Greenbrier Companies Inc (GBX) 2011 Q1 法說會逐字稿

Hello and welcome to The Greenbrier Companies first quarter of fiscal year 2011 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 over to Mr.

Mark Rittenbaum, Executive Vice President and Chief Financial Officer.

Mr.

Rittenbaum, you may begin.

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

Today I'm joined by our CEO, Bill Furman, and as always, on today's call we'll discuss our results and make a few remarks about the quarter and then open it up for your questions.

And as a reminder, matters discussed in the 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 our actual results in 2011 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company.

Today we reported our first quarter results for the quarter ended November 30, 2010, and we had a net loss attributable to Greenbrier of $2.3 million or $0.11 per share on revenues of $201.4 million.

The results for the quarter include a gain of $1.1 million net of taxes or $0.05 a share from insurance proceeds received by the Company associated with the fire at one of our facilities, our wheel services facilities in January of 2009.

The results for the quarter are consistent with our guidance provided back in December.

Looking forward and as Bill will discuss in greater detail, we continue to benefit from recovery in the new railcar market.

Since August 31, we've received orders for 6,000 new railcars with an aggregate value of $400 million.

This means since December 10, the last date in which we disclosed new orders, we have received orders for an additional 800 railcars.

To support the increase in demand and our growing backlog, we've begun ramping up production rates and plan to open up additional production line in June of 2011.

For the fiscal year as a whole, we currently anticipate delivering about 9,000 to 10,000 new railcars.

We continue to anticipate higher overall revenue and EBITDA for fiscal 2011 compared to 2010 with around breakeven results in Q2 and a return to profitability in the second half of the fiscal year.

Now let me address some highlights for the quarter to supplement comparisons you find in the press release.

I'll provide this color looking at our Q1 as compared to Q4 of our last fiscal year.

In our Wheel Services, Refurbishment & Parts segment on a sequential basis compared to Q4 we saw revenue increase principally due to higher wheel volumes but we are still running below historic norms.

Secondly, of course, we had the gain from the insurance proceeds.

Our gross margin for the segment was up compared to Q4 principally due to the insurance gain and excluding the gain, margin for the quarter was 9.3%.

The decline is compared to Q4's margin of 10.4% was principally due to less favorable mix.

We still anticipate volumes and margins will show improvement as the year progresses.

Turning to our Manufacturing segment, revenue increased significantly from Q4 principally due to higher new railcar deliveries.

We delivered 1,050 units compared to 700 units in Q4.

As anticipated, our manufacturing margin for the quarter was down sequentially to 6.7% of revenue principally due to lower marine production rates and a deferral of margin on a marine barge that we're working on that is delivered in Q2 or has been already delivered in our Q2, as well as some temporary inefficiencies in ramping up production rates.

Turning now to Leasing & Services, our utilization was up sequentially to nearly 97% compared to 94.4% last quarter.

This is our highest utilization level in ten quarters.

The decline in segment revenue as compared to Q4 is principally due to lower gains on equipment sales which were $600,000 in the current period compared to $2.5 million in Q4.

Looking ahead, we believe margins will improve as we migrate from shorter term leases, those that are longer term with more favorable rates.

This is partially offset by we have one important management services contract which expired in Q1 but we believe we'll be able to compensate for this loss or expiration of contract with higher leasing activities.

Selling and administrative costs were $17.9 million for the quarter and we expect them to run about $18 million to $19 million per quarter for the balance of the year.

Interest and foreign exchange of $10.3 million for the quarter, we expect similar rates going forward with the part that is less predictable in that number any foreign exchange gain or loss that might occur in a quarter.

The non-controlling or minority interest weighting to our GIMSA joint venture in Mexico where we build new railcars was only $250,000 for the quarter.

We do expect this amount to grow in the future.

Again, that is a deduction from the net income that flows to our bottom line.

That amount should grow in future quarters as we ramp up production rates and efficiencies at the joint venture.

The tax rate for the year is currently expected to be around 30% to 35%.

However, it is highly sensitive to the geographic mix of our earnings.

We anticipate net CapEx in fiscal 2011, that is, net of proceeds from any equipment sales to run about $90 million and depreciation and amortization run about $40 million.

We continue to manage with a view towards liquidity and ended the quarter with $49 million of cash and $108 million of additional borrowing capacity and as you know, subsequent to the quarter end, we received approximately $62.9 million in net proceeds from the sale of three million shares of stock.

The stock sale will allow us to more aggressively participate in the upturn while continuing to delever the Company and we thought this was an opportune time to raise this equity and we believe as a result of this offering combined with the May offering, we have sufficiently strengthened the balance sheet, both to grow the Company and to refinance our existing indebtedness that will principally become due in 2012 through 2015.

This concludes my remarks and I'll turn it over to Bill and then we'll open it up for questions.

Thank you, Mark.

