Greenbrier Companies Inc (GBX) 2012 Q2 法說會逐字稿

Hello and welcome to The Greenbrier Companies' Second Quarter 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 The Greenbrier Companies, this conference call is being recorded for instant replay purposes.

At this time, I would like to turn the conference call over to Mr.

Mark Rittenbaum, Executive Vice President and Chief Financial Officer.

Mr.

Rittenbaum, you may begin.

Thank you.

And good morning, everyone, and welcome to our fiscal second quarter conference call.

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

We will discuss our results and make a few remarks about the fiscal quarter and then we'll provide some qualitative outlook for the second half of the year.

And after that, we'll open it up for your questions.

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

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

Now turning to our results for the second quarter ended February 29, our net earnings for the quarter were $17.7 million or $0.57 per diluted share, on revenue of $458.2 million and EBITDA of $40.1 million.

Our continued focus on operational efficiency, combined with favorable interest rate fundamentals, has made the second quarter a record revenue quarter for the Company and driven profitability to new levels.

Now let me address some highlights for the quarter.

To supplement the year-over-year comparisons in the earnings release and in the financial tables, I will include additional color on a sequential basis, too.

Our manufacturing segment posted second-quarter revenues of $320.2 million, the strongest quarterly revenues for this segment in the Company's history.

The sequential increase from Q1's revenues of $262.7 million was primarily a result of increased demand for car types in which we focus, and the ramping up of production in response to this demand.

In Q2 we delivered approximately 3700 new rail cars, up from the 3300 deliveries in Q1.

We continue to see strong demand for our hopper cars and tank cars tied to the US energy sector, as well as new orders for additional car types not previously in backlog.

These orders diversify our product mix and provide further evidence of a more broad-based recovery.

We have steadily ramped up production rates at our eight operational lines and we are firing on more cylinders.

We still expect to deliver over 15,000 rail cars this fiscal year.

And currently we anticipate that Q3 deliveries will be higher than Q4 due to line changeovers that are going to occur [in line for], as well as a difference in product mix where we will be building an auto-carrying car, Auto-Max auto-carrying car in Q4, which is a higher labor hour, and therefore, a higher unit value car.

But with the higher labor hours, means less total units per labor hour.

So, but as I mentioned earlier, we continue at the continued ramp up production rates overall.

And that would continue into our next fiscal 2013.

Manufacturing gross margin for the second quarter was 9.2% of revenue, down from the 10.1% in Q1.

This margin is consistent with the guidance that we gave at the end of Q1, and in that it was the result of product mix and also a manufacturing issue related specifically to one product line at our Gimsa facility for a product line that we had not built in the past for a specific service.

And we expect to have that issue behind us in our Q3.

Notwithstanding that, our operational efficiency allowed us to recover quickly, as evidenced by the increase in new rail car deliveries overall for the quarter.

And in the second half of the year, we look forward to some modest margin expansion in this segment.

Now turning to our wheel services refurbishment and parts segment, revenues were up sequentially by a couple of million dollars.

The increase was driven by increased demand among all three components of this segment, and partially offset by reduced scrap volumes.

Gross margin for this segment was 11.1% of revenues, up sequentially from 10.1% in Q1, primarily due to production efficiency improvements and product mix.

We are cautiously optimistic that we will continue to see modest revenue and margin enhancement in the second half of this year, but we will remain guarded in these comments given some of the loading patterns and specific car types that may turn out to have some effect on our wheel segment.

Turning now to leasing and services, our fleet utilization was 97.3%, up slightly from 97.1% last quarter.

Segment revenue increased $18.1 million in Q2 compared to $17.8 million in the previous quarter due to higher rents earned.

Our gross margin for the quarter grew to 48.6% compared to 45.7% last quarter as the result of higher lease indication activities, where we keep the rent with low associated cost of ownership until the cars are sold.

The lease and lease rate environment continues to improve for most car types.

Gains on sale of equipment during the quarter were $2.7 million as we opportunistically rebalanced our lease portfolio to take advantage of market conditions, but it's hard to provide forward guidance in this area due to the opportunistic nature of sales out of our lease portfolio.

We currently anticipate lower activity in the second half of the year than in the first half of the year in trading gains.

Selling and administrative costs were $25 million for the quarter, up from $23.2 million in the prior quarter, primarily the result of headcount increases associated with higher levels of activity, increases in incentive compensation.

While we expect to continue to see economies of scale going forward with G&A as a percentage of revenue being -- declining going forward in absolute dollars terms, we do see that this could continue to grow some, associated with the higher levels of activity.

And that could run between $26.5 million and $27.5 million a quarter for the balance of the year.

Interest and foreign exchange for the quarter was up $1.1 million from the prior quarter.

And this was solely due to foreign exchange gains and losses.

