Greenbrier Companies Inc (GBX) 2010 Q4 法說會逐字稿

Hello and welcome to the Greenbrier companies fourth quarter and fiscal year 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 now like to turn the conference over to Mr.

Mark Rittenbaum Executive Vice President and Chief Financial Officer .

Mr.

Rittenbaum you may

Thank you and good morning.

And welcome to our fiscal fourth quarter conference call.

As always, on today's call we'll discuss our results for the quarter, and make some remarks about the quarter and then also provide some outlook for our current fiscal year 2011 and then after that we'll open up for questions.

I'm joined this morning by our CEO Bill Furman.

Before I get started a reminder that matters discussed in this conference call include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Throughout the discussion today we will describe some of the important factors that could cause our actual results in 2011 and beyond to differ materially from those expressed in any forward looking statement made by or behalf of Greenbrier.

At today, we reported our fourth quarter and fiscal year end results for the year ended August 31.

In the fourth quarter, net earnings were $7.7 million or $0.33 per share on revenues of $181.4 million.

Results for the quarter included non-cash item income of $11.9 million, net of tax or $0.50 per diluted share.

Related to the release of the liability for the 2008 deconsolidation of our former Canadian subsidiary, TrentonWorks.

The results for the quarter were in line with the expectations we provided on September 27 of earnings in the range of $0.30 to $0.35 per share.

For the quarter, new rail car manufacturing and leasing exceeded our expectations where as marine wheel services, refurbishment, and parts fell short.

You will recall, originally we provided guidance and anticipated that the results for the second half of the fiscal 2010, both in terms of revenues and EBITDA would be stronger than the first half.

This has been the trend in recent years.

This was certainly true for the third quarter, but the trend did not continue in the fourth quarter.

As early in the summer, we began to experience lower trends in our wheel services and marine businesses.

And also began to anticipate potential delivery cancellations in marine.

During the quarter we formally removed $60 million of marine backlog due to the current likelihood that the vessels will not be produced and sold due to current market conditions.

As a result, we have slowed down marine production which we also previously discussed and moved much of our marine labor over to rail.

And we, as Bill will discuss in greater detail, and is noted in the release, we're seeing significant pickup in the new rail car manufacturing side of the business that will benefit our 2011 results.

Now let me address some highlights for the quarter.

To supplement the year-over-year comparisons, you can find our financial tables and press release that you can find in our financial tables and press release, I'll include additional segment color on a sequential basis.

In our wheel services, refurbishment, and parts segment on a sequential basis as compared to Q3 of this year, revenue declined.

This was primarily because of slower wheel services volumes particularly with our largest customer.

This trend is continued in the first quarter of 2011 .

However, we continue to believe that volume should improve as cars come out of storage and as rail car loadings increase.

And we expect that this business should improve as the year progresses.

Gross margin for the segment was 10.4% of revenues, down sequentially from 13.8% in Q3.

Again, primarily due to the slowdown in wheel services, a less favorable product mix overall, and labor inefficiencies associated with hiring of additional labor in the repair business.

We anticipate that repair will gain momentum and produce increase revenue and margin throughout 2011.

Turning to our manufacturing segment, new rail car deliveries were 700 units for Q4, the same as Q3.

Full year, new rail car deliveries were 2,500 units compared to 3,700 units in 2009.

The decrease in manufacturing revenue in Q4 compared to Q3, was due to marine, as I mentioned earlier where we slowdown production rates.

Manufacturing gross margin for the fourth quarter was 10.8% of revenue, down from 11.5% in Q3 and the gross margin decreased again was primarily the result of marine production levels.

Looking ahead, and as we noted in our September 27 call, we are seeing a lot of momentum on the new car side of the business, particularly for the car types we are currently building, principally being double-stack cars and covered hopper cars of various types.

This momentum continues in 2011 deliveries will be significantly exceed 2010 deliveries.

Based on our August 31 backlog, and new orders received since August 31, we already have about 7,000 cars of firm backlog scheduled to be built in 2011.

We also, as we look into 2011, we will be building at increasing production rates during the year.

So that deliveries and gaining momentum throughout the year so deliveries will be higher in the second half of the year than the first half.

