Greenbrier Companies Inc (GBX) 2009 Q3 法說會逐字稿

Hello, and welcome to the Greenbrier Company's third-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 call 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, operator, and good morning and welcome to our third-quarter conference call.

I will -- I am joined today by Bill Furman, our CEO.

We will both make some prepared remarks, and then we will turn it back to the operator to open it up for questions.

And as always, we will make -- discuss our results and make a few remarks about the quarter and provide some outlook.

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

Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's 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 results for our third fiscal quarter ended May 31, 2009.

Our earnings before special goodwill impairment charges were $600,000, or $0.03 per share, on revenues of $244 million.

During the quarter, we completed our annual testing for potential impairment of goodwill and took a $51.1 million, or $3.03 per share, after-tax charge.

You will recall this charge is excluded from financial covenant calculations under our amended revolving credit facility.

I want to reiterate despite this charge we believe the strategic and fundamental economic reasons for our prior acquisitions which gave rise to the goodwill in the first place are still intact, regardless of the accounting principles that require us to mark down our investments in the current depressed environment.

Results for the quarter were also impacted by a $0.9 million of pretax costs related to severance costs and interest rate swap breakage costs for the voluntary prepayment of certain debt.

Lastly, the quarter results include a foreign exchange loss of $2.5 million pretax.

We continue to manage the Company for cash and liquidity.

This was a focus of ours during the quarter, and we are glad to have successfully executed on an amendment to our North American revolving line of credit and complete a strategic investment from WL Ross & Company.

During the quarter, we paid down net debt by $19 million.

Our current cash balances are approximately $50 million, and we have $96 million of committed additional borrowing capacity.

We expect to remain out of our domestic lines of credit until market conditions are [approved] or until appropriate opportunities avail themselves.

Now let me add some color on the quarter.

I will not go into detail in each segment as the information is contained in our earnings release, which we provided earlier today.

First, as anticipated, we did see sequential improvement in our refurbishment and parts margins as compared to Q1 and Q2 of this year.

And this is a result of cost reduction efforts and the bottoming of scrap prices in earlier quarters.

We also saw sequential improvement in our manufacturing operations as the result of a product mix on the new railcar side that was more favorable, and continued strong performance by Marine, along with stability provided by our European operations.

Starting in July, we are concentrating new railcar production in North America at our joint venture facility, GIMSA, located in Mexico.

We are shuttering our Concarril facility located in Mexico.

And her in Portland, Oregon at our Gunderson facility, we will be focusing on railcar refurbishment and Marine.

While we expect Marine in Europe to continue to perform well, we hope to maintain a slightly positive margin in manufacturing overall for the manufacturing segment, though this in part will depend on the GE contract.

Turning now to Leasing & Services, our fleet utilization was 92.1% as of the end of the quarter compared to 94.3% at the end of our second fiscal quarter and 96.1% at the end of our third quarter of 2008.

Performance of our lease fleet is feeling the effects of the weak economy.

North American rail loadings are down 20% year-over-year and about 25% of the entire North American fleet is idle.

Lessees are turning back surplus cars and are seeking significantly reduced rental rates at lease expiration.

In other words, it is a buyers' market.

We are placing renewed focus on keeping cars in our lease fleet utilized.

The current quarter also includes on the leasing side a $0.4 million loss on the sale of equipment, while the prior year's third quarter includes $5 million of gains.

The loss we realized for the quarterly is somewhat unusual as it relates to an adjustment to a previously recorded loss contingency for certain recently built AutoMax cars to be sold in the current quarter -- that is the Q4 quarter -- where we have guaranteed future earnings up to defined amount.

We still believe that there is embedded equity in the lease fleet, and we do regularly sell assets and realize gains from the sale of those assets.

We continue to curtail CapEx in the current environment and remain vigilant in doing so.

A reminder on a few housekeeping issues.

We will incur amortization expense of about $2.8 million per annum over the next three years related to the amortization of fees and expenses associated with our recently completed financings.

We are performing evaluation of the warrants, which will also be amortized over the next year three years, that is.

To the extent our average stock price each quarter exceeds the warrant strike price, the number of diluted shares will also be impacted.

Starting in fiscal 2010, a recent accounting pronouncement relating to convertible bonds will be implemented, which also affects the accounting treatment of the convertible bonds on our balance sheet.

On September 1, 2009, we expect to record on the consolidated balance sheet a debt discount of $17 million, a deferred tax liability of $6.7 million and a $10.3 million increase in equity.

The debt discount of $17 million is expected to be amortized through May 2013, and the amortization expense will flow through the P&L.

The pretax amortization is expected to be in the range of $4 million to $5 million per annum over the next three years and then trailing off in fiscal 2013.

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

Thank you, Mark, and thanks to all of you for joining us on this call this morning.

