Greenbrier Companies Inc (GBX) 2012 Q3 法說會逐字稿

Hello, and welcome to the Greenbrier Companies' third-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 The Greenbrier Companies, the conference call is being recorded for instant replay purposes.

At this time, I would like to turn the conference over to Ms. Lorie Leeson, Vice President and Treasurer.

Ms. Leeson, you may begin.

Thanks, Christy.

Good morning, everyone and welcome to Greenbrier's fiscal 2012 third-quarter conference call.

On today's call, I'm joined by our CEO, Bill Furman, and CFO, Mark Rittenbaum.

We will discuss our results and make a few remarks about the fiscal quarter ended May 31, 2012.

We will also comment on our outlook for the rest of the fiscal year.

After that, we'll open the call up for questions.

Please note that we've included additional financial information in our earnings release and a slide deck on our website that includes supplemental information.

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

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

For our third quarter of 2012 ended May 31, net earnings were $19.1 million, or $0.61 per diluted share, on record revenues of $507.8 million and EBITDA of $44.6 million.

This is the second consecutive quarter we achieved record revenues.

It supports our view that the industry's broad-based recovery remains on track and that our strategy to expand and diversify our product offerings with a low-cost manufacturing footprint are working.

We're intently focused on improving operational efficiencies; our EBITDA margin grew to 8.8% of revenue, and inventory levels declined by almost $20 million during the quarter, and cash provided by operating activities were over $61 million for the quarter.

And for the sixth consecutive quarter, the average sales price in our backlog grew.

The diversity in our backlog also grew, and we now have seven different car types in our North American backlog providing yet more evidence as to the breadth of the recovery.

I will now turn it over to Mark to give some additional color on our quarterly results.

Thank you, Lorie.

And of course, many of you know Lorie, who is our Treasurer, who is also over the past several years taken over the primary contact on the Investor Relations side, and that we're happy to have Lorie to participate more robustly in our conference calls as well as throughout the quarter.

So I'm going to go into some more detail on the results for the quarter and supplement the year over year comparisons that are in the press release.

And we have provided more color in the press release in tables itself.

I'll provide some color more on a sequential basis than is found in the press release.

Our manufacturing segment turning [tib] first produce revenue during the quarter of $365 million.

That compares to $320 million in the prior quarter, and we delivered 4,500 new railcars, up from 3,700 cars delivered in Q2.

Our marine activity picked up in Q3 as well with two new orders, and our marine backlogs now approaching $26 million compared to virtually nil at the end of the second quarter.

And we are encouraged by these new orders and believe this business will continue to grow.

And Bill will make some comments on that as well in his remarks.

Our manufacturing margin for the quarter was 10.8% of revenue, up from 9.2% in the second quarter, and was primarily the result of learning curve efficiencies.

As you are all well aware, we've been ramping up production quite dramatically through the year, and we're seeing the efficiencies being realized as we have ramped up as well as efficiencies of operating at higher production rates.

As well, we've benefited from our syndication activities during the quarter to our lease syndication activities.

Turning to our wheel refurbishment and part segment, this was up sequentially as well with revenues growing from $119.9 million in Q2 to $125.1 million in Q3.

It was primarily driven by increased revenue in our repair and parts businesses where business has picked up, partially offset by headwinds in our wheel services business due to lower volumes, both from an unseasonably mild winter and lower than expected long-haul coal loading.

And both of these are factors in the usage of wheels overall.

The recovery in this segment has been slow out of the gate for this -- during the current cycle.

We continue to see steadily improvement business trends in repair and parts, and remain mindful and watchful of what is going on in the trends in the repair -- in the wheels side of the business.

The gross margin for this segment was 10.8% of revenue, down sequentially from 11.1% in Q2,.

The decline in margin for Q2 was primarily due to the charge associated with our wheel set recall disclosed in May.

We took a $750,000 charge associated with this during the quarter, representing the cost of replacing 591 nonconforming wheel sets, which had been identified as in need of replacement.

So we fully reserved against those 591 wheel sets.

In addition, we estimate there is about $250,000 of costs related to inefficiencies associated and indirect costs associated with the recall.

So in total, about $1 million during the quarter.

And again, the $750,000 we should not see on a carry-forward basis.

Turning lastly to leasing and services revenues decreased slightly to $17.7 million in Q3, compared to $18.1 million in the previous quarter, while second margin grew slightly to $8.9 million, compared to $8.8 million last quarter.

Our margin percentages in the segment were up to 50.2% compared to 48% -- 48.6% last quarter.

The increase in dollars and percentage is principally due to higher rents on railcars held for syndication, which have low associated costs of revenue.

And this has been a concerted effort during the course of the year to enhance our leasing model, both with the volume of business, we are driving this way and with the way that we conduct our syndication activities.

Our fleet utilization was down slightly from last quarter.

It's 95.5%, down from 97.3%.

This is due to the trends overall in coal that I think you're all aware of, with coal loadings being down and cars going into storage.

We don't have large exposure to coal in our lease fleet.

We only have about 600 cars, 650 cars in our own lease fleet.

But 220 of those cars came off rent during the quarter and an additional 30 after the quarter end.

And this is the reason for the trend down.

We're optimistic we will be able to get this equipment back into service soon, and the remaining equipment is on leases expiring in 2013 and 2017.

Excluding coal cars, we continue to see favorable trends in lease rates.