And also as we are bringing on new production lines, we expect that margins should improve, both as a result of an improved product mix and operating efficiencies as we hit our stride after opening up these new production lines.

Turning now to leasing and services.

Our fleet utilization was essentially flat, 94.4% compared to 94.5% in Q3.

While utilization is flat, we are seeing some improvement in lease rates, particularly for certain car types.

Segment revenue was $21.2 million in Q4 compared to $21.4 million in Q3.

And our gross margin for this segment was 54.2% of revenue compared to 53.6% in Q3.

Gains on sale for the quarter were $2.5 million compared to $3.1 million in Q3.

Looking ahead, we believe margins will improve as we migrate from shorter-term leases to those that are longer term as we term out shorter-term leases with improving market conditions and more favorable terms.

We are also seeing significant attractive opportunities to grow our lease fleet and after two years of pretty much no reinvestment in our lease fleet on a net basis, we intend to grow our fleet this year.

One headwind that we would note or offset in this segment is that we do have, as a counterbalance, the expiration of one particular management services contract that will take place near the end of our first quarter.

This was a favorable contract to us and we expect to have, to be able to offset this through growth on the leasing side of the business in the leasing revenues.

Selling and administrative costs, turning to that now, were $19.2 million for the quarter or 10.6% of revenues versus $17.5 million or 8.3% of revenues last quarter.

The principal reason for the increase from the prior period is due to a one time import duty of about $1 million related to certain equipment purchases for one of our Mexican operations.

We also had some adjustments to certain of our reserves.

So, as we look into 2011, we would expect G&A expense to run at about $18.5 million range and possibly, in the latter half of the year, growing closer to $19 million per quarter.

Interest in foreign exchange was $10.1 million for the quarter compared to $9.5 million in Q3.

The current quarter includes a $1 million gain on extinguishment of $10 million of convertible bonds that we bought back in the open market in the prior quarter includes $2.2 million of gains on extinguishment at $23 million of convertible debt.

So today we have $67 million of our convertible bonds remaining outstanding.

Both quarters include non-cash charges of $1.1 million for warrant amortization expense and $1 million for amortization of convertible debt.

We expect that on a normalized basis, interest in foreign exchange should run about $11 million per quarter.

We ended the quarter with $99 million of cash and $105 million of additional committed borrowing capacity.

And as we look into 2011, we expect CapEx to run about $80 million on a net basis compared to $16 million in 2010.

Obviously, this is a significant increase.

We expect about half of that CapEx to be devoted to our leasing operations, which I mentioned earlier.

But this is discretionary CapEx and we can either open or pull back on the throttle.

In our wheel services and refurbishment and parts business we expect CapEx to run about $25 million but over half of that will be dedicated to the building of the new facility as replacement for one that was destroyed by fire.

And much of that CapEx will be funded by insurance proceed that we had either already collected or will collect during the current fiscal year.

The balance of the CapEx will be devoted to our manufacturing where we're enhancing our existing capacity to accommodate the increase in demand.

As we expected depreciation and amortization to run about $40 million this year.

That concludes my prepared remarks.

I'll turn it over to Bill and then we'll open it up for

Thank you Mark.

While we had a weaker Q4 ending August 31 than we had anticipated, but a stronger rail manufacturing segment performance, along with restoration of volumes.

Efficiencies and mix in our wheel repair and parts segments are expected to lift our earnings in the second half of the year in particular, and we expect a much stronger gap in EBITDA profit profitability as the year builds.

I'm going to begin my remarks today with comments on industry trends that present a backdrop for our financial operating results and prospects for 2010 and 2011.

That is things that actually occurred in our fiscal 2010 and those of which are going to be a backdrop for 2011.

I'll then turn to more granular remarks about the Q4 operations and our plans for 2011.

Looking at the total industry, North American rail car loadings for the calendar year third quarter ending September 30 slowed to a 6% growth rate over the same period in 2009.

And in the second calendar quarter, ending June 2010, the same rate year-over-year had been up 13.8% from 2009 levels.

Cumulative year-over-year loadings ending in September were up 9.8% from 2009.

