came down a little bit more.

What do you have forecast for --?

Yes, under $10 million.

It is nice that interest rates are as low as they are on our floating-rate debt.

So, maybe closer to $9.5 million, but under the $10 million would be correct.

Okay.

Thanks for your time.

Art Hatfield, Morgan Keegan.

Morning.

Thanks, gentlemen.

Most of my questions have been answered.

Just one quick rhetorical question.

Given the environment I bet you are glad to see Nova Scotia in your rearview mirror.

Yes, we are.

It's not entirely in our rearview mirror, because we have quite a lot of book value wrapped up in it, which should be released.

But for technical reasons, because of the legal process up there, it may be some time before we find that coming back into income and hitting our balance sheet as a positive contribution to our net worth.

So with that exception, we are delighted to have it behind us.

I can appreciate that.

Just a quick question, and I don't know if you addressed this.

You talked a lot about the lease fleet; but did you mention anything about what you are seeing with regards to pricing of leases currently?

We didn't mention it, no.

Could you?

Sure.

They are not improving.

The mix of our lease fleet has a component, however, of operating leases that are disconnected from direct negotiation and are instead set by car hire agreements and standards in the industry.

So we have some automatic insulation by the nature of those particular operating leases.

But we definitely have seen downward pressure on leases.

It of course depends on the kinds of cars.

However, having said that, we have been fairly successful in remarketing our assets at reasonable prices.

Maybe Mark could give more tangible color to those general remarks.

We don't break it out on a percentage, on a car by car lease renewal basis.

So as Bill said we are definitely seeing, as you would expect, lease rates go down on any renewals.

That is part of the reason that we have staggered lease terms and a diversified fleet by car type.

We have a fairly significant sized commercial operation compared to our competitors; and that, of course, contributes to G&A.

We are constantly weighing our emphasis on the commercial side of our business through these integrated -- by integrating the units.

But one of the things that we receive as a consequence of that is we see most of the opportunities.

And they have done a very good job of getting us through, at least so far, this part of the downturn.

We have to do that every single lease renewal; but they have been fairly nimble in keeping our lease rates higher than the average bear, I suppose.

Do you have any portion of your fleet that is just on per diem leases?

Or is everything term?

No, we do -- Bill mentioned earlier that that is what he was referring to when he said these negotiated car hire rates; and that is the utilization type of leases.

It probably is less than 25% of our total lease fleet.

Okay, okay.

Just a quick question, again, you may have addressed this, but on the -- SG&A was down in the quarter and you had had a couple things in there.

But is that more general a level of where it should be for this year?

Or is it going to kind of move back up to where it's been over the last several quarters?

No, our goal is to keep it at that level or bring it down; and by that level, the $17.5 million.

Okay, okay.

Then finally, Bill, do you have an estimate on how many stored cars you think are across the country at this time?

I don't.

I know it's a lot.

It's -- I think we say tens of thousands, and there is no central database where we can go and get that information.

We have -- maybe it's something we should know, but maybe it's because we're afraid to ask.

I understand, and I know there is no number; I just wondered if you had had an estimate of your own that you were thinking about.

That's all I've got.

Thank you very much.

Thanks for your time.

Steve Barger, KeyBanc Capital Markets.

Good morning, guys.

This is actually Joe Box filling in for Steve.

I just wanted to ask a follow-up to Art's previous question.

Just generally speaking, if you assume an average five-year lease, are the renewed rates below their previous rate that they were being charged?

Or are you saying that they are below what the average market rate would be right now for that car?

Can you perhaps clarify, Joe?

I'm not sure I am following the question correctly.

I'm just trying to understand if somebody is going to end up paying less than what they were previously paying; or are they just going to be paying less than what the current market would be looking for?

They are going to be paying less on any lease renewal.

The lease rates are going to be down from the prior lease terms.

Maybe only slightly, depending on the car type, though.

So even if it is something that they maybe signed up for five, 10 years ago, they're going to be paying a little bit less on that?

Let me explain how that works, because the price of materials -- even though we have seen a dramatic drop, particularly with steel and other materials -- is still high relative to historical numbers.

So to the degree we have older cars in our fleet, the value of those cars is much lower than cars that have been built by others in recent years.

And to the extent we have newer cars, those are higher price.

So the lease rate factor is what we look at, and it's as a percentage of original cost.

So when we look at yields and we average our fleet, we have been hit most by lower utilization in both our operating lease fleet and in our renewals.

We have been able to maintain a fairly decent yield but -- so the average prices are slightly down for us.

We also are embedded into the system much differently than other railcar leasing companies, because we manage so many assets and we repair so many assets.

We have access to transactions that others couldn't engineer by the nature of our network, which plugs into the US rail system.

