Greenbrier Companies Inc (GBX) 2012 Q1 法說會逐字稿

Hello, and welcome to the Greenbrier Companies first quarter of fiscal year 2012 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 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.

Good morning, and welcome to our fiscal 2012 first-quarter conference call.

On today's call I'm joined by our CEO, Bill Furman; and by our Treasurer, Lorie Leeson.

We'll discuss our results for the quarter and make a few comments about the outlook for the year, and then we're going to open it up for questions.

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

Throughout our discussion today, we will describe some of the important factors that could cause our actual results in 2012 and beyond to differ materially from those expressed in any forward-looking statement made by, or on behalf of Greenbrier.

Now, turning to our results for the first quarter ended November 30, we're pleased that we are able to report strong results, as our net earnings for the first quarter were $14.5 million or $0.48 per diluted share on revenues of $398 million and EBITDA of $37.6 million.

Momentum from the second half of our last fiscal year carried over into the first quarter, and we believe this momentum will continue throughout our fiscal year.

Our visibility into our business continues to improve, and we believe we are a major beneficiary of the ongoing recovery in the markets we serve.

Our results also reflect the fruits of the operating efficiency and cost reduction initiatives undertaken in 2011, as well as lower interest costs from the debt refinancings we executed in 2011.

Now, let me address some highlights for the quarter.

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

First, turning to Manufacturing, our first-quarter revenues of $262.7 million were about triple of what we realized in the first quarter of 2011, and a sequential decline from our record manufacturing revenues of nearly $306 million in the fourth quarter of last year.

In Q1 of this year, as anticipated, we delivered approximately 3,300 new railcars, down from the 4,000 deliveries in Q4 of 2011.

Yet we actually produced more railcars in Q1 than Q4, as we continue to increase production rates.

However in Q4, we delivered more than we produced during the quarter, obviously, as cars produced in prior periods and are hung up on our balance sheet as leased railcars for syndication were sold in the quarter.

This quarter, the opposite occurred, where some of our production is hung up on the balance sheet as leased railcars for syndication and will be sold in future periods.

As a reminder, all these cars are under lease in money-good transactions and we're earning rent in an annual run rate of anywhere from 8% to 10% per annum and, of course, our incremental borrowing cost is closer to 3% per annum.

Our Manufacturing gross margin for the quarter was 10.1% of revenue, up from 9.9% in Q4.

We continue to believe that margins for the year will run about 10% to 11%, with potential upside if marine picks up in the second half of the year.

As we have spoken about previously, we took many steps to ramp up production in 2011, and our production rates continued to increase.

This has positioned us well to meeting the continued robust demand and capture market share.

To support demand, we have opened new production lines in Mexico, and now produce new railcars on eight lines in North America, with flexibility to open up an additional three lines, later in 2012.

We still expect to deliver over 15,000 new railcars this year, and our backlog provides us very good visibility.

On the marine side, we received a small new order during the quarter, and inquiries have increased.

We are becoming increasingly optimistic that there are signs of recovery in this market.

Turning to our Wheel Services, Refurbishment and Parts segment, revenues were relatively flat in Q1 compared to Q4.

Gross margin for this segment was 10.1% of revenues, down sequentially from the 10.8% in Q4, due to lower margins in both the wheel services and repair side of this business segment.

The lower margins is really a product mix issue.

As we talked about in prior periods, when we put new rail mounts on cars rather than turn balance, these have a higher dollar sales value, but with that -- and produce incremental dollar margin than on a percentage basis, it's a lower percentage of revenue.

On the repair business, we continue to experience labor shortages and inefficiencies related to training new hires.

We believe we can realize better efficiencies in this operation, and our parts operation, and are adding resources to do so.

We continue to be cautiously optimistic that this segment will rebound in upcoming quarters, as the railcar industry continues to strengthen, workers become fully trained, and our efficiencies improve.

Now turning to Leasing and Services, our fleet utilization was up on a sequential basis and now stands at 97.1%, up from 95.7% in the last quarter.

Segment revenues on a sequential basis in this segment were also flat.

Our gross margin for the quarter grew to 45.7%, compared to 43.7% last quarter, due to increased rents, both on lease renewals and for leased railcars for syndication.

As I mentioned earlier, the amounts -- the number of railcars that were hung up on the balance sheet earning rent, grew during the quarter and this adds incremental revenue, for which there's little associated cost.

Looking ahead, we continue to expect improvement as margins as the leasing and lease rate environment improves and we migrate from shorter-term leases to those that are longer-term in the current favorable environment.

Selling and administrative costs were $23.2 million for the quarter, up about $1.1 million from Q4.

This is primarily related to employee-related costs associated with operating at higher volumes and restoration of salary reductions implemented during the downturn.

As we indicated last quarter in 2012, we expect to see greater economies of scale, with G&A as a percentage of revenue declining, and in absolute dollar terms, we expect it to run about $23 million to $24.5 million per quarter.

Our interest in foreign exchange was down $0.9 million from Q4 at $5.4 million.

This is primarily due to foreign currency, as the foreign currency exchange gain for the quarter was $0.9 million compared to a gain in Q4 of last year of $0.3 million.

Our tax rate was 36.3%.

We anticipate it to run about 35% to 40% for 2012, and it is dependent on our geographic mix of earnings.

I want to make a comment about the line item on our financials.

Net earnings/loss attributable to non-controlling interest.

This relates to our partner's 50% ownership interest in our GIMSA joint venture manufacturing facility in Mexico.

You'll note it showed a loss of approximately $1.2 million for the quarter.

