Greenbrier Companies Inc (GBX) 2011 Q4 法說會逐字稿

Hello and welcome to the Greenbrier Companies fourth 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 Greenbrier Companies, this conference call is being recorded for instance 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, operator, and good morning and welcome to our fourth quarter call.

And as always, we'll make a few repaired -- prepared remarks, and then we'll open it back up for questions.

Today I'm joined on the call by our CEO, Bill Furman; and by our Treasurer, Lorie Leeson.

Many of you already know Lorie as she's carrying the [laboring] (inaudible) in our Investor Relations area.

Before I make some remarks today and turn it over to Bill, as always, matters discussed in the conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act 1995.

Throughout our discussion today, we'll describe some important factors that could cause our actual results in 2012 and beyond to differ materially from those expressed in any forward-looking statement.

So with that, today we reported our fourth quarter, ended August 31, results.

Excluding a charge for loss on extinguishment of debt, net earnings attributable to Greenbrier for the quarter were $16 million or $0.52 per diluted share, with revenues of $443 million and EBITDA of $39.1 million.

Overall, both end-user demand and business visibility continue to improve.

As the industry benefits from the ongoing market recovery, Greenbrier is winning a meaningful share of new orders from rail operations in the US and Europe, and our backlog continues to grow.

It now stands at 15,400 units valued at $1.23 billion.

And based on our current production plans, we anticipate approximately 14,500 of these units will be delivered in our fiscal 2012, with the balance in our fiscal 2013.

Now let me address some highlights for the quarter to supplement the year-over-year comparisons you found in the press release and the table.

I'll include additional segment color on a sequential basis, comparing to our third quarter, ended May 31.

First turning to our manufacturing segment, revenue has grown for four consecutive quarters.

Q4 revenues of $443 million were a revenue -- were a record, as we continue to ramp up new railcar production.

In Q4 we delivered approximately 4,000 new railcars, almost double what we delivered in Q3.

About 3,500 of these cars were produced during the quarter, with the balance produced and placed under lease in prior periods and sold to financial institutions this quarter.

As a reminder, until these units are -- were sold to a third party, they appeared on the balance sheet in prior quarters.

Consistently we do this, and it appears as lease cars for syndication.

Just as a backdrop again, we only delivered 2,500 cars in all of our fiscal 2010.

So the ramping we achieved in 2011 is a true testament to our manufacturing flexibility and to our workforce.

In particular, turning back to the fourth quarter, we ramped up production volumes of car types to support the particularly strong energy sector, related to hopper cars and tanker cars.

And (inaudible) the sport, the continued increase and demand across the all-car-type suite opened up new production lines in Mexico and now produce new railcars in North American on eight lines, with the flexibility to continue to ramp up productions on three additional lines later in fiscal 2012.

At which time we estimate our theoretic North American capacity, if we -- and once we were to open up all of these three additional lines, to be about 18,000 units.

Manufacturing gross margin for our fourth quarter was 10% of revenue, up from 8.5% in Q3.

Primarily the result of operating at higher production volumes and a favorable product mix.

Generally, as a reminder, we receive a premium price from sale car -- from sales of railcars with leases attached to it.

When we sell these railcars, we also generally retain some management rights on the cars and earn management -- ongoing management fees.

And until the time that we sell the cars, we also keep the rent.

Both the rent and the management fees show up in the leasing segment of our income segment.

Now turning to our wheel services, refurbishment and parts segment, revenues were down sequentially from the Q3 from $119.3 million in Q4 down from $126.3 million in Q3.

The decrease was primarily in our wheel services segment, and it was due to a product mix.

We -- when we do wheel mounts, we're either turning existing wheel sets or we're putting on new wheel sets.

New wheel sets have a higher dollar value per unit than turns.

In this quarter, the mix was more weighted toward turns than new wheel mounts, as compared to Q3.

And as such, although our volumes were up, the revenues were down sequentially.

Turning to gross margin from this segment, it was 10.8% of revenue, down sequentially from 12% in Q3.

This was principally due to lower margins in our repair and parts business, and repair margins suffered from some unanticipated labor shortages.