In the prior quarter we had a gain of $0.9 million whereas in the current quarter we had a loss of $0.2 million, so that created a $1.1 million swing in and of itself in this line item.

Our tax rate for the quarter was 23.7%.

Where we expect it to run about 33% for the balance of the year, the actual rate will be dependent on our geographic mix of earnings.

But the lower rate for the quarter was due to the release of certain valuation allowances in the foreign jurisdictions.

Turning to the line item net earnings/loss attributable to non-controlling interest, this relates to our partner's 50% ownership in our Gimsa joint-venture in Mexico.

For this quarter we showed a loss of approximately $4 million on the line item.

And since it's our share of the partner's losses in this case, that goes to grow what is remaining for Greenbrier in that it is an add-back to get to Greenbrier's number.

We did not actually have an operating loss from this entity, though.

Rather, many of the cars which were produced but not sold -- or were not sold during the quarter, and they are hung up on the balance sheet and the related margin is hung up on the balance sheet until after these cars are ultimately sold.

We expect that this line item will show growing income rather than loss in future quarters.

And then, at the point where when it shows income, it will be a deduct to get to Greenbrier's earnings rather than an add-back.

Looking forward to the rest of fiscal 2012 based on business trends and production rates, we still expect to deliver in excess of 15,000 cars, and that revenues and adjusted EBITDA in the second half of the fiscal year will be higher than the first half of the year, primarily due to higher deliveries.

As a reminder of the orderly flow, and Bill will comment on this, we were pleased with the order rates we achieved, as a reminder that that tends to be nonlinear in nature and lumpy in nature.

We continue to expect CapEx in fiscal 2012 net of equipment sales to run about $70 million to $80 million, and depreciation and amortization will run about $40 million.

Finally, as a reminder, the calculation of diluted EPS can be complicated due to the nature of the convertible bonds and the outstanding warrants.

Lorie went through this on our last call, and if you have any questions after, she'll be happy to go through it.

As a reminder for now, we include the underlying shares associated with the convertible bonds in the diluted share count, even though at the conversion stock price of $38.05 a share, those bonds are currently out of the money.

With that I'll turn it over to Bill, and then we'll open it up to questions.

Easy for me to say.

(Laughter) Thanks, Mark, and good morning.

The cat got your tongue this morning, I guess.

During the quarter, Greenbrier produced strong operating and financial performance, continuing to build product backlog and to execute on our strategy, as we have done over the past year.

I'm especially pleased about the orders received during the quarter and the strong start in the first month of the current fiscal Q3 quarter.

As indicated in our press release, we received orders for 3600 units during the Q, and subsequent to quarter-end during March, we received another 2300 units with a valuation of $270 million.

The order pace and interest pace, the deals that we are tracking, continue to remain strong and more broadly-based than only energy.

Our strategy has been to expand our lower-cost production facilities, increasing capacity in high-demand freight cars on the manufacturing side, while broadening our product offerings to provide coverage over most shipping needs throughout the North American and European freight rail networks.

At our Rail Services unit, we're focused on improved margins and operating efficiencies.

In our leasing company, we are increasing our lease rates on our owned and managed portfolio, as well as targeting and realizing higher throughput through our lease syndication model.

Both the low-cost manufacturing footprint, and the higher volumes and more complex lease syndication model, have contributed greatly to Greenbrier's profitability over the past two quarters.

Beyond these business unit strategies, we've realized significant benefits through cost control and other measures in global sourcing.

And we've expanded human resources available to help us sustain higher volumes and performance, as well as build for the future.

In absolute dollars, our backlog remains stable this quarter at about $1.1 billion in our manufacturing segment, not counting the order flow referenced at the end -- or subsequent to the Q.

And as mentioned earlier, that flow continues to remain strong.

We're seeing more order diversity in the quarter and over the past six months among a broader range of car types.

While Mark mentioned energy and energy-related products continue to make up much of industry backlog and demand, we also have backlog building in other car types including food-grade covered hoppers, green cars, boxcars, gondola cars, double-stacked intermodal cars, and in the automotive market, our Auto-Max car.

With the exception of coal, industry loadings continued very strong.

And looking at the overall statistics, coal has dragged down the actual performance of the broader-based commodity mix.

So we believe the fundamentals in the rail sector on all of those products and needs remain strong.

We continue to be optimistic on energy and we are expanding our capacity in tank cars, and copying what we did last year in a wide range of covered hopper cars.

In so doing, we are enhancing our capacity to address the energy market, which has experienced growth of almost 30% year-over-year and is truly a bright spot in the North American economy, which will have broad knock-on effects for economic development in an energy-sufficient environment over the next decade or two.

Our railcar capacity for some product lines are booked through 2013.

We see signs of renewed activity in the marine business, which could be an upside to our 2012 and first half of 2013 plans.