Turning to selling and administrative costs, they were at $28.8 million for the quarter, up from $25 million last quarter.

The increase is due to a number of factors, including increased incentive compensation.

As well, we incurred nonrecurring professional fees of about $1 million required to structure and complete large and complex lease syndication transactions from which we will also benefit in future periods and future fundings.

So in the current quarter, we expect G&A go to decline slightly.

Remind people overall that G&A is very much a variable cost from Greenbrier.

You recall at the depth of the cycle, G&A expense was down as low as $65 million on an annual run rate.

And indeed as we ramp up our activities, we see a correlation in G&A expense, but we can also ramp it down quite significantly and rapidly too.

Interest in foreign exchange was flat sequentially at $6.6 million.

The net earnings attributable to our non-controlling interest relates to our GIMSA joint venture, and that was $1.6 million for the quarter.

That's a reduction from net income that flows directly to our bottom line.

Our tax rate for Q3 was 30%.

We expected for the balance of the year to be 33%, and the lower tax rate for the quarter is due to certain discrete tax items.

Now turning forward-looking, based on our current business trends and production rates and level inquiry, we'd expect to deliver 4,000 new railcars in the fourth quarter, which is about 15,000 for the full year -- over 15,000 for the full year.

The decline in deliveries in Q4 is not an indication of our slowing production rates or a more pessimistic outlook.

Rather, it is due to a change of mix, with higher dollar value and higher labor content cars, line changeovers, and lower lease syndication activity in Q4.

As we said before, we expect order flow to be nonlinear throughout the recovery.

And Bill will talk about what we see in the activity and inquiry level in the marketplace which is quite active.

We anticipate CapEx, net from proceeds from equipment sales for the year to be in the range of $70,000 $75,000 -- $75 million.

We continue to focus on working capital management and free cash flow.

During the quarter, we generated operating cash flow of over $61 million.

And our goal was to continue to strengthen these metrics in the quarters ahead and generate increasing free cash flow going forward.

As a reminder, the calculation of diluted EPS can be complicated due to our convertible bonds and outstanding warrants.

And we're happy to take that up with any of you off-line.

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

Thank you, Mark, and thanks to all of you for joining us this morning.

During the quarter, Greenbrier improved manufacturing margins on higher volumes and increased the dollar value of its backlog, continuing a shift in backlog to higher value and more diverse units.

Sand cars, for example, now represent a little less than 18% of our total North American backlog at the end of Q3.

We do expect that market to recover in 2013, and we are receiving solid inquiries for sand and are selling sand cars even today.

But it has declined as a percentage of our backlog, which is a positive thing, as we see it.

We're continuing to ramp up on tank cars, which are in high demand.

By opening a second line, we'll be able to roughly double our tank car production in 2013 from last quarter's levels.

And we will be able to produce approximately 3,000 units per year.

We have a solid tank car strategy and intend to continue to grow our business in the tank car area, which does look positive over the next several years.

While we are mindful of the economic and political risks in the global market, we continue to see solid fundamentals in the rail sector in both North America and Europe.

And I'll talk to some of these.

Our backlog increased in Europe during the quarter and subsequent to the quarter, we received new orders as well.

So we are not seeing softness in our European operation, exactly the contrary.

Opportunities we are tracking in North America have roughly doubled quarter over quarter, and we're seeing a fair number of -- a variety of cars in demand with selected customers.

I'll talk in a moment about why that is occurring despite lower railcar loadings overall.

While the pricing environment may become challenging on some car types, we're producing seven different car types in our three factories in North America and a similar number in Europe.

Our manufacturing strategy North America has been to grow capacity at our lower cost facilities in Mexico and to further diversify product offerings offsetting our vulnerability to concentration in any given car type.

This gives us the opportunity to achieve top-line manufacturing growth and market share in selected markets, and ultimately, higher margins.

Our goal is to maximize margin dollars per day and operating profit per facility, not margin percentages, per se.

While in earlier quarters, we experienced some difficulties with this strategy in execution due to ramp up and a very aggressive ramp-up program, we've now worked out the kinks and are operating at increasing scale, with a $10 million increase in margins in Q3, and with record deliveries growing margin dollars.

Working capital efficiency has improved, while we still have work to do in that area and as margins have improved, especially after the effects of our lease syndication activities and added volume from cars sold to institutional investors.

While North American railcar loadings on the surface looked lackluster for the 26 months ending June 16, 2012 with a net decline of 1.8%, this negative statistic conceals much more robust growth across diverse product segments.

For example, coal loadings alone declined by 10% during that timeframe.

And because coal is by far the largest commodity hauled by railroads, this was enough to sink the overall statistic by almost 5 full percentage points.

Excluding coal, car loadings were up 3% during the same period.

But excluding another soft commodity looking backward, grain, traffic was up 5.6% in the first 24 months of the year.

Now, why is that important?

Greenbrier does not manufacture coal cars and has only a small number of coal cars in its own lease fleet, 600 as Mark pointed out, while we do manage cars for others.

Container loadings and coal can affect us in our wheel services business.

Container loadings during the same period, turning to other cars, because a railcar is not a railcar, is not a railcar.

There are many, many different kinds of railcars.

Container loadings during same period were up 6% in North America.

Container loadings.

Motor vehicles were up 17% in North America.

Nonmetallic metals and minerals were up 5.6%, and even forest products were up 3%, something that can be very attractive for Greenbrier if any sort of growth in that area is sustained.