While this has been an ongoing battle, perhaps somewhat surprisingly with 10% national unemployment, this quarter we have the -- particularly we've suffered from some labor shortages that we're recovering from.

Looking forward, we are cautiously optimistic that this segment will rebound in future quarters as the rail industry continues to strengthen.

And we're hopeful that we should see some modest margin expansion in 2012 from where we ended up Q4 of 2011.

Turning now to leasing and services, our fleet utilization was 95.7%, down from 96.8% last quarter.

We consider that statistically insignificant given the small size of our fleet of about 9,000 railcars.

That's the difference of less than 100 cars that can -- are between lease, and we continue to see strengthening -- and strength in this segment of the business, both in utilization -- overall utilization and an improvement in lease rates.

Segment revenue increased from the second consecutive quarter to $17.9 million, up from $17.5 million in the previous quarter, principally due to the higher rental income from railcars that we held for lease syndication.

And again, we earn rent on those cars until the time we syndicate.

Our gross margin was down from Q3 at 43.7% compared to 47% in Q3.

This is -- was due to, we believe, unusual items such as unrecoverable transportation costs.

And looking ahead, we would expect margins to improve and approach or exceed the 47%.

We realize in Q3 and in our 2012, and that we continue to migrate from shorter-term leases to start -- to terming out leases on that more favorable term.

Selling or G&A expense was $22.1 million for the quarter, flattish with Q3.

But as a percent of revenues it's down as we're getting to 5% of revenues, as we're getting to economies of scale.

Looking forward, we'd expect that as a percent of revenue, G&A expense will continue to climb as our revenues grow.

And that on a dollar basis, that we would see a small increase of -- on a quarterly run rate to about $23 to $24.4 million per annum.

So, again, G&A expense as a percentage of revenue, we would expect to decline going forward.

Interest in foreign exchange was $6.3 million for the quarter, compared to $9.8 million in Q3.

We believe that $6.3 million is a good run rate going forward.

And the decline, again, is principally the result of the refinancings that we did in the prior -- in the year that just ended, that that will save us over $10 million per annum.

Our tax rate for the quarter was 23% due to the geographic mix of earnings.

We and you know that this is a volatile tax rate that we have seen bounce around from quarters due to the geographic mix.

We currently anticipate for 2012 that a tax rate of 35% is what we would see for the year.

Net earnings attributable to non-controlling interests relates to our (inaudible) joint venture in Mexico.

This was $900,000 for the quarter.

And as we continue to ramp up production, we would expect that this would grow.

And of course this is a deduction from the debt earnings that are ultimately available to Greenbrier.

Now, turning to our 2012, we plan to build on the momentum that we -- that has built up in 2011.

And based on production lates and our outlook, we expect to deliver in excess of 15,000 new railcars this year, and for revenues and EBITDA to be up significantly for 2011.

Our CapEx net of any proceeds from sales and any equipment out of our lease fleet is expected to be about $80 million to $85 million this year.

And depreciation and amortization will run about $40 million, remaining very liquid.

And we believe as a result of the refinancings, we're well poised to take advantage of the upturn here, as well as any unanticipated shocks.

As a reminder to all of you, our calculation of dilute of EPS can be complicated and tricky, due to the warrants and convertible bonds.

And if any of you have any questions or want to go into detail on that, then Lorie will be happy to take these questions offline here or clarify anything on the call.

With this, this concludes my comments, and I'll turn it over to Bill, and then we'll open it up to questions.

Thank you, Mark, and good morning to all of you.

We appreciate your participation in this call and your interest in Greenbrier is important to us.

This morning I'll make brief comments about our industry and provide some operating color to Mark's financial comments.

We're very pleased with the results of our fourth quarter and about the building momentum in Greenbrier's business, which will allow scale and utilization economics -- economies in our operations during 2012 and beyond.

Greenbrier has benefited substantially in the quarter from the results of changes in our business strategy.

These changes have reduced our costs, improved manufacturing efficiency by expanding capacity in lower cost locations and through administrative initiatives, which have lowered health costs, administrative cost and interest cost through repayment and refinancing of debt.

All of these forces are reflected in our improved manufacturing margin and in G&A and interest costs as a percent of revenue.