We continue to pass through the risk of longer-term exposure on materials, have an advantage on materials availability through our strong supply relationships and global sourcing network, also something that has been part of our strategy changes over the past year.

European demand remains strong.

We expect good performance from this unit in 2012 and 2013 despite the general concerns about the European debt situation.

Over the past year we have ramped up production in our manufacturing segment almost 4-fold from this time last year.

And we look forward to record production volumes in North America.

The ramp-up has not been without some issues, both in labor and in delays in certain specific production lines.

However, the issues we've experienced and commented on in past quarters have been largely addressed.

We expect our balance sheet margins to improve in manufacturing moving through the balance of this fiscal year.

And we expect excess inventories will continue to work down.

As new workers become more experienced, we should become more efficient.

And because of those factors in the past -- the trailing six months, we have been behind our working capital goals, and we're determined to respect capital and to make efficient use of our working capital.

In summary, we remain focused on fundamental changes in our business strategies which should help us take advantage of what seems to us to remain an early-stage recovery in the freight transportation sector.

Industry forecasts continue to predict strong demand for freight car products and services over the next several years.

And the economic advantages of rail transportation over other modes make the outlook much more promising than I have seen at this time in the cycle throughout my long career in this industry.

Coupled with strong railroad balance sheets and prosperity in the railroad side, their desire and willingness to reinvest for the future, the need for new equipment and services for both replacement and growth and fundamental -- continues strong.

And we think that the fundamental changes in energy-related economic activity will revitalize the American industrial sector.

Of course, the world is very complicated; these structural trends and the political situation, not only in North America but throughout the world, remain things to ponder seriously.

And a good economic revival can always trumped by those forces on a global scale.

Overall, however, we remain very optimistic.

We're happy to have a third consecutive quarter of strong financial performance behind us, with the promise of more to come.

Mark, back to you.

Thank you, Bill.

And operator, we'll go ahead and open it up now for questions if you can provide instructions on doing so.

(Operator Instructions).

Bascome Majors, Susquehanna.

Looking at the math between the orders, deliveries, and backlog, and you alluded to this on the prepared comments, is that you're building and taking cars in inventory while they are awaiting syndication.

Is there any other variable in here?

Or is that really the missing number between those other three?

That is the missing number.

There can be cases where cars that -- I think it's the missing number for the quarter in total, and one missing piece from time to time can be that we can choose to take cars into our lease fleet that we might otherwise earlier chosen to sell or vice versa.

But in this quarter, think you've hit the missing piece.

Okay.

And is that -- that's been heading in the same direction for the last couple of quarters.

How much of that is a function of leasing demand and how much of that is a function of the --?

It is a deliberate choice, which relates to our strategy to market through a combination of direct sales and leasing.

So we'll stage production, part of which will be locked for our own fleet to take into our fleet, and then also for product to go into the syndication market.

At the same time, we're working very closely with a few selected customers on a strategic basis.

So that is basically the underlying business drivers for the movement in that category.

So is any of this tied to the production issues you mentioned at Gimsa?

Or is it really a function of just the nature of the model as you ramp up production?

No, our direct inventory may be a little higher than we would -- well, it's a little higher than we would like because of some production delays at Gimsa, and some labor issues that were -- that caused some inventory to pile up at our other facility in Mexico, Concarril -- Sahagun.

But it has nothing to do with the leasing side, at least that I detect.

So you look at -- the line item leased railcars for syndication on the balance sheet is specifically the line item that relates to the syndication activity.

And all of that is finished production.

And Bascome, we can talk about this further off-line if you'd like.

Sure.

And just one other one.

You alluded to marine still -- to looking on the up and up for later this year and possibly by 2013.

Can you give us a little more color on that, and where demand and inquiries stand, or any incremental orders that you may have received?

We received a small order and we have a number -- I think what I'm talking to there is the increased number of inquiries, and just some of the dynamics in that market that relate to energy.

So I -- it's a little stronger as far as the order -- or the inquiry rate.

Actually, it's considerably stronger than the last conference call we had.

But we haven't booked any huge deals, but I do think that the trend is very promising for that business.

Probably in the second -- the last quarter of this year perhaps, and in 2013.

All right, guys, thank you for the time.

Thank you.

Allison Poliniak, Wells Fargo.

Bill, last quarter we talked a little bit about international intermodal.

You were talking about there was some increased interest.

Can you just update us on that, just given some of the economic concerns out there?

You're talking about, say, the consumer demand in international boxes coming into North America?

Exactly, exactly.

Yes, I continue to be -- pretty optimistic that in 2013 we'll see a need for 40-foot equipment.

I believe that the economy is stronger than pundits would like to make it sometimes.

We talk about the bad news.

But there is some signs that consumers are stirring, and just generally the balances of movements, and working off of inventory and storage and so on, seems to me to be reflective of demand that would be, for equipment at least, coming in 2013.