Well, Greenbrier has completed a busy quarter, where much of our effort has been to deal with the unusual industry conditions, on the business side.

Also, as Mark has commented and following the quarter, we achieved our goal of strengthening our balance sheet, reducing our commercial bank credit lines, paying off the bulk of our commercial bank debt and renegotiating covenants to more flexible terms in favor of the Company.

These actions have generally insulated Greenbrier from the risk of cross default exposure in our commercial banking loan agreements.

The earlier bank commitments of $290 million were too large for the present economic environment, and moreover, carried covenants which might under some circumstances have triggered technical exposure to cross default responsibility to bondholders down the line.

We have enjoyed excellent support from our bankers, particularly from the Bank of America, and we thank them for their flexibility in allowing us to reorganize our commercial banking operation consistent with a strategic investment.

By reducing our bank lines and reducing the risk of technical cross default with our commercial bankers, we feel comfortable that we now have a safe cushion of cash, a strong balance sheet and we will be able to enjoy positive cash flow into the future.

With prospects of reviving economy by 2011 and 2012, we believe we can easily handle the loan repayment obligations on the bonds, which do not mature until 2013 and 2015.

The bonds do not contain restrictive covenants which can be tripped by financial performance milestones of the Company, so these are so-called covenant light.

They can only be called or tripped in the case of a cross default in our revolver or in the case of a payment default.

Payments are modest and represent interest only until maturity.

Along with this move, which was taken to make us stronger in a time of tough economic conditions in our industry and throughout the world and a recognition of credit market instability, we also gained three new board members, including Victoria McManus, a recognized expert in our industry, and Wilbur Ross and Wendy Teramoto from the WLR organization.

The most important investment by Mr.

Ross in Greenbrier makes him our largest prospective shareholder and brings with it the possibility of further funding and a platform for opportunity in our core businesses, where we might work together in connection with his business goals to invest in industry assets.

This model, a model that Greenbrier has long pursued with other financial institutions, could allow Greenbrier to invest alongside Mr.

Ross on major transactions and to help him integrate prospective assets with the benefit of our network around the world, with Greenbrier's 40 facilities in North America, its lease origination capabilities, asset management and repair/refurbishment network.

With all of this, we are interested in finding opportunities across our core product groups to work with Mr.

Ross and his associates on attractive investment opportunities, particularly now that asset prices in our sector are so depressed.

So not only has the work of the past quarter and several months insulated us against risk, it also brings significant opportunity to build on a platform that we have carefully put in place in a manner that Greenbrier has done historically with other working partners.

Having said all that, our industry on the new car building side is experiencing very weak visibility and difficult times.

New railcars are being stored in numbers not seen since the early 1980s.

Some of this is due to improved industry velocity, with faster trains and less congestion on the rails in a very bad down economic cycle, given that railroad car loadings have fallen 20% below last year's levels.

It is not at all clear that the velocity improvements made in the rail system will remain permanent, and increased traffic levels in the past have always brought more congestion and more cars out of storage disproportionate to the traffic increases.

Scrapping decisions have been deferred, and with prospects for improvement in this area as the business cycle recovers, many obsolete cars and older cars which are now being stored may be headed to the scrap pile.

Industry backlog in the first calendar quarter ending March 31 had fallen to 26,171 cars, down 5750 units from the previous quarter, and with tank cars representing 54% of the total backlog in that quarter.

While industry data at the end of June has not yet been published, we estimate backlog of approximately 23,875 cars in backlog at the end of June, if orders and build rates are roughly -- result in cutting last quarter's loss roughly in half.

That is to say, a decline in backlog of half of the decline from the last quarter.

So assuming that estimated data point for backlog in June is roughly accurate, Greenbrier's multiyear order with General Electric Railcar Services will represent about 50% of total industry backlog.

This will affect not only Greenbrier, but the entire railcar supply industry throughout the United States in most of the states which produce railcar parts and specialties, including brake systems, truck castings, wheels, axles, bearings, safety appliances, yokes, couplers, centerplates and on and on.

Therefore, our issue with GE is an important issue for not only us, but for the entire industry.

We are pleased that our suppliers have supported us in attempting to reach a fair resolution of this important contract for not only Greenbrier, but for our entire industry in these highly unusual times.

I continue to be very bullish on the rail industry over time, and we are impressed with their resiliency and financial strength throughout this downturn.

That means that when business turns up, they should be up to the challenges of increased traffic, with a green footprint and with fuel efficiency much superior to other options for hauling freight long distances.

I have strong confidence in Greenbrier's ability to continue to make stronger our Greenbrier rail services network, with the rail car repair, [rail] services parts and other services in the leasing side of Greenbrier that can make us efficient value players for a railroad system which is presently running its cars with high velocity and requires all of these services for reliability and safe operations today, even in this market.