We intend to build on this momentum, and we have a strong backlog and good visibility in our markets to achieve record financial performance in our fiscal year 2012.

Greenbrier's strategy is to distinguish and differentiate its products and services through an integrated business model, so as to produce exceptional service and quality to our railroad shipper and financial customers.

We do this by providing them a cost-efficient value proposition.

In manufacturing, we are creating a low-cost, low-capital and highly flexible, fixed factory footprint.

In 2012, we expect to benefit significantly from substantial strategic and tactical changes, which we launched in our fiscal 2011.

These are very specific.

They include bolt-on capacity additions to our facilities, which Mark alluded to, and these are largely in Mexico, which have greatly increased our capacity, but with a flex plant capability to trim our sales in any unforeseen downturn.

Also, we've increased throughput in our leasing company model, increasing syndications to financial partners where we will manage railcars for a significant part of their long physical lives, creating service and maintenance income beyond the manufacture of a freight car.

And we've increased manufacturing margins by sale of assets with leases attached, versus cash sales and cash -- and to cash customers, which we also, of course, welcome.

Various lean initiatives have contributed tens of millions to the profitability of our business enterprise by turning costs and improved efficiency, including the $10 million in interest savings on an annual run rate, $10 million from health and welfare and other administrative efficiencies, as well as improvements in working capital efficiency.

Operating improvements in manufacturing have produced synergies in purchasing, value engineering and other savings, which will improve our cost line, and thus our margin equations.

Our goal is to increase market share and gross margin, yield to the bottom line through a combination of all of these factors, compared to our capabilities to do so this time last year.

And as well, we are benefiting from stronger railcar market.

In short, we are a leaner, meaner operating Company, operating at higher volumes than a year ago.

And we believe we are well poised to take advantage of the opportunities that the current market conditions present.

Now, just a few words about those markets.

Backlog, as Mark indicated and in the press release, continued to build in the quarter to over 15,000 cars, while deliveries increased and production was at 3,500 cars.

Delivery is actually 4,000 cars and production at 3,500 cars.

For the year we received orders for North America and in Europe in excess of 20,000 units, as measured by North American industry association ARCI.

We have approximately 25% market share of the quarter's -- trailing quarter's orders.

In the past, our North American market share has doubled during downturns but has fallen during upturns, to close to our actual share of theoretical total industry capacity.

Our share used to be about 15% of industry peak capacity, but due to the changes we have made, our capacity is now -- is closer to 30% of that theoretical capacity, at least in the area of efficient capacity.

Now, with flex facilities in North America, our market share can be in a sustained 25% to 30% range, depending on mix.

This is a very good spot for us because it combines the best of our strengths when the industry is operating a bit below the theoretical capacity; let's suppose 75,000 cars.

Thus, we believe we should be able to easily achieve a 30% market share in a 50,000, 60,000 or 70,000 car year.

We can flex our facilities, allowing those facilities in that market share to flex if and when production climbs to peak levels or if it declines.

In many ways, demand for railroad -- railcars and railroading has uncoupled from the overall economic drivers, which have long linked the industry to GDP and the economic health of the nation.

Commodity demand has remained strong.

Intermodal demand for containers and especially domestic containers are very strong year over year, concealed in the year-over-year intermodal loading statistics, which have a lower growth traffic included in the data.

An aging fleet and increased scrappage rates have reduced cars and storage to normalized levels, giving the mix -- given the mix of some car types, which belong to traffic sectors, which have not yet recovered, such as lumber cars.

Railroad balance sheets are very strong.

Much more significant though than any of these factors, energy transformation is afoot in North America, which will drive demand upward for some car types and punish others.

I'm not talking about solar or wind energy, but clean energy nevertheless in a dramatic growth in untapped oil and gas reserves going on over the past two years.

Dramatic and transformational growth, improving clean energy reserves, gas reserves in North America, along with advancements in exploration and extraction have transformed the North American energy outlook in only these last few years.

These forces will continue to imply significant changes to the railroad industry.

And on balance, I believe they will very -- they will be very positive.