Chemicals, metallic ores, and other categories were all up at levels almost double the US GDP rate for the period.

So if one looks at all railcar types, and present pessimism is confined to only a few car types and grain is coming back in 2013 with what we believe will be a record crop forecast and drop in some global markets.

This should be good for exports.

So we continue to see strong demand in many markets, especially in higher value car types, such as tanks and automotive cars, which would address our Auto-Max product.

Intermodal, gondolas, boxcars, and a recovery in certain covered hopper cars, especially for grain and certain specialty cars in the high cube covered hopper area.

During 2013 the energy revolution in North America will continue to reduce the cost of energy feed stocks, and this along with cheaper oil and gas prices have made North America the place to build major factories and plastics, petrochemicals and other industrial products.

In turn, during the 2013 to the 2014 timeframe, we believe this will reinforce demand for tank cars and certain specialty cars, such as plastic colored cars.

We are in both markets.

During the quarter we received orders for two oceangoing barges for a total value of almost $26 million.

The overall inquiry level has increased, and we expect 2013 deliveries to grow beyond our current backlog.

For example, we're a finalist on a major coal barge project with Amber Energy, an Australian company, for export of coal from its mines in Montana and Wyoming to be transshipped by rail to the Port of Moreau on the upper the upper Columbia River and then by barge to an export facility down river, below and bypassing the Portland Metropolitan area.

At the outset, the project will require 20 barges with an approximate value of $80 million.

We will most likely share this project with another Oregon builder if it's approved.

The project looks promising, subject to a permitting process with the US Corps of Engineers.

And the US Corps of Engineers also responded to environmental pressure, saying that they will not do a systemic environmental impact study as the governor of Oregon has requested.

Eventually, we believe coal exports will be a bright spot for future coal traffic, not only by rail, but increasingly by barge.

And that can occur both on the Mississippi and on the Columbia Rivers.

Turning to leasing and rail services, we completed a major milestone during the quarter in our leasing strategy to drive more volume through our syndication business and to diversify our investor base, adding value through services provided over the life of a railcar by selling not just the railcar, but railcar management and physical maintenance services under our integrated business model.

During the quarter, we closed minutes with two separate investors to sell and manage $130 million in railcars, and about 50% of that commitment was drawn down in the third quarter, boosting railcar shipments for that quarter.

Our go-to market strategy in manufacturing is to sell railcars directly to cash buyers and to support our loyal customers.

We also use our leasing company to initiate leasing opportunities, which we then place with strategic investors and customers, including other leasing companies, with whom we have close working relationships.

Generally, we are better aligned with companies who do not own their own manufacturing facilities, who are in the leasing business, and who can work with us to deliver a quality freight car for their lease fleet, whether they are purchasing for that lease fleet or whether we syndicate and originate and syndicate leases to them in an informal alliance.

In that sense, we can add major value to certain leasing company partners.

We do not normally buy railcars ahead of placement of leases.

And we have a home for cars before scheduling them for production.

That is, we do not follow a practice of speculating on railcars.

We've signed leases, we've bought them out, and we then sell them.

We compete aggressively with some leasing companies with whom our own model is directly competitive.

And we work very closely with others, especially in certain car types, such as tank cars.

Our wheel repair and parts segment, while showing consistent results in the quarter, still lags in recovery as compared to new railcar manufacturing in our leasing segment.

Revenue was up slightly and margins declined slightly from 11.1% last quarter to 10.8% in Q3.

However, Mark has commented on the special charge we took on the wheel issues.

Parts and repair service and business is up in that segment, while wheel volumes are down due to coal traffic being down.

And we do believe that the wheel recall announced earlier, the financial hit from that recall is now behind us.

Remediation efforts have been successful on that project with over 50% of the cars affected having been identified, taken off the list through wheel replacements, or otherwise addressed through active field intervention.

Finally, and recently, we reached out to our investors and have been listening to your comments about our strategy, our share price, our policies on communications with investors.

In the quarters to follow, we hope to simplify and better explain Greenbrier's strategies and markets.

We will begin by posting supplemental information on segments on our business model on our website, beginning today.

We are also making positive, significant positive changes in pay and other governance practices based on shareholder input regarding say on pay.

We invite you to follow-up in this area with questions and suggestions about how we are doing.

Back to you, Mark.

Thank you, Bill.

Operator, we'll go ahead and open it up for questions.

Thank you.

(Operator Instructions) Our first question comes from Allison Poliniak with Wells Fargo.

Your line is now open.

Bill, you've talked in the past that you thought the refurbishment in parts business had the potential to reach $650 million to $700 million annually.

With the issues surrounding coal, is there any change to your thoughts around that?

No.

We have a number of initiatives, strategic initiatives, that we have headwinds in coal, which affects wheel replacement.

But I continue to believe that that unit has considerable potential.

We're not realizing the potential.

We're aware that we are not realizing it, and we're working on measures to approach it.

We're looking aggressively at an integrated, for example, an integrated strategy addressing the coal -- or addressing the tank car service business.

We think that we can have some growth in that area in our repair business, integrating with our leasing and manufacturing strategy for tank cars.

So we do believe that we can achieve growth there.

More importantly, we believe through the repair and parts business, we've addressed margins very successfully.

We're going to attack coal directly, and we're going to attack wheel replacement directly with some specific strategic implementation plans in 2013.