Finally, I am pleased that we were turning the corner in many ways during our Q3 and that we continue to pay down debt, with almost another $20 million reduction in the quarter.

We continue to manage for cash flow, and the most important metrics for us during this phase of the cycle is EBITDA, close attention to loan covenants and cash, both on the balance sheet, in cash flow and in undrawn lines of credit.

With that, I will now turn it back to you, Mark.

Thank you, Bill.

And operator, we will turn it back to you to open it up for questions, please.

Thank you.

(Operator Instructions) John Barnes, RBC Capital Markets.

Good morning, guys.

Had a couple of things.

As you look at the General Electric contract, do you have any prior examples of one going like this?

And if so, what was the resolution to it?

Let me answer that that way -- this way, John.

It's not unusual in times like this for companies to ask for renegotiated terms on contracts.

Nor is it, in circumstances like we are in today, unusual for companies to go to their customers.

And we have frequently done that to talk about how the terms of the agreement could be modified in a manner that would be useful for both parties and recognize economic circumstances.

It is very unusual, however, in our industry for contracts to be unilaterally adjusted or simply ignored.

So while there are many instances of both customers and suppliers sitting down and working together, which is what we've certainly attempted over the past months since last October, there appear very few situations which are like the one we currently find ourselves in with General Electric.

Okay.

I think you mentioned in the press release that you are continuing to manufacture cars during the ramp-up phase at the normal level, even though GE is slowing down the acceptance of those cars -- or delivery of those cars.

What are you doing with the cars that are manufactured but not delivered?

Are you just storing them on your -- in your facility until delivery is taken?

No, we are shipping them to General Electric.

Okay.

And are they paying for those cars, even though they are saying they are [expecting] them at a much lower level?

We're not sure.

I mean, we don't know yet, because we have only begun making those shipments to them.

Okay, all right.

Is there any impact on raw material inventory or anything?

Have you had kind of a backup of that as -- is that proving to be a bit of a cash drain, just given how -- the way the contract has slowed down?

Actually, with the way the contract has slowed, the current level of operation -- which we do not wish to continue at this current level because our capacity is much greater -- is positive with respect to cash because we are operating at low levels.

And we are able to keep inventories and the supply chain pipeline in tune with the expected production.

It will become much more problematic as we are ramping up if we can't find a mutually agreeable production schedule.

And of course, there are many other possible ways of resolving issues like this.

I would imagine that with a company of GE's reputation to imagine opportunities and to imagine solutions to complex issues, and they certainly understand the issues that we have to face as a manufacturing company, having run so many world-class manufacturing operations.

And we are hopeful that as this grows in importance and as we are able to obtain their attention that we will find some positive solution that both parties like.

However, it is a very big issue to us, prospectively.

And it's a very big issue to the industry, since it represents 50%, approximately, of the industry backlog.

Sure.

Along those lines, have you incurred any other cost?

I mean, have you -- in the SG&A line, have you seen an increase in legal fees associated with this?

Or is there anything kind of related to this that if this was to correct itself, you would see a lower level of SG&A or something?

Yes, John, this is Mark Rittenbaum.

There is no doubt that we are realizing inefficiencies now.

We described that we are operating at lower levels.

We described that the hypertechnical nature of the inspections, you can imagine, with a contract of this importance that we are putting a lot of energy in it on all fronts.

So we are feeling some of the effects through the P&L.

I wouldn't want to quantify that for a number of reasons.

But yes, we are seeing that.

Yet at the same time, when you reflect on the quarter, with all those factors, including the lower deliveries we would have otherwise anticipated a more efficient operations, we think we ended up with a pretty reasonable quarter under those circumstances.

Sure.

One last question.

After the 550 furloughs that you announced in this press release, can you give us an idea of what full-time equivalents are going to look like, numbers?

As we mentioned in the press release, we are in the process of mothballing our Concarril factory.

That will be another 550 workers.

We will continue to have some attrition unless we can reach the ramp-up levels in the GE contract.

So we would expect perhaps another round of headcount reductions and even compensation reductions in some of the quarters.

I don't have specific numbers that we can release to you.

John, we will get back and maybe post something on that, but I believe that it is likely that we are down to about 2500 or maybe less from a peak of about 4500 or in excess of 4500.

And I should mention that number actually -- would have probably had a peak of closer to 5000 actually, or in excess of 5000 employees.

Okay.

Very good, guys.

Thanks for your time.

Art Hatfield, Morgan, Keegan.

Good morning.

Thank you, gentlemen, for taking the time.

Mark, just a couple questions.

On the two different amortizations that you talked about, the $2.8 million and the $2.4 million, can you give us (technical difficulty) that flows through the income statement?

I'm sorry, Art, you broke out at the last part of that.

Can you -- the question was can I --?