Despite the slower Q3 growth, intermodal traffic and select commodity loadings remains very strong.

For the same Q3 ending of September.

Industry storage statistics continue to decline.

But shortages have developed in certain specific new car types creating new demand early in the economic cycle.

For certain cars.

Industry orders have been robust in select car types such as 53 foot double-stack container cars, and a variety of covered hopper cars, both for fleet upgrades and for growth.

Intermodal loadings, for example, continue to be robust and hit a record level for the week ending October 16, up 15.9% over the same week in 2009.

And up 17.2% for the first 41 weeks in 2010.

In week 37 container loadings reached 256,000 containers surpassing previous record loadings and pre-recession 2007.

So what does this mean for Greenbrier?

Two principal bullets.

Lot of cars coming out of storage, and many of these are flooding into repair shops.

And, unexpectedly strong recovery building up in our manufacturing segment more than offsetting headwinds in our marine subsegment of that business which is had a period of softness in demand.

And where we have redirected labor, over from marine to rail.

Our backlog and market share has risen substantially driven by new orders for double-stack cars and covered hopper cars, specific types of covered hopper cars.

Greenbrier received more than half of the total double-stack car units placed to date for a total of 3,300 units .

Our market share in the first-round of orders is 55%, as compared to our historical share in excess of 60%.

And only one other builder has received orders, participating presently in the space.

We believe we are the low-cost builder of this car, and have a good margin in this build.

Mixing production at two plants, one in Mexico and here in our Gunderson facility in Oregon, we are easily able to compete for remaining orders, which we believe will be forthcoming in the balance of 2010 and significant orders in 2011.

Therefore, I think that the part of the recovery that we're seeing in our new rail car production is very firm.

And is certain to be carrying forward in building during the balance of calendar year 2011.

In fact, we may find shortages and diminish market share and therefore were expanding some of our facilities in Mexico.

Third quarter reports ending September reflected industry orders of 9,194 new cars for example.

Total orders for the calendar year 2009 were only a comparable number of cars.

Of the total of the orders received through September, our share was 52%.

We received 50% of the orders for all covered hopper cars and of that segment over 79% of the low cube covered hopper car builds for some specific commodities.

Our backlog at the end of September grew over 7,500 cars or about 40% of total industry backlog.

We continue to build our order book and again expect strong performance from our rail segment in 2011.

So, all of this is very good news and is also good news for our wheel and repair segment.

What explains the lower financial performance in the Q4 and has Mark has commented on potentially to a lesser degree in our first quarter of 2011 ending in November.

This is accounted for, by a slowness recovery in wheel demand and a mix of work on repair and new hiring policies as we have brought back cars into the system from stored cars that have been taken out of service.

I believe we underestimated the lag time that it would take to assimilate new people so our efficiencies have not been where our targets had expected them to be.

The mix of work and repair has by necessity then light to satisfy some of our major customers, so that this has caused some efficiency decline in the quarter to quarter statistics.

We expect this momentum to rebuild and the big driver is the degree to which wheel replacement and wheel demand normalizes from what has been in the industry very low levels.

We are optimistic about the segment.

If you look at the combination of marine and rail, in Q4 for example, our total miss from what we had expected was approximately $9 million in margins.

And we expect easily to over whelm the component of that which was marine by stronger new car construction.

We also expect that the GRS performance, which has been lagging and wheel statistics that have been lagging will become more normalized by December.

So I hope that backdrop we'll give some context for the quarterly results, the Q4 results and what we are anticipating in our Q1 of 2011.

With that I'm going to turn it back to you, Mark, for

(Operator Instructions)

Ken Hoexter with Merrill Lynch.

Your line is open.

Hi.

Good morning.

Bill, can you talk about-- you noted that you're getting less than the low 50s in terms of market share.

Is there some reason why you are below that 60% you said it was historically?

Are there products that the customers are choosing to chase, or is there a reason why you're not seeing that maintain historical averages?

Well, we are modestly disappointed that we hit 55%, but that's still a big chunk and it's quite close to the goal.

I think in this first round of orders, we priced perhaps a little more cautiously than the pricing power that we have.