Environmental activism against coal and in favor of cleaner energy has stimulated demand for cheaper and cleaner gas-fired energy plants, coupled with an amazing natural gas surplus and unthought-of lower prices for natural gas due to plentiful supply.

We are faced with the prospect that North America may have such riches of this plentiful and green energy source that we might become a net exporter.

But clean oil extraction comes along with it.

This energy windfall will drive down costs and is also driving down input costs for many chemicals.

New plants are being built for many types of chemicals and plastics to be produced in America on a low-cost basis as a result of this energy transformation.

This development talked about but little recognized, we believe, will become a driver of the US economy.

Lower natural gas input costs, slower growth in domestic coal consumption, except for replacement demand, and proven energy reserves, which will all rival the Middle East when modern extraction technology such as fracking are considered.

These things will drive demand for tank cars and certain kinds of covered hopper cars, such as those used in frack sand, as they have been doing during the last year.

During the last year, and finally, we have greatly improved our balance sheet.

We have improved our operating efficiency through relentless focus on our strategic model and on the economics of scale and utilization.

We have positioned Greenbrier well to be a solid performer and leader in the present rail renaissance environment.

We look forward to the year ahead and the challenges and opportunities it will bring.

Thank you and back to Mark.

Thank you, Bill.

And operator, now we will open it up for questions, if you can provide some instruction on how to do so.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from Allison Poliniak from Wells Fargo.

Your line is open.

Hi.

Good morning.

Hi, Allison.

Just in terms of deliveries, how should we be thinking about the for the year?

Is it going to be pretty consistent, or maybe weighted more towards the second half versus first half?

It will be weighted a little bit more towards the second half of the year because we are continuing to ramp up our production as we speak.

And we'll -- that ramping will continue into the first of the year and even into the -- even into later on in the year.

As we indicated, we'll have some additional capacity available.

So roughly speaking, I would anticipate maybe a 40/60 split between the first and the second half of the year.

Great.

And then, Bill, I think you touched a bit on this in your remarks, but just can you comment more so on the order trends in fiscal Q1, you know, what you've seen?

I think you've talked about you received 25% on the new orders that were announced a few weeks ago.

Our order rate has been very robust.

It's concentrated in several car types.

A lot of activity in the energy market that I referred to, frack sand.

Lease rates are strengthening in -- across many car types.

And in general, we see in 2012 a good environment for other car types.

As grain and other car types sort out, we see a fairly broad-based need.

We do agree that the earlier forecasts by FTR and EPA needed revision.

We never thought -- and I think I've mentioned in earlier calls, we never believed that production and demand would be as high as they had earlier forecast.

But we now believe in the 50,000 and 60,000 car range that we feel much more comfortable because the forces driving this demand are largely replacement and isolated growth, and very fast growth in some of those sectors.

Great.

Thank you.

Our next question is from Peter Nesvold of Jefferies.

Your line is open.

Good morning, guys.

Congratulations on a great quarter.

When I look at the implied ASPs on the backlog, they're still about 10% below past peak, and I assume that there's probably a little bit of steel that was in that implied ASP past peak.

But even the gross profit dollars per railcar are still below where we were a year ago.

So, you know, what's the best way of thinking about pricing in this particular environment?

Will we see ASPs get back to past-peak levels, or is there a better way of thinking about it, whether that's gross profit dollars per car or some other way?

Right.

So you're referring to the average selling price and the backlog, Peter, maybe compared to past cycles.

Correct.

Is that -- I think that really is a result -- it's a mix.

That's definitely a mix item.

You know, while steel prices are not back to their peak levels, they are certainly at high levels here.

So that would be purely a result of a mix rather than anything else really significant.

Although we in the entire industry are absolutely looking to continue to expand our margins in the current environment.

You point out an interesting phenomenon though.

As steel prices have increased cycle over cycle and other input costs have increased, the margin that can be charged in those value adds isn't as great as it can be charged on labor.

So the distinguishing force has to be efficiency in labor.

But the dollars per day or dollars per month in terms of real dollars and yield from these transactions actually has a much better trend than the percentages themselves.

So if I look at it on a gross profit dollars per car, which tries to strip out that steel impact that you talked about, Bill, I think it was roughly $7,600 per railcar for manufacturing profit this quarter.