Tell us where those flow through the income statement.

Yes, it will flow through Interest and Other.

Both of those items will?

Yes.

And the amortization -- the $2.8 million, that's an ongoing item.

But the $2.4 million ends in 2013.

Is that correct?

Let me go through the numbers again.

The $2.8 million relates to amortization expense.

And that will go on for three years.

Then I talked about the convertible bonds, and that is a higher number.

The pretax amortization under the convertible bonds will -- which also flows through interest, will be about $4 million in 2010, $4.5 million in 2011, peaking at about $5 million in 2012, and then falling off to $3.5 million in 2013.

And that amortization represents the earliest maturity date of the convertible bonds.

I got it.

Okay, thank you.

That's helpful.

Right.

Then there will be one last one that we have not quantified yet, but that we will also place a fair market value on the warrants that were issued.

And we will be amortizing that over the next three years, as well.

I don't want to put a specific number, but it is going to be somewhere in the ranges of the numbers -- between the ranges of the numbers I talked about on the two previous numbers that I talked about.

Do you have a timing on when you will kind of have that number?

It will be in Q4.

That analysis will be completed in our Q4.

Got it.

Okay.

That is very helpful.

The other thing -- oh, and on all this, you didn't have any of this in Q3.

This all starts in Q4, correct?

That is correct.

Okay.

Just a quick question on cash flow.

Do we think about your business, I guess, in the past or going forward, as having any seasonality to the cash flow?

And also, looking at the balance sheet, it seems like you are doing -- you are having a good time collecting on Accounts Receivable.

But is there anything underlying there where you are seeing some slow pay or having problems collecting with any -- from customers at this point in time?

Let me address that second part first.

As we are managing for cash, certainly we put a strong emphasis this year on working capital management, inventory payables/receivables, and we are seeing the benefits of that.

Overall, in terms of cash collections, we are not having any significant issues there in either of the three of our business segments.

So while we would see some slight, perhaps, increase in what is called utilization type leases with perhaps weaker, smaller railroads, overall these are not really very material to the financials.

So I would say that is not really an issue.

But we are -- we do actively focus on that, particularly on the leasing and the refurbishment and parts side of the business with smaller customers.

In terms of the seasonality of the business, I would say that it always seems like the second half of our year, our fiscal year, we build up momentum during the year.

Now, some of that is in Q2 with the holiday season, as well as customers typically tend to scale back or adjust their capital expenditures later in the calendar year and may curtail capital in the latter part of the year.

That is probably why we feel some of that at the end of our fiscal quarter -- our Q1 and our Q2.

So I can't point to -- so generally speaking, we do see momentum as the year builds up, and for the reasons I just discussed.

Okay.

That's helpful.

Thanks for your time.

Frank Magdlen, the Robins Group.

Could you give us a little detail in the quarter of what -- how much barge revenue was there, Mark, in the quarter, and how many barges are in backlog?

Yes, Frank, the barges in the backlog -- let me -- just let me turn to that for a minute here.

The revenues are approximately $25 million for the quarter.

The barges -- why don't I come back to that, Frank?

I think the number is around 10, but let me come back to that.

All right.

And then looking forward on the Marine business, what would be a reasonable run rate?

It seems -- is that still in the $80 million to $100 million range?

Yes, we had talked a year ago about this being $100 million a year revenue business with the current footprint.

With some adjustments in the work force directed to new cars at Gunderson, we have taken some steps to improve that footprint somewhat.

So we think that $100 million a year is capable (inaudible).

That depends of course -- we're capable of that.

It depends a lot on the mix, the product mix.

Fortunately now, we have a fairly significant run of vessels for customers that have been longtime customers of the Company, and they are large vessels.

So we have consistency in the production function there.

So I think that $80 million to $100 million is a good range for that business, and probably tending on the upper range.

We still don't see -- we still see opportunities in that market just due to the basic demographics underlying it, and we are happy that we've got the backlog we have there.

We will be looking in the future for similar niche Marine bolt-on opportunities if we can.

The facility at Gunderson has a good balance now between Marine repair and repair work which we are putting into Gunderson and also still capability of new car construction.

All right.

Go ahead.

Frank, just to close the loop on your prior question, my memory was correct.

It is 10 units in backlog.

All right.

Bill, when you look at the repair and refurbishment business, what is your outlook there going forward, both from a revenue standpoint -- are we at the trough or do we see a gradual decline from this last quarter?

And where might gross margins go from here if scrap prices remain flat?

We have kind of a natural hedge in that business.

On the wheel side -- we want to be sure we are talking about the same unit; the GRS unit has repair refurbishment wheels and parts.

And on the wheel side and in all of the unit, we generate a considerable amount of scrap, but we also have scrap surcharges.

And that business has been a good business to offset variations in input costs on the marine construction and the rail construction costs.

