Greenbrier Companies Inc (GBX) 2011 Q2 法說會逐字稿

Hello, and welcome to The Greenbrier Companies second-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 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, everyone, and welcome to our second fiscal quarter conference call.

Today, of course, I'm joined by our CEO, Bill Furman.

I will make some remarks about the quarter that just ended, and Bill will provide some commentary, and then we will open it up for questions.

The first, as always, matters discussed in this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

Today, we reported our second-quarter results for the quarter ended February 28.

These results are consistent with our previous guidance, near breakeven and also just got reaffirmed and published last week at the time that we launched our convertible debt offering that we will touch on a bit as well.

Our business and visibility has improved as we continue to benefit from the next stage of recovery.

Since the beginning of the year, we have received orders for 10,200 new railcars, and we expect to realize efficiencies of long production runs of similar car types as we work through our backlog.

The pace of new railcar order activity reflects our ability to capitalize on the cyclical recovery in new railcar manufacturing, particularly for railcar types in which we focused.

And as we discussed previously, our market share is the end of December, the last published date for North American data, and we expect the March data to be coming out soon.

Our share of backlog was roughly 36% of all North American industry backlog.

We are encouraged by the product diversity of new orders not only that we are receiving, but overall in the marketplace, and we believe this indicates a broader-based recovery in the new rail car market.

Now, let me address some highlights for the quarter to supplement the year-over-year comparisons in the press release and financial tables.

I'll include some segment color on a sequential basis as compared to the first quarter this year.

Turning first to our Manufacturing segment, revenue showed strong growth from the last quarter, primarily due to increased new railcar deliveries.

In Q2, we delivered 2200 new railcars compared to 1,050 cars in Q1.

And as indicated in our January call, we delivered one Marine vessel.

To supplement ongoing demand, on the last quarter's call, we outlined our plan to reopen production lines, ramp up production rates and open an additional production line.

In Q4 of our fiscal year, these plans are well underway, and we're meeting our goals and targets.

Our gross margin for the second quarter was 5.8% of revenue, down 6.6 -- down from the 6.7% of revenue in Q1, primarily the result of certain production inefficiencies associated with ramping up production rates, and those are principally behind us, and a lower-margin product mix in Europe this quarter.

We expect some margin expansion in the second half of the year as we operated higher production rates and higher up the learning curve, but we still expect these margins to be in the single digits, as the pricing environment when we took these orders remained very competitive.

Now turning to our Wheel Services, Refurbishment and Parts segment, this has grown consistently for the second consecutive quarter, primarily due to improved volumes in the Wheel Services business, as well as an increase in railcar loadings and volumes of railcars coming out of storage.

Gross margin for this segment was 9.5% of revenues, down sequentially from 11% in Q1, due to a lower-margin product mix and the impact of severe weather conditions at some of our facilities.

Specifically, some of the product mix, we earn these same margin dollars, but it is for -- in our Wheel Services segment, but it's for a higher dollar value of our revenue product does, so the margin percentage is down but the margin dollars on this product line is -- remains the same.

We continue to believe that this segment will improve steadily as the year progresses, particularly in the repair side of the business.

Turning now to Leasing & Services, our fleet utilization was 95.9%, down from 96.7% last quarter.

Revenue for this segment was $17.7 million compared to $18.9 million last quarter, due to principally a discontinuation of certain management services contract, offset by higher gains on sales from assets from our lease fleet and rent that we earn on these assets while we are holding them for sale.

We are seeing stronger participation in liquidity in the secondary markets for buying and selling of railcar assets via the leasing companies, which we also believe is a positive development.

And we believe, in the longer run, we will be able to compensate for the expiration of the management services contract with higher leasing activities.

Gross margin from this segment was 50.6% of revenue compared to 51.6% last quarter.

Looking ahead, we anticipate margins will improve as we term out shorter-term leases into longer-term leases with more favorable terms.

Our SG&A expense for the quarter was $17.7 million compared to $17.9 million last quarter; obviously a lower percentage of revenues this quarter.

