Greenbrier Companies Inc (GBX) 2011 Q3 法說會逐字稿

Hello and welcome to The Greenbrier Companies' third quarter of fiscal year 2011 earnings conference call.

Following today's presentation we will conduct a question-and-answer session.

At 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 third-quarter conference call, everyone.

I am joined today, as always, by our CEO, Bill Furman.

On today's call we will discuss our results and make a few remarks about the quarter that ended, and then after that we will open it up for questions.

As always, matters discussed in the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of '95.

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 statements.

With that, I will turn to our results.

Today we reported results, excluding the one-time charge of $10 million pretax, $6 million after-tax for costs associated with the retirement of our high-yield bonds during the quarter, of net earnings of $2.7 million or $0.10 per share on revenues of $317 million.

While we are pleased to return to profitability as anticipated, results for the quarter did not fully meet our expectation, as a casting shortage that is now behind us and certification issues on some railcars produced in Europe, which are also now behind us, affected deliveries for about 300 units during the quarter.

In addition, the castings issue also affected margins through production inefficiencies.

As I said, these issues are now largely behind us.

As well, the quarter included about $2 million of nonrecurring selling and administrative costs.

Having said this, each of our business segments showed sequential growth in revenue and margins compared to Q2 and Q1 of the year.

Overall, revenues, earnings, and business visibility continue to improve as we benefit from the ongoing recovery in our markets.

Subsequent to quarter end on June 30 we closed a new five-year $245 million revolver which replaces our $100 million revolver which would have matured in November of this year.

In connection with the new revolver we also retired our $72 million outstanding a term loan due June of 2012 from affiliates of WL Ross & Company.

The current interest rate on the revolver of LIBOR plus 250 is 100 basis points lower than the Ross loan and about 150 basis points lower than our old revolver, which was undrawn at the time of the closing.

As noted in the release, we will take an additional one-time charge in the fourth quarter of about $6 million pretax associated with the writeoff of these expenses from the retirement of the Ross loan and the old revolver with our new revolver.

This financing is a culmination of activities over the last 15 months which have also included raising $1[15] million of equity; issuing $230 million of 3.5% coupon convertible notes due in 2018; and fully retiring our $235 million of high-yield bonds, 8 and 3/8% coupon, which would have been due in 2015.

As a result we believe we have transformed the balance sheet.

We have extended our debt maturities from three to five years, lowered our interest costs by over $10 million per annum cash, and increased our liquidity and borrowing capacity by $75 million.

With these measures we believe we are well poised to take full advantage of the upturn in our markets.

Now let me address some highlights for the quarter.

To supplement the year-over-year comparisons and quarter-over-quarter comparisons compared to the prior year, I will include color more on a sequential basis.

First turning to our manufacturing segments, revenue has grown for three consecutive quarters.

Our Q3 revenues of $174 million improved from the $157 million over last quarter.

In both quarters we delivered 2,200 units, but the mix in Q3 was a higher per-unit value.

We did experience some lost production time due to the component availability that I referred to -- or constraints on it that I referred to earlier associated with the global upturn in freight car manufacturing.

We are able to resolve these issues through new component contracts that will ensure our supply needs throughout the subsequent stages of the market recovery.

We received orders for 6,400 units during the quarter, and our backlog grew to 13,600 units with an estimated value of $1.05 billion compared to 9,500 units valued at $720 million as of the end of our last quarter.

For those of you doing the math of the February 28 backlog, plus new orders, minus deliveries, you will see that it does not quite fit to the 13,600 units in backlog.

As a reminder, there can be a difference between production and deliveries in a quarter, and as we often hold railcars produced during a quarter for future syndication, and that is shown on the balance sheet; and then we sell them in future periods.

As a reminder, while we hold these cars, we do relieve them from backlog, but -- and then we record the sale when they are sold to a third-party customer.

And while we are holding them we are earning leasing revenue at a rate of about 10% per annum.

To support ongoing demand we are opening production lines -- reopening production lines, opening new lines, and ramping up production rates.

This includes a third line in our GIMSA facility which came onboard during the month of July -- or is coming onboard.

We expect to deliver about 9,300 units for the year, implying the Q4 deliveries will be about 3,900 units.

Manufacturing margin for the quarter was about 8.5% of revenue, up from 5.8% in Q2.

Primarily a result of efficiency improvements and more favorable pricing and product mix; and indeed we would expect as we continue to work through our backlog that the pricing environment would have improved and that we will see that in future quarters.

Our Wheel Services, Refurbishment & Parts segment has grown consistently for the third quarter in a row.

It is up to $126 million from $112 million in the prior quarter.

This was principally due by higher wheel volumes, as this business is showing signs of recovery, albeit far from the levels that we experienced at the peak of the market in 2008.

We are guardedly optimistic that this trend will continue.

We also believe that the repair side of the business will show improvement both through higher volumes and a better mix of business.

Gross margin for this segment was 12% of revenues, up sequentially from 9.5% in Q2 principally due to operating at increased production levels as well as benefiting from higher scrap prices and metal scrapping programs that have been ramping up.

Finally, turning to our Leasing & Services segment, our utilization was up to 96.8% from 95.9% in the prior quarter.

Our revenues grew to $17.5 million from $15.7 million in the last quarter.

Similarly, our margins were up to 47% from 44.4% in the prior quarter, all principally due to higher lease revenues generated on our lease free, again from a market recovery, and from railcars held for syndication.

In the long run, we will look to enhance our syndication activities in this segment and pull more value out of the integrated model.

You will now see that we report gains on disposition of assets as a separate line item on the income statement; and gains for the quarter were $1.7 million compared to $2 million in Q2.

As I mentioned earlier, turning to G&A expense, it did grow to $22.6 million, up from $17.7 million in the prior quarter.

We said on the prior call that we expected G&A levels to increase as business levels and activities picked up.

But having said this, this quarter included about $2 million of nonrecurring items; and we'd expect the next quarter to run closer to $20 million to $21 million.