Joe, I appreciate your clarifying your question.

So my answer was more quarter-over-quarter.

That same railcar was coming off of lease six months ago, that was coming off lease today, we would have gotten a higher lease rate six months ago for that car than we would today.

But if you are comparing to when that car was originally put in service, it depends how long ago that car was originally put in service.

So in your example, if it was a car that is 10 years old, it had an initial 10-year lease attached to it, it is likely that rate today is higher than it was 10 years ago.

If that car was built a year ago and under a one-year lease, it is likely that that lease rate is lower than it was a year ago.

It just depends where that car is in its life.

Okay, great.

That's exactly what I was looking for.

Good explanation.

I would also like to just ask a historical question here and maybe how you think this cycle compares to past cycles.

In your experience, what is the typical variability in selling prices throughout the course of the cycle?

I know it's obviously going to be very different by each railcar type.

But are we talking about a 5% change from peak to trough?

Or are we talking more about a 20% swing, if you assume that input prices hold steady?

That is the big assumption, Joe, is input prices.

So you are talking about keeping that steady, but that is not necessarily the case.

And that is really the difference between this cycle and others.

I think that we see a lot of rhetoric -- in fact, the president-elect this morning talked about this being the worst business cycle that we have seen for 30 years, and we have comparisons to the Great Depression.

In our segment, this is not the mother of all cycles in any respect.

2001, 9/11 saw order rates drop to 15,000 annualized units per year.

In 1985, we survived an industry that had 5,000 cars ordered per year.

These things have to be anticipated if you are running a cyclical business and you have to react very rapidly to them.

But this is the third worst so far.

If these forecasts are true, we will sail through this.

And perhaps although this economic stimulus which will eventually affect the value of our currency downward, I think, will give us a false prosperity and things -- happy days will be here again.

I am much more skeptical about that.

But I think this is not the kind of cycle that we have seen at least so far where orders just dry up.

You can see that in the last quarter where there were orders for 7,000 or 8,000 railcars.

So, I don't think this is -- we don't want to use rhetoric and fear mongering to say this is an unsustainable cycle.

This is not the worst cycle I have been through.

The worst cycle I have been through was when there were more cars stored.

We came off a 100,000 car build.

People didn't need them.

There was deregulation, mergers, and nobody wanted to order any new railcars.

And yet Greenbrier prospered and survived during that period by changing its tactics.

Not its strategy, but its tactics.

And we will survive in this one as well.

I appreciate that clarity.

I guess, though, to go back to the previous question, and maybe we will just phrase it up this way.

In 2001, during that cycle right there, did you see -- what sort of peak to trough change in average car prices did you see?

You could see from peak to trough in that particular cycle -- and again a good part of this was commodity related, too -- but some cars went down in value 30% of a new car price.

Now, that is not all on the margin basis.

A lot of that is in -- but you could see a car that was selling for $70,000 sell for $50,000.

Indeed in the current -- with steel and scrap prices coming down now as significantly as they have, car prices are coming down just by that alone.

If you are holding prices, if you hold all of that constant, you might think about it in terms of the remark I made earlier.

In peak, you can see by the public companies that we have -- that double-digit margins are out there.

The comment I made on the call is that in a difficult environment people make a contribution to fixed overhead.

So there is that kind of variability from peak to trough on just the margin side of the business.

Part of that, however, is choice.

We choose often to not operate as our peers do for the short term, but rather to sustain a line in a longer term.

So we slow production often and husband our backlogs.

Therefore, we are able to rebound a little bit better.

You have heard us describe today a strategy where we are going to be cutting our capacity.

So obviously, we are not sanguine about this current environment at all, or the prospects for recovery.

But if we slow our production rate instead of running our production out in the first quarter or the second quarter, looking at a longer-term economic view, that is going to affect our margins; it's going to affect our profitability in Manufacturing.

And yet, frequently that is the most sensible thing to do in our industry, to buy time to maneuver to do other things to keep the engines running.

Great, that's helpful.

Then, my last question relates to the potential for industrywide cancellations or deferrals that you alluded to.

Again I know that this cycle is very different from past, and if the industry backlog is around 52,000 cars right now, what would your expectation be for cars that could potentially get deferred or even canceled out of the backlog?

I don't have an estimate of that.

I can only tell you that over the last decade, the behavior in our industry has changed.

It was highly unusual in the past for a Class I railroad or a major leasing company to honor an agreement or to cancel an agreement.

And you can cancel -- you can honor an agreement by canceling if you do it the right way.

But it wasn't something that was typically quite common.

In the current environment, with the two massive swings up and down in commodity prices, all bets are off.

We are all negotiating with each other furiously.

If we don't, we end up behind the eight ball.

So we are doing all this with suppliers.