Perfect, and just in the manufacturing side, assuming we had these line changeovers, how should we be thinking about gross margins in that segment?

Could we potentially see down sequentially, just given some of the changeovers that are happening in the quarter?

I think for the fourth quarter, Allison, we are thinking that -- I think our prior-quarter comments that we would see flattish for the fourth quarter.

Perhaps some modest improvement there.

And we'll be providing color on our outlook for 2013 on our next call.

But I think again, consistent with our prior comments, we would expect that as we get further up the learning curve and with these efficiencies, that there is certainly room for margin enhancement in 2013 and beyond.

Our next question is from Bascome Majors with Susquehanna Financial Group.

Your line is open

I was curious, did you guys book any marine revenue this quarter?

I know you talked to orders, but I'm curious what might have hit the P&L.

Very, very nominal amount this quarter, Bascome.

Okay.

And you talked about the $25 million or $26 million in orders during the quarter and laid out the expectation that they are going to continue to grow in that 2013 could exceed your backlog for revenue perspective.

Can you walk us through the timing of when these orders should start to translate to revenues?

How the inquiries are trending in that market, and how long you think it will take to get production efficiencies up to the above rail margins you've you historically generated in that business?

Right.

So, Bascome, partly in our marine business, the accounting will dictate the -- there's both completed contract method and percentage of completions method that applies to our marine business where rail is all upon completion of the railcar.

So one of the barges in our backlog is completed contract and the other is percentage of completion method.

So it would be a bit of lumpiness tied to -- based on those two barges, tied to when it would hit.

And again, our next quarter's call, we'll give a little more color on that.

And of course that will also hold true for anything that we ultimately end up booking as it will depend on whether it's a completed contract or percentage of completion.

As to margin, one of the things that we try to remind people is that barges are high labor content.

So our Gunderson facility here in Portland, it is a big absorption of overhead.

And typically, margins in barges do exceed our railcar margins.

But the effect on the margin overall far exceeds just the gross margin percentage because of the absorption of overhead.

Our next question is from Brad Delco with Stephens.

Your line is open.

Bill, you mentioned something that I thought was interesting.

You said pricing is becoming a little bit more challenging in some railcar types.

And then you went on to talk about the diversification of what you're seeing in your backlog, and then how that is a benefit.

I was just curious if you maybe could provide a little bit more color on what's challenging and why what's in your backlog is -- anything bodes well for the current market?

Well, there's been an awful lot of talk for example about softness or sudden shift on sand cars.

I think that's a grossly misunderstood area, because it's actually longer-term one of the great phenomenons of this decade.

So I think that, that market, for example, will come back in volumes in 2013.

With however, with the surge of capacity dedicated to that type of car by several builders, we'd expect that those cars that do come out, we did sell some in our Q3, we booked some orders for sand cars, would be more aggressively priced.

That would be an example of a car type where people are equipped to address the market, may have space on like what the situation is in tank cars where space is at a premium and margins continue to be high.

And so again, it depends on -- if you look at the car types that are driven by the specific car loading volume statistics that I described, the ones that are weaker would be coal cars, for example.

Very toughly contended, I would expect or difficult to negotiate one of those orders.

We don't make coal cars, so we are fortunately not in that situation.

But I would say for example, sand cars would be one particular car type that would be more hotly contended.

Got you.

Appreciate that.

And then, Mark, maybe for you, the additional tank car line, I would assume you guys are not building that without feeling pretty good about orders and things currently.

Is there -- is this going to take or pull forward the timing of your backlog?

Or is this essentially in order to support new orders that you expect coming on the tank site?

And how much is it going to cost to put in a new take our line?

Right, I appreciate the question because it helps us clarify some of our comments.

We did not add on to that line based on anticipated demand.

We have a firm orders to support that line.

And in fact, that line would be substantially committed through our calendar 2013.

And we're optimistic about -- very optimistic and feel very strongly that we'll be able to keep those two production lines that now will have committed to tank cars, very fully booked throughout the cycle.

So as far as the cost associated with that to us, I think because it's a joint-venture facility, that it's probably in the neighborhood of about $5 million, including working capital needs.

And this partly gets to what we refer to as our low cost footprint and something that we can quickly and flexibly bring up to fill demand.

Got you.

And if I could ask one housekeeping question, I'm pretty encouraged to hear your commentary on expectation for manufacturing margins in the fourth quarter.

And if I remember correctly, Mark, you may have alluded to seeing some lower lease syndication in the fourth quarter, which tend to help the margins a little bit.

So we should be reading this that seeing the backlog value improve sequentially also means that the margin percent gets better with these type of cars.

What are the offsets to lower lease syndication in the fourth quarter?

What's the positive margin contribution that would be offsetting that?

What would be positive that would offset the lack of -- or lower lease syndication margin.

I appreciate that one of the -- going back to the question that Bascome Majors asked earlier about marine is that we do have a marine barge that's not part of the $26 million that's in backlog.

We do have a barge that we will be launching in July that we will have revenue recognition on that barge.

And again to my comment earlier, marine typically both has a higher margin percentage and a big absorber of overhead.

So that will be a meaningful item.

That is not one of the two barges that we received the orders for.

Those are in addition to that one barge that was already in backlog.

That's a smaller barge.

So when we see the number of units you're delivering going down fourth quarter, you're talking about the mix improving, it's not like you're losing efficiency with your employees, right?

That would be offsetting some of the margins is also part of that question?