Interest and foreign exchange was $9.8 million for the quarter, down from $10.5 million in Q2, again in part due to lower borrowing levels and the bond refinancing.

But we only had a very small part of the quarter where we benefited from that.

As we noted in our release, as a result of this refinancing at the lower interest rate on that loan as well as from the retirement of the Ross loan, we will save about $10 million per annum which will fully kick in in Q4.

And we will have over $2.5 million of cash interest savings in Q4.

Net earnings attributable to non-controlling interest relates to our GIMSA joint venture in Mexico.

As activity levels pick up there, of course the numbers pick up in this line item as well.

It was approximately $1 million for the quarter, and we would expect that figure to grow in future periods.

Of course, this is a deduction to net income that flows through ultimately to our bottom line.

The tax rate for the year should be about 30% to 35%.

We expect the fourth quarter to be -- the trend that started in the third quarter would continue and that we'd have higher revenue, EBITDA, and earnings excluding special charges and, excluding these special charges, to be profitable for the year as a whole.

CapEx, net of proceeds from any equipment sales out of our lease fleet -- so net CapEx as we refer to it -- should be run about $66 million for the year.

Depreciation and amortization about $35 million for the year.

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

Thank you, Mark.

I'm going to comment briefly on industry demand conditions and then move on to specific remarks about operations in the quarter.

I will leave a little bit -- turn back for questions.

Order activity in North America for new freight cars during the three months ending March 2011, the month before our quarter ended, was 36,000 cars, the third-largest quarter reported since 1969.

The delivery rate of 7,650 cars was just above the preceding quarter total of 7,333 cars delivered, contributing to an expanded -- very robust expansion of industry backlog.

Industry backlog reached 60,000 cars, the highest experienced since 2008.

Greenbrier captured more than 25% of those new orders placed during that quarter and at the end of the quarter had about 21% of total industry backlog.

Several large multiyear orders were included in the quarter, and we do not expect order activity to be sustained at that level, at the level for that quarter, as these kinds of deals are not routine.

Greenbrier did not participate in those multiyear orders, skewing our market share somewhat, because all of our production is for the next year, year and a half.

During our Q3 and for the next three months ending April 31, as Mark has indicated we received orders for 6,400 railcars in North America and Europe; and our backlog reached 13,600 cars worth over $1 billion in value for the first time since the inception of the economic downturn.

Industry car loadings have abated somewhat for the first 23 weeks of the year, up 22.7% over the same period in 2010, although intermodal loadings have remained quite strong at 7.5% growth for that same period year-over-year.

This is not an especially discouraging sign with respect to the lower general freight car growth rate, due to unusual weather and railroad operating conditions during the quarter.

Those conditions were fairly severe in many parts of the middle United States, both in the South and in the North.

And they continue to inhibit velocity and have reduced the railroads' ability to handle carloads.

Further, after the first year of recovery it is not unusual for railroad car loadings to trend downward from a spike up and to stabilize at a point closer to GDP growth, while robust demand conditions continue during the same time due to replacement of freight cars and car mix.

Conditions continue to favor railroads and railroading, and we believe healthy demand conditions remain across most rail supply products, including freight cars themselves, but also components such as in our wheels services and repair business.

There have been component shortages affecting most customers and affecting car builders, as Mark has also indicated.

I think we have suffered somewhat from these component shortages.

They have now been addressed, as I will speak to in a moment.

I think others are still struggling with them, however.

Turning to our Q3 performance, we were pleased to return to profitability, excluding consideration of one-time financing charges, although both our EBITDA and our net income were below Street estimates and our own expectations.

This was driven largely by a timing issue in one large railcar syndication transaction, which was postponed to a later period, as well to both fire and flood conditions affecting some facilities and higher than normal G&A costs during the quarter.

Also, there were spot casting shortages which affected the production of one major car type, as well as delivery delays in Europe on certain railcars due to certification.

That latter issue as well as the weather and supply-chain conditions as it respects -- as it relates directly to us have now been rectified and we expect better financial performance in our fourth quarter.

During the quarter, we had improvement in volumes and margins at our GRS segment in both wheels and repair and parts as compared to our financial plan.

During the quarter, as Mark has indicated, we continued our balance sheet and liquidity improvement, which has been a multi-year effort.

We are very pleased with how this has played out.

Having reached a threshold or a plateau with this, we certainly will be turning our resources to other endeavors.

With the closing of the $245 million revolver, the retirement of the WL Ross notes, and the extension of our average maturities to five years, all of this will give us a stable platform.

And we expect positive cash flow in the next couple of years as the industry upturn in our segments continue.

The revolver, as Mark has also indicated, will lead to another one-time special charge in the fourth quarter.

But that charge will replace amortization expense of warrants which otherwise would have carried forward to the maturity of the Ross loan.

Due to timing of retirement of senior debt with cheaper convertible debt earlier announced, we do not see the full effects of interest reductions from debt retirement, as Mark has also indicated, in the quarter.

But this should be fully in effect in our Q4, and we of course expect additional savings from retiring the WLR term loan.

Manufacturing wheel repair segment volumes and improved visibility should allow us to achieve better operating leverage in the quarters to come and improve margins as the industry recovery continues.

Both industry forecasters FTR and Global Insight are forecasting continued solid demand for freight cars through 2016.

FTR is the most bullish, with projected build rates ranging from a low of 70,000 cars in 2012 to 80,000 cars during 2014 and 2015.

During the quarter we continued our strategic initiatives to create value by accelerating adoption of lean practices, with a goal of major improvement, static state and working capital levels and EBITDA.

Naturally working capital levels will change as we build backlog and production.

We are now operating -- but we expect to be more efficient at use of working capital as a result of these initiatives.

We are now operating a third line at our joint venture facility, GIMSA in Monclova, Mexico, and have added a fourth line at our Concarril facility in Plant 2, the former Komatsu plant, with the capability to expand production further later in our fiscal 2012.