We're pleased to have concluded such a busy quarter, including immediately following the quarter a placement of our common stock and of course, receiving important new orders in the last four months and finally, progress on improving our manufacturing footprint in North America.

As Mark has stated, we will bring a third line on at our Mexico GIMSA location mid-year and the addition of that line should allow us to operate three production lines at each of our facilities in Mexico; so six lines total in our Mexico operations.

Most of this production will be devoted to conventional cars and one line of tank cars and finally, a line of double-stack cars.

We are making good progress at filling these lines and have visibility through most of calendar 2011 and into 2012.

We are running double-stack cars at two locations then, at our primary location in Portland, Oregon, and then the line, which is a smaller line, we will be running at one of our facilities in Mexico.

Car loadings and a good holiday season for retailers should prompt inventory replacement in the Lunar New Year and growth throughout the spring.

We expect additional orders for double-stack cars to be placed during the spring or by early summer for delivery later in 2011 -- calendar 2011.

Recent orders include 800 cars received in the month of December as Mark has noted and in the first few days of January, so this momentum is continuing and following our last public announcement, where we announced the receipt of orders for 2,000 cars.

The majority of these orders are for domestic production in North America although we are receiving a good level of orders in our European operation as well.

During 2010, we have achieved a number of important goals, improving our balance sheet, renegotiating a major multi-year contract, improving our equity base, paying down debt, and strengthening our integrated business model.

The railroad and railroad shipper industries are in very good place to benefit from the economic recovery not only because of their strong balance sheets but because economic and social realities favor rail transportation.

Moreover, industry analysts recently increased their estimates of railcar deliveries for 2011 to 42,000 cars compared to 30,000 cars, consensus in November and actual production in 2015 which we believe to be less than 15,000 units but which have not yet been fully reported.

Therefore, backlogs in our industry should be increasing with the next industry report ending in the fourth quarter, just through December and in November, we believe we had approximately 40% of the industry backlog for all car types, including one multi-year contract in our backlog.

According to analysts, car building should be in for a good increase in the next few years with 70,000 plus car builds predicted for 2012 and 2013.

This is good for Greenbrier across all our product lines as the car building industry is a bellwether of health for the entire supply chain and railroad transportation.

During 2011, we intend to continue to focus on improving efficiencies and operations, strengthening our management team, liquidity and planning for reduction of debt and returning to sustained profitability in our second half.

We intend to emphasize operational excellence to address the new forces which we are now required to manage into the recovery, including keen focus on safety, lean manufacturing, headcount efficiency, inventory management and other key drivers of gross margin and profitability as well as liquidity.

With that, Mark, I'll turn the mic back to you.

Thank you, Bill, and we'll now open it up for questions.

Operator, if you can provide the instructions please?

Yes, sir.

(Operator Instructions) Our first question will come from Allison Poliniak of Wells Fargo.

Your line is open.

Hi, good morning.

Hi, Allison.

How are you?

Could you talk about how we should be thinking about the timing of deliveries, in terms of the railcars just given that you're saying you could deliver between 9,000 and 10,000 this year?

Right.

Well since we're ramping up production and as Bill mentioned also bringing up another line around June, it is definitely going to be weighted to the second half of the year with growth sequentially each quarter, so we expect Q2 to be higher than Q1 and Q3 higher than Q2 and Q4 the peak.

Okay, and can you talk about the pricing environment as well with the new orders?

I think, well the pricing environment given the amount of capacity that is out there continues to be a challenging environment.

However, I think that there's an advantage to having operating plants so our efficiencies at those facilities allowed us to make reasonable margins and we are -- we have embedded in each of the transactions, we've bid on and received decent margins.

I think that it's hard to predict when margins will be able to be increased on the pricing side but we continue to want to work on the cost side to improve margins and that goes to one of the last points that I've made in my remarks.

We'll be focused very aggressively on that both in our procurement policies and in our plant operating models.

Okay, great.

Thank you.

Our next question will come from Ken Hoexter of Merrill Lynch.

Your line is open.

Great.

Good morning.

Can you talk about the utility -- I'm sorry, your utilization?

You talked about what you're bringing online.

What is your total available capacity right now for building cars, if you think about your plants right now?

I guess, Ken, once we bring on the third line, it's somewhat of a theoretic question because it depends on the product mix and the length of production runs and theoretic capacity in North America would probably be closer to about 14,000 railcars, but that would be with the stars, the sun and the moon all lining up.

So that again, we're having long production runs of single car types.

Can you break down what you're building or maybe of the total 9,000 you plan in terms of just general what percent is intermodal, what percent is hopper cars and then what is other?

I think we can give you some general color on that.

I don't think we publish the specific kinds of cars.

Right.

So probably in the range of about 400 to 500 cars would be tank cars and then the balance would be either general freight or intermodal cars, and for competitive reasons, we would prefer not to break out between intermodal and conventional and some of that is still to be played out.

Currently in the conventional car area, we're building covered hopper cars, two different types of covered hopper cars but we certainly have the flexibility to change that mix from covered hoppers.