We do not actually have an operating loss at this entity, though.

Rather, many of the cars that we produced but were not sold during the quarter and hung up on the balance sheet came from this facility, and as such, the related margin is hung up on the balance sheet and after you eliminate the margin from these railcars, that's what is yielding the loss rather than earnings on this line item.

In future quarters, we expect, of course, that this will be profitable and at a growing rate, and as a reminder, when it's profitable and it's our partner's share of earnings, then it's a reduction -- it's a deduction to get to our bottom line earnings.

As we look forward to the rest of the year, we expect to deliver, as I mentioned earlier, in excess of 15,000 cars.

We expect our EBITDA revenue and earnings to be significantly higher than 2012.

Our CapEx expectations have not changed from the guidance last quarter of the $80 million to $85 million on a net basis.

That's for the entire year, and the depreciation of about $40 million.

We do note that our working capital levels, particularly inventory, continue to grow as we increase our production rates and operate at higher volumes.

We did have some learning curve inefficiencies and some production issues that we worked through and are working through that are, in part, a cause of this inventory build up on a couple of our lines.

And we now believe that we are near or at the peak of the build up of inventory and that it should start reverse itself.

A final comment is that we've known from talking to analysts and investors that the calculation of EPS can be complicated due to our $230 million of bonds.

We did put a supplemental schedule in our press release to help people through the calculation, and I wanted Lorie to make a few comments on this topic, and then we'll turn it over to Bill.

Thank you, Mark, and good morning, everyone.

You will note, as Mark said, that we provided a reconciliation of our diluted EPS calculation in the financial table to the press release, and this reconciliation includes the effect of our $230 million convertible bonds in the calculation.

So you'll see that net earnings are adjusted to add back the related interest expense of $1.4 million after tax, and the denominator, or share count, is adjusted to include the 6 million shares underlying the bonds.

GAAP requires us to do this, even though the underlying start price on the bonds is $38.05 per share, and of course at our current stock price, the bonds would not be converted to equity.

An additional area of confusion that we've noticed associated with the bonds relates to the total enterprise value and related multiples calculation.

We believe, as many of you likely are, you should either exclude the $230 million of bond debt, if you're including the 6 million shares in calculating the market cap component of enterprise value, or vice versa.

Likely, many of you already have this set up via a formula toggle or something like that in your calculation based on actual share price, but we just wanted to give you that reminder.

Bill?

Thank you, Lorie.

I also wanted to thank one of our investors who really helped walk us through this.

I think that's a very good schedule and sometimes the mysteries of GAAP accounting are incredibly interesting.

Anyway, thank you and good morning.

Greenbrier did have a very good quarter, and for those of you who have followed us for years, you know that is a good omen for the rest of the year, because it has not always been the best quarter of the year for us.

Indeed, we expect performance to improve through the balance of the year, as Mark has referenced, and so far the market appears robust enough for demand to allow us to continue a solid pace in manufacturing, leasing, and our repair services businesses throughout 2012.

Last quarter, I commented on the structural changes we've made in the Company to enhance our strategy, and specifically, to improve metrically-driven measurement and initiatives which will drive value propositions, and those, in turn, produce materially better financial performance.

These included many specific enhancements of our cost structure, as well as revenue and margin enhancements.

As last year came to an end, we began to see these kick in, and we expect to continue this process in 2012, producing tens of millions of dollars in efficiencies and margin improvements.

More importantly, we're changing the way we're doing business with much more specific goals and objectives targeted for bottom line improvement.

We will comment on some of those in the stockholders meeting today and we'll post those comments on our website.

We invite you to see our webcast or to participate by reviewing the slides posted from that meeting.

As Mark just touched upon, this quarter had several moving parts, including the benefit of enhanced margins on some specific transactions, and those may not repeat.

On the other hand, our expectations for the year and the positives -- or the drag on the quarter, the headwinds in the quarter, which he referenced on manufacturing, would suggest much more upside than downside.

We intend to make another wave of financial improvements with our strategy in 2012, and some drags on the quarter will not be present in the current quarter in the second half.

These include some production issues compared -- and slowing of production compared to our schedule, which led to higher inventories.

And those were due to very specific causes; one involved labor friction at a GRS facility which is now resolved, and one of our manufacturing facilities, also which has now been resolved.

Both issues are now behind us with satisfactory resolution, but we did have some production slowdown, especially in the manufacturing side, which led to higher inventories.

At another of our manufacturing facilities, significant production delays occurred as we struggled with higher volumes and a specific order related to installation of new production equipment.

These are also being remediated, and we expect steady improvement, therefore in manufacturing and GRS efficiency during the balance of the year.

We're also strengthening our management bench with new hires.

We're confident that we're on the right track to deliver good execution on our goals throughout the year, so the outlook continues to be optimistic.

Visibility in the marketplace, as Mark has indicated, continues to be very good, with selected traffic segments showing robust growth in loadings, buried in the aggregate growth rate of only just over 2% for all traffic and car loadings, which is near the GDP growth.

During the year, for example, demand for chemicals, energy, intermodal remained robust, with container traffic up over 2010 levels, although not above record 2006 levels.

And within container traffic, a very strong showing for domestic containers, with up to 10% growth on some major intermodal railroads, along with strong truck/traffic diversion programs in the East.

Meanwhile, 40-foot container capacity seems adequate at the time, or even surplus, but may not remain so near the end of calendar 2012 if the economy recovers its sea legs.