We also entered into a multiyear supply agreement with a major industry supplier, which should allow us to stabilize our component availability at highly competitive costs in the present stronger in product market.

Additionally, we will be receiving truck castings from our joint venture with Ohio Castings.

In our leasing business we are making improvements in our financing and lease management capabilities, which we talked about during the last quarter's call.

And all of these things will make our business a more important part of -- that leasing business a more important part of the Greenbrier integrated model, enhancing our margins and customer service capabilities.

With those comments, I will turn it back to you, Mark, for questions.

Thank you.

And, operator, we will go ahead and open it up for questions if you could provide callers' instructions, please.

(Operator Instructions) Allison Poliniak, Wells Fargo.

Hi, good morning.

Hi, Allison.

I think your name was pronounced correctly as well.

I know; imagine that.

Just going back to the manufacturing gross margin, you talked about obviously the impact from the casting issues and such.

Is there any way to quantify what gross margin could have been in that segment if it had not run into some of those issues?

I think that is more problematic to put a -- we certainly tried to highlight the number of deliveries that were impacted.

But it's a little more difficult to put an exact percentage, which is probably the way you would like to see it expressed, just from the inefficiencies of operating at lower levels and on certain days having to stand down some workers.

It seems like it would affect the gross amount, the total amount of margin as opposed to the margin percentage, if that is what you are talking about, Allison.

Yes, yes; thank you.

Then on the demand environment, are we still very selective in terms of the car types being ordered?

Or are things starting to broaden out into other car types and becoming more general?

We are seeing kind of a shift in demand somewhat.

We continue to see strong demand in the frac sand and other covered hopper car types, including grain.

We are seeing some mild interest, continued interest in cars like boxcars.

We have a backlog of boxcars, and we expect that we will see more activity in that in the coming year.

Double stacked car demand continues to be relatively robust as reflected in the car loadings.

There are also other car types which we are tracking.

So I think that it is fairly -- it is becoming a little bit more broad-based, and there may be some abatement temporarily in the very large demand for some certain types of covered hopper cars.

Some of the car types that were particularly weak do remain weak.

Car types such as those for the housing market.

I think you see some loading statistics and things like -- there are some car types that we don't participate in, such as coal, that we would be less equipped, but that the loading statistics remain weak.

All right.

Then last --

One positive thing, though, is the tank car.

The tank car side looks like it is continuing to be quite strong, and as you know we have a tank car line running in our GIMSA facility.

Great.

And last, can you just touch on the marine business?

What your view is for that business over the next few quarters; is it getting better?

Right.

Well we noted that we are virtually out of marine backlog now, and we have shifted that production over to -- or those workers over to rail, other than of course maintaining our more experienced workforce and our engineering capability.

So we are operating at skeleton levels now, and we anticipate that that is going to run probably throughout the current calendar year.

We are guardedly more optimistic about that calendar 2012.

But for the near term that market, which has typically been more counterbalanced to the rail market -- that we are anticipating that is going to remain soft for about the next -- at least the next six months here.

Okay, perfect.

Thank you.

Ken Hoexter, Merrill Lynch.

Great, good morning.

It seems like now you have got the balance sheet moved to the sideline.

You're going to focus on the business.

What do you think the margins can get to on the manufacturing side?

Can you return that?

Here you are at 8.5%.

Can you get it back to into the low double digits?

Well, there's a couple of -- I guess the shorter answer is yes, we do.

At the levels of forecasted demand out there, the pricing environment should continue to improve.

And as we operated higher production levels, we would also see production efficiencies.

Of course, when we are starting up production lines or reopening production lines, as you might anticipate, we do have startup inefficiencies and learning curve inefficiencies; and then we start to hit our stride.

So we continue to open our production lines up.

So the shorter answer is yes.

The longer answer is that -- something that Allison referred to is that marine is also part of our Manufacturing business.

While it is marine revenues are even in a strong year less than $100 million a year, it does absorb a lot of overhead at one of our facilities.

And marine margins can be attractive.

So that is a bit of a -- that is a headwind overall against Manufacturing margins that we fully hit our stride when marine comes back on board.

So you have now got the third line open at GIMSA.

You have got the fourth line open at Concarril, with the potential for the other one not until 2012.

And then Portland has how many lines open now?

Just to correct, as well at Concarril we will have a fourth one coming up in just a couple of -- shortly.

It has not come up yet, but it will be coming up near the beginning of our fiscal 2012.

So there is still some more startup costs in there?

We are opening it and we haven't seen -- we haven't had the production kick, the gross dollar --

Right, we haven't had the output.

But we don't expect -- we expect that line -- since the entire plant is running smoothly, that line shouldn't have any particular startup issues or affect on margin.

Helpful.

Let me dig a little deeper into the supply chain issue here, because I think obviously for the quarter it seemed to be real significant.

Can you talk about -- maybe walk us through what happened on the casting side and how that got resolved?

Sure.

Mark referred to robust global demand.

There have been a strong demand for commodities such as steel and truck castings in China, Russia, and throughout the world in addition to a resurgence of demand in the North American market.

Some of our suppliers, all of our suppliers of critical components are operating on a global scale now.

So some of the capacity was diverted.

And naturally, during a time of weak economic conditions, many of these facilities were either closed or diverted to other markets.

So while this may be somewhat temporary, given the strong demand and the underlying fundamentals of the market it is of concern.

The specific areas where it was of concern were in bearings, but principally in truck castings and in some cases other components.

But principally in those two areas.

I think most manufacturers and most users of those components have had shortages and supply interruption as far as their desired demand levels are concerned.

That's helpful.

Just quickly over on the Leasing segment, you mentioned I think in the release -- was there a lost contract in the quarter?

Can you talk about what extent we should see that impact results going forward?

I think the reference is -- again we have a line item on the balance sheet, railcars for syndication.