I'd be incorrect if I were reminded by Bill of three types of covered hopper cars today.

Okay.

It's helpful just because as we see certain parts of the rail business ramping up it's helpful to know where the orders are coming through, where they are seeing some of the shortage as well, but on the margin weakness that you talked about and that was helpful to understand the decline this quarter because of some of the ramp ups, should we see that pressure again when this new line comes on in June?

Well there are two drivers to that in this quarter.

One was ramp ups but the other was the decline in the Manufacturing Marine segment, so what we really are hoping for in 2011, late calendar 2011 is for the Marine business to get legs on it again because it was a very good producer of both revenue and margin and absorption of hours at our Gunderson facility in Portland.

We think longer term, that has a -- that business has a lot of potential but we really have got caught in a downdraft there.

So if we can get that operation clicking as it has been during the downturn.

Perversely, it seemed to go soft right at the beginning of the recovery, and we are seeing some signs of renewed activity in the Marine sector, the Jones Act large vessels that we manufacture here, so those are the two forces that drove that.

Therefore, until that remanufacturing comes back, we'll still have headwinds in the margin because we'll be relying entirely on new car production -- go ahead.

No, no.

Please finish up.

I think that the margins that we're looking at given the mix of the production that we have in the quarter are more reflective of our freight car margins than without the boost that manufacturing barges has given us in the past.

Okay, so when you look at the leased division, it looked like the cars at that division jumped about 850.

You produced just over 1,000 cars, was all of this in-house production or can you describe the -- was it external and you purchased in cars from elsewhere?

How should we look at that growth there?

Well, I'm not -- I may have missed what you're referring to with the -- when you say 800 -- when you referenced a number like 800.

I think last quarter, the cars under your lease that you control jumped about from 8,200 owned cars up to 9,000 or so if I understood the release right.

Right.

Yes, that would have been owned and managed equipment -- owned and managed.

I think we did not have much growth in our own leased fleet this quarter.

That would have been nominal.

What we do have hung up on our balance sheet is called assets held for sale and that would have been new railcars produced during the quarter with leases attached to those railcars that we intend to sell to other leasing companies in the marketplace in the near future.

And so that's a timing difference between when a car, a railcar is produced and when it's delivered and if you look on the balance sheet, you would have seen some fairly healthy increase in assets held for sale from $31 million to $75 million and that principally would have been due to what I just described.

Okay.

That's helpful and just my last one would be on the refurb part, you kind of delved into why the margins went down in the manufacturing and the start up on the marine side.

Can you just do the same on the refurb because you went into why it was down a little bit but maybe you could just provide a little bit more insight into why the sequential decline?

Part of that on the repair and refurbishment side of the business, we had -- while the business volumes had increased, we're still seeing relatively weaker mix or less desirable mix and we had been ramping up, we have been hiring and ramping up for the increased volumes and we saw some production inefficiencies and some near term labor inefficiencies on the refurbishment -- on that piece of the business.

So that was one contributor and then with the softer wheel volumes, overall we have seen some pricing pressure that we talked about last quarter on the wheel side of the business.

Wonderful.

And just -- I'm sorry -- I just want to clarify a number you threw out.

Did you say the tax rate would stay in the mid-30%s, right?

That's what you ended with?

Yes, in the 30% to 35% range with the big caution that I think you've seen in prior quarters that because it's tied to the geographic mix of earnings and in some jurisdictions, we even have NOL carryforwards and so it's a highly volatile tax rate, but that's our current belief is 30% to 35% range.

That's great.

Lower than we thought.

Thank you very much for the time.

Appreciate it.

Sure.

Our next question will come from Thom Albrecht of BB&T.

Your line is open.

Hi, Thom.

Mark and Bill, can you hear me okay?

Yes.

Okay, good.

A couple of questions.

On the production schedule, could you be a little bit more specific relative to this February quarter?

I think we all understand that the back half of the year is more loaded but just for modeling purposes should we be thinking about 1,500 or 2,000 railcars?

Can you be a little more specific there and I've got a couple of other questions.

I think that it's probably closer to the 1,500 range but somewhere I think directionally that you're correct, that it's going to be higher than the 1,050 and that partly due to the assets.

Some of the difficulty in the precision is what I described as the assets held for sale on the balance sheet when we exactly -- the timing of when we exactly sell them to third parties, but I think directionally you're probably in the right range with about 1,500 cars.

Okay, and then I can't really tell if -- I believe last quarter your comments about marine were pretty clear but I thought that marine might be around a breakeven as opposed to a profit contributor but it almost looks like it was a drag.

Can you help us out there beyond the big picture comments you've made on marine?

Right.

Well, the drag would have been this quarter that there was no margin recognition which again would imply breakeven but is compared to Q4 when we did have some margin recognition, so that would have been I guess a drag as compared to Q4.

The other thing is since we're operating at lower marine production levels, we're absorbing less overhead tied to the marine operation.