Any sense for how high that can get?

I guess a year ago it was over $10,000, but I know that was kind of an unusual environment.

Can we get into the $8,000 or $9,000 range, do you think, in fiscal '12?

Right.

And if I could address what -- I'm not sure.

What may be picking up -- I would need to clarify and looking at your numbers, and we could take that offline.

But there would be marine margin and manufacturing in some prior quarters, and so you can't just simply take the total manufacturing margin.

There was no marine margin this -- the quarter that just ended, and we currently are not -- where it would have been small.

And looking forward here in the near term, we're not building marine barges.

Having said that, the guidance that we're looking at now, which I seem to have skipped over in my prepared remarks, was maybe a 10% margin guidance for manufacturing, absent any marine production for this year.

And certainly as the cycle continues out, we would look for continued margin expansion beyond that and believe that we could increase that by several points or more.

You make a very good point about the marine margins, and while our expectations for the full fiscal year do not include a significant contribution from marine margins, we do expect marine to bounce in the second half of the year.

So that's going to be upside to our own views, and that will enhance manufacturing margins.

Those are attractive -- that's an attractive business unit, and we do see market demand coming back for that segment -- sub-segment.

Great.

Thanks a lot, guys.

Our next question is from Paul Bodnar of Longbow Research.

Your line is open.

Hi.

Good morning.

I wanted to follow up a little bit on the -- some of the capacity editions.

What kinds of lines are you adding?

And is it that tank car capacity?

And I guess in particular how is the tank car?

Any kind of new sales there?

How's that going?

Tank car demand is very robust, and we are adding tank car capacity.

We have -- I mentioned bolt-on capacity changes.

We can increase our production level on the lines that we have already.

Our base case, there are only a couple of cars per day on the line down there, but we're increasing that dramatically.

We are also open -- we opened another full lien at our joint venture facility, and we are in the process of opening more efficient lines at our Concarril facility, almost doubling the capacity of that facility.

So the lines that we're opening, as Bill mentioned, we're increasing that capacity or increasing throughput on our tank line.

But the additional lines that we're opening are flexible to build really all car types, other than tank cars.

Okay.

Or coal cars.

And then -- and I guess on that, I mean, in terms of a customer, I mean, I know GE obviously kind of got you into that business.

Have you heard anything new from them, one.

And then secondly, are some of these orders from people besides GE that you're building this capacity for?

I think there's a very robust demand for tank cars here and actually, surprisingly in Europe.

The forces that I described are driving the need for tank cars, and the industry projections are very great for tank cars over the next five years.

So, yes, we are getting other outside orders.

We could -- we have to -- we've had a very good base load with GE.

I think GE has to speak for itself, but the public news is they are no longer -- it is no longer for sale.

They need to replenish their fleet, and we have a very good relationship with GE.

In the current environment, we believe that they'll continue to be a customer over time, if we don't sell that space out first.

Right now we have -- we actually could sell more than we can produce.

Okay.

And just one last question.

Can you give us a little more detail on the labor shortages that you had in the refurbishment and parts business, and what's kind of the cause of that?

As part of our -- as a fallout of our strategic plan, we've taken a strong -- we've taken a very strong review of all of our facilities.

We have a stringent compliance test at these facilities.

And we have had to make some changes that have caused the loss of 85 to 100 workers in the GRS network.

I think longer term that's going to be a very positive thing for us, but short term, as Mark said, in any of the rural locations where we operate and the diverse locations we operate, despite the unemployment levels, finding people who want to work in a factory environment is difficult.

We're also competing in areas like Texas and even in the Midwest, we're competing with the booming business and exploration and development of energy, gas sands and so on.

Okay.

Well, thanks a lot.

Sure.

Our next question is from [Sal] (inaudible) with (inaudible).

Your line is open.

Good morning.

Thank you for taking my question.

Good morning.

First a clarification, Mark.

Did I hear that right during the Q&A that you mentioned you had 10% margin guidance for manufacturing gross margin for fiscal 2012?

Is that right?

And Sal, you're breaking up a bit.

We'll hope that -- while it might be unpleasant for you, we'll hope that it's on your line rather than our line.