That is where we produce railcars that are then leased to a third-party customer; and then we hold them and then sell them to another financial institution; and then typically enter into a management arrangement on those cars.

There were cars that were slated to be sold during the quarter under that scenario, that the timing of that closing got delayed until the current quarter.

It is not that the contract fell through; there was a timing difference there for about 150 cars that will then flush through this quarter.

No, I understood that, Mark.

But I thought there was something you mentioned, a discontinuation of certain management services contracts.

Oh, I apologize.

We had a reduction there.

We had a small reduction in the number of cars managed with two specific customers.

It is not a significant financial impact, and it was expected.

In our syndication model, we sell to companies that may use our services for a period of five years or the term of the initial lease.

As those -- most times we will continue to keep those services or attempt to keep their services in place.

But some of the customers, some of the syndication partners we use have their own back-office operation.

We encourage them when we sell cars to them to use our services, but often they like to migrate over to theirs.

So it is not a significant change.

We in fact in other ways are expecting to grow that business and make it more profitable.

Then lastly, you have got a pretty big ramp up going from 2,200 cars delivered this quarter.

I think Mark mentioned 3,900 next quarter, based on the planned deliveries.

Is that -- when you look at the lines that you have got up and running now at GIMSA and Concarril and Portland, what is your total run rate that you look at production right now?

Maybe before the extra line comes in, in 2012.

Well, we wouldn't want to get into the detail today of how many cars a day are coming out of our facility.

What we have stated before is our North American capacity as its stands, with our existing footprint and this line coming up, is about 14,000 cars.

But just to give a little more flavor on that, our production rates are affected by our backlog as well as the capability Mark just referred to.

So if we have a stronger backlog we tend to ramp up to optimum production rates.

So one of the reasons that public companies in this space trade off of backlog is that principle, because the higher the backlog the more implied production rate throughput that the company can afford to responsibly push through their facilities while maintaining a stable workforce and quality commitment to efficiency and safety.

Makes a lot of sense.

I appreciate the time.

But, Bill, were you suggesting then that we shouldn't expect this level of backlog to maintain its base then?

Before when you were saying with the multi --?

I think we are continuing to see -- we believe that the industry has significant momentum.

We are cognizant of the economic data and the concern about the economy.

But we share most economists' views that this is not a precursor to a double dip.

It is a slowdown.

It's not terribly unusual.

We have got a lot of earnings reports coming out.

We expect a little bit more consumer buoyancy.

But the railroad demand and the shipper demand is going to be driven by different forces than the total general economy in the context of a fairly stable and healthy environment.

It will be replacement of older, less-efficient cars, service optimization.

It would also be efforts to achieve higher velocity and better throughput on the part of the railroads themselves.

And I think it is just a different environment.

Plus there will be continued diversion from truck to rail, I think, in the present economic environment with high fuel prices and driver shortages and safety issues that this whole transportation industry is grappling with.

Great.

Bill, Mark, and if Lorie is there, thanks for the time.

Appreciate it.

Thom Albrecht, BB&T.

Good morning, everyone.

I wanted to dig a little bit deeper in some of the questions.

Bill, of the 6,400 orders you got in the quarter, we know industry statistics of course included the month of March, which was in your quarter.

How strong was the order book in April and May and -- of that 6,400?

There was a number of those orders that were booked in April and May and that I think we announced after our last quarter end that -- I don't have the numbers in front of me, and I have been -- I can be dangerous in my recollection here.

But I think it the end of last quarter that we said that we'd received about 2,400 cars in essence in the month of -- that would have been in the month of March in essence.

So the balance of that 6,400 cars would have been in April and May.

Okay, that's helpful.

Then I guess as a twofold question, so you are going to produce, call it 3,800 to 3,900 cars in the August quarter.

A, how confident are you?

And then what can we think about for fiscal '12 production?

I think a moment ago, Bill, you alluded to maybe full capacities around 14,000.

But I think there has been a wide variance on estimates.

Part of that might be because we all have different production assumptions.

So how confident are you on the 3,800-plus?

And can you give us a window into fiscal '12 production?

Mark Rittenbaum Right.

Well, just as well -- because I expect you are doing the 3,900 and then multiplying by 4 and saying -- well, that is about 16,000 units; so what is the disconnect here?

There's two things.

One is that North American capacity of 14,000; that is just North America.

There is about another 1,500 in Europe.

And again we are looking at -- we're making some expansion to our footprint with the opening of the line at GIMSA and also this fourth line at Concarril.

So that it would take our capacity closer to the 16,000 level.

Then lastly, when we talk about deliveries of 3,900 units, that includes units that are hung up on our balance sheet today.

Again, those railcars for syndication.

So there's about 500 cars in there that could be relieved in the fourth quarter.

So that hopefully will help reconcile the capacity.

Having said all of this in fiscal year 2012, while we have not given guidance yet, we would anticipate that our deliveries are going to be higher in fiscal 2012 than they are in 2011.

I don't think that we are expecting to use our full capacity of 14,000 cars.

We are expanding our capacity.

I think we will use our most efficient plants first, and we will selectively allocate some lines to double-stack production, particularly Gunderson.

So, it's a little bit difficult to see that equation from the outside.

14,000 is a theoretical capacity.

We tend in this part of the cycle to try to improve margins.

The reason we do that is we have been able to, with our model, in downturns have a very high market share.

We typically double our market share going with the commodity prices in a downturn, but marketing hard with our leasing and other services.

In an upturn, when capacity -- when you reach 40,000, 50,000 cars delivered, other builders gain market share simply because they have got the capacity to deliver from their equally efficient plants; and we don't have the capacity to keep up with the market.

So it is a dynamic that will affect margins as well as throughput.

Okay, that's helpful.

So just to clarify, the 14,000 theoretical is including the third line at GIMSA and the fourth line at Concarril?

Or that would be before those expansions?

Includes the third line at GIMSA, but not the fourth line at Concarril.

Okay.

