Greenbrier Companies Inc (GBX) 2010 Q3 法說會逐字稿

Hello, and welcome to The Greenbrier Companies third quarter of fiscal 2010 earnings 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 call over to Mr. Mark Rittenbaum, Executive Vice President and Chief Financial Officer. Mr. Rittenbaum, you may begin.

Good morning, everyone, and welcome to our third-quarter conference call. I am joined today by Bill Furman, our CEO. On today's call as always we will discuss the results for the quarter and make a few remarks about it, and then we will update you on our outlook and then open it up for questions.

But first again, as always, matters discussed in the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today we will describe some of the important factors that could cause our actual results in 2010 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company.

With that behind us, today we reported our results for the third quarter ended May 31 and that earnings attributable to Greenbrier were $4.6 million or $0.23 per diluted share on revenues of $211.5 million. Results for the quarter include non-cash charges of $1.2 million net of tax or $0.06 per share per [warrant] amortization expense and amortization of convertible debt discount, both non-cash charges. These non-cash charges will continue to appear in 2012 and 2013.

In addition, during the quarter we realized a net gain from extinguishment of debt of $0.8 million net of tax or $0.04 per diluted share. Both of these amounts are included in interest and foreign-exchange expense on our income statement.

As anticipated, the results for the quarter were stronger than the first and second quarter and, similar to prior years, we expect the operating results for the second half of the year will be stronger than the first half. We also anticipate that the Q3 that just ended will be our strongest quarter for the year.

As previously stated, for the year as a whole we anticipate modestly higher EBITDA before special charges on lower revenues than 2009. You will note our weighted average diluted share count increased in Q3 as compared to Q2 for two reasons. The 4.5 million share equity offering we completed on May 6 such that effectively Q3 includes less than one month of the additional share count; and second, the dilutive effect of warrants to purchase 3.4 million shares of our common stock. The warrants are only included in the diluted share count when we are making money, and the dilutive effect is based on the treasury stock method using the average market price for our stock during the quarter. For the third quarter, dilution from the warrants totaled 1.8 million shares.

Now let me address some highlights. I will include additional color by providing comparisons of our Q3 results to our Q2 results, since the news release and our 10-Q goes into detailed comparisons to the prior comparable period in 2009.

First with our refurbishment and parts segments, as a reminder, we derive revenue and margin from three sources; repair and refurbishment, wheel services and parts. All three reported stronger revenue on a sequential basis as compared to Q2, and gross margin for this segment was 13.8% of revenues, up sequentially from 11.6% in Q2. The revenue increase is principally due to higher volumes of work resulting from increases in rail loadings, which in turn lead to more cars moving overall, but also more cars coming out of storage and into service, many of which are in need of repair.

In addition, our wheel services business benefited from higher scrap prices, which have dropped a bit since quarter end. Our repair business is operating at high utilization levels, although as we mentioned last quarter, the mix is still more heavily weighted to repair rather than higher-margin refurbishment work. Our wheel volumes have not recovered as rapidly as we might have expected as our customers are more tightly managing this expense item.

Turning to our manufacturing segment, we delivered 700 cars this quarter compared to 800 cars in Q2. Year-to-date deliveries are 1800 units. For the year as a whole we expect to deliver 2600 units. So this means Q4 deliveries are estimated to be about 800 units.

As previously reported, near the end of the quarter we slowed down marine production rates as a result of current market conditions. Manufacturing gross margin for the third quarter was a very strong 11.5% of revenue, up from 7.3% in Q2. We expect margins -- this type of margin will not be sustainable in Q4, but it will be closer to the first half of the year for two reasons; a less favorable product mix and operating at lower marine production rates, as during this quarter we did benefit from higher production rates and a favorable product mix as well as favorable exchange rates in Europe.

During the fourth quarter, we will continue to evaluate marine production rates based on market demand and outlook. As we noted in our press release, during the quarter new railcar orders exceeded production rates, and in July our second facility in Mexico recommenced new railcar production as the result of increased demand.

Some may look at our backlog and ask, if our backlog is unchanged from last quarter in terms of unit count, how can new orders that we report exceed production? And the answer is that we only include in deliveries and backlog those units that we expect to sell to third parties, while production and orders include cars that we intend to hold for our lease fleet as well there can be timing differences between when we produce a railcar and when it is delivered to a customer and are counted in our deliveries for revenue recognition.

Turning now to Leasing & Services, segment revenue was $21.4 million compared to $17.6 million last quarter. Our fleet utilization was up sequentially to 94.5% compared to 92.4% last quarter. This helped contribute to higher revenues. Much of the revenue increase, though, was attributable to pretax gains on sale of leased equipment, which were $3.1 million in the quarter compared to $0.1 million in the prior quarter.

I would like to remind participants that these sales occur as a normal course of our business, and over the past five years gains on sales have averaged $8.1 million per year. We anticipate several million dollars of gain in Q4 as well.

