Greenbrier Companies Inc (GBX) 2013 Q1 法說會逐字稿

Hello and welcome to the Greenbrier Companies first quarter of fiscal year 2013 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 over to Ms. Lorie Leeson, Senior Vice President and Treasurer.

Ms. Leeson you may begin.

Thank you and good morning and everyone, welcome to our fiscal '13 first quarter conference call.

With me on today's call is Greenbrier's Chief Executive Officer, Bill Furman, and Mark Rittenbaum, our Chief Financial Officer.

Please note that we've included on the IR Section of our corporate website, www.GBRX.com, some additional information to our press release as well as some slides that contain supplemental financial information that we encourage everyone to take a look at.

Also note that we will no longer be discussing quarterly results and relevant comparisons to prior periods.

That information, as well as key factors for the changes in the figures, have been captured in the financial slides of our earnings presentation.

And lastly as always, matters discussed on today's conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Throughout our discussion today we will describe some of the important factors that could cause Greenbrier's actual results in 2013 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

With that I'd now like to turn the call over to Bill Furman, our CEO.

Bill?

Thank you, Lorie and welcome, everyone to today's call.

This morning I'd like to take a few minutes to walk all of you through some recent events at our Company, talk a bit about Greenbrier's stock valuation and our outlook for 2013 and beyond.

This is partly in response to questions we've received from shareholders and analysts community following the dialogue with Carl Icahn and other matters.

As most of you are aware, Greenbrier's Board of Directors recently turned down a conditional proposal from Carl Icahn regarding an acquisition of Greenbrier by American Railcar Industries for $22 per share.

We believe that proposal undervalued the Company and was not in the best interest of our stockholders.

While a combination of Greenbrier and American Railcar might be beneficial to both companies and the respective shareholders, our Board decided it could not support a transaction that undervalues our Company, and the potential benefits to American Railcar, or for that matter, one which might overvalue American Railcar if there ever were a merger transaction involving an exchange of stock irrespective of which company might be the acquirer.

Our response to Mr. Icahn's conditional proposal is already accessible on our corporate website.

To provide more color on what we meant by undervaluing Greenbrier we believe that Mr. Icahn's proposal did not reflect the significant value inherent in our unique integrated business model, diversified product portfolio and outstanding position in the railway supply industry.

All of which enables Greenbrier to deliver customized solutions to customers and to enhance shareholder value.

Neither did the proposal reflect the sizable synergies of a possible combination, nor the complexities of putting together two competitors with a conditional proposal at such a low cash price.

Further, beyond failing to share synergies the proposal overlooked an appropriate premium that would be implied by the serious strategic nature of such a possible combination, the scarcity of possible combinations in the railroad supply space, as well as the differing strategic, as opposed to tactical positions, of the two companies today and their respective long-term prospects.

We believe that Greenbrier's integrated business model, together with our diversified product offerings, will enhance financial performance across the business cycle.

Our model creates powerful cross-selling opportunities and captures value for Greenbrier, its shareholders, and its customers throughout the life of the railcar.

Importantly, our diverse product offerings will serve a broad array of commodities.

As a result, we are able to adapt to demand as market dynamics shift away from one commodity or one car type to another.

For example, over the past three years in response to increases in demand resulting from the strong energy markets, we've built 11,000 tank cars and hopper cars for the transportation of oil by rail and for the frac sand markets.

We're dramatically ramping our participation in the high margin tank car business and have successfully secured or will secure major orders across the entire range of freight cars except coal, matching the capabilities of our new manufacturing and engineering footprint and capabilities.

We do not want to be tied to a single car type as we used to be with intermodal and forest products.

We've greatly expanded our available market by increasing capacity and diversifying our entire product portfolio.

This strategy is working.

Monday evening we announced that we received orders for 4,200 railcar units valued at $430 million across the broad range of car types, led by tank cars and automotive.