Well, the only thing again is when there's a line changeover, there is a little bit of down production time, and then there's a learning curve efficiency, even if we built the car in the past, which we will have in all the car types coming up, that you do have just a learning curve ramp anytime you have a line changeover.

Right.

Just to add on that, that's just the one line the we are having a line changeover in the fourth quarter.

So we are continuing as we're seeing in the third-quarter margins, we're hitting our stride, improving our margin percentage.

So we would expect that to continue through as an offset to the lower syndication activity and those changeovers.

Our next question is from Art Hatfield with Raymond James.

Your line is open.

Just back to the tank car capacity build out, is that going to be incremental to the overall build capacity?

Are you switching a particular existing line over to tank-only capacity?

Art, that's -- we have one line running now.

We had been running that line at a very low level under the GE contract of two a day.

We've gone to four a day, six a day, and you can just do the scale on that.

And we'll be hitting as many as 14 in the second quarter of our -- or early third quarter of fiscal 2013.

So we're continuing to ramp up the current line.

And in order to reach the 14, we'll be opening a second line, which is a fairly modest add-on and a reconfiguration of the GIMSA facility, as Mark had described, which would allow us to achieve that higher rate of production.

It is possible, according to our manufacturing planning, that we might exceed the level that we've described to take advantage of the temporary boom in tanks.

But we are all -- most builders, at least, I think all the builders are stretched with production in 2013.

So we don't anticipate having trouble selling those cars.

I think we just want to produce some with quality and keeping the positive things going that we've got going now in achieving scale.

That's helpful.

Just to add to that, if we think about what you're going to build this year, a little over 15,000 cars, and the additional, does that make the assumption -- I think the math I did, it would be your ability to do an incremental 1,500 tank cars a year.

Is it fair to say that the capacity at the Company is now 17,000 cars a year?

Or does mix change change that thought process for 2013 and possibly '14?

Hi, Art, this is Lorie.

So I think it's fair to say the theoretical capacity is somewhere around 17,500 or 18,000, but we do like to stick that theoretical in the front of that comment just because as you say, product mix can change it.

So as we talked about today and on the last call, we are going to be changing over to build some of our Auto-Max cars next year.

Those are a much larger car.

They have a lot more hours in them, so that reduces the overall throughput in our facility.

So that would potentially bring down that unit count on an annual basis.

So it's important not to get hung up on the units in the backlog.

It's important to -- maybe we need to get more color on the valuation per unit and the mix.

Because an Auto-Max car for example, a three unit car is upwards of $200,000.

So that compares to a sand car in the $80,000 range and a tank car plus $100,000.

These are all very physically different and have different production functions.

And so the economics of manufacturing are quite complicated.

They go much beyond a simple margin rate.

It's the production rate you can achieve during the day.

It's the dollars per day.

And it really is an interesting function.

But volume and the size of these cars -- the type of cars in the backlog really is much more important than the number of cars.

I appreciate that, and I do get that.

I just wanted to draw some clarity out from you guys on that.

Just additionally, I think a lot of the other questions that I had got answered, but one of the things that's weighed on equity prices in this sector recently has been concerns that maybe we've reached our cyclical peak in earnings.

Now I know you don't want to get into too much color about the out year, but can you philosophize a little bit on where you think we are at in the cycle and if you think there's still room for you, assuming the market cooperates, your ability to grow earnings going forward?

Art, before Bill philosophizes --

Mark is trying to gag me.

Not at all.

I think before the -- I said earlier in the fourth quarter, we'd give more color for next year during the quarter, but we definitely feel optimistic that this is not as good as it gets.

And that we anticipate 2013 is going to be stronger than 2012.

And we don't think 2013 is as good as it gets either, but I'm going to let Bill speak to --

Well, let's take first operating efficiency.

We've been very honest and open about issues we've had.

Some quality, some paint, some wheel issues that have plagued us during this substantial ramp-up to scale, which we've now achieved.

So one of the first things I think looking at Greenbrier would be how much operational improvement at steady state levels could you obtain, assuming that we can't continue to grow volumes.

But one of our goals -- and it should be made very clear, is to grow our volumes and therefore to grow operating profit dollars.

And we want to do that with better working capital efficiency and with efficiency in relation to G&A cost as well.

So I think one area that is perceived to be something of a weakness, seemingly in reading some of the analyst reports, is our ability to produce higher-margin, higher-margin rates and percentage numbers.

Actually, what I'm focused on is margin dollars and producing those efficiently.

So I think that the ability to hit our pace to those who have been mildly critical of the margin pick up as we've gained scale, it's very difficult to quadruple your production in the course of a year.

That's what we've achieved.

We've done it with 14 different car types at this point.

And it's an amazing accomplishment our production people have delivered.

And if we were to press them today to get that margin rate up, that percentage rate today, we would be suffering in the future.

So I think there's a significant improvement that we can get just from operating at scale.

As far as the philosophy of what's going to occur in the economy, I would leave that to fortune tellers, because we're living in a very tumultuous time.

There's a lot of gloominess out there about Europe; there's gloominess about lots of different things.

But what we have to deal with is the reality of what we see in the marketplace and the fundamentals of rail transportation, and those fundamentals are very good, with the exception of coal, which is causing a lot of issues.

But in many car types, we see a lot of strength.

And I don't see we're anywhere near the end of this cycle at all.

I think we're at the worst, the midpoint of it.