I shared that view, actually, with several of my colleagues and some of the western railroads.

Great.

And then Mark, you had alluded to -- and the gross margin in rail manufacturing, obviously, some issues in Q2.

Could we be looking at Q3 more in line with what Q1 was, sort of a rebound in gross margins on that side?

I think directionally that's correct.

You know, we're talking about a one percentage point delta, whether or not we get all the way back up to there.

But I think that's probably more on the outer edge of what we see now.

But since we're ramping up here, we just want to be cautious and not be too optimistic until we get to levels that exceed what were Q1.

Okay, thank you.

Thank you, Allison.

Thom Albrecht, BB&T.

A couple of things here.

I want to make sure I heard.

You said the Gimsa loss was $4 million in the quarter?

$400,000.

Okay, I was going to say, that number you had on the sheet looked like it should have been something else, so, okay.

Thank you on that.

And Bill, I know you have commented favorably about the demand for energy cars, but what about the fracking cars?

If not seen a little bit of a lessening in quotation activity, given the price of natural gas?

Well, what is happening is that some gas exploration and production is being slowed and that may have some dampening effect on the fracking demand short-term.

I think what is probably happening, to the degree that that is true, is the -- an awful lot of cars have been ordered; an awful lot of production is in play.

So I think there's just a pause as people calibrate their demands.

In talking to those -- and we just completed a very extensive industry study, an energy study.

And it indicates strong demand for both tank cars more or less on a two- to three-year basis, where there will be a period of time where leases will continue to be in fairly -- very strong demand for oil.

And that will taper off as pipelines kick in.

But in the frac business, the only real threat to that is the environmental side.

So we remain bullish on it.

But you're right; there has been a slowing down of the frantic pace.

Frankly, I'm happy to see that, because I think the pure logistical of absorbing a fleet as large as this one is becoming -- need to be given a lot of thought, and just a digestion issue.

But I think in terms of underlying demand and the demand shift for this car, there really isn't anything that's going to interfere with this, given some of the pipeline -- or given some of the dynamics in this industry.

It is of course speculation in some ways, because we have never been through this before.

And it is truly an amazing phenomenon.

And I think -- well, we'll just have to wait and see.

But I continue to be pretty optimistic about it.

Okay.

And then on the production side, I want to make sure I'm thinking about this right.

So do you now have two tank lines and now you're at eight lines total?

I think last quarter it was seven.

Do you have definitive plans to go to the ninth and tenth line?

We have only one tank line and we're simply increasing the capacity throughput through that line.

And that line is at Gimsa.

Okay.

We have expanded Gimsa, so we have a third line there.

And we are in the middle of expansion plans at our Sahagun facility that will add three new lines in 2013.

But we will lose one line at Bombardier -- the Bombardier facility, which is a loaned line.

So we'll end up net two additional lines.

(multiple speakers) And then just one additional comment, Thom.

As Mark indicated, we are going to be changing over and starting up our auto-carrying car in the fourth quarter of this fiscal year.

Because that is such a labor-intensive and large car, it's going to actually take up two of our production lines.

So, just in case that creates any confusion on the number of lines we have running in the future, it does depend on product mix.

Will those be two existing lines that take up?

Or they'll take two lines in their entirety and they represent new capacity?

Existing lines.

Okay.

So we're basically adding a net two lines.

One of the current lines we are using has been loaned and we will give that one back.

And so we're adding in the short term, while we are running Auto-Max, one net new line at Concarril that we can use.

We have adequate capacity, though, to meet the targets or exceed the targets that Mark is talking about for this year and then increase those rates next year, I believe.

Okay, thank you.

I'll get back in the queue.

(Operator Instructions).

Peter Nesvold, Jefferies & Co.

It's actually Elliott Waller in for Peter.

Congratulations on a good quarter.

Thank you.

Quick question -- a couple questions for you.

You had mentioned Gimsa to show profit in future quarters.

Should we expect that to start in the fiscal third quarter?

Yes.

Okay, great.

And then as we think about just general directional trends in pricing this quarter versus last, how would you talk about that or give some color on that, if you would?

I'll let Mark talk to the leasing side in a moment.

On the manufacturing side, we see pricing remaining -- well, it remains competitive across some of the commodities car types.

But generally, there has been less sensitivity into pricing on the frac sand and on the -- I think we are getting decent margins, improving margins on our tank lines.

And then on the leasing side of the business, generally pricing is firmer and stronger.

There is -- note that there is some car types that loadings have been down (inaudible) rather than up.

And in those car types, then, the least rate environment would have been, if anything, a bit softer in coal (multiple speakers)

And that would be true of coal cars, right?

Right.

And generally, in other cars, we are seeing some strengthening for demand.