The recent large orders just received in both North America and Europe for automotive delivery railcar systems illustrate the versatility of Greenbrier as it expands to higher value and higher-margin car types in energy and automotive and expand its product portfolio while continuing to hold a strong position in our more traditional markets like intermodal.

We've improved our competitive position by shifting our manufacturing footprint to low-cost flexible facilities and we've strengthened our origination and funding capabilities in Leasing, driving more volume through our Leasing business to the benefit of our other two segments.

So we remain open to conversations with Mr. Icahn about a possible combination but believe that a successful one would amalgamate the strengths of our two valuable management teams and product lines, create powerful synergies, and strengthen product depth and diversity, making the total entity leaner and much less cyclical.

Today, ARI, a fine company, is riding high on the waves of a tank car boom.

That wave cannot, however, be sustained.

Recently due to a bad quarter, Greenbrier shares fell to an unjustified low.

And continue to trade at enterprise values to EBITDA and PE ratios much lower than our historical levels and those of some peers, especially those heavily concentrated in the now popular tank car markets.

As we improve execution of our strategy we expect to return to more historical ranges.

Greenbrier is trading considerably below where it has traded within the past year.

For example, I personally purchased Greenbrier stock at $25 per share.

I own almost 2 million shares of the Company's shares and I am as interested in shareholder value as any other shareholder.

I believe we can return to well above valuation levels of the last year or so as our strategy is vindicated and as we carry out the execution of that strategy.

However, we recognize and have listened to shareholders and the analyst community.

We understand Greenbrier needs to demonstrate that investor confidence is justified by better execution of that strategy.

This means improving margins, profitability, and capital efficiency.

And that is exactly what we are going to do.

As Mark will discuss in his remarks Greenbrier's strong financial profile has the Company poised for continued growth.

With a solid railcar backlog we continue to see a positive trend in the rail space with average sales prices and mix improving quarter-over-quarter.

Now, with some of the uncertainty removed concerning the Fiscal Cliff, the macroeconomic environment looks much more certain.

Railroad balance sheets are sound and basic economics favor railroad transportation and railroading.

We have upside in intermodal, forest products, automotive, tank cars, plastic pellets, chemicals, cement, sand cars, and in our Marine business.

During the quarter we improved our margins on our Wheel Repair and Parts segment.

And we have more work to do there, both to improve margins and ROI in that segment.

As we improve margins and capital efficiency by full execution of our model and our strategy there's upside in all our business segments.

Within the coming quarter we expect to make more clear how we are going to address shareholder value through execution and through adding additional human resources as we've recently done with Martin Graham in our Manufacturing segment to promote efficiency, improve margins, as well as returns on capital.

Mark, I'll turn it back to you.

Thank you, Bill.

I'll take a few minutes to summarize our first quarter financial performance at a high level and add some additional color.

As you've seen, reported today our first quarter revenue was $415.4 million and we realized net earnings for the quarter of $10.4 million or $0.35 per diluted share, and our EBITDA for the quarter was $31.8 million or 7.6% of revenue.

We've delivered 2,900 new railcars in Q1, a solid start to the year.

As we have stated before, our business ramps up in the second half of the year and we expect deliveries to be more heavily weighted in the third and fourth quarters of fiscal '13.

Our new railcar manufacturing backlog as of November 30 was 9,700 units with an estimated value of $1.11 billion.

This is the eighth consecutive quarter that our per-unit sales price and backlog increased, and it is now $114,000 per unit, up 2% sequentially.

Since September 1, the beginning of our year as Bill noted we've received orders for 4,200 new railcar units valued at $430 million, 1,400 of those units were received during the first quarter and 2,800 units were received subsequent to quarter end.

In addition we received order for two barges, and as noted on many previous occasions, the recovery of Marine has significant upside to our Manufacturing segment.

Our Wheel Refurbishment and Parts segment is also showing margin improvement due to better performance in the Repair and Refurbishment and in Parts and improved mix of business and improved labor efficiencies.