So while that is not negative margin when you think about it in absorbing overhead or what would be under-absorbed overhead operating at lower marine production rates, that would be a drag because we're just not operating at high capacity levels at our facility here in Portland.

Notwithstanding that we have significantly boosted up railcar production rates here in Portland.

So should we continue -- I'm trying to remember how you worded it last quarter, but basically for the first half of this fiscal year was unimpressive earnings, maybe a modest loss so despite the production ramp up should we continue to think that the February quarter might only be a hair better than the quarter you just had?

Should we be thinking about profitability in the last six months of the fiscal year?

I think it's correct that we believe that we'll return to profitability the second half of the year and the guidance that we gave that we continue to give is that we expect the current quarter to be around breakeven and whether or not we get to actual breakeven or a little better or a little bit to the negative side, we still have to play out.

You're raising an important point, Thom, on the marine versus rail pick up and just giving a little more granularity on overhead absorption.

We have brought on enough railcar business to absorb great -- to replace the absorption that marine has had earlier in doing and we also have dropped the head -- brought the headcount down dramatically down to 20% of what it was transferring those people over to rail.

So fundamentally, what's happening is you look at our margins, we have neutralized with the present volumes of railcars -- the drag, if you will, and then we should see an incremental pick up as we add 500 or 1,000 cars to production quarter-by-quarter which will be a dynamic as long as we can keep the mix roughly what it is today with -- between double-stack and conventional cars and continue to keep our Gunderson facility building cars at the pace that they're currently running over there.

One of the things we get just wrapping up on that and reflecting on some comments we've made in prior quarters about marine we've -- as you're looking at the math here, we've said that in the current environment that or looking at our current margins on rail compared to marine margins last year that marine margins had been running higher than new railcar margins.

Right, right.

I forgot about that.

Okay.

So your headcount, since the end of the fiscal year, I forgot -- I think the number might have been in the 10-K.

Where is your headcount roughly now and as you especially bring on that additional production line in June, I forgot if those are leased employees or they will be actual headcount to your payroll.

Right, so we said that we were adding on about 200 workers at our Gunderson or 250 workers at our Gunderson facility as a result of the increase in demand so we had about 2,700 employees Company-wide.

That excludes workers that would have been at our Concarril facility so just because they're under an agreement with Bombardier so when you add those in we're probably closer to about 3,500.

And then so -- but we've again at our facility here in Portland, since the year-end we've added on about 250 and we're also adding on employees at our Mexican facilities as we're ramping up production too.

So I don't have the precise count but we would be adding from where we were.

Okay, that's helpful at least directionally and then lastly, Bill, you're always very good at understanding these cycles.

Can you comment a little bit more specifically on the pricing?

I know you were asked about it but how does this feel pricing right now where we are versus the last let's say trough when orders begin to reemerge but it can be very competitive early on.

Is pricing starting at a worst deficit, if you will, versus what you'd come off of and/or what's happening with the leasing companies as well?

Because they've kind of been on the sidelines and your big customer in Chicago, I'm not really counting them as a leasing company.

You're referring to TTX?

Right.

We have many big customers in Chicago.

I'm sorry.

One notable one over the years.

That one notable one is TTX, and we love TTX.

They are a fine company and we don't see them as a leasing company either, although others categorize them in that area.

With the exception of -- you're right about the leasing company participants.

that means that much of this is either direct ship replacement, much of this demand is direct ship replacement or railroad -- replenishment of fleets or upgrading of fleets, so if you count TTX as a railroad, a predominant amount of the new orders has been railroad driven as opposed to leasing company driven.

That's unusual at this stage in the recovery.

We don't see major players in the leasing side emerging.

There's certainly active players in the case of Trinity who has a very powerful and strong leasing business, but I don't think that you've seen that kind of play, so you also have some manufacturing facilities sitting on the sidelines that haven't been activated and those of us who have been able to start lines or keep lines running through the downturn which we were fortunate, having the GE contract have got a cost advantage, because we have economies of utilization in the facilities with those lines running.

So that's a very good spot to be in in competing with new business and it tends to create efforts to enter with bids at low margins, so it's a very interesting dynamic and unusual.

As far as the leasing side is concerned, we are seeing the market there.

We are able to remarket cars as they come up and we remarketed almost 3,000 cars in the last year counting the cars that we have under management on the Ross portfolio so we're able to place cars, we're staying short in this kind of market and most of our work.

We haven't seen a lot of increase in rates but we expect this to occur as backlogs build in the industry.

That's the normal cycle so it just hasn't happened yet, but it's going to probably happen.

Right now, the demand is however new cars that principally railroads are adding and other shippers that aren't basically in that used fleet and we haven't seen coal come back yet.

Okay, that's great.

I'll jump back in the queue.

I appreciate all of the commentary.

Thank you.

Good questions.

Our next question will come from John Parker of Jefferies.

Your line is open.