We expect for the second half of the year for G&A to run at somewhat higher levels as we operate at higher activity levels, offset somewhat by recent cost reduction initiatives.

Interest and foreign exchange expense was $10.5 million for the quarter, compared to $10.3 million in Q1.

As a result of our recent bond refinancing, we expect starting in Q4 that we're going to save about $2.5 million a quarter in pretax interest expense.

Obviously, a very significant reduction in this area.

Earnings attributable to our non-controlling subsidiaries relating to our GIMSA joint venture was $257,000.

This figures the deduction for net income, and we expected that that amount will grow in future quarters as we operated higher production rates and higher profitability down there.

Turning ahead, we believe we're on track to deliver $9,000 to 10,000 railcars in fiscal 2011, consistent with our outlook earlier in the year, and we continue to expect that EBITDA in the second half of the year will be greater than the first half, and that we will be profitable for the second half of the year as a whole -- for the second half of the year and for the year as a whole, excluding any one-time charges associated with the retirement of our high-yield bonds.

We expect the tax rate to run around 40%.

This has been very volatile, and it may remain so, as it's in part dependent on our geographic mix of earnings.

Net CapEx should run about $70 million.

That's net of any assets sold from our leasing fleet.

And depreciation, amortization should run about $40 million.

We continue to manage proactively for cash flow and liquidity and for strengthening the balance sheet.

We ended the quarter with nearly $100 million of cash and over $100 million of additional borrowing capacity.

And during the quarter, we completed a equity offering where we raised nearly $63 million from the sale of 3 million shares.

And then last week, we just completed a $230 million convertible debt offering with the coupon of 3.5% and a conversion rate of $38.05 a share.

That was up 37.5% from the closing price that day.

And we used the net proceeds from the convertible debt offering and cash on hand to retire our high-yield bonds.

As I mentioned earlier, this will save us about $10 million of pretax interest expense and extends our debt maturity by three years.

We're going to have a one-time charge in the third quarter related to retiring the high-yield bonds of about $10.3 million pretax.

We're now going to turn our attention to the refinancing of our revolving credit facility, and we are highly confident that -- in our ability to execute on more favorable terms than our current facility.

Just a brief word about earnings per share calculations going forward, with the convertible debt offering, we're going to calculate it using -- on a dilutive basis, the more dilutive of two methods.

The first method will take GAAP earnings, which of course includes the interest expense from the convertible bonds, and in the denominator, we will not include any of the potential effect of the conversion of these bonds into 6 million shares of common stock.

So it will be GAAP earnings divided by outstanding shares, excluding the conversion of the bonds.

The second method will take GAAP earnings and add back interest expense on an after-tax basis and then we will include the dilutive effect of the 6 million shares underlying the bonds in the denominator.

Of course, when we're profitable, we will also include the dilutive effects of the warrants and the shares outstanding.

That concludes my comments and I will turn it over to Bill, and then we will open it up for questions.

Thank you, Mark, and welcome to our call this morning.

We appreciate your interest in Greenbrier and the time you take to stay in touch with us on these quarterly calls.

First of all, I'm pleased that we met our Q2 goal, as earlier announced, of a near break even financially.

And the results for the quarter had a few headwinds that we had to overcome to meet that target.

In the second half of our fiscal year, we believe we will achieve solid earnings performance in the quarters ahead and into 2012.

I want to speak for a moment or two about market conditions in the industry, just in terms of the bigger picture.

And turning to orders, while final industry orders, as Mark had indicated, haven't been yet published for the calendar quarter just ended March 31, obviously, these are going to be robust and backlog should be moving up.

I will remind you that some of the major orders that have been placed this quarter, not any of ours, but others in the industry, have been multi-year orders, and so some of that production will not be delivered in the coming year, but those backlog statistics will be moving up.

This recovery cycle has bounced back more abruptly than from other downturns, and it seems that the outlook for railroading and car building will be very positive for the balance of this year, calendar 2011 through 2012 and beyond.

Official storage statistics in February, for example, were just over 300,000 cars, and will have fallen in March and the first weeks of April below the 300,000 car range.

In fact, they are well below that range.