On that score, FTR Associates, one of the two major forecasting companies in our segment or industry, has once again revised its outlook for freight car building after reducing it earlier in the year, upward to 60,000 cars for 2012 and 67,000 cars for 2013.

Much of the macroeconomic drag on outlook in the economy is related to the European financial crisis, or issue, and growing disenchantment or non-functionality in our political climate here in the United States.

As these forces appear to be self-correcting, and in a self-correcting mode, I believe this headwind may be removed, and our outlook remains more optimistic.

Greenbrier's outlook remains more optimistic on the macroeconomic climate than consensus, perhaps because what we are seeing in our sector and in manufacturing in general.

Despite disappointing news on jobs in America just recently, in many parts of America manufacturing remains strong and, indeed, in many of the jurisdictions where we have plant facilities, especially with rail services, we are having difficulty filling position -- job positions and this would be true of a wide array of blue collar and even white collar jobs.

So there certainly are jobs in many parts of America, and in manufacturing, and contrary to the popular view, manufacturing is not dying in America.

I think it is just changing.

A lot of this is being driven by the energy boomlets in Texas and some of the plains states.

I commented on this major change in America's outlook for energy in our last conference call and I continue to believe that, especially in our sector, that it will bring many new opportunities yet unforeseen, plus unknown consequences for some commodities, such as coal.

We're conducting a major study of how this may affect our business, and I expect that we will be in a position by the next quarter to act on that study, expanding our capacity in some of the energy-related business and perhaps entering, despite an uncertain -- a more uncertain outlook, perhaps entering the coal car business.

As we enter 2012, calendar 2012, we continue to look forward to a tail wind from the energy market, and from our strategic changes, and finally from our new flex manufacturing facilities and concepts implemented in Mexico, and at GRS, our new state-of-the-art wheel shop in North Platte, Nebraska.

This will allow us to continue to enter new markets, reduce our costs and all in keeping with our strategic goals.

Thanks, everyone, for attending and back to you, Mark.

Thank you, Bill.

Operator?

We'll go ahead now and open it up for questions, please.

(Operator Instructions).

Allison Poliniak of Wells Fargo, you may ask your question.

Mark you talked about producing cars this quarter, held on the books until you can deliver them.

Can you quantify how many cars there are, and are we looking at them to be delivered next quarter at this point?

Well, some of those we'll deliver next quarter.

Some of those we'll deliver after that, and what I tend to look at is kind of on a net basis, each quarter, Allison, we'll always have some of our production that will be hung up on the balance sheet and some of it that will come off of the balance sheet, and be sold.

And shorthand for that, by looking at it on kind of a net basis, but it went up by -- you can see from the balance sheet it went up by about $38 million, so that's going to be roughly 500 or 600 railcars that would be represented by that $38 million.

Okay, so I guess would 3,300 be a good run rate at least for the first two quarters?

I know you guys are adding some lines during the back half of the year, in terms of true production and deliveries.

Some of that would be dependent on the timing of these lease syndications themselves, and again, we earn a positive carry on those cars while we're holding them, so that's why or sorry, I'm a little cautious on specific guidance between quarters but I would probably tend to, I would tend to say that I would expect at least a bit of an increase next quarter, and then more later towards the second half of the year.

Great.

And then Bill, just going back to your comments on the international intermodal, it sounds like it was starting to become a little bit more positive.

Are you guys getting a little bit more inquiries on that?

I would have to imagine those cars would need to be ordered in the next few months to get delivery by the end of the year.

We don't really see a major market in 2012 for new construction of double-stack cars for a variety of complicated reasons.

There's been a fairly healthy build in the backlog, and we are stretched into the Fall in our schedule.

So we don't see that yet, but you're right to really identify the 40-foot market and the 53-foot market, so there's been quite a lot of investment in the 53s.

That's where the traffic, both from exports and truck diversion, has taken place.

The 40s are still both in the pool, and national pool TTX operates with specific railroads who still own those, are in a surplus position, but it is improving and the outlook could very well be for that to change, and be in equilibrium by the end of our second half or the Fall of 2012.

I would expect in 2013 there would be demand for that car, and there will be probably a pause as we see some of the 53-foot capacity being absorbed.

However, that's a conservative approach, and all we need is to just have a little more of a boost in the economy, and the domestic containerization to continue.

When you're looking at 10% growth on some of these railroads, and the diversion movement from truck to rail, it has been difficult to really assess, so that could be an upside in our strategy for 2012.

Great, thank you.

Thom Albrecht of BBT, you may ask your question.

Hi, good morning, everyone.

Congratulations on a good quarter.

Mark, you mentioned in the beginning that your production had exceeded your deliveries.

What was the production figure in the quarter?

We didn't disclose that, and don't disclose that each quarter, but I think directionally, if you take the number of cars that we delivered of 3,300 cars, and the growth in what was on the balance sheet, you're going to--

I could infer.

You can kind of get to it.

Okay, and then refresh my memory.

I know we've been through a very long dry period in the barge.

In the first quarter of last year, was there any barge revenue in manufacturing?

We seem to have in our notes something between $1 million and $2 million and I'm not sure if that's just an old faulty note.

In the first quarter of last year?

Correct.

We did not.

There was no marine revenue.

Okay.

And then I wanted to ask you about so you've gotten 2,400 railcar orders subsequent to the quarter end, really nice value.

Obviously a big part of that is mix, but can we read that pricing has really accelerated even in the last three months or so, or should we view that almost average ASP of around $100,000 as being overwhelmingly just mix?

I think the primary driver of that is mix with a heavier concentration on higher-value cars such as tank cars and box cars.