Hi.

It seems like you broke out equity compensation in this quarter.

You haven't done that previously but you did break it out for the year ago period.

Could we assume on a yearly run rate basis just take the quarterly number and multiply it by four?

Is that where you've been running or can you give us anymore guidance on that?

I know you can't give us forward guidance but just looking back historically.

Yes, I think for now, that's probably a pretty good assumption as to use that for the four quarters and if we have any update during the year we'll give you additional guidance.

Okay, and then you're obviously going through a big working capital build here.

Your inventories are up.

It looks like your AP came up luckily too but can you give us any guidance about how high your inventory might go and it looks like your days on your AP, your Accounts Payable came up pretty high.

Will you be under pressure to bring that back in line?

Just trying to figure out how much cash your working capital is going to use over the next several quarters as you ramp up production.

I'd say a fair question and an observation.

We did have some build up in inventory this quarter, in response to operating at some higher production rates and some assets -- the buildup of the assets held for sale and some -- what we describe as temporary production inefficiencies.

So it's a little too early to tell with another line coming on in June but we would hope that we would not see too much more growth in the working capital usage at this point and that it's definitely an area of focus to try to actually bring that down rather than have it being stabilized at this level.

The one exception to that would be the new line in Mexico if we run up to ten cars a day on that line we would have accompanying amount of working capital, would not be material in the total inventory situation that we have today and would be offset largely by payables.

Okay.

That's the building item and then if our marine sector does come back we'll have modest inventory builds in that which would be a big boost because we haven't factored that in for 2011 in any of our plans.

We've just assumed it's going to continue to stay in the [doldrums] during this year as it effectively operates on our fiscal year at least.

So it sounds like you expect modest inventory builds from here but you would expect to get some cash back in your assets held for sale.

Is that a fair assessment or do you think overall the number is a little bit slightly negative going forward?

I think you're right about the railcars held for sale.

That can move up and down during the course of the year too, so I could see it coming down, building back up and coming down, so that can fluctuate.

The important thing is all of those assets do have a lease attached to them and so we're earning revenue on those assets while they're sitting on the balance sheet too and this compared to our current [idle] investment of cash in very low rates of return.

It's very attractive to hold those assets short-term before selling them.

Okay, and then finally it looks like scrap prices are picking up nicely here.

I think that I was looking at something that indicated that your November period maybe scrap prices were 6% higher than the trailing period but showing off up so far in your next period up maybe 16% plus and they continue to rise.

Can you give us any indication of how much that will impact your margins on the Refurbishment & Parts business or any sensitivity numbers you can give us to the scrap prices?

Just a general remark about scrap prices.

They have been somewhat volatile and difficult to predict.

The situation is going to become somewhat more complicated now that we have these Australian floods that have submerged some of the important coking and other ferrous inputs which could cause a shock to the entire system and not to overdo that but that's a secular thing that has just kind of jumped out in the last few weeks so they have gone up.

We have a natural hedge.

We have some modest exposure to this on the steel side although we continue to index the vast majority of all of our contracts so we -- but it comes in the nature of scrap surcharges that can be -- can have sticker shock and cause issues with especially new bids.

And I think that we're using -- we're looking at scrap to offset some of the weakness that we continue to see in volumes and margins on the wheel side, so it's a positive thing, a very positive thing.

We have almost 100,000 tons of scrap annually that we control through our network and depending on how we handle that, we do have a natural hedge to be helpful in our -- in planning for these commodities.

Management issues have come up in this part of the cycle.

I don't think we can provide you an algorithm and you heard Bill say we handle 100,000 tons.

Not all of that closed through our bottom line or through to -- for our benefit in some of those cases, in a number of those cases, while we used to enjoy more benefit from rising scrap prices in that segment with -- under current contract renewals that is lesser so the case, so you shouldn't take that 100,000 divide by 12 and then look at changes in the index and say that flows through to us.

Okay, I'll be sure not to do that.

But I thank you guys very much for your help.

That's all I have.

Thank you.

Our next question will come from Steve Barger of KeyBanc Capital Markets.

Your line is open.

Hi, good morning.

Good morning.

If I heard you right in your prepared remarks, you said the secondary is going to allow you to more aggressively participate in the upturn.

Does that mean you've identified some operational pursuit that you need capital for or does that mean you're going to pay down debt meaning that earnings are going to grow more aggressively as volume returns or can you give us some more color there?

Well, I think as you know in our -- in the prospectus we said our use of proceeds were for general purposes and what you have seen is partly a buildup in working capital that we talked about that -- and also we are more aggressively participating, as an example, on the leasing side of the business both with the CapEx that we talked about of nearly $90 million of that CapEx this year, much of which would be dedicated to either permanent additions to the lease fleet or holding assets shorter term in nature, so it would be -- we see plenty of uses organically in our business.