Wheel volumes are still down, which can be attributed to the sluggishness in coal, but we are encouraged by our progress and continue to work on enhancing margins in this segment.

After quarter end we were also awarded a multi-year maintenance contract that will generate $12 million in annual revenues starting in the current calendar year.

In our Leasing and Services segment, fleet utilization was 95.2%, up from 93.5% last quarter, primarily due to fleet additions in Q4 that were placed in service during Q1 of this year.

We continue to gain traction with our syndication partners and we were also awarded two multi-year management contracts which will generate $3.5 million in revenue when fully implemented in fiscal 2014.

Let me provide some additional color on our 2013 outlook.

As we have said before we expect order flow to be nonlinear.

We now anticipate our new railcar deliveries will be 13,000 units.

This is the upper end of our previous guidance as we now have more visibility with our recent orders and with our order pipeline.

We expect these railcars that have higher average selling prices also to have a more favorable margin mix, continuing the current trend.

We also anticipate stronger Marine revenue for 2013 as compared to 2012.

We expect that fiscal 2013 revenue, adjusted EBITDA, and earnings per share will be similar to fiscal 2012, with the second half of the year significantly stronger than the first half with momentum building throughout the year.

This is due to the ramping of tank car production and the anticipated timing of demand for double stacked intermodal railcars.

A reminder, some of our guidance for SG&A, noncontrolling interest, CapEx, and depreciation remains unchanged from our last earnings call.

SG&A will be more heavily weighted towards the second half of the year.

Noncontrolling interest will be up in 2013 as compared to 2012.

And net CapEx will be approximately $85 million.

We expect our tax rate to be about 34% to 35% for the balance of 2013.

We also recognize this can change to the geographic mix of earnings as well as to discrete tax items.

In conclusion, we're keenly focused on execution in the four identified areas.

As Bill noted, we are confident this focus, coupled with our diverse product offerings, integrated model, low cost manufacturing footprint position us to continue to gain share and enhance margins and growth through the cycle.

That concludes our prepared remarks.

We'll open it up for questions.

I'd like to remind everyone that the purpose of today's call is to discuss Greenbrier's first quarter operational and financial performance and results.

And we'd greatly appreciate it if you can focus your questions in this manner.

With that we'll now be happy to open it up to questions.

Operator?

Thank you.

(Operator Instructions)

J.B. Groh, D.A. Davidson.

Hi guys, thanks for taking my call.

I noticed a little bit of a pickup in the barge activity in terms of orders.

And having been there a few weeks ago I noticed that there's a couple in process -- was there any barge revenue booked in the quarter?

And can you talk about the trends in it looks like what's some smaller barges?

I'm assuming that this 15 LOI for $60 million is in addition to the ones that you got the LOI for last quarter?

No.

The $60 million is the same coal contract that is pending permitting on the Columbia River.

Sorry if there's confusion about that.

Okay.

As the release indicated we received two smaller orders since the last public release, so we have a total of four in process.

When you were over there you saw one of the first two.

Okay.

So, Mark, how much barge revenue booked in the quarter?

It was a very small amount.

Less than $5 million.

And we expect that -- that's partially because of the completed contract method of accounting for the barges.

We expect that that will grow throughout the year and be more meaningful.

Okay.

And then one of the things I noticed about the orders that you announced, earlier in the week, was that it seemed like that the demand was fairly broad-based relative to all the buzz about tank and auto.

You've got a lot orders from some other card types.

Can you sort of talk about, Bill, what you're seeing there?

Is this a momentary thing -- or do you think it's a general pickup in the market with the economy?

I think the thing that is so interesting about this last quarter's orders is how diverse they were.

While there was concentration in two major categories that we focused on in the release, we had a substantial number of gondola cars for metals movement, over 500, I believe.

We are seeing some pickup in forest products.

There is strong interest in boxcars, and we have some inquiry activity on with intermodal as well.

We didn't book any intermodal orders during the quarter.