We estimate the actual stored car surplus to be closer to 250,000 cars due to definitions of stored cars, bad order cars, and so on.

So, also, I will remind you that there are many kinds of rail freight cars.

The fleet is not a homogeneous mass of equipment, but instead, consists of a broad number of many car types, some of which are in great demand and others which are not in demand, such as center beam cars for forest product service.

Moreover, there's frictional storage in the system just as there is frictional unemployment, a base of cars which are kept for peak demand or for future salvage but which are not immediate candidates for service or scrap.

Some of these cars are coming out of service and going into repair shops, and we expect that to driver repair demand in the future.

Also we expect recoveries in volumes and wheels and other GRS, or rail services businesses.

Finally, even though railroads have become very efficient and are in great financial shape, the velocity of the fleet is showing signs of a downward drift, also something that's typical in an upturn.

This means it takes more cars to carry the same ton miles of traffic, thus driving demand for new and used cars.

So, what does this mean for us and for the industry?

It's all good news for our three business segments.

We expect to see the results in more robust demand for our products and services, and we should have more ability to drive margins up in almost all of our railcar subsegments -- Manufacturing, Leasing, asset management for others, Wheel and Axle Services repair and parts, and even in our non-rail marine business, which has been going through a dry period over this last year, but has been a very strong earner in previous years and a very strong earner in the downturn.

This past quarter, as Mark has indicated, has been a very busy one, with new orders, major financings and strategic and operating initiatives which will lower our costs and make our integrated business model much more efficient.

Over the past five years, we have built an integrated business plan that provides revenue to Greenbrier and value to our customers over the entire lifecycle of a railcar.

These initiatives and others recently concluded that helped us to reduce our fixed costs, and more of that is ahead; to significantly expand into the less cyclical, higher-margin railcar aftermarkets business; to enhance and expand our manufacturing footprint; and grow our marine business; and to de-lever the balance sheet and strengthen the balance sheet while providing a strong platform for future growth.

All of these things also helped get us through the recent downturn, increasing our trough EBITDA.

The low point in this downturn was $21 million, or in the earlier downturn, in the early 2000's, was $21 million during the trough.

And the low point for us in this cycle was a more robust $64 million, reflecting the work we have done to improve mix and efficiency.

Our goal and the offering just completed will help us save more than $10 million annually.

We expect to set a target of achieving operational efficiencies of at least that much and more, giving us momentum into the 2012 period.

This should allow us to continue our growth trajectory and help complete a comprehensive strengthening of our businesses going forward.

So going forward, we see greater -- great improvement in market conditions.

We intend to take advantage of all of the strategic initiatives that I spoke about to drive growth and profitability.

We're stronger coming out of this downturn than the last, and we expect to improve our performance as the market recovers as a result of the initiatives we've taken.

The industry tends to have long cycles of low and high activity for construction of freight cars.

We're now in an upswing, which should be supported in smooth to higher than historical levels driven by favorable demographic trends and the advantages of rail transportation.

One of the two most accepted industry forecasts are FTR Associates says car building recovering to 42,000 this year in calendar 2011, a position with which we agree, to exceed 70,000 cars per year in each of the next three years thereafter, hitting 80,000 cars in the outlying years.

While that outlying number may be a bit optimistic, we believe that we will reach this peak rapidly, reach a peak rapidly in the 60,000, 70,000 car range in the industry, and that will likely -- to be sustained for a period of a few years before we see a next downcycle.

In this recovering market, we will encounter issues much like those in such earlier markets, including choosing among production and customer opportunities; increasing margins in a still competitive environment; coping with supply-chain bottlenecks and components; higher steel prices; fuel rationing; and other issues, which our experienced management team has coped with in previous cycles.

We are managing our exposure to commodities well.

We are building a profitable backlog with provision for escalation and materials costs on orders with extended delivery exposure, as well as interest-rate escalations on our underlying leases for freight cars placed on lease and held for sale or later syndication.

We did experience in the last quarter a few operating disruptions in truck supply for castings from China during the quarter, and some castings continued to be in short supply for North America due to demand abroad.