Our yields, on the plus side of that, will be very high not only in Gunderson but very, very high in our facility in Mexico.

So, on the remaining orders, we anticipate getting closer to our historical share.

But, it's close enough so that's hard to really, it's hard really call.

55% is awfully close to 60%.

Okay.

And then on the wheel business, it sounds like it was obviously weak in the week targeted and yourself as well.

As the rails have continued to aggressively take the cars out of storage, are you , it sounds like are you starting to even see that increase at this pace?

We have seen the car load volumes fall year-over-year.

It was slowing on an absolute basis.

Obviously, as we got into peak season volumes picked up through the season.

I'm just wondering what was another driver of the weakness on the wheel side?

The refurb

Well, the principal driver on the refurb side is a lagging of volume in wheel work and particularly wheel replacement.

We've analyzed this as thoroughly as we can and there are a number of forces that seem to be acting on it, but it really does just seem to be a lag that is anticipated to recover by most of the parties and the industry tracks this closely.

I think in general, wheel volumes are 20% off where we would have expected them to be.

And, I think that they're going to recover but the issue is when exactly will that occur?

That's a very big amount of replacement and wheel work.

One theory is that the cars that were stored went in with work that was done and that's consistent with our pattern, because there was a similar lag when the recession hit of about six months.

We kept chunking out wheel work and it appeared that these were being placed on cars.

So, as cars came out, they're coming out with wheels in better condition.

But there are a variety of things, including some, at the margins, some additional competitive entrants in the wheel business.

It really is something that we're seeing evidence of recovery in October.

September wasn't strong and was proceeding at a similar pace, but in October really getting back to close to what we were targeting.

So, I believe that we should be able to make this up , certainly in the second half.

We expect that to be clicking along at a much better

All right if I could just wrap up with your backlog.

I just want to understand the number you gave out before.

Is that what you expect to be delivered in the 2011 timeframe?

And then maybe just, on that; your color on your timing of on kind of back half 2011 targets, in the release, when you talked about weighted more toward the back half?

I think that Mark has indicated in the release, we were planning, certainly at the time the release, this morning, that about 7,000 of those units, and we're talking both about domestic and European production.

Right.

So, with August 31 backlog and orders that we received, after year-end, there's about 7,000 cars in firm backlog that are scheduled for delivery in 2011.

We still have open production space so obviously, our plans are in anticipation that we'll build something much greater than 7,000 cars in the current fiscal year.

It is true that we have open production space in the accounting context of what we can put in firm backlog.

However, our order books are building and our production rates are going to change as a result of that.

So, that the levels of production could be stronger in the second half of the year than the current backlog indicates.

We have a real surge in certain of these car types and I think that we're seeing an awful lot of strength in them.

And then we have a reservoir of other car types that we must participate in down the road.

Our automotive product for one.

It looks like there'll be a build in boxcars.

So, we need a line for that and I think that we'll continue to see this dynamic strengthen through the year.

I'm not concerned about, I don't feel cautious about the rail car, new rail car segment.

It's unexpectedly strong.

The drag on our earnings on what you're seeing in the trailing financial performance is a strong hit for marine, which is easily being overcome on the rail side.

And will continue to be overcome on the rail side and an unexpected slowness in recovery in the wheel, part of the business due to volumes.

And, in the case of the repair and refurbishment part of that segment, inefficiencies and lower margins and anticipated due to the ramp-up in the type of mix that we're seeing in the many facilities that we are operating.

So, I think it's important not to be discouraged by these quarterly results in the context of the entire model when it's clicking together.

And it really is working the way we want it to.

The rail manufacturing segment has really been bouncing back.

The repair refurbishment wheel business we believe will be there, certainly in strength for the second half.

And we believe that there's hope for optimism marine side.

So, if we can get all these things clicking at once, we are going to be in very good shape for the year.

I'm familiar with the expectations on EBITDA margin and those remain, I believe, in the realizable level or we should be able to over achieved them.

I appreciate the take away, but can I just clarify?

I just want to understand you are targeting 7,000 units delivered in 2011?

No, we're targeting something substantially in excess of 7,000.