So it's something of a natural hedge.

I see that business as organically one of the stronger parts of our business.

I think our leasing business will continue to be strong, although with storage statistics as high as they are, we are not immune to that.

Generally speaking, car owners are turning back leased equipment or really negotiating very aggressively on leased equipment when it comes back.

So of all of the business units that we have today, I think that the GRS businesses are poised for a stronger recovery, with the possible exception of Marine, and an even growth.

And there are two or three reasons for that.

One is that the railroads are operating very efficiently with high velocity.

Two, railroads and other owners of equipment are deferring maintenance.

Three, that maintenance can't be deferred forever.

And finally, when the traffic does tick up, there will be kind of an acceleration effect on the need to put cars back into shape.

But lastly and probably more importantly, throughout the national system, of North American system, these cars represent a lost opportunity for exchange, for reengineering, for remarketing, and they represent an interesting pool of very underutilized assets, which in itself is an opportunity.

In the past, we have tapped into that pool, and by innovative transactions with our customers, we have managed to find ways to help them create value using our engineering and other capabilities and remarketing capabilities.

So we are looking at some potential deals there that could bolster the margins of that unit.

And so what we need is program work at a time like this where we can put significant cars through a shop, and I'm kind of excited about the opportunity to fully deploy our commercial organization into that field of opportunity.

Can you elaborate?

Would this be like taking an older intermodal car and making it available to carry wind towers or something else like that or --?

I can give you an example of some of the things we are doing.

We are cutting cars today, and we are extending cars today.

We are looking at extensions of 48 and even 40-foot container cars into a domestic container size, 53-foot size.

And we are cutting down 48-foot cars to 40-foot cars in the intermodal arena.

In the past, we've reconfigured [TOC-COC] cars to auto-rack cars and auto-rack cars back to TOC-COC cars.

We have significantly modified the size and delivery capacity of a variety of covered hopper cars in the past.

And the necessary thing for that is the engineering experience, and finally, the remarketing capability.

Because for cars that are stored, maybe they may not be useful to one party, but another party in a different configuration may have a need for that equipment.

So the marginal cost of that car to the owner is -- it is a sub cost, and any revenue that can be created on it theoretically is valuable.

So it is a very interesting area, but where this would hit our financials is that we are seeing our program work component in the GRS business declining, and what we need to do is boost that.

We know the techniques we can use to boost it, and I think it would show up in more program work in successive quarters, probably getting us in second half of 2010 to really ramp up and gear -- in our fiscal 2010 to really get these things going, if we are successful in achieving a couple of those goals.

All right.

And then on the backlog, the non-GE backlog is about 2300 units.

How much of that is Europe and about how long will it take you to go through that backlog?

I think at current levels, approximately half of it is in Europe, 1000 cars.

We have a fairly solid backlog for GIMSA, with covered hoppers, with another major railroad, a good contract.

A contract that has been in all respects, even though in these times that contract could not be -- would not be done those prices and probably the cars would not even be ordered.

But they were ordered, and they were ordered at those prices and the customer is honoring the contract.

So that is a positive thing.

Our European operation actually is running at slower rates with a goal to break even or better.

It has fairly decent prospects over there to continue either -- with a stable backlog at the current rates.

And it has a lot of prospective opportunities that changes business model by duplicating the business model we have over here.

The fellow we've had running Europe in the last six months, William Glenn, has been promoted and will be our Vice President of Strategic Planning, but not only in charge of Europe, but will be our Chief Commercial Officer.

And one of our goals is to integrate each of our business units in the way they deliver their products and services to market so that we are offering our customers the unified capacity of our entire system.

And we think we can create considerable value if we approach the market in a different way.

All right.

Thank you.

Paul Bodnar, Longbow Research.

Yes, just to start off, just as a follow-up to that last question, you said Europe in the quarter then was probably at least break even or slightly better than?

Correct.

And it is -- then it is fair to assume, I guess, that obviously on a gross profit basis, barge is profitable, but then on a -- rest of your manufacturing operations were at probably a slight loss then -- in the quarter on a gross profit basis?

That's probably an accurate -- looking at North America Rail.

Okay.

Great.

That's helpful.

And then also, I just wanted to see if you could give a little more clarity on refurbishment parts.

You guys were talking a little bit about your outlook there.

What are you seeing right now in terms of call it more standard maintenance, replacement of wheel sets, things like that, that just get wear and tear, the decline on that side versus the decline in obviously overall refurbishment work?

I don't know if you can talk a little bit -- one, what you've seen so far year to date --.

Certainly, when you have railroad loadings decline by 20%, even though the trains are running faster, more miles per day, the algorithm for that is a little difficult to decipher throughout the whole network of rail operations.

But it definitely results in some softening on the repair and the use of wheels.