However, we anticipated this well in advance and have an adequate supply chain protection for an increasing book of business through 2011.

During the balance of the calendar year 2011, we will benefit from lower interest rates, as Mark has indicated on the recent financing, as well as significant savings at similar annual levels to the interest-rate savings from operational enhancement and lowered fixed costs and IT, health plans and business rationalization.

During the quarter, we saw revenues in our GRS unit exceed expectations, while margins were less than levels which should be associated with that level of revenue.

This is not unusual in a recovery because that business tends to lag recoveries and be slower going into downturns.

So we aim to improve margins and capital turnover in the GRS business unit.

Our marine unit, contrariwise, was able to exceed its margin targets during the quarter with much lower revenues than had been expected.

Our marine operation is fully leaned, and marine activity appears to be picking up a bit, with higher oil prices and some pressure for renewed offshore drilling.

We expect to be able to reduce some finished product inventory in the marine unit and secure new contracts later in our fiscal year for fiscal 2012 production.

Europe was at about a break even for the quarter.

This was the first of 10 consecutive quarters where Europe has not made money, but breaking even in this particular quarter, given the ramp-up and other operational issues we faced was good, and that market seems to be coming back and recovering.

There's also a very robust market in the former CIS countries, which we're examining.

That concludes my remarks.

Mark, back to you.

Thank you, Bill, and operator, we'll go ahead and open it up now for questions if you can give the caller's instructions, please.

(Operator Instructions).

Allison Poliniak, Wells Fargo.

A question on going sort of back to margins at this point.

In the rail I guess Manufacturing segment particularly, have we hit bottom here that we should see sort of a gradual improvement as some of these startup costs start to go away in that business?

Are you referring to manufacturing margins, Allison?

Yes, Manufacturing specifically.

I think that's a correct statement.

Okay.

Because we are getting I guess to the point potentially next year, I know -- if I remember correctly, your capacity in terms of manufacturing was through the 13,000, 14,000 range, which conceivably we could hit next year.

Is there any reason that margins couldn't get back to prior peak level next year if that's the case?

I would say next year -- and in fact, let me also address your capacity because you are right; a couple of years ago we were directionally -- you are correct.

Since then, we've had some capacity enhancements and we view our -- and in fact we're going to be adding a third production line at our GIMSA facility, so we view our North American theoretic capacity probably closer to 15,000 cars with another -- 14,500 with another 1,000 to 1,500 cars in Europe.

I think when you look at next year, we'd probably say it's still a little early to get to those kind of peak margins because, again, we have backlog that is stretching into 2012.

And the environment in which we were taking those orders is still a very competitive environment.

So we see a ramping but I don't think we're going to be that we would consider closer to peak margin, at least in the first half of 2012.

Great.

Perfect.

Thanks so much.

Steve Sherowski, Merrill Lynch.

Hi, I'm in for Ken Hoexter today.

Just building on that last question regarding margins, what is a good margin run rate, excluding the barge business on a go-forward basis?

How should we think about that?

Which segment are you --

For manufacturing.

I'm sorry.

I think, again, Steve, it's going to partly be where we -- the mix of business itself and then how far out into the cycle that we are.

We -- if you look at past peaks, we've had margins in the double digits, up even into the low, low teens or high -- so somewhere in the 11% to 14% to 15%, and in some cases, even beyond that.

But what we said is that we didn't believe that we would be near those peak levels in the first half of the year, for the reason we discussed, but we would expect our margins to continually, to gradually expand.

Okay.

And just a quick follow-up, it seems to me if you maintain anywhere near that 36% backlog market share, you're going to bump up against your maximum production capacity fairly soon.

Do you have any plans to alleviate that capacity, or have you thought about that at all?

I think we look at it two ways, Steve.

Just going back to your question on margins, it is the major opportunity we have to increase our margins in Manufacturing because our market share in past cycles -- we're good at maintaining and enhancing market share.

Our market share typically doubles in a downturn, but it goes back to a lower market share in an upturn.

And unless we expand operations at our lower-cost facilities or build a new facility, which wouldn't come on stream for some time, the practical opportunities for enhancing production in the current cycle aren't great.