It kind of tracks the national trend of concealed car loading growth by the downdraft in coal.

Right.

Right, makes sense, okay.

And then finally, you had mentioned refurbishments and parts looking forward, that obviously, given the overall soft volumes, again driven down by coal, how should we think about that trajectory going forward?

Will that grow with changes in volumes, overall volumes?

Or how should we think about that?

I'm sorry, I'm not sure I understand the question.

Could you repeat it?

Just trying get a sense for how we should be thinking about the refurbishments and parts revenue going forward; I know you expressed a little -- excuse me, caution regarding the overall coal volumes, or overall rail volumes, which have been impacted by coal.

Yes, we don't have a lot of refurbishment in parts revenue dedicated to the coal market.

We have a small amount.

So, the wheel side would be where it would affect -- yes, on the wheel side it would affect potential demand for wheels.

We haven't really seen that.

We've seen fairly strong demand for wheels.

But we're still watching the coal market very closely.

On the more general side of refurbishment, we think we're pretty -- I'm pretty optimistic about continued improvement in that segment as this recovery continues.

Okay, very good.

Thank you for your time.

Ken Hoexter, Merrill Lynch.

Mark, can you go into that a little bit, the -- I just want to make sure I heard you right.

You said Q4 will have fewer cars delivered than Q3 despite the more -- the additional lines.

Just wanted to verify that was your statement earlier.

Correct.

Okay.

And that's because of the auto -- more manual production.

It would be that.

We're also going to have another line changeover in Q4, and partly due to anticipated timing of some of our lease syndication activity.

So, those three items overall are why we would see Q4 being lower than Q3.

That does not mean that we're ramping down production rates, though.

It is those specific items.

Okay, you said Q4 less than Q3.

And then one line is changing over.

What was the last thing on the leasing?

The timing of our lease syndication activities, and that can be a little tricky.

But you see the rail cars, somebody asked earlier, rail cars we can build in one period and ship to a customer, or we can build in one period but then include as a sale in a different period.

That's when we place a car under lease with a customer.

And then we hold it on our balance sheet and earn the rent on those cars, and then sell it in a future quarter.

And right now, we have about $80 million of that on our balance sheet under leased rail cars for syndication.

And depending on when the timing of those flush through the system, we could see more of those flushed through the system in Q3 than in Q4.

Just to clarify though, those aren't ones that you count in production though, is it?

Is that cars produced?

Well, we call it a delivery.

So when we -- in our releases, delivery is when we have revenue recognition.

So we produced the car in one period and that is hung up on our balance sheet as leased rail cars for syndication.

When it's actually sold to a third party, that's when we count it as a delivery and recognize the revenue and margin.

Okay.

So just switching a little bit, if I take the $320 million that you had in manufacturing revenues, divide it by that 3700 cars, you get mid-$80,000's in terms of thousand dollars' revenue per car.

And then the new -- the subsequent to quarter end, and even last quarter subsequent to quarter end, are over [$115,000].

I know you've talked a lot about mix shift, but can you talk about profitability shift of the different types of cars?

Does that vary much as you get into these various -- you know, you talked about an expanding base of type of cars.

Should we see a profitability shift as well?

Well, the first part of this is, you're correct that overall the dollar change is just due to mix of equipment.

But overall, we've made the comment that the pricing environment has improved.

This is going to be partly dependent on length of production runs.

But we would not see margins contracting -- we would not anticipate seeing margins contracting going forward.

So that's another way to look at it, is that we will see hopefully opportunities for expansion.

Okay.

Is the shift of who is buying the cars shifting at all?

Is it shifting -- when you get more energy, are you shifting more from the rail car -- the rail companies to the shippers at all?

Does that matter in your mix change as well?

That, again, is dependent on car types.

Some car types are more prone to be either shipper or leasing company owned was other car types lesser so.

But -- and then some also depend -- with our lease syndication model that we have been looking to grow that aspect of the business.

So there's not one flat answer that we can give you.

We can tell you that our backlog does have a good mix of shippers, railroads, and leasing companies that are purchasing equipment.

Okay.

One last one, if I can; just a numerical one.

The working capital seems to have gotten awfully high the last two quarters.

Is there something that keeps that high or allows you to bring that down to pay down debt?

I just want to understand how you look at the balance sheet going forward.

You sound like the chair of our audit committee.

(Laughter)

That's true.

(Laughter)

We are looking at working capital.

We are disappointed that the working capital is not where we have targeted and not according to our plan.

But it is the product of heavy ramping up.

Again, if you ramp up manufacturing four times where you were a year ago, it is -- that fact alone will cause heavy buildings of inventories and other items on the balance sheet.

We've had a couple of glitches in deliveries, in production schedules, which have caused inventory to pile up, because we have to order to the planned schedules.