Leasing & Services gross margin for the quarter was 53.6% of revenue compared to 38.5% last quarter. The sales of leased equipment always has a positive impact on gross margin as the gain on the sale goes directly to the margin line. It is reported in revenue and goes directly to margin and -- as there is no cost of revenue.

Looking ahead, we are optimistic that leasing margins, that is margins from the actual leasing of the 8000 cars that we own, will improve as market conditions improve and we are able to negotiate higher lease rates on leases that are maturing, and that our utilization-based leases will also generate more revenue.

Turning to selling and administrative costs, they grew by $0.5 million compared to last quarter, and the increase is primarily due to research and development costs in Europe associated with the engineering and certification of new designs.

Interest in foreign exchange expense was $9.5 million for the quarter compared to $12.4 million last quarter. The current quarter includes a $1.3 million net gain on a pretax basis from the extinguishment of debt, and that is $22 million of our convertible bonds that we bought back during the quarter as well as retired $3 million of term debt. In addition, the prior quarter had a foreign exchange loss of $0.7 million compared to foreign exchange gain of $0.1 million in the current quarter.

Finally, there is lower interest expense due to lower outstanding borrowings, and we believe on a normalized basis this line item should run about $11 million to $11.5 million per quarter. We anticipate net CapEx will run about $20 million in 2010, and our depreciation and amortization will run about $40 million per annum.

Finally, we continue to manage the Company with a view towards cash flow liquidity and paying down debt. We ended the quarter with $117 million of cash and $106 million of additional borrowing capacity. Of course during the quarter we completed our equity offering, and a result of the equity offering and the paydown of debt we reduced net debt by $75 million, or one whole turn of EBITDA.

We intend to use the proceeds from our offering both in growth opportunities in our core businesses and to selectively pay down debt. Exact mix will depend on the opportunities. As a result of the equity offering, we have strengthened the balance sheet and are much more comfortable with our leverage and financial ratios when you look at them in a more normalized operating environment. This in turn allows us to play more offense while also protecting us should some of the recent economic fears ring true.

So these are my comments. I will now turn it over to Bill, and then we'll open it up for questions.

Thank you, Mark. We are pleased with the directional improvement in financial and operating performance. And as Mark has said, we had a very busy quarter in Q3.

I will start with just a few observations on the quarter and then move to a few remarks about our business segments. I'm going to keep my remarks today fairly general and brief because Mark has covered a lot of the granular points that I think many of you will be interested in hearing about in Q&A.

First, looking at the quarter, looking at the overall market for our products and services, we believe the year continues to play out as we expected, with the second half much stronger than the first, both for historical reasons but also due to recovery in the market. In fact, business in the third quarter increased even though individual segment results did shift.

And while manufacturing revenues continued to lag 2008 and 2009 in total, the pricing and market conditions in the rail environment are becoming more favorable while, as Mark has indicated, marine is showing some lagging effects of the recession in part due to uncertainties in the Gulf and our product mix at the Gundersen facility.

The leasing environment is modestly improving and utilization has increased, as is spelled out in our press release. We are pleased with that sequential improvement in utilization over the past several quarters. Railcars continue to come out of storage, which has had a positive impact on our refurbishment and parts business and ultimately on the manufacturing segment in rail.

Overall, industry metrics remain positive such as car loadings, velocity and volume. For example, in June intermodal traffic reached its highest level since 2008, and the mix of intermodal traffic with very low growth in trailers, higher growth in containers is important to understand and analyze.

North American traffic statistics remain up year-over-year for the first 25 weeks of the year through June 2010, although down from 2008 peak levels. All traffic was up 10.5% from last year, and intermodal trailers and containers in North America were up 13% from last year. These statistics were driven by specific product or commodity movements, stronger traffic in chemicals up 15%, metallic ores and metals up 56%, motor vehicles up 43%, and intermodal containers, as opposed to total intermodal movement, 15%. Within that mix of intermodal containers there are both domestic and international containers, which is an important thing to also analyze.

Coal remained flat to slightly negative, actually eclipsed by some welcome positive growth, 3% in forest products. Coal remains a drag on railroad car loadings with inventories of coal stock at record levels. And as we all know, coal is an important railroad traffic -- of the railroad traffic growth without the boost from coal is in fact a very positive story, looking at other parts of the total railcar and car-loading pie chart.

As we diversify our business, first at Greenbrier Rail Services and refurbishment and wheels and parts, and more recently in leasing services, we believe we are positioning ourselves to gain from a larger share of total spend from customers and provide more integrated solution to our customers, part of our longer-term plan to diversify the business.

Moving now to refurbishment and parts. Over the past 18 months, our refurbishment and parts segments, which we refer to as Greenbrier Rail Services internally, has been the largest revenue segment of our business a majority of the time and provides a high percentage of our gross margin. We anticipate that this business will continue to demonstrate growth as cars come out of storage; and as railroad traffic is sustained, the economic recovery is a sustained.

We do face some headwinds in wheels as scrap pricing is expected to moderate and has moderated slightly by about $40 to $50 per ton. In moving forward, however, that, we believe, will be temporary and should resume its separate level of growth in the next few quarters.