There's also longer-term overcapacity in this Manufacturing segment.

So, I think the way to look at this is that it really is an opportunity for us even though our market share is expected to decline, to be more selective about the opportunities we, and the customer base with which we operate, optimize our leasing model and increase our margins in Manufacturing.

Okay, great.

Thank you.

Art Hatfield, Morgan Keegan.

Hey.

Good morning, everyone.

Hey, Mark, can I start with you?

Just can you give us a quick kind of rundown on what the share count was at the end of the quarter?

Obviously post the operating; and then what impact the warrants and whatnot would have on the dilutive share count?

Right.

The outstanding shares was roughly $25 million at the end of the quarter.

To get the share count from the convertible bonds, you would take the $230 million and divide that by $38.05 a share, and that would give you the roughly $6 million from the convertible bonds.

And then on the warrants, it depends on the stock price.

Each quarter it's a treasury stock method where you take the underlying warrants and you multiply it by the $6 strike price and then divide that by the number of shares that we would buy back at the market price at the time.

And the net of that is how many shares would be outstanding.

And we can go through the math with you off-line, if you would like to, on the warrants.

Okay.

Do you know off the top of your head what impact they had in this quarter?

They are only included in -- when -- in profitable quarters, so --

Oh, yes, yes, yes, I'm sorry.

Yes, I knew that.

I should have remembered that.

That's fine.

Just a couple other questions, on the affiliate earnings line, can you talk a little bit about how we can think about that going forward from a modeling perspective?

I know it's a small number, but just want to get a handle on how we should maybe think about directionally, where that could go and how it should improve going forward.

So there's two things with affiliates.

We have one, a castings venture, that is an equity -- it is accounted for in the equity method.

And it's also consistent with -- we also have another equity interest that is showing on the financials.

And that number is not going to change materially in the near term; loss for unconsolidated affiliates.

That's also where our WLRG, the ex-leasing platform; we are working on some things in that area that, when consummated, would change that number materially.

But until we announce some of those potential restructurings, I think that line item is not going to move too materially in the near-term.

The other one is the, what's labeled net earnings attributable to non-controlling interest.

And that's our GIMSA joint venture.

And as I alluded to earlier, that was -- that is going to be a deduct because that's our partner's share of the earnings down there.

It was only $0.25 million this quarter.

We expect that number to grow and grow fairly significantly as we continue to ramp up production and efficiencies there.

Just as an example, by the end of this year, that number could even approach up to $1 million.

Okay.

Of course, our share would -- which is greater -- would go up (multiple speakers)

Right.

Right, right, right.

The offset --

I do think that's -- I think you're hitting an important point in your modeling, though, perhaps, Art, in that that is our -- where we are - our highest production levels are at that facility, and there is a partner who picks up 50% of the earnings.

Great.

Just a couple more, you made a comment about the castings business.

I'm assuming that's -- you're talking about Ohio Castings.

Is that a business that should open up soon, and given some of the constraints, Bill, you talked about with components that you have seen recently?

We are examining with our partners the re-opening of that facility.

And I would expect with the current market that that would be a big contributor to the well-being of the three partners.

Those three partners are Amsted, ARI and Greenbrier.

We each have a third interest in that entity.

So that is a very good, stabilizing factor.

It's an efficient facility.

We closed it during the downturn, and the board is authorized reopening it, which will be one of the things that will give some relief to the current casting shortages for other car builders.

Castings for this year are a limiting factor for some builders who don't have this type of internal supply chain protection, and it's a very good thing for us, so we expect that to bump up.

Sometimes -- I will have to go back and see whether that will get reflected in the -- because that's a cost center, so it might just get reflected somewhere else in our P&L in the Manufacturing margin.

Right.

I think the big boost will be -- as Bill mentioned, both in allowing us to achieve higher production levels and also in our cost of sales from the, obviously, the advantageous purchase price of having an ownership interest in the facility.

It would modestly affect the line, the equity or loss from unconsolidated affiliates.

It won't have much of an effect for this fiscal year, but going forward, it would have a modestly positive effect.