But I believe your question is guidance for manufacturing margins for 2012.

And yes, the guidance that I gave was about a 10% margin for 2012.

Okay.

And should we expect that to be higher in the back half, I assume, given the 40/60 split for (inaudible) you gave?

A little bit higher, but as we ramp up production and get efficiencies, a reminder some of this is purely due to mix and contractual prices.

And as we mentioned earlier, when we sell rail cars with leases attached to them, those will have higher -- generally have higher margins on them.

And those can be -- fall out in different quantities and in different quarters here.

But generally speaking, I'd say, yes, more modest improvement in the second half of the year.

Once again, just to caution, those margins do not include any marine construction in the second half of the year.

That could change -- it just is a very changeable situation.

But we're being very conservative about that.

Okay.

On the guidance you gave for fiscal 2012 railcars, deliveries of over 15,000, just looking at the backlog, I think you said earlier that about 14,500 of the units that are currently in backlog will be delivered in fiscal '12 with the balance in fiscal '13.

So I guess in your 15,000 plus deliveries forecast for next year, that includes (inaudible) that you've already gotten (inaudible) to date, as well as what you would expect to receive I guess next quarter.

That's -- maybe just to restate the -- in case others are not able to hear, I think you're asking we gave guidance for over 15,000 railcars this year, and our backlog that we published of 15,400 cars, we said that there is 14,500 of them that we'd build in fiscal 2012, and is that 14,500 embedded in our guidance for fiscal 2012.

The answer is yes.

The way things are shaping up in 2012, we have -- we're negotiating large numbers of transactions, significant numbers of transactions, and we see space as tight for our customers in 2012.

That's generally true of covered hopper cars for the energy market and tank cars and other cars that are related, as opposed to lumber cars or coal cars or things like that.

But I would say that we do have a modest amount of -- in our backlog of multiyear agreements, particularly on the GE contract.

We don't anticipate -- this -- the burn rate is about equal to one year's backlog, so you're really addressing the burn rate.

We feel comfortable with the burn rate production under current market conditions.

If something changes, if there's a major secular shock, then all of this would have to be recalibrated, but that's how we are feeling as of this morning.

Can you give a little bit of color on the -- I guess the orders that you received in the fourth quarter and into the first quarter.

You know, what percentage of those orders were intermodal?

Maybe just generally speaking because we don't break out our backlog by car type, the quarter -- we did have intermodal orders during the quarter, but of the 5,300 units that we disclosed, they were more weighted towards the energy sector, as we referred to, with hopper cars and tank cars.

That segues into my next question.

I guess does that explain why the ASP of railcar orders seems so (inaudible).

Because based on my calculations, the ASP of the new railcar order during 4Q was about 91,600.

So are you saying that there's some mix in there from just a higher price tank car and covered hoppers?

Yes, and it --

Take that discussion offline.

Yes, we'll answer this last one, and then maybe take it offline and also just the -- for some reason, the quality of this -- we're having some breakup here.

There'll definitely be a mix issue.

The last thing we'd point out is when we have -- when orders are weighted more towards European rail cars, then European railcars across the board generally have a higher per-unit value than cars in North America do.

And those are just really due to the technical standards.

But it would be -- do nothing more than a mix issue.

So Salvador, if we could take it offline, either Mark or Lorie would be happy to discuss.

That's a fairly technical question, and you're breaking up.

So maybe we could go on with other questions.

Our next question is from Steve Barger of KeyBanc.

Your line is open.

Good morning, guys.

Good morning, Steve.

I had to drop off the line, so if this has already been asked, just let me know and I'll check the transcript.

But if I heard right, you produced 3,500 in the quarter but delivered 4,000.

Were the other 500 produced in years 3Q, or was that earlier in the year?

And can you talk about pricing on the 500 versus what is -- what you have in current production?

You're correct that the other 500 were produced in other prior quarters.

Generally, they would have been produced in Q3.

But I guess without the details, it's possible that some of those could have been produced in Q2 as well.

We, again, not like to specifically get into the sale prices on those cars versus a car that doesn't have a lease attached, other than to say that cars that have a lease attached to them are more valuable to a leasing company than a car that does not have a lease attached to it.