There are 7,000 we already have in firm backlog.

Okay.

So back to more than 2008 levels?

I think-- I don't have that in front of me.

That's probably something achievable or perhaps even higher.

Wonderful.

Thanks for the time.

And the next question comes from with John Parker with Jefferies.

Your line is open.

Hello.

I apologize if you went over this.

I missed the beginning of the call, but did you disclose any October orders.

I know you had good results in October and September.

Were there no orders or are you just not ready to disclose that at this time?

There were some orders in October.

I think you may be trying to triangulate from the press release that we put on September 27, which was subsequent to the one on August 25.

The September 27 orders that we released included some orders that happened at the end of August so they were in our August backlog.

So, when we announced 3,200 cars since year-end, that means that included some orders that we received in October.

Okay.

And then, it looks to me with your backlog disclosure on marine and the drawdown of your backlog, it looks like you did about $5 million of marine revenues and then you've got $10 million left .

Is it fair to assume you did $5 million this quarter and then $5 million in the next two quarters and then beyond that is uncertain.

Is that the right way to look at

I think directionally, you're correct about the fourth quarter.

What's remaining in backlog, in essence, is one barge that will not be, that's not on the percentage of completion method.

It's completed contract.

So, we'll actually not have marine revenue in Q1.

And we will have marine revenue in Q2.

And then beyond that, it will be at reduced rates.

Okay.

And then, on the wheel front , I think you said something in an earlier press release about one major customer of yours was slowing down.

But when you look at your slowdown in wheel replacement work, is that consistent with what's going on industrywide or is it more specific to your customer

It's consistent with what's going on industrywide.

Okay.

That's all I have.

Thank you very much for your help.

In the next question comes from Steve Barger with KeyBanc Capital Markets.

Your line is open.

Hello.

Good morning.

Good morning.

I just want to make sure I understand the outlook.

Production is going to ramp through the year here.

I know you do have some off sets in marine and wheel, but should we be thinking that your earning power, as you go into the back half, is equal to, or better, than what you were doing in 2006 and 2007?

Where you were annualizing around $1 billion in sales and delivering 8,000 cars and maybe averaging $0.40 or more per quarter?

Is that a fair comp?

Were not going to get to that granular on the earnings guidance at all.

I think that in terms of production and delivery rates, I think you're correct.

Then, to just come kind of full circle to what Ken Hoexter was asking earlier, that indeed, annual deliveries for 2011 could exceed 8,000 rail cars and will be weighted to the second half of the year.

But also when you compare to 2008, one of the things-- moving off the manufacturing, into some of our other segments-- is we were benefiting from high scrap steel prices that boosted some of the margins, particularly our wheel services segment, that are not likely to be repeated.

So, that would mute some of what occurred in 2008.

But overall, when you talk about annualized revenues for the year, you're also in the ballpark of about $1 billion.

The last thing I'll remind you of is compared to 2008 is that there's more shares outstanding.

And that on a fully diluted basis we have closer to about 24 million shares outstanding today.

Right.

I guess to approach just the rail car manufacturing, and I know marine is in there.

After-- as you've gone through the downturn and rationalized your facilities to a certain degree, should we think about gross margin being structurally higher now on a similar delivery cadence than where it was in prior years?

Or do you expect gross margin plus or minus to be in the same range?

We believe the first part is correct.

It will be in cadence with the earlier years.

And it will offset the marine drag that we earlier talked about.

Okay.

Moving to the refurb and parts, just so I understand.

Do you expect revenue's going to be sequentially down from 4Q in the first Q there, and will that lead to a gross margin decline sequentially in refurb and parts?

In refurb and parts, you're asking.

I think in refurb and parts is probably, no, we wouldn't necessarily see a decline from Q4.

We probably see it more as being flattish from Q4.

Okay.

And last question and I'll get back in line.

Your most recent conversations on the rail car OE side.

Are those being held with shippers primarily or class ones, or leasors.

Whose the buyer here?

And in general is your expectation that pricing is firming up?

All of the above, with respect to the customer base and, I think pricing is obviously a factor.

The market is competitive.