How long does it take to ramp that facility up?

We expect that can be ramped up very quickly.

We should have relief in the summertime, but not -- it won't affect our P&L that much, is what Mark means, so it (multiple speakers) come on --

Yes, yes.

Yes.

I think that it will be a real boost to the shortage, and we do expect that that will be a profitable operation, very profitable operation, for the partners.

However, the way we report it may not be -- it may not come out fully in this line item you're talking about.

No, that's fine.

When I asked about the ramp up, I was just curious how quickly from a -- if there was supply shortages of the casting.

We expect there will be a supply shortage of castings which will constrain many car builders.

Even those who have received orders and taken orders will have difficulty delivering those orders well into the late fall and into 2012.

It's something that we really have worked hard to get ahead of, and we are just right on target with the production plans we have for the balance of the year.

And in fact, due to some disruptions in supply chain from China, and the very strong market in China and in Russia, we have had some slowdown of our -- we and the other double stack car builders had some slowdown in delivery for castings to our Portland plant.

Okay.

Just, I don't want to belabor this, but you said something that made me want to clarify.

You talked about constraints for car builders potentially down the -- bigger constraints down the road from supply of the castings.

You're talking about car builders outside of the ownership Ohio Castings.

You're basically saying that that is potentially a competitive advantage to you going forward.

It is definitely a competitive advantage to us and to ARI.

Right.

Correct, correct.

Just a final question, you had mentioned the orders for 2400 units subsequent to the quarter.

The mix in that business, I want to say that your existing backlog is bad, but you had talked about pricing pressures on recent orders being a constraint to margins.

Are the orders you are getting today, are you seeing a material improvement in the mix and the pricing of those orders?

Yes.

We're -- we are definitely -- given the constraints that we have, we're trying to get our margins up, and the mix is more favorable in some of the orders we received.

We are starting a boxcar line in Mexico, and so we anticipate, on this latest batch of orders that the margins will be better than in earlier -- than they were earlier.

Great.

That's all I got.

Thanks for your time.

J.B.

Groh, D.A.

Davidson.

Morning, guys.

Most of my questions have been answered, but it would be helpful for me if you could kind of recap that capacity in North America.

Could you kind of break that down between the different facilities?

I think you have in the past.

I think right now since we are still in our expansion phases, that we'd prefer to get less granular.

I think it is safe to say that the capacity expansions that we have been working on have been related to our two facilities in Mexico, and of course the GIMSA one being where the greatest expansion.

But we've also taken some measures through -- at our Concarril facility with an adjacent [Komatsu] facility that is able to furnish parts that they are allowing for greater capacity in Concarril and also potential future capacity.

Okay.

That's what I figured.

I think I can kind of back into it.

So there hasn't been any real significant change at Gunderson in Portland.

It's just - it's mostly growth has been in Mexico?

Most of the growth is in Mexico, and we see Gunderson as a primary car builder for double stacked cars and some specialty cars.

Got you, okay.

Okay, that's helpful.

And then, maybe Bill, you could -- it looks like you got a pretty nice order number already for Q3, with just a month or so into the quarter.

Could you talk about maybe the velocity of RFP activity?

Are you seeing that pick up, slow down, stay the same?

Kind of give us some indications on that front.

Well, from my perspective, there's good news and bad news.

The good news is that the business is robust.

It's up there and we are actually, for the balance the year, effectively, in our minds, at least, sold out for the calendar year, but we still have a few bridges to cross there.

There's a lot of activity out there.

That's the good news.

The bad news is that for us, it will constrain our market share because others have been receiving orders.

They are getting their plants up and running.

We've had an advantage through the downturn of having two of our facilities operating, and we have had lower costs as a result of that.

So that's the other side of the coin.

That we will not be as competitive on delivery as others, and so we expect our market share to climb.

On the other hand, we see very robust demand going into 2012.

A lot of the orders or a lot of the RFPs that are out there are anticipating capacity constraints and especially with trucks as a capacity constraint for 2011 production.

We expect many of the customers to adjust their expectations on delivery to deliveries in 2012, calendar 2012.