We have not -- clearly, we've left the flexibility to use that capital either for growth and organically in our business, potentially other growth opportunities or to pay down debt but we haven't specifically defined and I think the market circumstances are going to dictate -- and opportunities out there are going to dictate where that capital is deployed.

Okay, so so far, you haven't done much with it, so should we think that you have $100 million in cash plus or minus and the $108 million of borrowing capacity or $200 million in liquidity right now?

Yes.

Okay.

And any idea, I mean as you look at the spectrum of opportunities, how should we think about the timing of putting some of these proceeds to work?

Well, I guess the timing is partly we're putting it to work.

We're partly putting it to work every day in either working capital or asset additions.

We had our -- we're saying $90 million of net CapEx this year, very modest amount of that was spent in the first quarter, so I can't give you exactly when quarter-by-quarter when that $90 million of CapEx is going to come on but it would ramp up during the course of the year as well.

Can you talk about maybe that would be helpful to him and understand the mix of that CapEx roughly between leasing and manufacturing?

Right.

About $50 million of that would be leasing CapEx, about $15 million to $20 million of that or about $20 million of that would also be in our Refurbishment & Parts arena where we're replacing the location where we had a fire with the new location so while that's CapEx, we have a lot of that CapEx and it does show up as CapEx would be paid for by the insurance proceeds we have received.

And the balance of it is going to be in Manufacturing and a good part of that would be associated either with production efficiencies or bringing on the third production line that Bill talked about down at our joint venture facility as well as [lease] a third line effectively at our Concarril facility.

Right, and is it -- can you deploy capital fast enough that we can start to get a benefit of it in -- aside from working capital which is going to work right now, is there anything that will actually add to the earnings accretion in the back half as a function of the money that you've raised via the secondary?

So I think what you're really getting to is can you assume something more than we're going to earn 0.5% or whatever it is on $100 million which doesn't sound -- wouldn't sound very attractive to us either to sit on that kind of money longer term, so the examples would be the assets that we're investing in that then we sell in later quarters.

Those assets can generate a return of about around 8% or 9% per annum just holding those shorter term and then selling them off.

I don't -- what I'm reticent on is to say you should take X percent of those proceeds and assume we're going to earn something like 8% rather than a 0.5%.

We certainly intend to put that money to use either in growing the business and/or paying down debt and of course, we could -- our highest cost debt has about an 8.375% on it so -- but you should definitely assume we're going to do something that's accretive that's going to add to earnings other than just sitting there and investing it at 0.5%.

That's great.

That's a very important point.

I'd just like to add one more comment on it, just to refresh everyone's understanding of our business model and this part of the cycle, we routinely initiate transactions that are leasing transactions.

We have a number of very close working relationships with institutions.

We syndicate these sales and often manage the assets following the syndication which goes into our managed pool and that over the life cycle of the car can end up producing benefits on repair, refurbishment, wheels, all kinds of services associated with the cars.

But more importantly as we build those assets up, they're attached to money-good leases, they are very liquid and we get interim rent as Mark described so during an upturn when this kind of activity is possible because the market is strong, we typically have a great boost, a good boost in earnings from this interim rent.

We can manage this fairly thoroughly so I would say in the second half that we will certainly deploy a substantial amount of assets -- cash into that kind of activity and then the timing of the sale of those will be keyed off of what other uses for the cash we may have so it's a good way to warehouse cash to create a stream of revenue equal at least to our marginal debt costs and much higher than we would be able to get just parking it in CDs.

That's great color.

I appreciate it.

One more question and I'll get back in line.

You spent a lot of time on margins earlier and you said that the margins, the manufacturing margins in the quarter were more reflective of railcar manufacturing ex-marine but you only delivered around 1,000 cars in the quarter.

If marine volumes remain low, how should we think about margin expansion as volume ramps?

Or can you get to high single digit margins if you're delivering 6,000 or 7,000 cars in the back half just on its own?

We would anticipate that, yes.

We would anticipate margin expansion as a result of operating at higher production rates and also a mix, so I think you're thinking about it correctly with that statement.

So I know you're hopeful marine comes back later in calendar 2011.

If that should happen and you were running at these kind of volumes it wouldn't be out of line to think low double digit operating margins on -- gross margins on manufacturing which you previously ran in the prior upturn.

Is that -- I mean, is there any reason why that shouldn't happen?

I think again you're thinking about it correctly, whether or not in the current marine environment we can achieve the kind of margins that we saw in a much more robust environment is probably not likely just where we would be in the market cycle, but still having marine volumes come on operating at higher production levels and with margin rather than the zero margin that we're assuming right now that yes, we should be able to get back into the lower double digits.

So just the two bullet points on that.

Marine is a real wild card, A, and B, we're not counting on it but we're certainly hoping and trying to get it to work and we're seeing a large, much more -- much better level of inquiries than we saw in the closing months of the year, so one could be cautiously optimistic.

We'll try to give more guidance as that stabilizes perhaps from call to call as we move through the year.

All right, that's great.

Thanks for the time.