All right.

Then so GIMSA is roughly July/August here; and then the fourth line at Concarril is what?

After August?

Correct -- is when we'd expect to see production coming out.

Okay, and then last question and then I'll jump back in the queue.

People have asked about margins, but I guess the more pointed question is -- as you increase production should we have concerns that your very nice margin improvement this quarter is going to either stop or even reverse itself?

I'd say there is always -- we shouldn't take our production line startups for granted.

But as Bill mentioned, we believe we are hitting our stride here and we would expect our railcar margins to continue to improve.

The drag, the headwind, against that again is that we will not have marine.

We are out of marine backlog right now, so we will not have marine to help both absorb overhead and contribute to that.

So we could see in the next quarter that the margins are relatively flattish by the next quarter -- I mean the quarter that we are in.

Could I just add a bit of flavor to that as well?

We have a much broader product mix in rail than we have had in previous cycles.

We have, for example different lines of different types of more efficient types of covered hopper cars, and we have had a prominent role in the demand, for example, for the frac sand cars.

We have tank cars that we had added in our facilities.

So we are expanding our capacity, and some of this capacity is specific to the individual car types.

But in the cycle, the part of the cycle we are in, I just have to emphasize that pricing discipline returns to the industry as the famine ceases.

And that is not -- that is a general statement; but in addition Greenbrier has a benefit.

It is that we are forced to use pricing discipline, we are forced to improve margins, because we have allocation issues with particular lines.

So we will pass on some orders and we will -- and we just did.

We made a decision recently, not passing on it but taking a different distribution of the order and maintaining a higher margin.

So we are trying to go for margin enhancement and pricing, and we are seeing the market respond more favorably as the industry matures -- as the cycle matures.

Helpful, I appreciate that.

Lorie, on the share count, I forgot to ask this.

Now that you are profitable shouldn't we be including the WL Ross warrant shares, which is supposed to be 2.6 million to 3 million?

And then can you maybe talk -- because there was a lot of noise on the convertible and what to include there.

In the old days, you had to only include that when you were within about 15% of the strike price.

But maybe I have missed something.

So address those two tranches of stock so that we are all modeling appropriately.

Great question.

Yes, absolutely.

On the warrants, while -- excluding special charges -- we were profitable, the way that these calculation works is it is based on the GAAP earnings.

So we did have a GAAP loss for the quarter; so the warrant dilution did not come into play.

But you are correct that again on the warrants that is the treasury stock method.

So looking at a range of different stock prices it does average around 2.8 million to 3 million shares as this dilutive of the warrants.

Then on the shares underlying the convertible bonds, it's on a slightly different method.

I am happy to do something off-line, to chat with anyone about the calculation.

But it is based on $230 million of bonds divided by the strike price of $38.05.

So that is about 6 million shares.

Again that comes into play -- it is what's called the if--converted method; and we did not hit a level of -- well, we didn't have earnings.

We have to reach a certain level of earnings prior to that if-converted method kicking in.

So that calculation's not been tied to the stock price relative to the conversion, but a certain level of earnings?

That's correct.

Can you share what that level is?

Because I know I get 23 questions a day on that.

In general, basically if you look at the way the if-converted method works is you have to look at the after-tax cost associated with the convertible bonds; so if you are thinking about $230 million of bonds times 3.5% interest, and assuming a 40% tax rate; and then divide that by the number of shares that are underlying those convertible bonds.

It averages around -- if we exceed somewhere between $0.90 to $1.00 of earnings in an annual period, the if-converted method kicks in.

Okay.

Okay, thank you.

I have taken enough time.

I will jump back in the queue.

I think we would be happy to spend time off-line --

Absolutely.

-- to work through it with you, Thom, or any others, because the accounting for this is pretty meticulous.

Yes, thank you.

But the interest rate is very good.

Art Hatfield, Morgan Keegan.

Yes, good morning, everybody.

This is Derek Rabe in for Art.

Just wanted to circle back on your production lines real quick.

So just making sure I understand this, you have two lines basically opening up this year and maybe a third next year.

Can you talk as to any additional lines out there that you could potentially open up further down the road?

Yes.

We are opening the two you mentioned.

We are bringing one online at GIMSA now, this month; and we are actually getting production out of that facility this month.

And we will, as Mark has indicated on the timing, have a fourth line at Concarril.

We acquired a facility at Concarril so we actually have the lease facility and we own a facility at Concarril across the street.

In that facility we have the capacity to put multiple lines.

We expect to put one line in -- that is the fourth line at Concarril -- on a permanent basis.

We will also have the capacity if the market sustains it to add, on a bolt-on, additional lines to that facility, at least two.

Okay; at least two.

All right.

Just wanted to turn real quick to your pricing.

You guys seemed a bit more optimistic on the pricing front this quarter than last quarter.

Can you just talk about general trends on pricing for new orders?

It seems like that pressure has eased a little bit over the last several months.

One thing that is happening is we have added to backlog.

We haven't really given much color on pricing.

But the pricing and the additions to backlog in the last surge of orders has been better for us than -- so as we work that backlog off the pricing will be better.

And the operating efficiencies that affect margin, of course, will be better we expect as well.

The pricing discipline issue that we talked about, in terms of trying to manage what we participate in and -- that will be affected by the comments I made earlier both with respect to the industry which won't be as desperate for the volume, and the fact that we will pick our shots a little more carefully, particularly on double-stack equipment.

Okay.

When looking at your Services division here, the 12% margin was a nice uptick from Q3, but we are still off the pace of last year Q3 levels.

Can you just talk about what the impact from weather was in the quarter?

You're getting to our Refurbishment & Parts business?

Yes.

Yes, that would have more impacted the repair side of our business.

Similar to the castings question that was asked earlier, I can't give a specific impact on the margin percentage itself; but it did dampen the repair business a bit with inefficiencies and having some shutdowns on several occasions.

More importantly, what is impacting from peak margins the last cycle are two things.