If we received a large intermodal order, or large intermodal orders that would, those are measured in platforms, and they would be less valuable, so that's the big driver of manufacturing mix.

Also, our European cars are much more expensive and to the degree that they're included in a quarter, that adds to the value of the mix.

So Bill, if I could get you to comment, out of all of the different car types that you build, kind of where there's very little activity, medium level and high level of discussions, could you just kind of walk us through a handful of car types?

Well, what I said in my remarks and what's obvious from the traffic statistics, you just go where the loads are going, and the growth is going, and it would be derivative chemical demand.

Because they're new plants being brought online and a lot of this being driven by cheap natural gas, so tank cars are going to be very positive.

The forecast for tank cars is extraordinarily high over the next five years.

Covered hopper cars for the frac sand business, and perhaps next year, a different profiling of the commodity for grain and those kinds of -- potash and other minerals, so there's quite a lot of moving parts.

Metallic ores and steel is still continuing to show remarkably solid pricing, and all we need is a little bit of a bump to the economy, and we're going to see an awful lot of activity, so we're tracking a lot of different targets in that mix, and one of the great things about Greenbrier in the last five years is the remarkable amount of diversity that these facilities have allowed us in our product mix.

We make all kinds of freight cars today, except coal cars, and so we really have a lot of opportunities that we're able to access.

Okay, and then, I think that's all I have, so I'll jump in the queue, thank you.

Art Hatfield of Morgan Keegan, you may ask your question.

Good morning, everyone.

Just a few quick questions here and you've alluded to some of the answers on these, but I know historically, and this is years and years ago, that as you had switched over car types on certain lines, that you'd have costs related to that and some of your lines you had less flexibility than others.

I know you've improved that a lot, but can you talk about that as you move forward, and maybe you've switched between different car types within your manufacturing, how much more flexibility and how much less impact that could have on costs in a given quarter or a given year?

That's actually a good question and that's a phenomenon that I think we all struggle with.

We've got a jump start on our manufacturing, given the leasing tools that we were able to use, so we were able to hit our manufacturing stride earlier than some of our peers, but I think that when you're bringing on a new line, as we are in our Gimsa facility in Mexico, we opened the third line, we have a major expansion program in our Concarril facility that will almost double our capacity there at very low costs, and we are handling considerably greater volume than we were a year ago, almost three to four times as much depending on the factory, and so that's really been a learning curve issue.

In addition we've had a couple of stochastic unanticipated events, that labor issue has affected us because it was a work slowdown in one of the factories, and we had an equipment issue, an aligning issue in our Gimsa facility.

So these are things that we're just digesting, very optimistic we know the root causes and that's why I think things should continue to improve on margins throughout the year.

We're very focused on costs and efficiency.

We intend to continue to be very aggressive and competitive on going after market share and pricing, given the tools that these things that we've done allow us now to employ.

So all of this in our dream world, we all would like long production runs of a single car type, but we're definitely more flexible today than we were before and that within hopper cars and tank cars, of course, where a lot of the demand is, it's certainly easier to flex from one hopper car type to another hopper car type and one tank car type to another box car than is to turn a line over totally to a different car type, and so when we start up production of a car line or a car type, we're doing it with the belief and the confidence that we can achieve long production lines, so that's our goal.

Having said that, the flexibility that each of these plants is, and in the workforce has certainly improved over the last four years here.

Right.

Actually some of those comments led me to think of something else that I'll ask here real quick.

Are there kind of the constraints that we were seeing earlier in 2011 with regards to certain components?

Had those been alleviated within the industry?

Well, there are still isolated issues particularly affecting our GRS facilities with bearings and other component parts.

I wouldn't say they've been alleviated yet.

We don't expect that to really hit its stride until the second half of 2012, and I think that we have a good supply chain network, which has allowed us to ramp up our production and that's not been true of many of our peers.

That's helpful and finally just quick thoughts.

I know Bill you alluded to this.

Mark may have too, but as you know, we know about the seasonality and our earnings and you commented on how you would say unusually strong Q1 was.

Do you think your business has gotten to the point where as we think about, I know you don't want to give quarterly guidance, but as we think about our modeling that the modeling should really more closely resemble what kind of deliveries you're doing in a particular quarter?

Mark isn't going to let me answer that question.

I think certainly, particularly in a market like this with robust demand where manufacturing is driving a lot of the results, that the quarterly deliveries are going to be the biggest piece that we're to talk about in great detail is how the quarters might break out although I did comment a little bit earlier.

That would be a piece of it.

The other piece will be the gains on sales from our leasing assets, which you are well aware are recurring, but the predictability of when those will occur, it's more a market issue and opportunistic, so that will be the other probably the other key item in there.

The second quarter, we always and the repair and services side of the business can be slower, because they're just less working days.

I'm talking about our second fiscal quarter, because of the holidays in there, that that will tend to impact that segment.

Let me just summarize a couple of bullet points out of all of this though that I think are really the takeaways from it.

During this particular quarter, we had a good quarter.

We have had some headwinds that we've discussed and described, and we have the benefit of a solid backlog and uniform production.

We are going to continue to improve our manufacturing footprint and enter other products, or expand our product base, but I think that the good news about this is this should be constantly improving quarter by quarter over the year, as we have the benefit of even flows of production and backlog.

As long as the market remains moderately strong, as it is today, it's a very, very good position to be in, so I think we've got a positive out of manufacturing to look forward to, and our repair business has also had some drags, which we are working very hard to remove, labor and our repair, on the actual repair side, we've got a team of people working on that.