Our next question will come from Art Hatfield of Morgan Keegan.

Your line is open.

Morning.

Mark, can you clarify something?

You had made some comments in your prepared remarks regarding GIMSA, and how it would impact the income state going forward.

Can you rehash that real quickly?

Sure.

As you know, or as a reminder, our JV down in Mexico, we're 50/50 partners down there, so that is really today where our production is primarily coming from.

We're operating at the highest production rates, so 50% of the earnings from that JV, we consolidate it and so at the margin line we're reporting 100% of the earnings at that JV and then with the non-controlling interest piece that's where we're backing out our partners' 50% share of those earnings.

So that was only $250,000 that we were backing out this past quarter, relatively low amounts but we would expect that amount as the profits and the earnings at that business grows and of course, that minority interest piece is going to grow throughout the year too.

We would expect it to grow sequentially throughout the course of the year.

Okay, that's very helpful.

As I was listening I misheard you and I was believing that you had said that that loss would grow but that's not what you said.

No, no, it's the earnings and subtracting out more thinking as an expense item.

It's a deduction to the earnings available to us.

Absolutely.

That clarifies it.

That's a big help.

Secondarily, you've given us what you expect to deliver this year.

Anything about the future mix of business that would dramatically change the revenue per unit that you would see relative to where it's been the last couple quarters?

I'm just taking a little bit of a pause on that as to whether or not as we ramp up intermodal production that it might come down slightly because intermodal units have a -- just by the nature of the materials content, have a lower per unit sale price than either conventional or tank cars.

So that would be depending on the pace of which we ramp up intermodal production compared to conventional car production, it could cause the unit price to come down a little bit.

A little bit but not significant?

Correct.

Okay, that's fair, and then finally, in past quarters, Bill, you've commented on your thoughts on where fleet storage statistics are and what you thought -- what your personal thoughts were, the Company's thoughts were relative to those.

I didn't hear your comment on that today.

Any thoughts on that -- where we stand today?

Storage statistics continue to come down in terms of the published reports quarter-to-quarter, month-to-month.

The official numbers are down around 300,000, below maybe 300,000 now.

There continues to be a lot of misunderstanding about that data I think because a lot of it is stored in deep storage, a lot of it is in forest products cars so a car is not a car is not a car.

And even though that seems like a large number compared to a total fleet of 1.4 million, 1.5 million, a lot of those cars will eventually have to get fixed or they will have to get scrapped and so the real storage number is only probably a fraction of that -- if volumes continue.

If traffic continues to grow at the pace it's been growing, intermodal traffic in particular, we see coal cars and some types of intermodal cars that will be taken out of storage, so I think it's just depends segment on segment -- sector on sector.

You've got to look at the kinds of stuff that are being hauled in the cars and one has to really understand the difference between an intermodal car that's a trailer car, a container car, a domestic container car or a 40-foot ocean container car, so it's that -- the railroads when they have -- if you think of 300,000 cars that's a lot of cars to switch in and switch out and sometimes it's easier to buy new cars than it is to do that.

So that's the only -- I think it's positive.

It's moving in the right direction but much depends on the overall economic environment.

Are we going to have a sustained recovery, are the pundits who are predicting these high builds, what are they -- what kind of Kool-Aid are they drinking?

Is it -- does it have vitamins in it?

I don't know.

It seems like it's an awfully high projection to get back into the 70,000 to 80,000 car range.

I surely hope we don't get there.

I think the average replacement level is still around 50,000 cars a year but we've been running 20,000 -- we've been running 10,000 cars a year to under 15,000 cars a year last year, 15,000 cars this year, so we have some catch up and I think we are at the beginning of a cycle if the economy doesn't tumble, we don't have a terrorist event, we don't have -- on our US soil we don't have a war.

Great.

That's helpful and then just one last quick question.

I don't know if you really have much to say here but anything you would note with regarding lease rates within your portfolio?

Anything that stands out directionally what you saw in the quarter?

No, I don't think I'd care to comment on that.

Do you want to comment on it, Mark?

Not beyond what you had said earlier that lease rates are still slower; they are coming back up and stabilizing but still at a very slow, slow pace.

Great.

That's all I have.

Thanks for your time.

Thank you.

Our next went will come from J.B.

Groh of D.A.

Davidson.

Your line is open.

Morning, guys.

I think most everything has been answered but I had a couple clarifications.

On the roughly 6,000 cars you got ordered here in the last couple months, is the majority of that for delivery in fiscal 2011 or maybe a different way to phrase it, of the 8,000 that you have in backlog now plus the roughly 2,000 that you're going to get so call it 10,000, what percentage of that is contractually deliverable in fiscal 2011?

You're correct, that the majority of it is and just to make sure we follow each other's math, the guidance that we gave of 9,000 to 10,000 cars for the year that we'll deliver of course includes the 1,000 cars that we delivered this quarter.