Volumes, as Mark has indicated, in wheels also have been lower than expected. And while this lag is not unusual of wheels, we really expect to have recovery to anticipated levels in early -- by early 2011. So the outlook in this segment is very good. And meanwhile, we are very pleased that the repair and refurbishment subsegment of this business is picking up some of the slack from lower wheel volumes.

Turning to manufacturing, two areas of relative strength in the marketplace important to us during the last quarter and in trending were demand for certain types of covered hopper cars, and as Mark says, we've opened a second line at our Concarril facility after reopening that facility. So we will be producing freight cars in Mexico at two facilities on four lines, counting tank cars under the GE contract.

Shrinking storage -- [to six] on intermodal cars is the second area that has been positive for us. As most of you who follow the stock recognized over the past two decades, we have provided about 60% of the total intermodal double stack railcars in North America. And we expect to be able to maintain our market share when that market recovers.

There have been no new car builds in double stack for the past two years. We do anticipate some builds by early 2011.

I continue to believe that published storage statistics that affect our manufacturing segment overstate the actual surplus. While certainly a large number of freight cars are stored, perhaps as many as 20% now of the total industry fleet, there are many, many mitigating factors that make this statistic difficult to analyze. And the situation can change quickly as we've seen in the last quarter, as traffic increases and velocity on the railroads possibly decreases due to increased congestion.

Looking ahead, we expect improved manufacturing production in rail in Q4 and into 2011. And while Mark has mentioned we may have some headwinds in our marine business, marine could either be a driver of continued strong profitability in manufacturing or we could see some pressure for renegotiation of contracts and substitution of business as we have seen in the past and the rail segment moving forward. And it's not possible to tell at this time which of those two scenarios will play out. Needless to say, we are paying a great deal of attention to that.

Turning to Europe and overall looking at backlog in North America, we are seeing improved inquiry activity in both of those markets, and we are maintaining backlog. Particularly for Europe, Q3 was a critical quarter and we did much better there than we had expected operationally and in terms of replenishing our backlog with new transaction. Curiously, while much has been written about the Greek crisis and the effects on the European market, the lower euro has changed the dynamics of the European market and demand is stronger than one might expect.

Turning to leasing, there are many improving signals. Railcars are continuing to come out of storage, possibly slowing a slight bit in some car types in the last quarter over the quarter before. However, they continue to come out of storage in large quantities. Lease rates have stabilized or in some cases improved. Utilization has improved and lease fleet sales are possible on reasonable terms.

This last point is a very important thing to our lease syndication business with banks, fellow leasing companies and other institutions; and in the past has been a big driver of past income through and during cyclical recoveries. I would be happy to talk about the details of why that is true, but it relates to the increased activity of warehousing and syndicating transactions, which then translates into asset sales as Mark was talking about in his comments.

Finally, we are pleased, talking about leasing, with the formation of WL Ross, Greenbrier Rail Holdings LLC, which acquired 4000 railcars in the quarter, our first significant operational participation with WL Ross. This is a very positive development because originally we made that investment as a strategic alignment anticipating that we would have operational synergies but really as a defensive move to strengthen our balance sheet. So we were pleased as we see that plan coming together.

Just in summary, we continue to believe that our differentiated strategy is the right course for Greenbrier, adding to the mix of customer options and providing a wide variety of railcar-related solutions in both North America and Europe. Our execution is on target in terms of achieving reduced business volatility, capitalizing on our growth opportunities, managing for cash, serving our customers as a strategic vendor, increasing market share, and returning to profitability in 2010; all of which were goals earlier announced at the beginning of the year.

Our public offering in the quarter raised equity which we can use for growth and to pay down debt, and we do intend to aggressively manage our debt moving forward and to manage liquidity. Headwinds in early 2011 are expected from a loss of one important contract in our leasing business in 2011. However, we expect to be able to make that up from our increased services, higher -- in the leasing business, higher utilization and improved earnings on interim rent.

So we think that the leasing business will continue to be a good one in 2011. In fact, all three segments have considerable upside in 2011 but especially topline and operating profit growth potential in manufacturing and GRS can be very meaningful. Looking at historical data, we see GRS as a $600 million to $700 million business, and in the past, even in a less than normalized environment, manufacturing has been a big contributor to EBITDA. So we believe in 2011, if the recovery is sustained, that the future is relatively bright. Mark, back to you.

Thank you, Bill. And for those of you -- I know we use a lot of acronyms and sometimes we refer to our refurbishment and parts business as GRS, as well, which stands for Greenbrier Rail Services, so those two are one and the same.

And operator, we will go ahead and open it up for questions now please.

(Operator Instructions) Steve Barger, KeyBanc Capital Markets.

First question, can you talk about some of the mitigating factors that might skew the cars and storage number?

Yes, there are several. Just bullet points. First, queuing of cars and the ability to pull cars out that might be required in long storage queues, switching and other frictional aspects of getting cars back out of storage is not something that can be taken lightly in railroad operating terms. So sometimes you can have cars stored that are difficult to access. Many of the cars that can be stored can be stored in bad order and will require repair. So sometimes railroads and other customers will look at alternate options. But it's a frictional point.