We had not seen a lot of that until probably in this quarter for the first time there has been a bit of softening.

There is a limit to how far that can go in some of those categories, because the faster the trains run, the more of these expendables they consume.

So we think that by managing that business very aggressively and competitively, while we may have to sacrifice a bit of margin, we think we can get our fair share of the businesses that is out there.

Do you think that is a low double digits type -- low teens decline on the top line, of that kind of standard type maintenance work, is fair to look at right now, or do you think it is going to be a little worse, better than?

I don't know how to answer that.

I know if you look at the segment information that we provide, you see that margins have declined in that segment as revenues have declined.

And I kind of would go back to what we talked about earlier.

I think just in terms of the macroeconomic outlook that the US railroad system is going to benefit from the coming decade, not -- it's not going to be -- I think we're kind of turning the corner here.

I hope that's true, at least.

But there are very good reasons, economic reasons, to assume that will be true, I think as it relates to railroads.

Especially if we look at current season and we look at the potential for a declining dollar.

And we are a source of tremendous commodities in this country, and railroads are the best way to move commodities.

Whether they are coming in or going out, any change in currencies in one direction or another will favor some movement of some kind.

So I think that in the longer term the railroad business is a great bet.

I have been through many cycles where I have seen cars parked and then have seen railroads and shipping companies and leasing companies just dying to have those cars in another short few years.

So it can reverse itself very quickly.

The demographics of this business are peculiar to this business.

I think the macroeconomic environment is a very positive for this business, particularly when you look at green and fuel efficiency factors in that equation.

One follow-up on that is last thing was just -- and I don't know how much this affects your guys' parts, but are you seeing any kind of cannibalization of some of these idle cars for parts?

Has that impacted your business at all right now, or --?

Yes, there is a bit of that going on.

They are -- scrap market has been down.

The international scrap market is a little higher.

We expect that to come back earlier than domestic, but it will come back with any economic recovery.

We have all seen how oil has behaved and other commodities that are subject to scarcity are likely to behave in similar ways.

I think that it's a -- it's just a hard thing to predict in the really short term, but it looks like to me the longer you get out the more visibility in a way that you can see.

So you are saying if steel prices come up, basically, that people will stop cannibalizing for parts and start scrapping cars?

Yes, I think, Paul, there is no doubt that when scrap prices pick back up you will see more of this happening and more scrapping of cars occur.

When he says scrapping of cars, he actually means scrapping, because the idea of cannibalizing cars --.

-- borrowing cars --.

Yes, it used to work really well, but the railroads in the last decade have really increased their emphasis on safety, capacity, upgrading the quality of their equipment.

And so with some of the new safety rules, there is a limited amount of used parts that can actually be processed into a used car even.

There are still great examples of how you can reduce the cost of a car by using parts -- that still have part of (inaudible).

But there are -- there are just going to be a lot of cars that people don't want to scrap today because they are going to be valuable in the future, either in use or -- what most people who have cars think of them as value in use or they will have more value in exchange.

And that is where we can come in, because we have knowledge of how the railroads and the shipping companies operate, and we can play in both of those notions of value.

So it's really going to be the scrapping decision.

And a lot of the cars that we hear hysterical things about -- we hear 500,000 cars are stored, and many railroaders think it is closer to 300,000 that are actually stored, and are really stored stored.

Some of them are taken out and put back in service, and they are put back -- if they go bad order, they are put back.

[Fiscally], that can be quite a bonanza for us later, because they are going to have to fix those cars when traffic pulls up.

So if they run a car, then they bad order it, ship it out to a siting and just don't want to fix it, that car eventually is a good car and it will have to get fixed.

And so we may have to wait a while, but it will be good.

Good.

Thanks a lot, guys.

John Parker, Jefferies.

It seems like your negotiations with GE continue to be difficult.

I'm wondering if you are forced to adhere to the schedule they are trying to implement, would there be additional consolidation and furloughs required?

If we were forced to do that -- well, I'm not sure we will be forced to.

We won't do it if we can avoid it.

But if that were true, there would be additional furloughs.

Okay.

And then it seems in the last call you indicated you thought your manufacturing margins would be maybe slightly above breakeven in the prior quarter and then getting positive in the last quarter of the year.

But you came in with positive gross margins in your manufacturing segment for the quarter.

I'm wondering what caused the surprise.

And I think you indicated -- I just wanted to make sure I heard you correctly -- that they might be under a little bit of downward pressure in the final quarter because of some adjustments you are making, movements.

But could you comment on those two things?

Some of the -- I think Marine has been a strong performer, and some of the positives from this quarter were related to Marine.

We also said we had a favorable product mix this quarter.

So partly looking out -- Marine accounting is on percentage of completion method as well -- but partly looking out is to we are consolidating our new rail car production.