But you're correct that the 8,000 cars in backlog and then the 800 cars that are delivered that we got orders for subsequent to quarter end, most of that is for delivery in our current fiscal year -- or calendar year.

Other than, of course, in the backlog, we have our multi-year deal with GE, and of course that will be in there.

Which extends?

Okay, so I guess the question behind the question is you don't have to get a ton more orders to meet that delivery forecast of 9,000 to 10,000 for fiscal 2011.

That's correct, and I thought that maybe what you were getting to and just to clarify a remark I made of course, it's closer to 1,800 cars that we received since quarter end, not 800 cars.

Okay, and then to beat the dead horse on assets for sale, held for sale, when you get -- is that a discretionary item?

Are those leases that you have in hand and then you build the car and then you know that eventually you're going to sell it or how does that -- walk me through the mechanics of that?

Is that a discretionary item in terms of how you're spending cash?

Yes.

We market the cars either for sale or for lease.

We underwrite the lease with generally an institution in mind.

We typically will work with a number of companies.

It isn't something that is as threatening to leasing customers which there are fewer today, at least active in the market and then we syndicate those out, but we -- most of those transactions again are money good.

They have leases attached and then we have the discretion -- where the discretion comes in is when timing and when we sell them.

So I guess seeing that number is sort of a commentary on your view of the overall market over the near term, am I reading that right?

A commentary is to the positive nature of the market in the near term?

Yes.

Correct.

Okay, all right.

Thanks for your time.

Thank you.

Our next question will come from Kristine Kubacki of Avondale Partners.

Your line is open.

Good morning.

I just have one question.

It's on the wheel business.

I guess just to get a little bit more sense of kind of how that business is going.

Given the positive trends in gross ton miles are you still surprised relative to historical cycles how that wheel business still lags?

Yes.

We and others are surprised and a little baffled; I hate to say it, by the slowness in recovery of wheel volumes.

There may be some changes in industry practices that most of the major players don't understand.

Some of us are perhaps being affected more depending on our customer base and our geography than others, but we still are hopeful that these volumes will return to more historic levels, so I think the short answer is yes, we're continuing to be disappointed and a little surprised by the lower volumes.

Second thing that has happened is we have had in the American Allied market geography, when we acquired American Allied, we had a fire at Columbus that kind of broke our momentum and we're replacing that facility in North Platte.

But during that time some new competitors have sprung up in that North Central segment, in our Central and Eastern segment and that's creating some pressure on pricing.

Those are the two major things that are going on in wheels.

But we still have a very strong base volume with major customers, multi-year agreements, which we announced last year, some of which go on effectively for nine years.

Okay, that's very helpful.

I was looking for something statistically that we can watch for in terms of freight trends or mix or flows or geography.

It doesn't sound like it.

It still sounds like it's a little bit undefined in terms of what's driving the weakness at this point.

I think that one of the things that could be affecting it would be coal traffic because while railcar loadings are up, coal loadings are not up as much de minimisly and coal is a very large portion of the total rail shipments in North America, so when that commodity does recover, it's possible that coal loadings have more of a direct effect on wheel consumption as opposed to all other loadings, because that includes a lot of domestic shipments, short hauls and sometimes lower capacity cars.

But weather will be a factor this winter and we still expect wheel volumes to adjust and again, they were slow going into the slump by almost six months and they are slow coming out.

And if you look at a chart of consumption versus all of the other years we're below those consumption levels at the traffic levels so eventually, we believe that this has to get equalized because wheels wear out.

Okay, very good.

Thank you very much for your time.

I think we'll have one -- leave it open for one last question here and then we'll wrap it up.

Our final question comes from Thom Albrecht of BB&T.

Your line is open.

Hey, guys.

I just have a follow-up question.

Hi, Thom.

On management services contract that you lost, how many railcars were involved in that?

It was about 8,000 or 9,000 cars and actually just came up for -- it came up for expiration and not renewed.

The service was not continued, so no other party took the business.

It was just that they decided -- the customer decided that they could handle that fleet on their own.

Some of that work will continue to flow to us however.

Sure.

On the $44 million increase in the assets held for sale, I know you've discussed that some but I want to make sure I understand that, just in the sequential quarterly change.

In that, are there some just older nearly obsolete railcars or is it overwhelmingly new railcars ready, they are just at some stage before they've officially gone into the lease market?

They are predominantly -- very much predominantly, almost substantially all of the increase would be new railcars, newly built railcars within the last one to five months that would have leases attached to them where we're earning rental notes on those assets and as Bill described, the timing when we sell those railcars, we have some discretion and control over.

Okay, that's what I just wanted to make sure of that there wasn't something really old in there that had transpired, so that's helpful, thank you.

Very good.

Thank you.

Well, I think that's our last call.

We thank everybody for their participation and interest in the Company and as always, if you have any additional follow-up please give us a call offline.

Have a good day and thank you.

Thank you.

This does conclude today's conference.

At this time all participants may disconnect.