And as we are now an on time, we -- knock on wood, we have recovered on each of these, that should be working down.

So we're very, very focused on it.

But I think it's just, A, the momentum, building these new lines, opening new lines; and B, the delivery, some of the delivery issues that caused inventory to pile up.

And then C, with interest rates as low as they are and with volatility in the marketplace for raw materials, especially steel, scrap surcharges, steel surcharges it's -- and with a desire to have our materials costs covered, we sometimes acquire inventory to lock in favorable pricing.

But we are -- we do expect to see better numbers by year end.

And that's the same promise I've given to the chair of our audit committee.

(Laughter) Thank you.

Bill, Mark, appreciate the insight.

Thank you.

We'll let him know that you are interested in (multiple speakers) (laughter)

Sal Vitale, Sterne, Agee.

So, you discussed the reasons behind the tick down in manufacturing gross margin sequentially.

Just to make sure I completely understand that, you're saying there was no raw material pressure that contributed to that 90 basis point sequential decline, correct?

Correct.

And so it's basically just labor -- well, you mentioned delay issues.

And was there a labor component to that as well?

There -- the biggest component was a challenge we had with a specific car type down at our Gimsa facility, that it was for a service that we had not built before and it turned out to be more challenging than we had anticipated.

And we're working through that, but that is the number one issue.

We also, to a smaller extent, around the quarter end had a labor issue and a labor renegotiation at our Concarril facility that we successfully extended, that would have had modest impact.

But the biggest thing was the first one.

Okay.

And that labor issue -- it's been resolved?

And will that -- so will the labor component of the slight decline sequentially, will that be reversed in Q3 and Q4?

Can you repeat the question?

Right, so the portion of the margin, of the sequential margin decline that was ascribed to labor, should we expect to see that reverse in Q3 and Q4?

We do expect -- Sal, this is Lorie.

We expect manufacturing margins to get back to what we saw in the first quarter of this fiscal year.

So, yes, for a variety of reasons we would expect margins in the manufacturing segment to be improving in this next quarter.

Okay, that's helpful.

And then just the second question I have is -- pertains to the new orders that you've received.

And you said that there's some car types that were previously not included in the backlog, including food grade covered hoppers, grain cars, double stacked intermodal, Auto-Max.

Did I miss any there?

Were there any others?

Well, let me correct your statement just slightly.

We have had some of those --

Of course, double stacked -- I didn't (multiple speakers)

(multiple speakers) backlog, the double stack and we've had food grade covered hoppers.

I think my point is that we're seeing more activity in each of those areas.

And the Auto-Max is relatively new phenomenon.

The automotive market is really hot right now.

And the need for [trial host] is good.

So we're seeing just a broadly-based trend there.

And then finally, we've taken several orders for gondola cars for steel and other general-purpose use.

Okay.

And then just in general, and there's new types of cars.

Should we expect the margin profile, the profitability profile to be any different for those types?

On average -- Lorie, would you like to address that?

Probably --

Again, that is where it's -- because we do have such a broad product mix and are building so many different car types in any one period, it's hard to give that kind of specific guidance.

That's where we tend to look to the overall manufacturing segment and give guidance there, that we do expect it to improve from what we saw in that second quarter ending February 29, and get back to what we were seeing in the first quarter.

And then again, as we tend to have longer production runs, we expect to continue to see margin expansion, albeit at a slow pace.

Could I just go back -- (multiple speakers)

That's helpful (multiple speakers)

I'd interrupt for one second and you can still keep the floor.

I just want to go back and correct a possible misunderstanding that we might have been responsible for earlier.

There was a question that concerned me about Gimsa losing money.

Mark went through an accounting adjustment that has to do with our minority shareholder down there, or our shareholder down there, the other shareholder.

We did not lose money at Gimsa.

But we don't disclose the net contribution of these individual plants.

So we are very profitable at Gimsa.

We think our strategy is working very well.

We weren't as profitable as we would have been, had we not had a couple of production glitches having to do with one specific car type and some of the startup of a third line down there for covered hoppers.

And then just to complete that thought, because I know some people are looking at our income statement, and there is a line item on the income statement that says net earnings loss attributable to non-controlling interest.

And that number does show a loss of $400,000.

And the reason for that is, again, on a stand-alone basis, Gimsa made money.

Certain rail cars that were produced during the period are hung up on the balance sheet in rail cars for lease syndication.

And while they are hung up on the balance sheet, the margin associated with those cars is also hung up on the balance sheet until we sell those cars.

And so when you strip out that margin on a fairly sizable number of cars, that is what gets you to what is showing as a net loss, even though on a stand-alone basis Gimsa made money.

Thank you.

That's helpful.

Our next question (multiple speakers)

Go ahead, Operator.

Brad Delco, Stephens.

I wanted to make sure, I think you addressed this, but I want to make sure I understand the math on the backlog from a unit perspective.