Secondly, there is a substantial amount of obsolete equipment in the mix that either is not suitable for service, and an example of that would be, for example, 48-foot container-only double stack equipment that doesn't really match the need for either 40-foot equipment or 53-foot containers, which are the two significant areas of traffic today.

So the 48-foot domestic container is being phased out. There is a lot of equipment being stored, some of it is being either cut down to 40-foot or increased to 53-foot. That is of course good for us when that occurs.

So I think the last one I already mentioned in my comments, which is velocity. The total amount of traffic velocity has improved dramatically and the railroads improved their operating efficiencies. However, some velocity improvements come from the mere fact less traffic is moving and there is less congestion. And so when more traffic is on the railroads, things become more congested and velocity tends to be muted, and that means no more cars are required to carry the same amount of freight.

And I think I mentioned that in that storage statistics there is an awfully lot of cars, as many as somewhere between 60,000 and 100,000 cars that ultimately will be headed for scrap destinations. And many, in fact, have been queued up to move out toward the scrap heap. That might be -- that might be moderated in this current quarter as scrap prices have fallen slightly, but we still think that that is a factor in that data.

I also believe, finally, that that data just overreports actual storage because the seasonal effects of storage have to be taken out of the gross number and the cars are not -- many railcars are not used as fully year long as they are during the peak periods and the railroads and other shippers always factor that into their car acquisition decisions.

That's great color. So if the reported number is in the high 300,000 range, what do you think the real functional number probably is in cars and storage?

I don't know. I don't think anyone really knows. But to give you an index on it, a few years ago as this -- well, a year and a half ago, I guess as this was trending upward to a third of the total fleet or 500,000 plus units, I believe, as Mark referenced in his comments, I spoke with several senior operating officers and CEOs of major customers, and they estimated that the actual number then on a $500,000 -- or a 500 million stored data point was only 300,000 of truly stored cars considering all the frictional elements that I just listed.

Right, so I guess it stands to reason if you include the 60 to 100 that are ultimately going to scrap and obsolete stuff, maybe is it reasonable to think it could be half of that?

I guess that truthfully that is what I had in my head, but I really don't think you can parse this down to a science. Because the wildcard in all of this is railroad traffic loadings and the mix of traffic and how fast the trains are moving. Especially true in coal. Right now everything is moving very, very swiftly and smoothly.

There is heavy, heavy coal inventories dragging coal loadings down. But this can all move very quickly and change, and then cars move out of storage. You can have an entire year's requirement move out of storage just in a quarter or two.

Steve, I think you are aware that this is a relatively recent, relatively new statistic. The statistics weren't kept in more normalized times, so there it is not the baseline to track against it.

Right, no, I understand. Thinking about how it relates to your refurb business, what is the lag generally between seeing ton miles increase or seeing cars coming out of storage and when you start to see the increased volume through your network of shops?

Steve, we are seeing that now on the repair side of the business. So this really is reported near the end of last quarter. And when we reported our second-quarter results, we were starting to see the plant utilization of our repair facilities pick up. So they are operating at very high levels. We're actually hiring people again.

So it is there. What we would like to see is -- and what we are starting to see more is people opening their purse strings and putting higher dollar work into the shops.

It is really -- what the opportunity is in the repair and refurbishment business, as Mark said, is to get higher margin work. We are getting a lot of ordinary repair work. So we need to improve the mix of heavy repair, heavy refurbishment in that segment. Wheels lag going into the recession. They were strong going into the recession, and they tend to lag in volumes coming out of recession for reasons that are not entirely clear. But they do, and they are doing it.

So we expect every quarter we expect more growth in wheels than we've actually seen industrywide. It's not just us. It's everybody is finding lower consumption of wheels.

Since quarter end is your business to refurb and parts running ahead of run rate for what you saw in your third quarter?

No, I think we are running about the same levels overall, Steve. And I think maybe if you wouldn't mind, we will let -- if you wouldn't mind getting in the queue.

But Steve, our margin performance has improved though in the quarter in terms of a plan at least, and some of these things are just really moving parts that we have to go quarter to quarter on.

Okay, thanks.

Ken Hoexter, Bank of America Merrill Lynch.

Hi guys. Actually [Scott Weber] in for Ken. Are you guys getting the sense that spending from customers with previously deferred maintenance is now finally materializing? Or are we still kind of in the very early stages of that?

Yes, we believe that deferred maintenance is -- in select car types in particular is beginning to be addressed. And many customers are anticipating difficulty getting shop space, and they are getting some fairly good deals in getting in early. We really do intend, given the strength of our network, to try to improve the margins in our repair and refurbishment business. But it's definitely occurring, and it has been more pronounced in the last quarter.

A lot of increase in inquiries and across the board in the rail segment in all three -- all three places where we touch this. But that is one that really has recovered pretty well.

And that is something that would likely sustain then in terms of if you're seeing inquiries that is something that would sustain, and then you would see the fruition of that through the next several quarters I would assume? Is that fair?