Both in the Marine market and in the intermodal market though, we see some signs of life for the year.

So it is a fairly broad-based situation.

And we're pleased to see that.

And is the customer type -- is it mostly consistent with what we would view as sort of the ownership of the overall market?

Or is there -- are the class ones being more active than leasing companies?

Can you give us an indication there?

It's a mix again of leasing companies and class ones, although in recent years, following the pattern of other builders, we're developing good relationships with shippers.

And we had some very solid shipper orders during the quarter.

Okay.

Thanks for your time.

I appreciate it.

Thank you, J.B.

Brad Delco, Stevens.

Good morning Bill, good morning Mark and Lorie.

I guess -- Bill, to touch on your comments about enhancing shareholder value and seeing the basically improvements in profitability and margin, is there any way you can give us some targets now that you've had eight consecutive quarters of higher value railcars go into the backlog, where you can see on the manufacturing side margins getting to once you kind of get through the production ramps?

Or any, maybe this is for you, Mark, targets on sort of capital returns that you guys are sort of targeting that would essentially showcase the internal initiatives or improvements you guys are targeting?

Brad, that's a great question in connection with focusing our minds -- because with recent activity in our stock and the wild ride we've had the last few months, we have very much focused on communications from and with shareholders.

We've received a lot of input from shareholders, both old and new, and the analyst community.

We are not going to comment overly much about this today but we expect over the next few months we're going to get very granular about our targets and about how we are going to move in the three areas that I talked about, capital efficiency, margin improvement, and areas that need improvement as far as efficiency is concerned.

Got you.

Maybe Mark, I can ask you another way -- we saw the manufacturing margins tick down on a sequential basis, which you kind of set the stage for on the last quarterly call, but can you put a dollar figure on the what items that there were in the first quarter in terms of how much it cost for the production ramp to kind of see what really was impacting margins in this quarter relative to the last?

I'll provide some qualitative pieces to it that might be harder to put a dollar value, but we're ramping up, as you know, we're ramping up production at our, of tank cars at our GIMSA facility.

We're also adding production build out at our Concarril facility at our second plant there.

While we're doing that, we do have some -- both some learning curve inefficiencies that we would expect that of course as we're fully ramped would go away.

And we would also have some overhead under absorption that would occur during the quarter as we both add on people and we bring on fixed costs that were not fully ramped up on the production.

And so both of those would have a drag on margins.

At the same time, we noted that we would expect in the second half of the year for instance that in intermodal railcars where we'd be slowing down that production rates earlier in the year as compared to the second half of the year, so we have in Mexico, we're ramping up production and then some other product lines, we would be slowing down production.

The net of those in the short run would be a drag on margin.

But in the longer run would all be a positive to margins.

One of the big positives to margin is just the difference in 2012 and the current run rate on tanks and the run rate we will approach in the second half of our fiscal year and in the second half of the calendar year.

That, and the margins embedded in the mix of new orders, which are higher, will be helpful.

But I'd also point out that we are employing -- we're really putting human resources into efficiencies on the cost side as well.

And I think that the addition of Martin Graham will be very helpful to Alejandro Centurion.

You look at the growth in our Manufacturing segment and ramping -- in fiscal year '10, from that period on we've had 143% average growth rate.

A little over 2,000 -- close to 2,500 cars built in 2010.

And then moving up to 15,000 in 2012.

So we still have a plateau to reach on operating efficiency.

And the diversification can affect the efficiencies as we ramp.

So it is a slow ramp-up.

We've got to speed it up.

We're really focused on it in both the cost side and on the revenue side.

Brad, to quantitatively perhaps close the loop on those, what this would mean is that we'd expect in the second quarter that our margins would look more similar to the first quarter.

Whereas we would expect in the second half of the year that our margins would look more similar to Q4 of last year, which again was again in the mid-11s that you referred to.

Got you.

That's helpful.

Guys, I'll leave it there because of the depth of your response.