So it was 13,300 after the first quarter.

You delivered 3700 units.

You had orders for 3600.

To me, the math would suggest backlog was down 100 units, but it's down 800.

What was the explanation for the delta there?

Mix, I think.

It's going to be rail cars that were built in a prior period that got delivered to a customer, reducing backlog.

It is a little bit different this quarter than what we've seen the activity -- in prior quarters.

But again, it's just due to the timing of when the backlog gets relieved for cars that get delivered to a customer.

Okay, so I shouldn't read that as there were 700 units that were canceled, or anything like that, right?

That's correct.

There were not any cancellations.

Okay.

And then one of the -- I think, Bill, you might have suggested that, or Mark, the fourth quarter you may have more units sold out of syndication.

Typically don't those carry a lot higher margin associated with them because there's some leasing contract associated with it?

Just to clarify, right now, although the timing of these can be difficult, we may see that there are more of those syndicated in the third quarter than the fourth quarter.

And that was part of the reason that -- the explanation as to why the deliveries may be higher in Q3 than Q4.

In general, we are able to receive attractive margins on those types of railcar activities, in part just for the reason that you mentioned, that with the associated lease attached to the railcar and selling it, that does create value.

Got you, and then maybe one more remark.

I think the prior call you said SG&A somewhere between $23 million and $24.5 million.

It looks like you took that up today by a couple million.

What is the explanation for the delta there?

A part of it is -- I think there's really three parts -- increases in incentive compensation from operating at higher levels of performance.

We've also been ramping up headcount, as we've been operating at higher levels.

And I think overall, maybe as compared to earlier in the year, we've come to the conclusion that operating at these higher levels that we've been beefing up perhaps at a little bit more rapid a rate in our line operations with support.

So, those would be the two biggest areas.

So either compensation from headcount increases or an incentive compensation would be the two biggest areas.

And that's all due to operating at higher levels of activity.

Okay, well, great.

Thanks for the time, guys.

Thank you.

Good questions.

J.B.

Groh, D.A.

Davidson.

I think most of my questions have been answered, but I was just curious on this pattern of order flow.

It looks like at the beginning of the February quarter you start off really strong, and then orders slowed down a little bit.

And then, looks like the first part of the May quarter started off really strong.

Is that typical?

Or is this just something that's going on?

As Mark had said, it is a nonlinear or not homogeneous order flow in the industry.

When I look at backlog and order rates, every quarter is not going to have a building backlog even in a time of cycle when economic activity is building.

And that's just due to the way lines are set up and the way orders are placed, and to some degree, which orders we are targeting and what customers we're going after.

So I think that obviously we started out with a bang in the frac sand earlier last year, and have had a good lift on the tank car side.

And we continue to see covered hopper car demand across-the-board looking good, including some frac sand customers.

So we haven't really -- it's just a -- we've got a lot broader product mix than we've had before.

We're building all car types now except coal cars.

So, I think we will tend to become more homogeneous.

It used to be that we were very heavily weighted on intermodal.

And we were watching those intermodal orders very, very keenly.

But now, I think we're looking at a cross-section of the total rail products.

And we -- I wouldn't read too much into a particular pattern of one quarter or another.

But right now, we have -- seemingly are getting a lot of interest out there.

And then I'm seeing the cars and storage statistic, and I know in the past you've said that's a relatively new number and maybe not super reliable.

But can you comment there on what you think is going on?

It looks like it nudged up this month a little bit.

Probably coal?

I think it is coal, coal, and coal.

There is -- actually, there's an awful lot of interesting stuff going on underneath the surface of that statistic.

We were with a Class I railroad not long ago, and there is a lot of -- believe it or not, a lot of forced products movements that are kind of coming back.

And a lot of cars of different kinds are coming out of storage.

So it's -- a railcar is not a railcar, is not a railcar.

There's 20 different types at least that make up that data.

A lot of those are force products cars and a lot of them are obsolete cars, too.

One thing I might comment on though that's related to it is velocity.

Railroads have made very big strides in improving velocity.

And some of that happens when you look at the year-over-year peak to trough pattern of what they are trying to put on their railroads -- a very complicated equation to run these trains rapidly as traffic rebuilds.

But loadings as high as they are, still not as high as they would like them to be.

And in general, when demand comes up, velocity tends to be drug down.

So velocity is a very important item in the railcar equation, and it can actually add to the cyclical nature of the business.

If -- what I see probably in the near term is, in the next year, as railroads struggle with their operating issues to juggle traffic, although they have double-lined a lot of things and they're really -- a lot of their track -- they're achieving really good productivity, it's going to be very difficult to break out of the pattern of a drag on velocity as traffic builds.

So I think the velocity issue is always one that one has to look at when you look at railcars and storage.