We really -- it is not the dominant part of that segment, unfortunately for us, although it is an important part of the segment. Wheels are much a larger part of the segment, and we would really like to see wheel volumes recover, which hasn't been happening as anticipated. So when that shoe drops, we think that will really give us a boost in the GRS or rail refurbishment and parts segment.

Okay, and then in terms of manufacturing, can you give us some guidance for production plans for the remainder of the year here, and maybe looking into 2011 for both railcars and barges, just in terms of what you'd expect to deliver?

For the fourth quarter, we expect to deliver about 800 units. I think it is too early to give guidance on fiscal 2011 deliveries because the reality is we do have an open production space, and we are going into it with a strong backlog. You know, of our 4400 units, 800 will be delivered in backlog. 800 will be this year, and then the balance of those are over a multi-year period because there is multi-year agreement.

So we certainly anticipate that we'll have higher deliveries in 2011 than we will in 2010 on the new railcar side, and -- but we can't put a fence around it yet.

And then secondly, on the marine side right now, that business has maybe generated $70 million to $80 million of revenues in 2010. In 2011, as Bill mentioned, there is uncertainty there. And so that one is a bit of a wild card.

Fair enough. Finally, on the leasing side, I think you said you saw lease rates rise during the quarter. Can you give us a sense of the order of magnitude of the rate increase there, and kind of where we are in terms of historical lease rates on railcars?

That is a very difficult question to answer. I think that the strengthening is modest, but after you've been beaten up for so many months any sign of improvement like the inventory is very welcome. So it was in that context that I made that remark.

We wouldn't care to -- our data is very good compared to peers. There are a few other companies that are seeing the same kind of effect, but it's very important to have a remarketing capability, and our utilization statistics are up. So we are trying to get our yields up, and we are seeing that happening.

Sure. Okay, great. One last question on the proposed Green Railcar Act. Is there any update on timing of that? And just curious what kind of response you've seen or heard from fleet owners in regards to the Act if it gets enacted? And (multiple speakers) color on that.

This is being driven by a broad coalition of industry supply participants. RSI, Amsted Industries, Greenbrier, but practically every major rail equipment supplier, most all of the car builders, most of the car builders, the various component suppliers, and it is really a grassroots thing. We have constituents in every single state. And we are quite complementary to the political goals of the class one railroads.

On that side they have their own tax goals, and we found some compatibility with them. We think that we have their support, and we have the support of most shippers. So it is very clear that if we could get a 25% tax boost to take out older equipment that uses too much fuel, that isn't efficient, that we would create jobs in the supply segment. And we continue to be somewhat concerned about the health of the segment below the primary component suppliers.

So I think we are getting traction. We have 55 cosponsors in the House. We have to attach this to some legislation that is moving, and we have to continue to strengthen our coalition and get Senate support. It may not occur until the fall session, but we believe there are some legs on it. It still is perhaps a long shot. Who knows what the mood is going to be in DC after the election.

But we are taking a good shot at it, and I think we've got a great team working on it, and particularly I have to say John Wories at Amsted has just in a tremendous job, along with Tom Simpson, in framing that whole initiative.

Terrific. Thanks a lot, guys.

(Operator Instructions) John Parker, Jefferies.

So now you limit me to two questions. Actually I just have two quick questions.

Hey, John, they saw you in the queue. They know your rep.

Okay. You said you have $22 million of convert repurchases. Were those before the end of the period, or do those include purchases after the end of the period?

No, those were all during the third quarter.

So the face value outstanding now is $78 million -- or as of the end of the third quarter?

Correct.

And the $3 million of term debt, was that regular repayments, or were there some advanced repayments on the term debt?

There were some advanced payments, advance of scheduled principal payments.

Okay, perfect. And then the last question, on the seven new cars booked, new orders come in, can you give us any color on the types of cars that are in demand right now?

On the new railcar side?

Yes, on the new orders you booked in the quarter.

In Europe, there is a mix of automotive type wagons. That is a heavy replacement demand. Tank cars in North America. It is principally covered hopper cars, a variety of more specialized covered hopper cars where we have created a good niche. Of course, we have competitors in that space, very good competitors in that space, but we are pleased to see margins strengthening and becoming reasonable. We are pleased that we haven't had to take commodity exposure -- to the degree there has been a commodity exposure, it seems like steel pricing is coming down. So we are in a fairly fortunate window right now in terms of yields on those deals.

Okay. That's all I have. Thank you very much.

[James Leventhal], [Leventhal & Co.]

As I think you know I've been with the company for about three years, so I've watched the seasonality in your overall business. A question, though. As you've built out this repair and refurbishment business, which is clearly larger than it was three years ago, I would think that that would mitigate some of the seasonality after the holiday season when car loadings go down and supposedly refurbishment would go up. Can you address whether that is accurate or not?