Next question is from Elliott Waller with Jefferies & Company.

Congratulations on the quarter.

Had a quick question, you talked a little bit about sand cars.

If you could provide us a little color on what your current mix generally looks like in your backlog in terms of car types?

I know you mentioned it's been generally seven at this point.

Well, we have a growing percentage of tank cars in the backlog has we're ramping up our ability to produce them.

And so in terms of our public backlog, we would have a significant much larger share of tanks, as many as 30%.

We have a smaller percentage of mechanical refrigerated cars, a surprisingly small percentage of intermodal cars in the backlog, which we think there will be another round of orders there coming up for 2013.

Boxcars is a significant number in our fleet.

Auto-Max, we are just beginning lines with Auto-Max, in Europe.

We have almost 1,400 cars, which would be about 12% of our total backlog.

Okay.

That's helpful.

Thank you very much.

And could you discuss a little bit what the impact of lower scrap prices have done in terms of margins?

And then how should we think about the impact to the manufacturing business as opposed to the after-market business?

That's a great question.

I think on the manufacturing side of the business, lower scrap prices, because our contracts have clauses in them to deal with changes in that steel and scrap, so that on manufacturing, it really does not have much of an impact at all.

The only thing is that the lower the cost of materials, then the more attractive a car price is to a buyer.

But a direct impact on margin or sales is that it really doesn't.

In our wheel services, business, it affects more, or it affect us more closely in the wheel services side of the business where we do scrap wheels.

And generally lower scrap prices would be a moderate negative to the wheel services side of the business.

The -- and then higher scrap prices would be modestly favorable as it would be in our leasing business when we go to scrap railcars out of our lease fleet or in the underlying value of a rail car in the lease fleet.

The way I see it in terms of the total business, if scrap prices go up, it makes the climate in bidding forward on new car construction, which is by far a much larger piece of our business today, a bit more uncertain.

So we're ambivalent about scrap prices.

And almost neutral about them because we can, as Mark says, it doesn't have a direct -- we can pass through those scrap prices on new car construction, but it causes the uncertainty of the business going forward to be a little harder to deal with.

Because obviously, people push back and they'd like not to have those pass throughs.

So they bargain for a harder -- a stronger -- a lower price.

Our next question is from Sal Vitale with Sterne Agee.

The first question I have is on the barge business.

You mentioned, I believe it was 20 barges worth $80 million.

Those are not orders that you have.

That's an order that you believe you will get at some point soon.

Can you just give a little bit of timing, and I think you said that you will probably be sharing that with another manufacturer.

Can you give a sense of what the timing of that order might be?

It's almost totally dependent on a permitting process with the Corps of Engineers for a facility being constructed at the Port of Moreau on the upper Columbia River and then an exit port at Port Westward, which is down on the Columbia River on the Oregon side roughly across from Longview, Washington.

The permitting process is expected to end near the end of this calendar year.

So we would expect a determination of the outcome of that project to be in the first calendar quarter of next year sometime.

I think that it would be totally optimistic to assume that they might award equipment and terminal construction orders before they got permits for operating the barges and operating the trains through those port facilities.

Okay.

So it sounds like if anything, we should assume some of that works its way into revenue probably I would assume late '12 or -- sorry, late '13 or early '14?

Yes.

I would say the second half of 2013 is what we're targeting for that project.

I think we are -- we and other builder are almost certain to participate in the contract, but I want to hasten that that's just an example of a number of different marine activities that we're seeing.

There's a resurgent interest in marine barges, witness the two barges that we booked during the current quarter.

And we're working on a bridge into 2013, so we are hopeful that we can get other marine orders to bridge that possible project.

That's a very attractive project because it could be a template for Columbia River barge traffic resurgence.

Barge business has been down on the river.

And this is a particular kind of barge that we can build very efficiently.

We're a good builder for this barge.

Okay.

That's a good segue into my other question regarding the barges.

On that particular project, that 20 barge project, it sounds like you just said that the margin profile on that might be better than, say, the two barges you currently have in backlog?

Is that fair to say?

I didn't say that.

Mark Rittenbaum may have said that.

I wouldn't say that because I wouldn't want to have my customer hear that.

Did you say that?

Not if you don't want a customer to hear it.

Well, no, you just said that you were very efficient.

You think you would be very efficient at manufacturing --

We would benefit from a learning curve on the start up of the marine operation.

So we think it would be an attractive margin for our operation.

Okay.

Good.

And then if I could just shift gears to the tank car side.

If we look at the weekly railcar load data, it seems that the petroleum products is up roughly 50% year-on-year.

Now, at some point, that's going to normalize.

And accrued by rail, has been one of the main drivers of that.

How do you think -- what are your thoughts over the next couple of years -- what a more normal growth rate would be for that?

And more specifically, in thinking about your tank car production over the next couple of years, how much do you think will be driven by crude by rail growth, as opposed to the trend you mentioned earlier of higher chemical production here in the United States due to low feed stock prices?

That's an interesting point.

You've obviously been -- you're your obviously well-informed in this area.

There's an arbitrage going on between the pricing on rent crude and the distribution pattern with some of the shale fields, and the deposits don't have pipeline access.

So there's also been a shift in distribution patterns using oil tank cars as opposed to pipelines because of trading practices.

So there's those two forces driving the demand for fundamentally off of the frac and shale oil and gas exploration has been going on.

It's a certainty that in the next two years, we're going to see a surge in parties wanting to acquire these tank cars.