We're concentrating on the five most important facilities, so we really are, I think, geared to make many improvements.

I think finally on the leasing side, the leasing model really has been fine-tuned and our volumes are good but we also are looking to a more regular syndication go-to-market strategy throughout 2012 and into '13.

Thanks a lot.

That's all I had this morning.

Thank you.

Ken Hoexter of Merrill Lynch, you may ask your question.

Great.

Good morning.

You talked a bit about price before.

I want to stick with this, if we look at the number of cars that -- with the new orders during the quarter they were down at about you noted 1,600, maybe a little bit lighter than I would have expected.

Is the 2,400 that came after the quarter, is that a timing issue?

That's down obviously from the 5,000 or 6,000 we saw last quarter.

Is it because of your focus on price that we saw a little bit of shifting?

I just want to understand if you're taking a shift on your aggressiveness, at getting the orders relative to your focus on price now?

Well we certainly aren't making a conscious effort to drop our prices.

We're trying to improve pricing where we can.

We have become much more cost competitive in the last three years with a strategic model we've implemented.

We can compete on price, whereas in the past we've reviewed, as a quality car builder with a slightly higher price and a value proposition.

But this gives us more pricing power so obviously we're trying to take advantage of that.

However, this is basically as over capacitized industry on the car building side, and there are practical limitations, so we are focusing very much on our costs.

And as that occurs, we should enhance our margins, so that's about the best I can do.

We are certainly trying, and we aren't dropping our prices, but it's not an easy market to gain pricing leverage although backlogs are out now, and all of the builders are in a position where they can be a little more picky about what to take.

The other thing to remember is in our industry, is that the orders are lumpy.

There can be a relatively smaller number of very large orders, and indeed, that is the case in many quarters, and in the case in the orders that we disclose both during and after the quarter, so the timing when those land and are consummated, we cannot dictate.

So that you're going to see not only for ourselves but others in the industry, and particularly when you pull out, even if you pull out multi-year deals that various builders have announced, when you pull those out, you're going to see that orders are going to bounce around from quarter-to-quarter and so we can get too hung up on one quarter either way making a trend.

Okay, that's helpful and I guess I was looking at it from not being more price competitive but being I guess focusing on the higher value as you mentioned the $100,000 average revenue was a bit more towards mix but I wondered if you were focusing on that mix to get the pricing up to enhance those margins, or if that's just the way the orders fall in any given quarter.

In margins we look at dollars per day per factory so if you get a large order with large revenue and you can get good throughput on that, and you have uniformity and consistency, those forces are much more important than the margin so it's not, we don't price only on margin.

We price on the volume of dollars per day we can put through a line segment, and you can make more actual dollars that way by doing that.

So we look at margins obviously, and margins are very important, but the size of some of these orders, the price of the car is an important index.

On a higher-priced car, it's harder to leverage material cost margins, and it's easier to price labor a bit more than it is to price material.

That's resisted quite a bit.

Understood.

Lastly on that same point.

Is then there, it sounds like you aren't looking at margins so my question would have been is there a margin that you need to kind of get as a minimal level to keep that expansion going, and adding the lines at Concarril and the different locations that you're planning on expanding, how do you think about that minimal?

I think about it this way.

Our facilities in Mexico are flex facilities.

We are able to bolt on to those facilities at this stage given the space and the tooling that's required, fairly efficiently, fairly low-cost capital costs, significant additional capacity, so we are very happy when we've got a back log where we can run nine lines or 12 if we can get to that point in 2012, but if we have to run at seven or eight, we'll look at the mix, and we can adjust to that as well.

So what we look at is the flexibility and the low capital costs, and the efficiencies of these factories, that's why we're calling them flex facilities.

Perfect.

Appreciate the time, thank you.

Thank you.

Bascome Majors of Susquehanna Financial Group, you may ask your question.

Hi guys.

I just wanted to follow-up a little bit on Mexico.

You talked about the capability to add some capacity at Concarril in the second half of the year.

The constraints there, is it more demand visibility you need to get comfortable with, or is it a supply constraint where you just physically can't get the resources in place to do that sooner?

It's the latter.

We are doing it so there's no misunderstanding.

We are expanding our capacity at a second facility, you might recall some time ago we caught a Komatsu facility, and got a tremendous buy on it, and that facility is adjacent to the Bombardier facility, which we lease.

And that was both a strategic and protective measure, because we have, we're leasing that facility from Bombardier and while our relationship with them is excellent, we would like to continue it.

Longer term, as we don't own the facility, but the Komatsu facility we do own, which we're now calling Plant II, and we're making major investments in that, but it's how fast we can pull that, we can turn those on in the second half of 2012, without damaging our delivery and quality and efficiency and safety metrics.

Okay, so at this point, those are definitely intended to be added, given as long as demand stays where you see it at this point?

Right.

Those are included in our CapEx numbers that we have been talking about this quarter and last quarter.

Okay, so we'll start to see production begin in the second half of this year and ramp up through the second half assuming all goes as planned?

I'll let Mark address that a bit more.

That would be correct.

Really starting in the latter half of Q3 we would expect to see some production coming out of there.

Okay, and back to orders, certainly cognizant of the lumpiness and how these trends can go but I was curious with the last quarter with the number going down pretty significantly, was there any particular part of the market that may have taken their foot off the gas, was it leasing companies, rails, individual shippers, or was this sort of a broad base down tick that has since ramped up in the last six weeks or so?

In general we haven't seen the speculative kind of positioning by leasing companies that have -- and not as aggressive as in earlier upturns.