I think I agree in general with that characterization. I think there is more improvement, a lot more improvement we could make in the operational efficiencies of GRS and our repair, parts and refurbishment business. It isn't performing as -- frankly I had expected it to during the downturn. I expected it to do even better, and we see a number of opportunities to get that business back to levels exceeding where we've been in the past. And if you are familiar -- as you are familiar the company, and I know that, you can see how much of a driver that was. And we only had six full months of two quarters of real strong performance.

Mark will be happy to help you off-line, kind of go through the historical data on that if you would like. But both in new cars and in GRS we've got a lot of cyclical upside and seasonal upside. But I think we are trying to take the cyclicality out of the business. We are trying to take the seasonality out of the business and stabilize it as much as we can. So your question is a very good one.

Okay. Thank you. I'm going to get back in queue.

J.B. Groh, D.A. Davidson.

This is actually Chris Denny in for J.B. Most of my questions have been answered, but I have one quick question regarding the insurance proceed. Was that accounted for in revenue, and refurbishment and parts business?

Yes.

And so I assume there weren't any expenses associated with that.

Correct.

Okay, and do you expect any of that to continue into the fourth quarter?

Yes, there are more claims and more proceeds to collect. The timing is a little hard to predict and when they will occur, but we believe that we will have another one in the fourth quarter of a comparable amount.

You guys are just across the street, across the parking lot. Why don't you guys ever come over here and have coffee with us or something?

I'm sure if you guys invite us we will gladly come over there. That's it. Thanks, guys.

(Operator Instructions) Steve Barger, KeyBanc Capital Markets.

I wanted to drill down on some of the manufacturing segment information. You know, the revenue in the quarter was down 26% year-over-year. You posted a couple million more in gross profit. You called out mix and efficiency. Can you tell us what contributed to the increase? Was it more mix, was it more efficiency, just so we can get an idea of how much of that is sustainable?

There is another item as well, and that is in the prior year. Recall that we built some cars in 2009 that we had guaranteed some obligations under that car build, and we fully reserved for it in the second and third quarters of last year. So we reserved $2.1 million of that last year, and then when we [put] those cars in service and mitigate that risk, it all comes back to income. So -- and we recognize $0.8 million of revenue related to that. So the two of those together is almost a $3 million swing in margin in and of itself.

Then I don't know that I can really break it out, your second part is to mix and production efficiencies. And I can't really break out the two. It is no doubt that it is -- two things that I point out is our GIMSA facility continues to -- it was in startup mode just a few years ago and it continues to hit its stride, it's performing very well. So on an efficiency basis, that facility is very efficient and it's no doubt that it is more efficient than it was last year.

And secondly, we also noted that as part of our contract renegotiations this year on one of our multiyear deals that there were some changes in pricing that were more favorable to us as part of the concessions for us to adjust production rates.

Right. Can you tell me were there any cut down cars in the quarter?

Yes, there were. That is reported in the refurbishment and parts segment. We've been cutting down cars for several years now, and that is a key part of our plans going forward as well.

The reason that we talked a bit about marine is marine is an important component of that mix, and it's not to be overlooked. So it is something that has got our real attention. I think the trends here that are interesting is there is a little softer situation in marine. We aren't anticipating a problem, a big problem there, but we could have some renegotiation.

On the other hand, we've got three lines now operating in Mexico. We've got four lines operating in Mexico, two at GIMSA. GIMSA is doing very well. And Concarril, opening Concarril and a new business that we've developed there has been a real kick for the rail segment. So to some degree, those are kind of going in opposite directions.

Okay, and then just one follow-up to your comment. Inquiry on barge, has that dropped off dramatically? And if -- as barge production slows, is that generally accretive or dilutive to manufacturing gross margin?

It's -- when production slows, that is dilutive for two reasons. One, we are producing less marine revenues, but also we are producing -- and we've said that that has generally been a good margin business. And then secondly, we are producing those barges at the same facility that -- at our Gundersen facility we are also building new railcars and repairing cars. So we have less overhead absorption at that facility with lower marine production rates.

Right. But on a stand-alone basis, barges are a better margin business?

Yes, in the current environment, yes.

All right. Thanks.

Art Hatfield, Morgan Keegan.

Just a few questions, and if I missed any of this I do apologize. I've kind of been in and out of the call. But a couple, did you give any update on the political situation in the city of Portland with regards to what they are trying to do with the river there?

No. I'm glad you mentioned that, because one of the reasons we slowed the facility there is we want to make a point to the city of Portland that they don't have an open license to diminish the value of the industrial sanctuary that was set aside in that neighborhood years and years ago. It is an economic engine for Portland. We are very upset about the river plan and the increased bureaucracy, and we want to send a clear signal to them that we, they should not take river -- industrial users -- or industrial participants for granted.

It is a very serious issue, although it is just a constant fight in Portland and Oregon to deal with an increasingly bureaucratic system, in the city of Portland especially. So we are in a little bit of adjust with them, and we intend to make -- we intend to force through some considerable improvements in that plant by the time it is implemented. We think we have the political clout to do that.

Good. I would ask a rhetorical question thinking if you were really smart enough to get the point, but I won't -- you don't need to answer that.