I appreciate that and I'll get back in queue if I have any more questions.

Thank you.

Thanks Brad.

Allison Poliniak, Wells Fargo.

Hi, good morning guys.

Bill, you had talked a little bit about inquiries on the intermodal side.

Is that more on the domestic intermodal or are we starting to finally see some international interest there?

International car interest?

The ones I'm referring to are principally domestic.

Okay, any light at the end of the tunnel in terms of international yet or is it still on the sidelines right now?

I'd say it's very murky.

Okay.

And it swings back-and-forth.

There's a velocity issue that's going on in the rail industry both from efficiencies, but just in terms of coal being so down, it clears a lot of freight car traffic off the railroads.

That affects our Wheel business but it also affects the velocity of intermodal cars.

As that becomes more normalized, and it's never going -- it's not going to be a big growth story, but it should at some point plateau out, we expect that to affect the intermodal demand.

We do expect second half of the year to show some intermodal -- as the buildup for the Chinese New Year comes, we do expect to see some intermodal activity, as Mark mentioned.

Okay.

Great.

And then I might be reading into too much of this, but on your presentation, your objectives and focus, you talked about seeking diversification and growth opportunities in the marketplace.

Is that sort of just in line to what you are doing or is there something else there that we should think about?

I'm just talking about basic strategy of low cost facilities, very flexible facilities that can change over quickly from one car type to another.

Concentrating on larger production runs, efficiencies, and diversity of product in terms of product portfolio offerings.

An example would be moving into as we did swiftly, but without a lot of fanfare in the automotive side, witness the recent orders, and we all believe in the industry that there will be more demand for derivative products like plastic pellet cars following on the tail of the current tank car boom.

Perfect.

Thanks so much.

Thom Albrecht, BB&T.

Good morning everyone, can you hear me okay?

Okay, good.

So I just want to review a couple basic things and then ask a little bigger question.

So, Bill, do you have one or two tank lines at this point?

I forgot.

In my notes for last quarter I can't read my writing.

(laughter) common problem.

We are completing the second line -- that will be the second -- during the second half -- and it just started up.

It will take a couple more weeks for the production to fill that line.

So we have two lines currently operating.

Just finished the one line.

Okay.

And then you have how many lines across the entire network?

Is it seven right now?

Seven or eight?

We have two at Gunderson, three at GIMSA and four at Concarril currently operating.

One box, one gone, one covered hopper, one automotive line.

Okay.

That's helpful.

Okay.

And then as Marine comes back, is it fair to say that Gunderson was breakeven or a money loser but could become a profit contributor in the second half of the year?

Mark, I'll let you --

In terms of the effect on the consolidated results, it would not be a contributor, because as we noted earlier, it would not be a contributor in the quarter that just ended, because as we noted today and on our prior call, we're producing intermodal railcars specifically in anticipation of orders later in the year.

So what is actually an external sales is not a big contributor.

It's also building refrigerated boxcars or third party sales.

We would expect that to reverse again in the second half of the year as well as Marine coming on.

So that would be a big swing to the numbers.

Not to correct Mark but I would say that we're leasing those intermodal cars with the expectation that will convert to sales in a subsequent period.

Okay.

That's helpful.

Lastly I know Brad tried to ask this question -- maybe if I word it as not so much guidance or even targets, but just as you think about margins, you've got now a lean guy attacking some things, you're going to be comfortable with your mix within another quarter or so.

And your production runs.

Where do you think manufacturing gross margins might be able to get to over the next couple of years assuming fairly stable production?

Or if you don't want to talk about that, how about a consolidated EBIT margin?

Again, not guidance but just a discussion, your EBIT margin hangs out around 6%.

We know where the manufacturing gross margin is, but what's possible for this Company?

I mean, we've seen what's happened at one of your competitors based out of St.

Louis.

Can you just kind of chat about that a little bit?

Okay.