One, we benefited -- we were operating at higher production levels than we are this quarter.

We benefited more fully from scrap; scrap prices were also significantly higher than they are today.

Then the last thing that is happening is there is a bit of a shift in the product mix, particularly on the wheel side of our business, where we are earning the same margin dollars for a wheel changeout that -- because we are putting what is called a new mount on a car, rather than turning the existing wheelset -- we get a higher sales price for that product but we earn the same margin dollars.

So the impact adversely affects margin percentage just by the simple math of the same margin dollar on a higher priced set.

That is a particularly important point in our industry.

You can't put margin percentages in the bank.

It is only dollars per day.

You have seen that our volumes are up but our margins are down.

That is not necessarily a bad thing.

It is driven on the wheel side, as Mark says, by mix.

And that phenomenon can also occur in railcars.

Okay, that's great color.

Then did you guys build any cars for your own lease fleet?

During the quarter, I think you will see when we put out our Q that there were maybe 150 or 200 cars that were taken to our lease fleet during the quarter.

And 150 of those were for an outside third-party that you talked about?

Yes; we are not building cars on speculation.

The cars that we took into our lease fleet had a third-party customer.

Just as a reminder on that end, on a net basis each year -- net being what we take into our fleet minus what we sell out -- we grow our lease fleet on a net basis by about $20 million to $40 million a year.

This year is closer to the lower end of that range.

So we do take some cars into our lease fleet, but we originate a lot more leases than we can hold on our lease fleet.

And those are the ones that are sold to third parties.

Okay.

Great color.

Thanks for the help, guys.

Paul Bodnar, Longbow.

Yes, hi.

Good morning, guys.

Could you give a little more details on the lease rates and what you are seeing inside your fleet with some of the different car types?

The first part regarding lease rates, we are seeing improvement in lease rates.

Both utilization, utilization-type leases where the earnings are greater, and growth in lease rates across the board.

We don't have a lease index similar to what I think GATX puts out.

But I think it is safe to say that in all three of those areas that rates are -- that we are seeing improvement.

Is there a lot of disparity between car types at this point?

There is similar to -- again, new railcars provide an umbrella for pricing in essence for cars in the lease fleet.

So car types that you are seeing stronger new car demand or certainly you would see lease rates going up more precipitously in a lease fleet.

The one area that also that -- box cars would be an example -- that it is still a small new rail car market.

But in the leasing marketplace those are strong.

In the car types that are weaker today on the new car side, then lease rates still remain depressed.

And car types where their storage statistics are still relatively high, lease rates would be not as strong.

Then two quick questions.

You raised an interesting point there on the box cars.

Is that something that you are thinking that over the next few years we are going to see a pretty good amount of order activity for?

I know in the past it has been relatively dead; but there is supposedly some rebuilds and some new demand out there.

Well, the FTR and Global Insight data indicates in 2012, 2013 -- 2014 in the case of FTR -- car builds close to 2,000 in 2012; 2,500 in 2013; and 3,500 beyond that.

It is possible that those numbers -- and there's comparable numbers for Global Insight.

So that is not a significant amount of activity, but it is certainly more than 500 level cars or 100 cars or 200 cars, which has been more typical of 2007 through 2009 and even into 2010.

So that market is going to expand five-fold.

That doesn't sound like much, but if we can get a sizable share of that, that is an attractive -- can be an attractive market.

Historically we have had a pretty good share of that, correct?

We have -- yes, we have.

But historically we get -- [Reston] are history; Trinity is certainly gearing up; and National Steel Car has been in that market and has done a good job in continuing their market penetration.

But we are expecting to maintain a good position in that market.

And we also think that with our leasing model we can obtain transactions or even create transactions that otherwise may not be easier for the others to do, at least not for National.

Before you mentioned, obviously, you have one -- the tank car line there.

Is that all GE?

Or is there any capacity available on that?

Or when will the GE orders actually cease and you would actually have some different customers on that line?

Well, we have a contractual relationship with GE that we intend to honor, and we believe that we can absorb some cars into our lease fleet.

We believe that GE itself is somewhat in flux and may have more need.

So we are working with GE to try to be allowed to develop outside customers.

Indeed we have some modest success in that, and we expect more outside market immediately.

That is a positive.

That could be a positive area if we can get some traction on it.

Right now we have 150, maybe a couple hundred cars that we are going to be building outside the GE box.

But we are very happy to have that GE contract.

It goes into early 2013, and we have the capacity to increase that.

We're only doing two a day there; we could go up to six or more.

Okay.

I guess the last question -- I don't know if anybody had asked this or maybe you mentioned the number earlier and I missed it.

But did you give us a number on any kind of orders at the end of the quarter?

Mark Rittenbaum No, we did not disclose orders subsequent to the quarter end.

The market is certainly remains active, but we did not disclose orders booked since the quarter end, although there have been some.

Okay.

Last question.

If you wanted a car this year -- I know you're talking about some component availability.

I mean is '11 effectively pretty close to being sold out?

It probably is for you guys, I am thinking.

But what are your thoughts on the industry side?

There are some builders who could deliver in 2011 if they had the orders but they might have difficulty with materials and particularly castings.

Castings are an allocation -- truck castings are especially difficult to obtain at desired production rates.

That is one of the reasons why we have entered into a longer-term contract.

But I think it's -- we are all working in 2012 on a forward position.

Greenbrier has really relatively -- until our other lines kick in we have a relatively -- for our fiscal 2012 -- a small amount of production to allocate in 2012.

So that again should help us with our margins if we show pricing discipline.

And not in a bad way; that means also your book to bill should probably start trending towards a 1.0, a little over that type number, as people -- I guess they want to order two and three years out, I'm thinking.

Well, that is why some customers have gone into multiyear agreements.

There have been two big ones in the last -- in the first three months of the year, of course.

We are -- as I said, we didn't participate in any of the multiyear agreements.