Calendar 2012.

Okay.

Thanks a lot.

(Operator Instructions).

Paul Bodnar, Longbow Research.

Just a follow-up question here on the GIMSA facility.

I think you had mentioned that you were looking at adding another line down there.

Why are you guys choosing to do that at that facility?

Are margins that much better or -- and not somewhere else?

What's I guess the purpose of doing that with a joint venture partner, and not on your own?

Even though we have a 50% venture arrangement with them on ownership of the entity, we have an operating fee structure with them where our share is closer to two-thirds of the economic value created there.

It's something in that ballpark, and that was our original -- that was the original deal going in.

So we like having a partner, a substantial and well regarded partner in Mexico.

We think that that is the most efficient facility.

It's closer to the border.

Inbound freight is less and outbound shipment to our markets is less than Concarril facility.

And that's not to say that the Concarril facility is not very, very competitive.

It is.

It's just that the GIMSA facility suits us better.

One of the things that's attractive about the way we're doing this in Mexico is that we don't have as much capital invested in these facilities, and the capital we do have invested tends toward working capital as opposed to fixed plant and equipment.

Now, we're still evaluating all of our manufacturing footprint and there may be other opportunities to expand off of this footprint, but those are the basic reasons why we're focusing our Mexican facilities on GIMSA.

Okay.

Thanks on that.

And then, in terms of lease fleet expansion or any kind of additional ideas on expanding the leasing business, what are your thoughts there at this point?

We see a fairly significant opportunity to continue to grow toward the lifecycle services to railcars through our leasing and repair and asset management businesses.

As you know, when demand comes back in the industry, the leasing business lags a bit.

The leasing yields lag a bit, so we're expecting increased yields in our fleet, our own fleet, but also, we'd like to expand our assets under management, so we will put cars out of the lease and then syndicate those cars just in institutions.

In connection with the WL Ross portfolio, we've been going through a major review of our leasing model, and we believe there's some substantial value we can add out of the leasing business by fine-tuning and driving more volume through this model and fine-tuning it to have higher yields and a more robust asset management business associated with the leases we initiate.

So by driving more volume, you mean just syndicating -- pushing more cars through there, effectively?

We would push -- yes, we would like to push more cars through the model, which isn't untypical of what happens in any upturn, but we think that it's a valuable thing to do because we can attach more longer-term value adds if we are managing an asset and we -- so we're going to guide some more of our volume if we can through the leasing model.

Okay.

And then last question in the Refurbishment and Parts business, and I don't think you addressed this before.

If you did, I'm sorry about that.

The -- what should we think of in terms of peak margins on that?

I think last time around, you had some benefit from scrap and I don't know that you're going to get the same kind of thing this time.

Just kind of wanted to see what's changed there.

I think, Paul, you probably hit on the biggest piece, and that is the scrap piece from a few years ago that in some quarters got our margins to the high teens.

And that was a bit artificial.

We don't plan for that in our planning cycles, and some of that benefit is not available to us contractually going forward as well.

So we more view -- some because of that, we probably view the peak margins may be a couple of percent down from the last cycle.

Okay.

And then, would it kind of be a slow ramp to that or -- through this, or is there any kind of reason we should think that you might be able to get there a little bit sooner, being in 2012 (multiple speakers)?

Well, so far it has been a slow ramp, but the new car market has recovered quicker than the aftermarkets were anticipating, as we said.

And we are optimistic that it will see improvements going into the second half of the year.

But I think you probably characterized it correctly.

Some of the wildcard is just how quickly the wheel volumes themselves recover, and we are seeing signs of that recovery now.

Okay.

Thanks a lot, guys.

Stanley Furman, Longbow Capital.

Just a quick follow-up on GIMSA.

You mentioned about $0.25 million that was backed out due to the profitability there this quarter.

It looks like a year ago, that number was a little bigger.

Does that mean that you're actually less profitable in that facility now than you were a year ago?

For a particular quarter, looking at a snapshot of a quarter, if you are looking at a quarter where there was a bigger minority interest shown on there, it would indicate that the one thing that is absent that masks it a bit is that we do earn some fee income that tends to make that number a little bit confusing.