What I'm really trying to get at is the progression of pricing on an apples-to-apples basis from 2Q, 3Q into your 4Q, and a sense for how that has progressed for, say, a non-lease attached car.

Have you seen -- have you been able to realize better pricing?

On a leased car, Steve?

On a -- whether they're leased cars or non-leased cars, I'm just trying to get a sense for how pricing has improved, if it has, as you've gone through your fiscal year.

Overall, we think pricing has improved for cars we sell, and we believe it's -- while not totally reflected in our statements, the Ford contracts we're taking into 2012 have better pricing, we think, on them.

And we hedge all of our costs with escalations and even in the case of leasing cars with leasing hedges.

I think it's important to understand that when we are holding cars and selling them from a prior quarter, those are all leased cars, and we report those as backlog in orders to the industry, to ARCI.

So we are not speculating building cars and holding them.

We have already marketed the car.

The car goes out in service.

We get interim rent, which on a stream rate can be much higher than we hold and sell the car.

That's our basic leasing model.

Got it.

And are there other cars in finished goods inventory?

Yes, we would, and those cars are generally in transit.

When we build cars down in Mexico, for instance, the car is not delivered to the customer -- considered delivered to the customer till it crosses the border.

So we do have finished goods inventory.

Of the same magnitude that you saw in fourth quarter?

Will there be another 500, plus or minus, in 1Q '12?

It doesn't show up in finished goods.

It shows up in assets sold.

Well, any cars in transit will be embedded in our inventory numbers.

But looking at the balance sheet that was attached to the P&L on a sequential basis, that number is down from Q3 or from Q3, from about that $50 million to $30 million.

So sequentially it was down.

Okay.

What do you think the industry can support in terms of deliveries in 2012, just from a component standpoint?

We believe a constraint, until the middle of calendar 2012, will continue to be items like bearings and castings.

In our case, we opened the joint venture facility in Ohio.

Castings -- we have an adequate supply of castings and components for the market.

But I think it will be an industry production constraint for the first half of calendar year 2012.

So I would say that it's probably not a -- is such an essential thing because we agree that the build rate in 2012 is going to be in the approximate consensus range, with FTR and EPA something north of 50,000 cars, 55,000 cars perhaps.

And we don't -- we think that the market itself, you know, will average out to that level and address the capacity constraints that are more or less contemporary, as companies are ramping up.

Great.

One more and I'll get back in line.

Mark, in your prepared comments, you talked about modest margin expansion and refurb in parts for next year.

Is that -- and did you come back and give more color around that, or should I be thinking 50 basis points or 100 basis points?

Or what's kind of the -- what does modest margin expansion mean?

I think we were at 10+% in Q4.

We would hope that we could build back up to that 12% rate.

I think we're just being -- we're being cautious here.

Top-line growth has really been the thing that's driven the profitability of that unit.

So while they are exceeding our absolute expectations, the margins have been somewhat disappointing, and especially in the repair and parts pieces of that business.

The wheels are generally much better.

So if you get back up to 12%, do you think that's more from Mix or from improving labor efficiency?

It will be higher -- it will be -- we would anticipate it would be more on the repair and parts side of the business.

And it would be able -- so it would be, in part, our ability to ramp up on the labor side, which has been, as we talked about earlier, a -- you know, a continuing challenge, as the markets have come back.

Surprisingly, a continuing challenge.

All right.

Thanks.

I'll get back in line.

(OPERATOR INSTRUCTIONS) Our next question is from [Bascom Majors] of Susquehanna.

Your line is open.

Good morning, guys.

Morning.

You talked a little bit about marine and how it was running.

Basically nonexistent today but that you expect it to come back, and that that would effectively imply some upside to kind of what you're looking at in the second half now.

Could you walk us through what's on your dashboard to attract that market and sort of what you're looking for as a catalyst to help that kick back in?

Yes, I think to be precise about it, I don't think it has a material effect in our internal expectations for 2012 fiscal year.

That's not to say we won't have barge activity, but it's not -- at one point, that unit was pushing top-line growth of almost $100 million and a very robust EBITDA.