But again we're trying to increase our margins both on pricing and operational efficiency.

Multiyear orders are very effective in helping you improve operational efficiency; but they typically come with a trade-off of relatively low price.

So people use them as baseload orders.

And we have a decent baseload now, so at least in the foreseeable future we feel fairly comfortable on the new car side.

Okay, thanks a lot.

Peter Nesvold with Elliott Waller, Jefferies.

Hi, good morning.

Thanks for taking the call.

A couple questions if I could dig a little bit down into the pricing.

The implied average price on your deliveries in the quarter look like they're up sequentially roughly around 11%.

How should we think about that as we move into the fiscal fourth quarter?

Should we expect that same type of improvement, or how should we think about that?

Again as the referenced improvement would principally be related to mix rather than implying that sales prices on the same car type went up by 11%.

I think I am going to have to take a pause and get back to you on that piece, Elliott, and take a little closer look at the mix on the fourth quarter before answering that question.

Okay, that's fair.

Any color you could provide on pricing on new orders for the quarter, the fiscal third quarter on a year-over-year basis possibly, and how that compared to the fiscal second quarter for new orders?

Seen sequential -- we believe we are seeing sequential improvement in pricing and sequential improvement in operational efficiencies.

We are still having some trouble due to a lot of moving parts getting that to the bottom line.

But we are working as fast as our busy little feet and hands can carry us.

Great.

That's a good problem, I guess.

About the new supply relationship on the casting side, if you could provide any further detail on the length of that contract and the percentage of your castings that would be covered by that contract?

We probably would prefer not to comment.

It's a multiyear agreement with -- we have other multiyear agreements that are fairly routine.

Generally they are in the five- to eight-year time range.

The most significant piece of that is that we believe that it ensures us availability of critical components at competitive pricing, that would allow us to fully benefit from the upturn, along with the castings joint venture that we already have in place.

Okay, great.

Finally I think you mentioned SG&A for the fiscal fourth quarter roughly $20 million to $21 million, if I am not mistaken.

How should we think about that as volumes and deliveries start to pick up moving into fiscal '12?

What type of run rate are you as a percentage of revenue or in terms of dollar terms?

I am assuming that would move up with volumes.

We would expect that as a percentage of revenue that it would flatten off and go back down as we go back into our fiscal 2012.

On an absolute dollar basis, as we get further into the cycle we certainly can anticipate that it could exceed the $20 million to $21 million guidance that I gave this quarter -- or for the upcoming quarter, the one we are in.

But as a percentage of revenue we would expect that it could get back down below the 7% levels into the 6% levels.

Okay, great.

(multiple speakers) percent of revenues.

Very good.

Thank you very much.

Kristine Kubacki, Avondale Partners.

Good morning.

Most of my questions have been answered; but I just wanted to ask a question about the supply chain again.

I know you said you feel like this component shortage is behind you.

But it is in line -- just overall supply chains there have been -- kind of to see -- one of the things that we've been talking about with all our industrial companies is talking to us about raw material.

And seeing that things are tight, are you expecting any component cost escalation or any raw material escalation?

I know that in the spot market things have ebbed here; but we could see it come back here.

I guess in terms of how are you -- is there flexibility in your orders today that you can pass through either unforeseen costs in terms of you have a supply-chain hiccup, or just that raw materials start to escalate again?

As you say, we have passed through -- we are disciplined.

We are disciplined, not pretty disciplined.

We are disciplined about including passthrough and protection from commodity swings in all facets of managing our business, including hedging currency.

But the areas that affected us -- we are always managing yesterday's problems.

Yesterday's problems were castings for us.

We have addressed those.

The Ohio Castings joint venture is particularly powerful as that kicks in this summer, and it is beginning to.

It will benefit us because we are actually participating in the profitability of that, and that converts to a lower cost.

I didn't mean to seem smug about assuming that we are going to not have any supply-chain issues, because those are endemic to this kind of an upturn.

Particularly with steel, steel pricing -- it is hard to predict.

We have somewhat a natural hedge in scrap.

We create a lot of scrap volume, which helps us with scrap surcharges.

But we continue to have a team of people working hard to maintain a solid position.

So with respect to yesterday's problems, the casting shortages, and in some respects bearings and things of that nature, we feel we are in very strong competitive position at least equal to one of our peers, or at least in the ballpark of one of our peers, and that we exceed others.

But we are not taking any of that for granted.

As far as other kinds of steel or disruption in China from supply chain conversion to -- there is an awfully strong global market for railcars right now.

China, Russia in particular is -- has been booming, and it is drawing off a substantial amount of resources and creating price pressure on components and steel.

So if I am reading that right, you said though that you feel like you still have the flexibility to pass those through if there is unforeseen hiccups?

Just so I am understanding.

Yes.

We don't -- we try -- we're lashed to the mast on that one.

Although after the conference call I will run down to the marketing department and ensure that they are continuing to follow the discipline.

Very good.

Thank you very much.

Chris Denny, D.A.

Davidson.

Hi, guys; in for JB.

Can you guys talk about the cutdown work?

Are you seeing -- talk about the demand, what you are seeing out there in terms of going forward.

I see that as a good market for Gunderson and for GRS.

We have three facilities including Gunderson that are favored for that kind of work.

We still see legs in that market.

But I would say it's -- we should be able to chug along.

We are optimistic that we can continue to maintain a line at Gunderson in cutdowns or stretches.

There is a pool of equipment that, while not especially deep, we believe will continue.

If 40-foot equipment begins to be back in -- no longer in excess, which we do expect at some point, then the reservoir of cars available for stretch would be reduced.

But right now, it is the 48-foot market to either stretch or cut down that we are mining.

And there's still some two or three years of legs on that market.

But it is not a tremendous dial-mover.

Okay.

So you haven't seen any kind of cannibalization of new orders or anything like that?

No.

In fact, we have used it to sustain, to support market share on some new orders.