We are currently not hitting -- we've talked about the GE contracts -- so we are cautious that we'll be -- and will have the effects of Concarril now being shut down and Gunderson not producing new rail cars.

So that is the reason we are a little bit more muted about the margins over the next few quarters here, particularly until we get more visibility on the GE contract.

Okay.

That's all I have.

Thank you very much for your help.

Sandy Burns, Sterne, Agee.

Good morning.

Just in terms of the whole issue of scrapping railcars that you've been talking about, where it sounds like there is maybe not a lot of cars being scrapped at this time.

So I guess what do you hear from customers in addition to what may cause them to start scrapping cars?

Because I would think that ultimately if there is a lot of cars scrapped, then ultimately that would create demand for the new cars that you are looking to produce.

Yes, that's absolutely right.

Demographically, scrap is a valuable global commodity.

And there are companies -- I sit on the board of one -- that is a primary exporter of scrap.

Globally, scrap is an item that has many attributes that are quite attractive in making steel with new technology furnaces.

And globally, except in bad cycles like this, it is generally in short supply.

So scrap, while it is down today, is not likely to permanently remain up.

And in fact as soon as the economy recovers, it and other commodities will become, I believe, more valuable.

The reason that people aren't scrapping today if they can afford it is that -- and especially people who own lots of cars in storage -- is that they can store the cars.

It doesn't -- as long as it doesn't cost them to store the cars, they can even load the cars with scrap and they can wait for a reasonable period of time.

They can do the discounted cash flow themselves, and it's a fairly sure bet that over time, scrap markets will recover relative to where they are today.

So I think this is just a deferral of scrap decisions that is currently going on.

And I guess related to that then, I know in the past you've commented on what percent of the fleet that's out there is currently idle.

Can you give any current updates on what that was?

I think in the past you've mentioned maybe 20%, 25% or so, as I recall.

Do you have any further thoughts on how much excess supply you feel is out there at this point in time?

There really isn't good demographic data on that.

It just doesn't exist.

The individual railroads well tell each other and suppliers what they are doing, but that is just the tip of the iceberg.

So we know that estimates have been as much as 500,000 cars, which would be approximately a third of the fleet.

We estimate that it is lower than that, somewhere in the 20% to 25% of the entire fleet.

But again, it is depends on how you define an idle or stored car.

Some of these cars are obsolete cars and they should be scrapped, and for one reason or another, and sometimes it could be a very arcane reason, they are just stuck in a train somewhere and it is just not worth pulling them out for scrap until the economy recovers.

Because the shipping charges -- the shipping costs or the switching costs can be an impediment to operating efficiency at a time like this.

So I think it is -- some people are defining those cars as part of a larger number.

And if you talk to a railroad executive, you probably get a lower number, something like 300,000 real surplus cars that are scrap, that are probably good cars -- or that are stored that are probably good cars.

Now, that's not an inconsequential number because it is several years of manufacturing capacity.

Right.

Okay.

And just turning to the financial situation, with the Ross investment, you also have the ability for an additional $75 million loan from his firm.

I just wondered, can you give us an idea is that specified for certain uses, or could that be drawn down just to buy back bonds or repurchase stock or just repay some of the other debt obligations you have currently outstanding?

The other $75 million, the conditions to those would need to be worked -- mutually agreed upon as far as the terms of it.

But similar to our first $75 million -- or I should say with the first $75 million, there are no limitations on the use of proceeds of the funds of that $75 million, nor would we expect if we were to have another tranche of $75 million that it would be constrained.

Rather, we would have an understanding before -- just a good understanding before going into that $75 million about the outlook of the business.

But again, the much more exciting platform that has been created with having a shareholder like Mr.

Ross, whose timing instincts in looking at distressed industries he is very famous for this -- and I can see why; he is a brilliant man -- we see a lot of opportunity with our fixed asset infrastructure, the overhead costs that we've already established in North America, to facilitate investments by him and his associates and his funds in businesses that are of interest to us both.

There ought to be many opportunities -- railcars, factories -- if one has the assumption that over time the US economy will recover and we will be manufacturing in America.

I think that is the more significant opportunity, is that we have had a history of doing that with many financial institutions.

We don't -- so managing assets, originating assets, maintaining assets, whether it would be a factory or it would be a fleet of railcars, one of the benefits to his organization is that he can simply plug in to ours and, for a modest amount of income, which would be meaningful to us, but much less than it would cost for him to duplicate the overhead to run something on any scale, we have a very attractive kind of model that could help Greenbrier obtain scale benefits.

And I think all companies of our size have to think about that.

We are a small, public small-cap company.

And one of the issues we are all dealing with is -- as the governance and other things change is scale.

So I think this is an opportunity, if we get along and we are able to identify these and execute on them, to really do some exciting things together.

Great.