With -- it's remarkable if you look at cycle-to-cycle comparisons, that unit actually drove our margins through the down part of the cycle and seemed to stop when things were recovering.

But we expect it to recover and the demand to recover.

But we just don't have any idea how fast that would ramp up or when and if.

So we have chosen to assume that it simply will not, and that's kind of the upside that I -- that's the way I think about it.

If it comes back to, say, a moderate level, it would have a fairly -- could have a fairly profound effect in the first part of 2013 and then the last quarter of, say, 2012.

Okay.

With that being gone so long, and you sort of pushing up near where you were when that unit was running strong, do you think that it would still be margin accretive, or is it just too hard to say at this point?

Absolutely.

We almost have a complete -- we have an excellent (inaudible) Gunderson.

We can only build marine barges at Gunderson.

It's a deepwater -- we're on a deepwater river side launch there.

We have a flexible workforce, and we have taken all of the people from marine and put them over on the railcar lines.

And we've hired some new workers and hired back some workers from the downturn in the rail line.

So we have actually a very good pool of labor, and we, again, can flex that labor.

If the car demand comes off, we can put production in other facilities.

But we can get adequate labor for Gunderson, we believe, on the marine side because we've got them parked in rail right now.

And it's a very, very big asset to us to be able to move that labor force back and forth.

You know, the type of labor challenges we referred to earlier are not -- we're not really seeing here in the Portland area.

It's more in these repair shops, and as Bill referred to, in some of these areas where we're competing with alternative energy.

We, and others, as Bill had mentioned, are -- we're not the only ones that are finding this phenomenon.

If any of you folks want to have a job in Cleburne, Texas, for example, we would be dying to get you down there to weld and fit and move materials around.

Okay.

Just on that front, is there any way to quantify what sort of overhead that business may still be consuming in that facility?

And with that, I'll drop off.

Which facility?

You mean the Gunderson facility?

Gunderson.

How much is barge eating up in overhead, say, today, even though it's not producing?

Is that still a drag on margins?

Well, it would be in that Gunderson is not -- again, we're not building marine production today, and we've shifted those workers over to rail.

But we're not operating at 100% utilization or anywhere near there that or fully absorbing overhead at current production rates.

So one of the main benefits, again, of marine is it consumes a lot of labor hours, which help us absorb overhead.

And so that, alone, is a big kick.

But the direct supervisory and other labor engineers, for example, and layout to people, we have a fairly de minimis size there.

Yes.

All right.

Thanks for the time, guys.

Thank you.

Thank you.

Our last question is from Art Hatfield of Morgan Keegan.

Your line is open.

Yes, good morning, guys.

This is actually Derek Rabe in for Art.

Congrats on the quarter.

Okay.

Thank you very much.

Nice to have you with us.

Most of my questions have been answered, but just a couple of items here.

First on the acquisition front, I know last year -- toward the end of last year you guys mentioned that you might look at some potential deals going forward.

Anything on that horizon as you look at the acquisition pipeline, or do you guys expect to even be potentially in that market in 2012?

Well, you know, as we talked to Art in the previous conferences before, we've been really busy this year sticking to our knitting.

And acquisitions can be a huge distraction.

So far we're pretty happy with our business model, and I think that, you know, the right way to answer that question is to say never to say never.

In the right circumstances, we are getting to a point where we could absorb more workload.

But the bolt-on growth that we've had, for example, in manufacturing is fairly attractive compared to the cost of going elsewhere and acquiring anything.

And probably the rationalization of our GRS network would be a more realistic place to consider acquisitions.

But again, never say never, and we look at opportunities from time to time.

Great.

That's helpful.

And then my last question is just -- and I apologize if I missed it -- but what are your capital expenditure expectations for 2012?

Good question.

Nobody else asked that question.

It's in the book.

Right.

On a net basis, because we tend to look at that, CapEx, just from an expenditure net of assets that we would sell out of our lease fleet, $85 million.

All right.

Good.

Thanks a lot, guys.

Thank you.

Thanks for your attendance.

Thank you all for joining the call today.

Have a good day.

Thank you.

This concludes today's presentation.

You may disconnect at this time.