Going back to some of your comments with regards to the cars in storage and how quickly we can work through that, I don't know that you addressed this particular issue, but any thoughts on -- we've had a nice recovery in the industrial economy. If we flatten out from here, and let's say rail traffic, GDP gets to low single digits, and I'm not talking recession but we get to low single digits, and rail traffic kind of really moderates from a growth standpoint, any thoughts on how long it would take to work the storage backlog out?

It is a difficult question to answer because we would have to talk about what the specific drivers would be. Right now -- both our marine and our rail business is affected by consumer demand, and you know there is just a cloud of dismal thinking about the Gulf, and commodity pricing in general has backed off a bit.

But I think that you've got this -- there is just a lot of angst about where the economy is going to go, and you really have to dig into the granular side of where the traffic is coming from. I generally believe that railroads are very well positioned, and I think that we will see strengthening, or at least solidness. Because there's been a lot of deferred maintenance, there's been a lot of languishing and I think even in an almost stagnant environment things would have to be better than they've been in the early part of -- mid part of this recession. There is only so long you can defer some of this work.

I know that that is a difficult question to answer, and I really appreciate your thoughts on that. One final thought, and we follow transports broadly and we hear so much tightness with regards to capacity on truck. And we see that impacting the domestic intermodal market. And we are hearing some cross signals on the fact that some people are really struggling to get 53-foot well cars, but yet we are hearing in some other segments that there is plenty of intermodal equipment out there.

Can you kind of give us some better insights on what you are hearing with regards to availability of equipment?

Well, actually, both of those points of view are correct. There is plenty of intermodal equipment out there, but it's not the right kind of equipment. And there might be, might be, possibly plenty of the 53-foot wells out there, but there's not right now. And that has to do with patterns of utilization, loadings and whether cars are specifically saturated loading with 53s, or if they are mix loading with 40s and 20s, and that takes the 53-foot wells that are available out of service.

There is a great debate going on among all of the Class 1s and the great minds in the railroad industry and many shippers about how that's all going to play out. And we don't know how it will play out.

But I would think that looking at the intermodal 53-foot market and domestic containerization, given driver issues, insurance, their tightness in trucking, that it's really a great market for railroads. And that has been just so much investment in 53-foot container equipment that we know that, at some point, there is going to have to be reinvestment in that fleet.

So I am betting that the mix will continue pretty much like it is. There will be a demand for the 53-foot equipment, but if they change the entire business model, if they were successful in doing that, which I doubt they would be able to do were they able to do it, then they would probably have enough equipment for -- to stagger through another three or four quarters, especially if you add any kind of stagnant economy.

But I don't expect that to happen. I expect that things will be pretty much like they are currently done, and maybe somebody can give them a helpful push in some direction or another.

Got it. That's helpful. And when I think about this, too, when they talk about domestic 53-foot, I didn't think there was much of the 53-foot well cars operating in the international market. Am I wrong in that thinking?

Yes.

Okay.

It is a very odd mix because somebody might invest in a 53-foot well car and then they lose it and it goes off an interchange and it gets loaded with 20 foots and 40 foots and it comes back and they've got to mix it back into 53-foot service. And to those who really need that dedicated service, it is kind of a nightmare; and to those who need the car, they don't have a lot of 53s and they need to mix it. So both positions are correct. And from their point of view, it is just how they are going to reconcile all of that.

And of course, Art, one last piece that Bill mentioned earlier is some of the surplus double stacked equipment that is out there is the 48-foot car, which is neither fish nor fowl, and those cars are either being cut down to 40-foot cars or stretched to 53s, and there is still work to be done in that area.

If they are not cut down or stretched, they make really good bridges or anchors. That's about all they are good for right now.

That's very educational. That was helpful. And just one last thought on that. With all that going on, that has not yet led to you seeing a lot of potential kind of inquiry activity with regards to orders?

No. We are seeing a lot more inquiry activity than we saw even in the last quarter. But it's very isolated by specific car types, so the types we mentioned, including intermodal. There is always one or two murmurings and rumors of activity out there on the double stack equipment that we are all tracking.

Got it. Thank you so much for your time.

Akash Ghiya, Pine Cobble Capital.

Nice quarter. Thanks for taking my question. The comment that you made on the backlog in wheel refurbishment, obviously it's a government mandated thing and a certain number of miles that you had to get it done. Can you talk a little bit about where we are on that maturation curve and what that means backlog of wheel refurbishment over the next couple of quarters?

Well, it is a tough question because there are so many technical factors, including railroad optic operating practices, that can change when traffic is light and velocity is improved. They can pay a lot more attention to the cars that were moving so they can monitor the condition of wheels much better. And I just -- because it is so complex, I hesitate to say other than what I've said, that there is often a lag going into a recession and there is a lag coming out, and much of that seems to me to just be due to friction.

I would like it to be more scientific and more objective and I can quantify it for you, but our industry sometimes lends itself to that and sometimes it is a great mystery to us why it happens.