We have been able to obtain new orders because of our cutdown or our stretch capability in like-kind exchanges and that kind of thing.

Okay, great.

Thanks for the answers.

Todd Maiden, RBC Capital Markets.

Thank you.

I just wanted to go back to the prior question regarding cost escalators.

Can you tell us, in your entire backlog now, just from the aspect of steel escalators what percentage you are covered, those escalators already built into the contract?

They are, I would say, substantially quite a substantial majority.

Substantially all.

The only ones that wouldn't would be where there are nearer-term and in production or where we have been able to lock in pricing.

Okay.

Then does that hold true for the component side as well?

Is it --?

Yes, it would be a passthrough.

The passthroughs would address all material costs, not specific components.

Okay, great.

Then I don't know if you said it or not; if you did I didn't catch it.

How many lines do you have running in Portland now?

We have one new line and one repair line; and then the marine line, which is at relatively modest pace.

That's very -- most of the labor has been diverted over to the railcar segments, lines at Portland.

Portland has the capacity to produce substantially more railcars, but we are using Portland mainly on railcars to produce double-stack cars, where it continues to have a cost relevance.

Some of the other car types that we have historically built there, we'd be better off building them in our Mexican facility.

I understand, I understand.

All right.

Thanks a lot.

Thom Albrecht, BB&T.

I guess what percentage -- well, the whole Ohio Castings deal, it sounds like given the ramp-up in castings that we can start to think about that being a profitable entry within the next one to two quarters.

I wanted to get your comment on that.

Then even though that is a financial situation for you, what percentage of your castings do you get from there?

So, this is Lorie.

I will take the question on the financing part and leave the other for Bill to answer.

But as you probably saw historically when Ohio Castings was opened it -- that operation has run fairly close to breakeven.

So while it might turn to be a positive number or close to breakeven, it is not going to be a substantial number, I wouldn't assume, in the future.

The reason -- the way we obtain benefit in that is that we have obtained a favorable price in lieu of profit, reported profit.

So it is not a material line item, but it is a very material factor in our supply-chain management.

As to what percentage we obtain from Ohio Castings, I would say it is a critical percentage but not in any way a majority.

It is somewhat complex the way that supply agreement and relationship works, because we have three parties in that agreement -- Carl Icahn's company, and Amsted Industries, and Greenbrier.

Okay.

Then lastly, I know you don't give guidance, but there is a wide range of estimates for fiscal '12.

That is -- given that you've raised a lot of equity in the last year, can you just comment on maybe the rate of improvement that really we should all be thinking about?

Because I am not sure that it is to anyone's benefit to have such a wide range of estimates that I think go from about $1.30 to $2.00.

It just kind of leads to confusion.

And as a result, the good work that you are probably going to do this next year might get lost in all that confusion.

Well, not to be facetious about it, but I can't help myself but to say that I'm glad that all of you guys are as confused as we are.

Mark will give you a serious answer.

Mark is the person who won't let us give guidance, you know?

He just -- it is like a passthrough of costs on intermediate-term or longer term contracts for delivery.

He just won't give guidance.

So Lorie is maybe a better person to work on.

Because Mark just simply refuses to do it.

He's banging his head against the table here.

You know, I think that while it may not be the most ideal answer, in our next conference call -- which we recognize that we will be part-way through our first quarter -- that is where we will give much more color on what we are anticipating and giving at least qualitative guidance on line item basis for 2012.

I think it is safe to say that on the manufacturing side we expect meaningfully higher new railcar deliveries.

We expect as we said improvement in margins.

We are guardedly optimistic that the trends we are seeing in Refurbishment & Parts will continue to hold true, and that we will gain operating leverage in all of these areas as well as some cost initiatives that we have undertaken to see meaningful improvement in 2012.

Having said that, I recognize that that still leaves the wide range that you are referring to out there.

I think that we all here need to look at that wide range and listen serious to your question and the tenor of other questions that have been set today for us on that -- indirectly reaching that same subject.

We need to give as much clarity as we can to those of you who put the energy into following us.

There are a number of moving parts which favor some optimism.

The industry itself, we have talked about that quite a bit.

We think that railroading fundamentals are strong.

The initiatives that we have put a lot of energy in, in the last six months, to lean up the organization -- with the resources put into that we expect to pay big dividends.

And the energy and distraction of continuing to attempt to recover from one of the deepest cycles that our industry has ever had.

Not since the early 1980s have we seen a cycle that has been so catastrophic in its effect, far eclipsing the effect on the automotive business.

We think that we are not saying that happy times are here again.

But the stress on the organization of dealing with all these issues has been severe; and as things settle down a bit that in itself will have an effect as we can focus on operations, we can focus on transactions, and really run the Company as opposed to protecting ourselves and playing defense on the balance sheet.

I am really proud of what our financial team and we have achieved in strengthening the Company's balance sheet.

I think that has been essential given the uncertainties of the global financial markets.

But I think it is really time to buckle down and run this Company and to deal with a number of issues.

And we are doing that.

So the effect of all that should be positive, and that is where I look to some of the variation in expectations.

But we should be able to help you a bit more in the future on that.

And, Bill, just to add, I would be -- because of some of the transactions we have done this year, there is a little bit of confusion.

Maybe that is what is adding to this wide range, is the share count.

So I would be happy to chat with any of the analysts off-line about the share count, to make certain that is not what is creating part of this wide range.

Yes, and I think we could identify -- there's a lot of complexity to our accounting and to the business model.

If we could just identify the five points that are contributing to any confusion that would be very helpful.

If you could take the leap, Mark, in doing that.

Okay, thank you.

I will now turn the call back to Mr.

Mark Rittenbaum for closing remarks.

All right, I think that with those questions that concludes our remarks today.

We appreciate your participation in the call.

As always if there are other questions or a follow-up, we would be happy to take them later on.

Thank you for your interest today.

Bye-bye.

Thank you for participating in today's conference.

You may now disconnect.