This is a lot of shippers, a lot of railroads, driven demand and some leasing companies.

But I think the interesting thing about this recovery is that there's fairly responsible investment by all parties and the last thing I think any of us want to see is a 90,000 car year.

It's very good outlook to have a 60,000 car year, and a steady flow of many different opportunities to run through factories that are capable of adjusting to those opportunities, once the basic lines are set up and the tooling is in place, so it's a very good situation we're in right now where the mix is balanced and you don't see with the exception of any risk in the environmental area on the new techniques for energy exploration and development, that could be the only negative that we would see in terms of creating a bubble.

Okay, guys, thanks for your time.

Thank you.

Peter Nesvold of Jefferies, you may ask your question.

Good morning.

So I think I understand from the Q&A a little earlier why we didn't see the seasonal step down in manufacturing gross margins this quarter.

However it's still a little unclear to me why we won't see the seasonal step up in the second half so typically from sort of fiscal Q2 to Q3, normally you get 200 to 300 basis points of gross margin improvement in manufacturing.

It looks like based on the outlook, you're looking for modest improvement, maybe like in the 100 basis point range and so I'm just trying to understand a little bit better the lack of the seasonality going forward.

I think I understand why it didn't drop off from Q4 to Q1.

So I think partly relates to mix, Peter and Bill talked about a little earlier there's a combination of things that went on in the first quarter.

We did have some favorable contracts and items that would be less recurring, that's partially and to a good extent, offset by some of the headwinds we had with production issues, so with production continuing to ramp up and adding new production lines, I think we're just being cautious in the outlook here until we actually produce it, because we've seen as anticipated, when you're ramping up production as quick as we are, in the shorter term you're going to have some inefficiencies and some issues, so I think we want to be cautious in our outlook here until we do it.

Okay, all my other questions have been handled.

Okay, thank you.

J.B.

Groh of D.A.

Davidson, you may ask your question.

Good morning guys.

I had a question, Bill.

Your comments on coal cars sort of intrigued me and I was curious as to what sort of capital investment that would take if any, or is that something where you mentioned to your flexibility in Mexico, is that something that was stated with that plan?

Well the precursor there was that we are studying the energy market.

We want to understand what the best in the business are thinking about these things.

Coal exports have been good.

Demand on the leasing side has come back.

There are two participants in that market that we think we could easily, there really isn't as much intellectual property holding that back, so we think that we can enter that market and one of the questions is do we have to ask ourselves is it worth the trip?

And what else do we have?

We have an automotive product.

The automotive business is strong and we expect to get some orders for that.

We have other lines we can build, so we are physically capable of entering that market and we would use one of our two facilities down there.

More interestingly though, we're only running tank cars in one line.

We have a lot of loyalty to General Electric who brought us to the party, but we're producing cars now for other customers, leasing companies, and shippers, and we are looking very seriously at that market and it's very likely that we will be able to ramp up and produce a lot of value by a fairly small market share of that market, will have fairly sizable financial impact to us if we can achieve higher production rates and modest expansion of that, down in Gimsa.

And that really is exciting and an opportunity, if you look again at eight production lines, only one of those is dedicated to tank cars.

All you have to do is look at the industry statistics and see that, that's much lower than the percentage of overall industry orders and deliveries, so we've as Bill says, we've come a long way in tank cars.

We're just -- and with relatively modest investment there again, we can either expand or take one of our other lines, that we're producing other car types and expand in the tank car market and that's a good opportunity.

Going back to the big tank car and GE helping you get into that business, would you enter that coal car market without an order, or would you want to have something in hand?

Obviously, you'd want to have something in hand, but just trying to get your view as to how much risk you want to take.

Well, we are not especially risk averse.

We've done both.

We sponsored products, with the leasing power we have.

We can insert cars into the system, we would need a sponsor, customer sponsor and we think that we could obtain that.

It's really just a choice whether we want to focus on that, whether that's one of the cards we want in the deck.

Right now, it's the only car that we don't make out of the total package of equipment, or can make.

Coil steel cars are another car that we probably will look at to improve some of our designs, but we have done it both ways, and the best way would be to get a sponsor like we did with GE, but that's not necessary.

Great.

Thanks for your time.

Thank you.

Brad Delco of Stephens Inc., you may ask your question.

I think this has been addressed but Mark, maybe just touching on something you said last quarter.

You addressed being comfortable with the burn rate, and I know you commented on the lumpiness of the orders.

It came in a little bit below than we were expecting.

What would you be looking for to adjust that burn rate, or what gives you comfort in that you see a lot of increase right now, in the order front that would make that look better going forward?

Well on average, if we're trying to use the capacity that we're investing in, various options about pricing margins and rate, but if we are going to do 15,000 cars next year, we have to have an average order rate, average order rate over the year that A, maintains a reasonable backlog so that we can sustain a burn rate on the production side and delivery side, so there's a lot of flexibility in there.

There's no magic number, and it depends a little bit on mix, but 3,000 to 4,000 cars a quarter on average over the course of the year would allow us to produce the kinds of numbers that Mark has been throwing around.

And then maybe to get some numbers around some of the comments you made.

Ramping those additional lines, it doesn't sound like that should be a huge margin impact relative to what you had to ramp last year.

Is that the way we should think about it?

Yes.

It's the big step up is like triple production is over.

I think we're looking at incremental changes now and fine tuning a margin efficiency, cost efficiency, throughput, and sustaining the order rate.

You're right.

You're focused on the order rate.