You are correct that it is regulated as to when a wheel needs to be changed out, and it is just -- what it appears is that the customers are cutting it closer to the edge of when they are changing it out.

Let me put it in operating perspective. When a railroad -- let's suppose has a problem or an accident on its line, it will do everything very rapidly to get that accident cleared off so they can restore throughput. So when things are congested and things are moving rapidly, they will tend to replace a wheel just because they don't want to slow down the velocity. They can't afford it.

When they've got less movement, and things are really fine tuned as they are, they really made some great operational improvements, a lot of technology improvements with detection equipment and so on, they can pay more attention and fine tune and they are all trying to cut back. They are trying to -- like we are all doing -- preserve cash and preserve their operating budgets.

And so they are watching it more closely. But they can't afford to do that when the business improves, and that is a dynamic that is just kind of strange about the business. They just really don't have a choice, so they just fix it rather than fool with it sometimes.

Okay. So it stands to reason if we continue to see the trajectory in volumes and the trajectory downward in terms of velocity, that that backlog at some point has to come out.

Yes, if velocity does decline, which I expect it to even though I give the railroads a tremendous amount of credit for what they've achieved, they really have changed their operating paradigm and that is also somewhat a mystery in terms of how that velocity will change. But when it does change, and I think it will with congestion and declines, we are going to see a lot more activity in wheels. But just eventually you can't defer this stuff longer than you can.

As you say, it is mandated and wheels wear out, so they have to do something to it. And some of it they are doing internally. And they are cutting costs, and they are watching their costs, but as business comes back they will have to be more liberal in this whole segment of the repair parts refurbishments, and that will be good news for companies like Greenbrier.

Okay, and can you just remind me the differential in margin for wheel refurbishment versus other pieces of the business?

I think the wheel -- it is consistent with the segment overall between wheels and refurbishment, the margins are comparable. What we said is the lighter repair work is lower margin than the heavy refurbishment work.

Well, just to give you some volume statistics, we do 120,000 to 140,000 wheel sets a quarter. We do all of the work for the Union Pacific Railroad, for example. The other big player in this segment is Progress Rail. It's a heavy volume business, and it is both on revenue and in margin -- always more important than the repair and refurbishment business, although that business has really picked up.

Wonderful. Thank you, guys.

Jim Leventhal, Leventhal & Co.

This is a bit strategic, so it may be more appropriate for off-line, but it is a question about the leasing strategy. Obviously, as you point out in your press release, you've made good money selling the cars from your fleet, and I'm just wondering, obviously, if you are making good margins from that, obviously you are selling them for more than you bought them on a depreciated basis.

So what my question is is part of the secret sauce to that that you are able to get good transfer pricing from those cars you buy from your manufacturing arm?

It is something like that, but the secret sauce is really simple. When business improves, we will sponsor -- we will go out and originate leases and we will build cars based on those leases, and we will put them in an inventory using our credit lines and our cash. And we can build that up to as much as $80 million, $100 million. And if you make a 10% stream rate on that on $80 million to $100 million, you are looking at $8 million to $10 million a year. Plus you are buying at -- you're not showing any reported profit. So when we sell those cars into syndication, we report the gross profit. Plus we typically make some syndication fee and maybe we get to manage the car.

That is the secret sauce and that is where that money can come from, and that is why those asset sales are important and they tend to recover in an upturn.

Okay. Thank you. And if you don't mind, Mark, I will just follow up with you for a little more detail off-line.

Okay, good. And I think we will take one last question here and appreciate everybody's participation in the call today.

Marty Pollack, NWQ Investment Management.

If I may, just two questions. The marine business -- I wonder if you could break that down to [money] by end markets. How much of that is nonenergy related? And is that backlog -- where is -- can you project the backlog from here? I mean at this point it is about $75 million. I'm not sure where it came from. I'm not familiar with the company, but if you would just provide a little clarity on directionally where it is going.

It was upward of $125 million. The backlog has been declining. As it relates to marine business in one way or another, most of the Jones Act traffic is related to energy. There has been a big push to -- under OPA 90 to replace and double hull oceangoing barges for petroleum. And then deck barges are used to service consumer and other traffic. But a lot of -- is a lot of energy-related service business, and so offshore drilling, the normal activity of the marine market -- important market like the Gulf can affect all of our backlog.

More particularly our backlog is concentrated with a few customers who have individual exposures different than the total. I don't know if that's -- but that is about as responsive as I can be to your question, I think.

Secondly if you would, as far as debt, can you just separate the leasing debt [on point versus what it] would be regular corporate. What is that number for leasing?

That is a great question. Mark will do that for you.

It is about $140 million of the total debt on the balance sheet.

And is that -- what about the cash piece? Is some of that -- cash amount?

The cash is really fungible, so we really don't break the cash out by segment. I can certainly help you where that debt lies, but the cash is hard to segregate.

Thank you.

I think that is it. We appreciate everybody's interest and participation in the call, and we will be happy to take other questions off-line after the call. Thank you for your participation today. Bye-bye.

Thank you very much for participating in today's conference call. You may disconnect at this time.