Thanks.

And just one last question as a follow-up.

Given how you have now solidified your liquidity and bank covenant situation with that investment, since the time of the investment or as you think going forward, has the Company considered buying back any of the Senior Notes or convertible notes that are currently trading at depressed levels?

We have.

That has been intriguing.

It remains intriguing.

And I'm sure at the Board level we will have more discussion on that as well.

So that is -- when we look at opportunities, we definitely -- and returns on invested capital, we are definitely evaluating our bonds.

Great.

Thanks, and good luck.

Brian Keeley, Keeley Asset Management.

Good morning.

I just wanted to ask a quick question regarding your manufacturing segment, whether you feel that the car loadings being down 20% for a couple of quarters here are fully into the manufacturing or if there is more pain to come or --?

I know you expect a quick recovery if it recovers, but can you help me get a handle on that?

I'm skeptical about a quick recovery.

I'm sorry if I gave you -- in that segment.

I think the storage statistics are imposing; the car loadings are down, and as long as they are down, more pain will ensue.

I think the car builders who don't have other diversified revenue bases are going to really feel the pain, because my analysis, our analysis is that most of the backlog will be running out by the end of 2009.

So I think by 2010, late '10 or perhaps by 2011, that cycle will be adjusted.

Having said that, the time will pass, and when that time occurs, the business will be attractive again.

The thing you have to watch, though, very closely in the rail business is that it seems like it is boom and bust, but there are very good mathematical reasons why these things occur.

If traffic goes down 20%, storage goes up by more than 20%, or there are underutilized cars certainly by more than 20%.

Deferred maintenance occurs.

When the rubber band snaps back the other way, it snaps back in those two dimensions at a faster pace.

So cars are pulled out, cars are fixed.

There is a big, frantic amount of activity.

It is a very difficult for us to determine how much of the efficiencies that railroads have achieved are true efficiencies and how much is just this rubber-band effect that is normal for every business cycle.

Industry observers know this quite well, but people from outside the industry are always amazed at how quickly the worm can turn in one direction or another in the railcar building cycle.

So I think over a five-year period or six-year period, the data that is published -- and I know you guys read -- is fairly accurate.

But for any particular year or two-year period, it is a little bit of a crapshoot.

I acknowledge the snap-back.

I didn't mean to infer that you were saying anything different.

I guess what I was asking is if it maintains being down 20%, are you comfortable with these run rates on the revenue numbers over on the manufacturing side?

Or is there a whole bunch of longer-term -- not on the manufacturing -- on the repair -- or is there some longer repair stuff that has rolled off and needs to be replenished, that type of stuff?

Okay, well I may have misunderstood your question a bit.

First, just to finish up on manufacturing, we feel very comfortable with the reduced footprint and the reduced scale of the current manufacturing.

We've got a good franchise, a very good facility at GIMSA in Mexico and a good facility that is resilient in Portland.

And our Polish facility has a great deal of promise.

So we feel comfortable at where the current level is that with the Marine manufacturing segment as well -- or part of this as well -- that we can weather the storm and manufacture.

And we've taken the steps that will allow us to do it.

I think the much more exciting area is the service business, the repair, refurbishment, wheels, parts, axles, those kinds of things that -- and as you know, we've built that business to about $500 million a year in revenue, higher than that on a normalized level.

Since we've been spending quite a bit of time the last two quarters on our financial viability and our balance sheet, we've probably haven't put the kind of attention into the opportunity side on that.

So I think there is a great potential for improved margins and improved revenue in the GRS business segment at Greenbrier.

I am actually very excited about it in conjunction with this new association with Wilbur Ross.

Very good.

Nice quarter.

Thank you.

Operator, I think we have time for one last question.

Frank Magdlen, The Robins Group.

Mark, could you just give us an update on your CapEx for this year and for next year, if you have an estimate?

Frank, for this year, the total CapEx for manufacturing and refurbishment and parts will be about $17 million.

We are expecting Leasing & Services to actually be neutral to -- maybe neutral with a little plus or minus on either end.

For fiscal 2010, we are going to go through the same austerity type program.

I'm expecting that refurbishment and parts or that -- I'm expecting in 2010, depending on the outlook here and some of the factors that Bill talked about, that for our own book that we're probably going to be around the same levels at this point.

All right.

And then is $17 million roughly a maintenance CapEx number or is that a little bit lower?

Maintenance is probably a little bit lower because we still had some CapEx this year related to our tank car line.

So when I talk about levels next year, there are some -- I'm allowing for some leeway for a little bit beyond maintenance CapEx.

But I'd say maintenance CapEx is a little bit lower than that number.

All right.

Thank you very much.

Operator, I believe that with that, we will wrap up the call.

We appreciate everybody's participation in the call and interest in the Company.

Thank you, and have a good day.