That's already taken place.

People have put their chips down.

But after two more years, 2013, 2014, I would expect, and we would expect a more normalized level of tank car production as new pipelines are being built.

It's not going to be possible given the nature of the fracking dispersion of these fields to build pipelines everywhere, so there will always be some elements of new business in the tanks.

But we expect this to be about a 2-year to 2.5 year phenomenon beginning -- counting 2013 as one year, the full calendar year as one year.

What's going on right now that's putting a pause in the sand market is equally interesting.

And the longer-term view on sand cars is, in some ways, more optimistic because this is a long-term phenomenon, unless it's killed by environmentalists.

It seems to me that that will come back in 2013 as we see the effects of the drilling rigs being moved from gas exploration to oil gas exploitation in the oil fields.

All of this is affected, of course, by energy prices.

The price of oil continues to come down, but has to come down fairly significantly from current levels to affect the drilling for oil in these fields.

So we're not terribly concerned about that.

Okay.

And then just the last question I have is more a clarification on a question that was asked earlier.

So in thinking about the incremental, the new tank car production line that will be, I guess it will be operational was it by the end of this calendar year?

Is that correct?

Yes.

So how should we think about -- so you said that would take your tank car capacity to about 3,000, roughly double it.

So call it an incremental 1,500 tank cars?

Should we think about that as incremental to your internal thinking on what next year's production would be?

Or is it really just to replace, some of it is just substituting other car types?

It's not a discrete event.

The fact is that we are steadily increasing a rate of production in tank cars throughout this fiscal year.

And we'll reach a crossover point where we will then use the additional line to continue to expand that rate to the annualized level of 3,000 that I mentioned.

I expect other car builders are also -- and I know that other car builders are also attempting to increase their output of tank cars because it's basically third year.

But generally speaking, I think you are directionally correct with your comments.

I'd like to go back on tank cars to one other item that has to be considered in the market for those cars later on down the line.

The petrochemical build in products with gases as a feed stock is going to be very material.

There are a number of $1 billion projects, Dow and other companies that will be feeding into this market.

That will have a positive enhancement in the 2014, 2015 era -- area for continued support of tank cars.

So we're not at all thinking the tank car market is going to collapse or go away or a bubble is being created.

We just think it's not going to be sustainable at the rates that people will be producing in 2013 and 2014.

Our next question is from JB Groh with Davidson.

Your line is open.

One for Mark, and then maybe another one for Mark.

Mark, on the CapEx, obviously that swings around a little bit because you've got quite a bit of discretion, but could you update us on what you view as your maintenance level of CapEx?

I think we would view in the refurbishment and wheel refurbishment and parts area about $8 million to $10 million.

And in manufacturing, probably a similar type number.

Certainly what you've seen in this year's numbers the manufacturing represents expansion that we talked about on numerous occasions and so that number is much larger.

And certainly in our wheel services business, we have our facility, our North Platte wheel services facility that came on board this year.

That was the facility that was built, if you recall a few years ago, we had a fire at one of our facilities.

A lot of that is being built with insurance proceeds.

The CapEx is hitting this year too.

And of course, on the leasing side of our business, it is virtually 100% discretionary.

Right.

There's going to be $5 million extra next year, including working capital for the new tank line is what you said?

Right.

I want to clarify, let me go through on leasing, it's 100% discretionary.

What we review as replacement CapEx is what our depreciation is, in line our lease depreciation.

But I do want to clarify that the $5 million for the additional line that I referred to relates to the CapEx piece of it.

And there would be a working capital piece to that as well that would not likely exceed an additional $5 million.

Okay.

So that's a plus.

And then in the 8-K that you guys filed on the wheel issue and then you mentioned that you've identified 50% of the cars.

Is that 50% of the 550 or so, or is that 50% of the -- there 7,800 or so that varied from some mounting standards?

On the 7,800, those variances we do not believe represent a safety risk at this stage.

We've been monitoring through the auspices of UP and other railroads with their very impressive technical wizardry as trains go through, they can see if there's any deviation or variance on wheels.

While this was a technical deviation, we have the support of the [AR] at this point, and I don't think that's going to result in any action on those units.

If we find deviations selectively, we will address those and remove those wheels and replace them.

But we think that the major risk, which could have been that this would have spread through a mandatory early warning or recall across the board, it might've been a rather arbitrary thing that could occur.

Did not occur because frankly, our people got ahead of this and really went out and, there really is not a safety issue on those wheels sets.

So that's very pleasant thing to be able to report.

It's significant because it could be a cloud that was hanging over us, and I think we're pretty much out of the woods on it now.

Okay, but when you say that you've identified 50% of the problem wheels, that's 50% of the 540.

(Multiple Speakers) wheels sets on them had been remediated.

The wheels have been changed.

And then --

And that would benefit --

Almost all the cars.

That's for the 591.

So we've replaced out about 200 of those.

Not quite 200 of them.

But again, we fully reserved for the estimated cost of replacing all 591 of the wheels -- of the wheels sets that we've identified.

Some of these are queued up or store or we can't get access to them.

But the important thing is to identify them and get them queued for replacement.

So we're on top of it and we accrued for it.

Okay.

It seems like you have a pretty accurate guess there with 200 already done.

Our next question is from Ken Hexter, Bank of America Merrill Lynch.

Your line is open.

It's actually Wilson sitting in for Ken.