We are pressing very hard for concessions to bring down our materials costs; and our customers are doing, quite sensibly, the same with us.

So I just don't have any way of predicting how that will turn out.

Anyone who doesn't do that in this climate is rather silly, whether it's a customer or a company like us who is dealing with suppliers.

You're just going to have to be hard-nosed about it and look at the facts.

And the facts are the economic conditions are not as they have been; and they could get worse.

Very good.

Thanks for your time, guys.

I appreciate it.

Frank Magdlen, The Robins Group.

Bill?

Could you give a little color as to what is going on in Europe?

What percentage of your -- what cars -- how many cars were delivered in Europe in the first quarter and what do you expect for the balance of the year?

Sure.

We actually have our European head of operations, William Glenn, here.

Maybe Mark can summarize a little bit about the financial component of your question, and William could add some color to it.

Right.

There's several hundred cars during the quarter, Frank, that were delivered out of our total of 800; and our backlog is 1,000 cars or roughly 1,000 cars related to our European operations.

So that does go into the next year.

But we would see the bulk of that production being built this fiscal year.

William, is there anything overall that you would like to add about Europe?

The market is probably holding up a bit better than it is here, but it remains to be seen if that is a timing thing, or -- so it is definitely stronger, but we will see if that is sustainable.

It's probably true our competitive position is about as good as it has ever been.

You are also looking at adapting a different business model in Europe.

So I think you've done a very good job of stabilizing Europe, and you're more cautiously optimistic than you were when I assigned this to you.

Yes, the zloty has gone from 3.2 a few months to 4.2 to the euro, so that obviously does very good things for the sales into the Euro Zone.

And some of your competition has basically vanished from the scene in terms of credibility, so.

Some of our competitors have had major, major problems and are way behind.

One major competitor is now in the Euro Zone, so that is a big shift.

They were out of it last year.

So with the zloty swinging, we are in a better position against them, that is for sure.

And you're receiving new orders in Europe.

(multiple speakers)

We are -- there's pockets of demand and we have live negotiations going with customers where we hope we can turn them into new orders to add to the backlog.

But you know, I would put the caveat that it's hard to say with the current environment, whether that will be sustained.

So, I would say cautiously optimistic, we are holding our own, but the big question mark is the economy.

One of our objectives two quarters ago was to ensure that Europe didn't become a drain.

We were having reported losses which were tax disadvantaged in Europe.

William has addressed the tax issue, has restructured the business, and has achieved the objectives of stabilizing the European operation.

We are looking to see if we can build a platform there.

And longer term we will rationalize our investment and perhaps decide that Europe isn't in our future.

But today, we are very pleased to see the progress that we have made in the last two quarters.

Does that mean that you are profitable there?

We were closer to breakeven, Frank, which would be an improvement from where we were at the end of last year.

Sure.

Substantially.

At breakeven, aren't we, this quarter.

All right, fine.

I think I cut somebody off that was going to make one more comment.

No.

Thank you.

Wendy Caplan, Wachovia.

Thank you, and I am just about to lose my battery, so quickly, Mark, are you prepared to share with us the target for working capital management that you addressed?

Not specific as to each of the turnover, each of the ratios we have.

But that is how we are measuring them in either inventory turnovers or days outstanding.

Okay, okay.

Finally, Bill, you addressed in passing that it may get worse from here.

You have certainly been through this times before.

What is your view at this point?

Is it as bad as it's going to get, or do you think we still have some room to go?

I think that the new car segment is going to be very, very difficult, and I think that we are very happy to have the diversity.

I think that I am much more optimistic than perhaps I sound as to the opportunity of this for us -- and perhaps for others if they could see those opportunities.

We are particularly equipped to take advantage of opportunities because railcar values are not very well understood by people who aren't in the business.

So I am kind of optimistic that the rail industry is going to benefit from many things that are happening today legislatively.

Eventually commodities in North America will move, and manufacturing will eventually recover just because of the picture that I see and the prospects for continued weakening of our currency as a result of some things we are having to do to restore stability.

So I am pretty optimistic, actually.

We have a lot of dragons to fight, and we always do during these downturns.

But will it get worse?

I think there is a lag effect in the car orders.

So it wouldn't surprise me to see orders fall dramatically in the next quarter or two, and stay languishing at that level through into late 2009, and backlogs declining.

But I don't know that that is anything that one wouldn't expect in an environment like this.

Right.

Thank you so much.

I don't see that as getting worse, I just see that as a condition that is -- this is not as bad as 2001 when everything stopped, 9/11.

Things haven't stopped.

And we are -- we have a very big business that can't stop because the railroads have to run their equipment and they have a lot of inefficiency that we can help them with.

Thank you very much.

Thank you.

At this time I am showing nothing further.

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