Mark has cautioned everybody though, this is a very lumpy market and it's not for the faint of heart, so we're geared now with flex facilities to operate with lower backlog, or a greater backlog, so I think that we have also illustrated in the past, we've done numerous $1 billion transactions over the course of the last five years, so one of those goes a long ways to help with that rate.

But that's the fundamental math when you're looking at the end of the year numbers that we're likely to see in manufacturing and try to put that in a steady state.

An interesting point would be should we get more ambitious, and I think that's another question.

Got you, and then maybe, Mark one housekeeping question.

Understanding the non-controlling interest gain you booked this quarter, so we should expect that reverse when those railcars come off the balance sheet and kind of the same sort of meaningful, or same sort of, I guess dollar amount in the upcoming quarters?

We should be prepared for that?

Yes, that's correct, that we would expect it to go in the opposite direction, which means that we'll be a deduction to get to our earnings, and yes, kind of the same magnitude, we would expect that income number to be kind of the same magnitude that the loss number was this quarter.

And you think that's spread over the second and third quarter?

Correct.

Maybe, it will probably ramp up some during the year again as we're ramping up the continued ramp up, the production down there, so it's going to increase on a sequential basis.

Thanks, guys.

That's all I had.

Appreciate the time.

Paul Bodnar of Longbow Research, you may ask your question.

Yes, just a couple quick questions.

In the tank car market, I wonder if you could talk a little bit more about the competitive marketplace.

Is it more attractive because there's less competition on price?

Does it just happen to be how you're facilities or structured, wonder if you could dive into that a little bit more.

I'm not sure of your, can you repeat the question?

Yes, on the tank car side, one, you find it more attractive.

Is the pricing environment there just less competitive?

Is that why it's more attractive, or is there something in terms of how you manufacture that car that makes it better for margins?

Yes, it's more like the expression about why people rob banks.

That's where the money is right now.

The demand is going to be fairly robust in the tank car business, according to most industry analysts.

The user base is different.

It's very reactive to quality, not every car builder that has attempted to build tank cars has been successful, and in fact, many fail at it.

There are only a couple of, there are three participants in that market, but there's ample demand, three existing participants, and we're a fourth, but there is a shipper component to that, that is very important.

So it's on for our small participation in that market today, we think we can increase our participation in that market with a fairly significant financial impact, and not make a tremendous dent in the market itself or there's opportunity there.

Above those lines have you had any further talks with GE about any kind of replacement or additional work with them?

I can't comment on specific opportunities.

We have a good relationship with GE.

As you probably know, GE's rail unit is been back in business at one point.

They were looking at that as a discontinued business, which caused the issues that led to a contract renegotiation.

I have the highest respect for GE, and I expect them to be, since they're one of the largest owners of tank cars, we want to have them as a customer.

We built the plant for them, and we're loyal, so we want them to, when they're back in the market wanting to acquire equipment we want to be there for them.

Okay, well thanks a lot.

Sal Vitale of Sterne Agee, you may ask a question.

Nice quarter.

I missed the first few minutes of the presentation, sorry if you already discussed this, but did you give guidance regarding manufacturing gross margin for fiscal 2012?

We did.

We said that we would expect it to run in the 10% to 11% area, one of the other analysts questioned us on that, as to whether or not we were, given the margins this quarter, why we were not more optimistic.

And I think we really discussed that there were some things that contributed to positive margin this quarter in terms of favorable mix and favorable pricing on some transactions, partially offset by some production issues.

And as we continue to ramp up production, we believe there's more upside than downside.

But we're cautious on the margin outlook expanding beyond that, until we actually produce and achieve the efficiencies.

Also mentioned in my comments that marine could be a wild card, but that we are seeing signs of improvement in marine, and if we receive marine orders where we can hit higher volumes because we did receive one small order this quarter, then that can have a significant impact as well.

Okay so regarding marine in that 10% to 11%, are you contemplating any marine revenue and profit in that?

Nominal.

So that could potentially be some upside to the high end of that, would that be fair to say?

Yes, it would depend on the timing of those orders, and how quickly we would produce, because we're already in the first part of this year, but once marine does kick in, whenever it does, that will have a meaningful impact.

I would assume the incremental margin on whatever marine business you get would be fairly significant, given that the marine barges are going to be manufactured, and is it the Gunderson facility, is that it, which is currently producing railcars?

Yes, as long as we're currently producing railcars there that's true.

We will be throughout our fiscal year.

That's for sure.

Thank you.

Any sense for what the incremental margins should be, I guess, given that you're coming off a period where you are not producing any marine barges, what the initial incremental margins could be in the first or second quarter of deliveries, for marine barges?

I wouldn't want to comment on specifics and part of this, as Bill mentioned, is whether it's all incremental or whether some of it is a shifting of labor between rail and marine.

I think it's suffice to say, given the fixed overhead cost there in traditional marine pricing, that it's going to of course, in the absorption of overhead it's going to bleed meaningfully more than just the incremental gross margin or the current gross margin of 10%.

Especially the effect while we're running, if we continue to run a steady rate of freight cars at the same time, the overhead absorption is as important as the margin.

Right.

That makes sense.

Earlier, you mentioned so the margin drag from the production inefficiencies, is there any way you can quantify what that was in terms of the dollar amounts or percentage?

We can quantify it, we haven't published it.

We would have to shoot you.

Is it bigger than a bread box?

It's significant.

And then just the last question.

If I look forward to, I guess the FTR increased its deliveries forecast from about 50,000 for 2012 to about 60,000.

Right.