Most of my questions on the operational side have been answered.

If we dig a little bit deeper into perhaps how you guys are thinking about your debt profile going forward, you guys have mentioned that you paid down about $35 million in the quarter.

Could you A, specify which part of your revolvers or term loans you paid off?

And B, how you think about think about that pay down going forward, especially given some of the increased working capital you either devote to the new tank car lot and any other modifications you are making going forward as barge production does pick up or what have you?

Right.

So on the first part of the question, the debt we would have paid down would have been our revolving debt and primarily our US revolver.

So we have three pieces of revolving debt, our US revolver, our European revolver, and our revolver specifically tired to our GIMSA joint-venture facility.

And it would be primarily our US revolver that we pay down.

So we will have some competing things going on as we look into 2013.

We're still going to be bringing up capacity, as Bill referred to, and we will have some ramping up productions.

So we'll have some working capital needs associated with that, so that is going to be a consumer working capital.

At the same time, we are looking to have efficiencies, improved efficiencies and working capital usage next year as we are just starting to hit some of our goals in this area.

So I think it's a little too early for us to provide specific guidance on next year, other than our goal is to definitely improve free cash flow in 2013, with the focus to continue to pay down and retired debt.

Of course we will have our 2013 -- we have $67 million of bonds coming that have a first put date on them in May of 2013.

And we would anticipate now that the need to retire those bonds, and we would feel very comfortable retiring them out of our North American revolver, given our liquidity, but we haven't made any final determination.

That's what we'll do.

We know we have the liquidity to pay it off through operating cash flow and our revolver.

Our next question is from Matt Bookner.

Your line is open from Longbow.

Quick question, where are we in the production line changeover process?

I saw the focus on changeovers.

I'm not really sure where it all came from, because it is really not something I'm focused on as an issue.

So you guys talking about changeovers --

In the fourth quarter, yes.

You're right.

We do have a changeover scheduled in the fourth quarter.

It has not occurred yet, but it is in the fourth quarter.

And the reason that we identify that is just because it will could have an impact on efficiencies and margin as we do that changeover.

Just one those things, as you say, Bill, we have lots of different lines, lots of different car types being built, and so just trying to make certain that we clarify that while we are getting ramp ups and efficiencies on existing lines, we do have some changeovers.

So that will happen in the fourth quarter.

Okay.

So that is yet to happen, but it sounds like you have pretty good conviction that should be a smooth process given your gross margins and manufacturing are expected to be flat to maybe up a little bit in the fiscal fourth quarter?

That's correct.

And just to clarify, we will also likely have another changeover in the first quarter of next fiscal year.

Okay.

As we are producing the car though, these are fairly routine.

And we have one car type that we haven't produced for a while.

I think that's the one you guys are focused on which would occur this year.

Okay.

And the changeover in fiscal fourth quarter, that's a changeover for a car type that you're very familiar with, and again, that's part of an easier transition process?

First-quarter you mean?

Okay.

In both cases, yes.

In both cases, that would be true.

Okay.

Good.

And then if we --

I don't anticipate a big issue with that, because we keep talking about it.

I'm going to go look into that again.

But I really don't know why we're so concerned about it.

I think it's fairly routine at this point that we will be able to absorb it.

Okay.

Good.

And turning over to the lease segment, you mentioned utilization being down.

Part of that story on utilization was coal cars.

If maybe you net coal cars out of the lease fleet, can you talk a little bit about what utilization looked like sequentially without the coal cars?

Good question.

Without the coal cars, there would have been virtually no change or modestly up.

They're the only cars in the fleet that did go into storage and there was a net few that came out.

So it would have been modestly up without the coal cars.

Okay.

That's good to hear.

And just going back to the total number of cars that came off lease and I think are in storage, is the number 240 at this point?

That's correct.

Some of those -- that's correct.

Some of those were during the quarter.

Most of it was during the quarter and a few more after the quarter.

Okay.

And again, the thought process is hopefully at some point we find a new home, customer home for those cars?

That's correct.

We are not withstanding what's going on in coal, we are optimistic that we will get those back in service in a reasonable time.

I think some of the things to remember with the fleet of less than 10,000 cars, these utilization statistics, you have 100 cars or 200 cars that go off rent.

It's not going to be a dial mover on the lease side of the business, but it makes the statistics seem a little funky because then you have a 2% decline or a 1% decline in utilization for something that were not a big driver of the business overall to begin with.

Right.

Smaller part of the business.

And how much of a drag, I guess, were the coal cars coming off lease and going into storage on the leasing and services gross profit margin?

Were you able to separate that out?

To give you an example, the coal car market, cars were renting anywhere from $300 to $400.

These are used cars that are renting for $300 to $400 a month.

These are not high-value dollar cars.

So if you do some math on that and these were cars that just came out this quarter.

So if you do some math, you really see that 200 cars times $300 a month is just not --

In our supplemental information, we have broken out some trailing four quarters of comparative data.

And just on that point of gross margin and leasing, our gross margin and leasing went from 48.6% last quarter to 50.2%.

So actually, those two statistics seem to be somewhat opposite each other.

So it's just not a really big event for us.

Okay.

I'll dig into the supplemental data.

Operator, I think we'll turn it back to you now.

That concludes our remarks and time here, and we appreciate everybody's attendance on the call.

And I will be happy to follow-up with any of you afterwards.

Thank you for your participation today.

Have a good day.

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