So, I'd have to say that the pricing environment is still tough, but we are mostly being driven by efficiency.

The mix of cars, the type of car work that we're getting into our shops, which we have to accommodate to serve our major customers in each of the categories you mentioned.

As we bring on labor, some of these plants were operating at low levels, as we bring on new labor, that effects the efficiency.

So, this will take a couple of months to sort out and, as that occurs, we expect margins to climb back up to more historical levels.

Okay thanks I'll get back in line.

Thank you.

Your next question comes from with Wells Fargo your line is a.

Hi.

Good morning.

Hi Allison.

How are you?

Question on, I guess you talk on this a little bit, but when we're thinking about manufacture margins in, say the first half of fiscal 2011.

You touched about marine being a negative impact, but are these ramp up costs, sort of efficiencies, could that even pressure the margin further in the first half than we saw in the fourth quarter?

Well, both that-- The answer is that sequentially we do anticipate lower manufacturing margins in the first half of this year than we saw in Q4 for manufacturing for manufacturing as a whole, where margins were around 10%.

Okay.

And is that really marine or--?

Part of that, Allison, is going to be ramping up as you mentioned and bringing on new production.

And also a little bit of a change in the mix, particularly with our European operations.

It would be a little bit of a less favorable mix and what we had in Q4.

Okay.

And then obviously you had some really nice orders over the past calendar quarter.

Could you quantify maybe, are inquiries accelerating at this point?

Are they staying or moderating at these high-level?

Can you give us some color on that?

I'm sorry, you said deliveries?

The ordering.

The order inquiries.

They have been building.

Q3 was a very robust quarter both for the industry, but particularly for us.

As Bill mentioned earlier, we received over half of the orders-- of the industry orders and had 40% of the industry backlog as of the end of Q3.

And that momentum continues.

Okay great.

Thank you.

And the next question is from Kristine Kubacki with Avondale Partners.

Your line is open.

Morning.

Good morning.

My question is on growing the lease fleet .

Do anticipate growing this through organic growth or acquiring portfolios?

In terms of portfolios, are you seeing a willingness or attractive leasing opportunities in terms of portfolios out

Well, we are going to look at those opportunities which arise.

I think that our focus this year will be more on our syndication desk as we deal with the content of lease transaction in the backlog.

We will probably select from that backlogs certain transactions to add to our permanent base.

We have already discussed in some granularity our CAPEX plans.

So, you can see we don't have a large amount of CAPEX devoted to the gross.

So, it's principally organic, that what we have in our plan is organic.

Okay.

Then, I was just wondering a little bit on the-- you talked about elongating lease terms already in terms of duration.

I was wondering have you seen-- and you have talked about the rising rates.

Have you seen a recent rise in rates that's not been just linear?

Has it been a little bit more exponential at this point in the curve that's giving you the confidence to start thinking about or seeing lease terms going out?

Or has it been more linear still since the beginning of the year?

I suppose linear, I'm not sure I would choose the word linear, but I guess that's the better of the choices that you offered.

We see strengthening in that market and there's an awful lot of leasing activity out there that were generating.

The yields in those transactions are increasing.

But that's all I would care to say on that.

Mark, can you add anything else?

No.

Okay.

Finally, I was wondering on commodity costs we've seeing a recent rise in the metals market and commodities, I guess, how are you protecting yourselves in the future and how are you thinking about, are you seeing a commodities increase at this point?

Well, we're seeing a lot of requests for, as usual, for fixed pricing that were resisting those requests.

And we're adding, in our business, except where we have back visibility, on shorter-term deliveries where we can protect steel, like taking steel positions.

We're indexing and protecting ourselves from both surcharge escalation on components and on the base steel prices themselves.

On the plus side, as we see, if we see stronger steel pricing, principally due to dollar-denominated levels right now, but later in the year steel scrap prices go up.

That will be a direct benefit to our wheel business.

Excellent.

Thank you very much.

At this time there no additional questions.

Okay.

Well, thank you very much for your participation in the call, as always.

And we'll look forward to talking to you again before we know it, in January, about our Q1 results.

Thanks and have a good day.

This concludes today's conference, please disconnect at this time.