And if I remember correctly I don't think you increased your deliveries, forecast for fiscal 2012.

Is there something that and again, not knowing what exactly they're building into their forecast, and maybe you might have some insight into it, but could they be looking at it more optimistically than your published guidance of greater than 15,000?

That could be.

I don't think it's as much that though as we talked about earlier.

We're still, we still see robust demand, and we're very optimistic.

It's as much how quickly can we bring on capacity and production rates, and that's really the driver, the biggest driver of how many railcars we'll build this year.

They may be a little stronger on covered hoppers than we would believe, but the Big Four are covered hoppers, tanks, flat cars, principally double stacks.

These are deliveries, now for 2012 and gondola cars, including some aluminum gons and steel gons as well.

So about half and half.

So in that order, those are the important drivers for the 2012, their 2012 forecast.

And then just the last question I have is on tank cars.

So if I remember correctly, you said earlier that $100,000 per car on the new orders you received since the end of the quarter so the post quarter orders of 2,400, that is mostly mix rather than say price increase; correct?

Yes.

Could you comment on, without giving specifics, if I ask what is the profitability on a tank car relative to say the profitability on a intermodal flat, in terms of say gross profit per car.

Now, you may not disclose that, but is it greater on tank cars?

It's a difficult question to answer accurately, because I said earlier, that we look at gross margin dollars per day, so if you produce fewer cars on a line that takes up capacity and manpower, but you get a higher margin, is that better than producing more margin dollars on the same line with labor being available, it's hard to quantify that.

I think that's how we do it, whether it's right or wrong, others do it differently, so if you're looking only at margin, because there is a fairly demanding template for tank cars, the margins are good on tank cars.

But the production volume, because it's hard to build, may not be as great, so one of the things we would like to do is increase our production volume without really making a big disturbance there, and we can do that on the margin without really disturbing the market very much, because there's a good demand for this.

The demand for tank cars is double what it has historically been.

Over the next five years there's going to be a big market room for, anybody can play in it and not everybody can play in it.

Right.

And then just the last question.

You mentioned earlier you characterize the industry as over capacitized.

If I ask you to compare what the current capacity is, and when I say current capacity, including what's been announced in terms of capacity additions, versus at the last peak, would you say that it's greater than at the last peak, or about the same, and I mean industry capacity here.

It's greater than last peak for no other reason than we've expanded our capacity during the downturn, but it is greater than the last peak.

Okay.

One has to be crazy to be a car builder, or we wouldn't be a car builder, so that's how bad it is.

Now on a secular basis, there's over capacity.

Is there over capacity today?

Because of constraints and backlogs are out longer, because of production constraints ramping up, including specialties and supply chain, no there's not over capacity, but that doesn't mean you can --you have necessarily pricing leverage.

Okay, thank you for your time.

We have time for one last question here and then we'll take it offline and we appreciate everybody's interest today.

Our final question comes from Steve Barger of KeyBanc Capital.

You may ask your question.

Hi, thanks for getting me in under the wire.

Just a couple real quick follow-ups.

Mark, you're definitely talking more optimistically about marine.

Is that based on customer conversations picking up or do you have firm quotes out in the market that you expect will turn into orders?

We have a steady pipeline that we monitor of transactions, and that steady pipeline has remained steady.

We're looking at many, many opportunities.

In our sector, we see reasonable reason for optimism, and so, as far as tracking inquiries and bids that we have out there, but just like any of our markets, we just it's our job to be on the pulse here and just from what we're seeing and hearing out there, it gives us this optimism, and as we said we only announced one small order for the quarter but if we, our outlook we're just seeing more out there that we believe will turn into concrete orders.

It's very important not to because of the incremental nature of the demand in the business, not to reduce this to a formula where you have to have quarter-by-quarter consistency in orders because there will be some quarters that you can have very few orders.

As your backlog extends out, you work that back down.

There's a reasonable range of backlog at the current production rates where we feel comfortable operating without adjusting our production, and as has been in the past, if we intend to make any changes in our outlook, we've been very consistent in the last two quarters about our view of the marketplace, we're slightly more optimistic than many others about the industrial sector and the economy.

If we see a reason to change, we will announce that in one of these regular calls but we don't see any reason to change that outlook as of right now.

That's great and just one last one.

On a calendar basis, what quarter are you booking right now for most of the cars that you're taking in, and same question for the industry, if you have an answer there?

It really depends on the production line that we're operating on and I would guess that's true of the industry.

We have some space that's available in 2012 on some lines and indeed some of the orders that we booked, and many of the orders we booked that would have been calendar 2012 production, but on other production lines, that would not be true, so it's really on a line-by-line basis.

I would say that there is isolated space in 2012 although that space is getting booked up with most car builders and there's backlog in 2013 and some in 2014.

Can you give us what percentage of your backlog is scheduled for 2012 versus 2013?

We did in our 10-K as of August, and I just don't have that right in front of me.

We don't update that on a quarter-by-quarter basis, but again, as of August, and I can pull that out, there would not have been a lot of production space that would have been left available for 2012, our fiscal 2012.

Got it.

So we said in August that from our August backlog, based on current production plans, approximately 14,500 units in backlog were scheduled for delivery in fiscal 2012.

That gives you a feel for how substantially booked we are, and whether or not we can do better than our outlook in excess of 15,000 cars would be dependent on just how quickly we can bring up production.

The wild card is our new production though, in the second half of the calendar year, where we would have still some potential flexibility.

Great.

Thanks for the time.

Thank you very much.

Have a good day.

This concludes today's conference call.

Thank you for your participation.