As Bill mentioned, actually, since this time last year, we have a bigger interest, and that would have been our interest -- economic interest has actually grown when you take into account the fees.

But you're looking at a -- if you're comparing one particular quarter, it would be a snapshot in time.

And as we said, we had some production inefficiencies during this quarter, and we expect easily that through this cycle, that that number is going to grow steadily.

And by the end of this fiscal year, it could even exceed $1 million, the minority interest piece.

Wasn't it $4 million last year for the full year?

Just give me one minute to make sure that we're -- that is correct.

Though it still looks like it's going to be down this year versus the last year.

That's correct.

And part of that is reflective, I think, of our bigger economic interest in the facility.

Okay, great.

Thank you.

Ken Hoexter, Merrill Lynch.

Great.

Good morning.

I just wanted to follow up on some of the stuff you talked about earlier on shifting to pricing and kind of [capping up to] production.

But what options do you have to expand your production capacity here?

Does it mean you turn certain car types away so you're running longer of same car type production of the same car types?

Do you run additional shifts?

I just want to see what options you have to maybe even increase the production capability as orders continue to pick up?

For the balance of this fiscal year and even the calendar year, we have a production plan that's pretty well locked in now.

So, we aren't probably able through our first quarter of 2012 to affect the total output materially, unless we were to put more throughput through our Gunderson facility later in the year.

I think you are correct that one of the options when you are -- when we are in this position, we can run double shifts, and we are doing so.

We can run longer -- try to concentrate in car types and keep a longer run of a certain car types, so we will not get tempted to switch to another -- to a different car type, which is more typical in a downturn and reduces margins.

And those are really two of the principal drivers.

Both the GIMSA facility and the Concarril facility have potential longer term for physical expansion.

And so we're not ruling out -- when I say longer term, I'm talking about some enhancements that could occur in the second half of our fiscal 2012.

So it's not that we're not examining that.

We're trying to deal with the issues, responsibly, of quality and efficiency during an upturn, and so we want to be prudent about the pace at which we look at expanding the capacity.

We have very flexible facilities in Mexico.

And having said that, we are running -- we're opening a third line.

In one of the facilities we're running three lines at peak capacity; in another we're running some parts down there.

And we just want to be sure that we don't overtax the system and get -- and try to do too much in this type of a period.

But I would say in the second half of 2012, we're looking at all of our options down there.

That's helpful.

And just on the back end of that, you kind of talked about pricing strengthening, but as you -- when you give the revenue numbers of backlog in your orders, obviously, it's got a lot of mix in there.

Can you -- are you willing to delineate kind of what level of rate increases you've been seeing on select car types without detailing what per car type it is, but just kind of an overall level?

It is correct.

The mix is much different, so it's very hard to look at the revenue line without more detail.

I think that Mark, we've been reluctant to get into this more granular discussion of this in the past.

Right.

So, the -- particularly in terms of getting granular is to margin among car types.

I don't know if you are referring to that it is hard to tell if you look at backlog, or in any quarter of either backlog and dividing that by the number of units or --

Yes, that's what I'm getting at, Mark.

If I take the total number and I divide by the units, obviously I can get a rate per car, but there's obviously a lot of mix in there because you don't provide that level of detail.

So without giving the level of detail, is there kind of a -- if you were to pick one car type and kind of on average what level of price increases you were seeing, would it be similar to the overall or does the overall have such mix changes that it distorts that?

Are you talking about price increases of overall -- are they kind of consistent among car types?

Is that what you're -- and our ability to seek margin expansion?

Is that what your question is?

Yes.

I think, overall, that that is consistent.

We're very focused overall as we get further into the recovery to seeking margin expansion through all of the car types that were taking orders and at similar levels.

Okay.

Thank you for the time.

Appreciate it, Bill and Mark.

Thank you.

Thank you.

Appreciate the questions.

And that does conclude the Q&A portion of the call.

Okay.

Then I thank you very much for your participation today in our call and your interest in Greenbrier.

And we look forward to staying in touch.

Have a good day.