You need more rail cars -- if velocity falls, you need more rail cars to move the same amount of freight.

Okay, thanks for the details.

Art Hatfield, Raymond James.

Thanks for the time.

I'll try and be quick; you've had a lot of questions thrown at you today.

Just at first, Mark, did you all book any meaningful or any at all revenue related to marine in the quarter?

No, there were very small amounts.

And then secondly and finally, going just back to this capacity you talked about this year, you gave us guidance of 15,000 cars delivered in 2012.

As we think out going forward, your ability to grow the business in out years, assuming demand is there and as you make some of these changes to your production lines, what is -- and I know this is dependent on mix, but theoretically can we think about the potential for what you could do in a given year with regard to deliveries?

Is it something where you can grow it maybe 1000 more next year or could you conceivably get up to the 20,000 number if demand is there?

Well, to be honest with you, I've lost track of where we might be.

Things have been really hectic.

We are building a lot of capacity in Mexico.

As we get better labor hours in Mexico; as we train the workforce that we're bringing on, we are close to -- we're not quite at it yet, but we have close to 5000 workers in Mexico now.

And these are low-cost facilities, but as we ramp up, not only inventory but in margins and efficiencies and safety and all these things we manage, we expect improvements across the board.

And as we add these lines, we expect higher throughput.

So I think 20,000 cars, in a good year, when everything is clicking in Europe and in North America, is a good theoretic capacity for Greenbrier.

But again, I've got to remind you that a railcar is not a railcar.

A lot of -- we look at dollars per day in margin, not margin percentage and not the number of railcars.

We look at our backlog in terms of dollar-denominated backlog.

So it's a lot -- getting an Auto-Max car for something a little less than $200,000, $180,000 or so, and that backlog -- it's a good thing to have because it counts as a car.

Great, that's all I've got.

Thanks for the time.

Thank you.

Good luck at Raymond James, Art.

Thank you, appreciate it.

Thanks, Art.

Good luck.

Steven Barger, KeyBanc Capital Markets.

You just said what the price of the auto rack was, plus or minus.

And the orders post-quarter were significantly higher than what you've seen.

I think it was $86,500 for revenue per car in Q2.

Were there tank cars in there as well that helped get that average car price up?

Or was that really just the influence of the auto racks against whatever else you took that drove that average price that high?

That was tanks, and to a lesser degree, Auto-Max tanks, and Auto-Max and then some other higher-priced cars; I think boxcars.

Box -- okay.

Yes.

Boxes are quite expensive these days as well.

Great.

From a mix standpoint, is the back half going to look more like Q2 in terms of dollars per car as we think about modeling?

Or how long does it take to start working through some of these higher-priced cars that you are booking?

And when does that hit the P&L?

I think we are pausing before answering that.

We know in Q4 with our auto-carrying car, and as we ramp up our tank car production rates, that those two car types do have a higher unit value.

What I think we want to be -- take a pause on is that also we're increasing production rates in other car types, too.

And so, when you blend all of it, you actually end up with a higher dollar value per unit, or a significantly higher dollar value per unit in Q3 and Q4.

I think that will be the case in Q4.

But I don't want to over-emphasize that.

I understand, okay.

My last question, I saw a presentation from a Class I railroad that is adding several new, good-sized intermodal facilities over the next year or so.

Do you expect that will drive new intermodal car orders?

And typically how long does it take to see orders come in when a Class I build a new facility?

I think the building of the facility doesn't cause new orders.

The building of the facility is a very strong statement, however, of their faith in the intermodal phenomenon that's going on.

And again, and just for the building blocks of that, you have a domestic containerization and trans-load business in North America that has been driving most of the past two years of intermodal demand.

You have a very important remaining international business segment that has not been as robust, but which we expect on the car demand side to kick in again.

And if you have both of those working at the same time, then you have what would be an ideal market.

We don't have, as far as a car builder is concerned, an ideal double-stack market yet.

But I think in 2013 we could see both of those segments looking pretty good.

I think the major thing you have to look at when you're looking at the railroads in intermodal is the eastern railroads have a strategy that is going to, I think, be very successful.

And the western railroads have their business, which is also going to be very successful and will tend to have a bit more international business in it.

But the eastern railroads are going to really move the dial on the domestic side and I think that we'll see demand for intermodal cars coming back in 2013 for international, based on all of this.

And that is just -- that just shows the faith that they've got in -- and looking out what they believe is going on in those markets.

Right.

That's good color.

I appreciate the time.

Thank you.

We have no further questions at this time.

Okay, thank you very much for joining our call today.

We appreciate your interest.

And as always, if you have a follow-up, we'll look forward to responding to you.

Have a good day.

This concludes today's conference call.

You may disconnect at this time.

Once again, this concludes today's conference call.

You may disconnect at this time.

Thank you.