I'll try to restrain myself when you guys gang up on us like that -- (laughter) it is very difficult to answer it in granular -- without giving granular about it because every car type has a different demand profile and supply profile.

Tank cars today -- I say today -- are wildly profitable.

And you have to look at the longer-term.

And the longer-term strategy.

We are obtaining market share in tank cars today and we are achieving very attractive mid teens and upper teens margins on them.

But we don't have enough tanks in our total mix to make it wildly exciting as some of our other peers, especially the one you mentioned.

Which is a nice company, but it's principally making all that money on tank cars.

And the problem that we've all seen in this industry is that things change.

And it's better to have a diversified platform and product mix than it is to be a single car producer.

Greenbrier has in the past been a single type car producer.

Intermodal and forest products.

If you read the press about us you will see the intermodal car company.

But we are much more than that today.

So when you look at margins you have to look at the mix of -- across-the-board.

I think in getting in stride, certainly 12% to 13% margins as a goal, not across the mix of products as we hit our stride, shouldn't be out of the question.

And we should be able to shoot for more than that.

This is an industry that still has considerable competition.

And it is difficult to sustain 20% margins in any product, because of capacity additions and so on.

And so it's a moving target.

Thom -- I know you've focused on Manufacturing, but we'd certainly echo in our Wheel Services business that we're focused on execution and enhancing our margins and efficiencies there too.

So certainly through the cycle, we have loftier goals than what we're currently realizing in that segment.

I can appreciate that.

I think the question is focused on Manufacturing, because that's ultimately the tail that wags the dog for your earnings upside and why people get interested in your stock.

I appreciate the effort to try to answer that, Bill, in a volatile market.

The last thing I would ask and I'll move on -- if we look out a couple years and we continue to see this housing recovery, what kind of production in terms of annual units might a lumber car forest products be able to do since you were able to give us a run rate on the tanks by the end of this calendar year?

I'm not even thinking end of the calendar year, I'm just saying what kind of volumes can you get?

Is it a couple thousand cars?

5,000 cars?

Just humor us a little bit.

I think that two things.

First, while forest products is recovering with -- every week it seems that you're reading about housing improvements and particularly construction in residential apartment dwellings and so on, but it's off a fairly low base.

I would say that in more normalized times if the housing market fully recovers, 5,000 to 6,000 on the upside is not out of the question.

We've had years where we've run from 2,000 to 4,000 cars for forest products.

So it's -- but it's going to be a time before all of the inventory -- especially center beam cars are worked off.

But it's very good to see some positive movement in forest products and it's helping us on the boxcar side, particularly now, and I think we'll see other car types also responding.

The other area that we don't think about so much is hopper cars for cement and other construction.

And I think that that might be part of the reason why we're seeing more strength in the gondola market.

Thank you.

Sure.

Peter Nesvold, Jefferies & Company.

Good morning guys.

If I just limit the questions to the quarter, the Leasing and Services gross margins -- they were off the charts.

I think it was 57% which without gain on sale in there I don't think I've ever seen it that high.

So what drove that in the quarter?

And is this some kind of new normal?

It's a good question, Peter.

It's in part related to our Management Services business as well as to a maintenance contract and the expiration of that contract and some maintenance reserves.

So it was a very good quarter there.

I don't know that I would consider it a new normal going forward.

I think that something closer to the 50% area is a margin, is what we would expect in the quarters ahead here.

Okay.

And then my follow-up question, as you are expanding production capacity in GIMSA, the minority interest line -- should that continue to sort of widen from current levels?

I know it's a bit of a modeling question but just to make sure that I'm getting that right?

You are getting it right.

The one thing that can, directionally, that's absolutely true.

It can be a little volatile from quarter to quarter depending on when we syndicate railcars because -- that's what's referred to as the railcars for sale.

And until those cars are sold of course it's hung up on the balance sheet and we don't recognize the margin.

So directionally, you're correct.

That should grow as we ramp up production.

Okay.

Great.

Thanks a lot.

Thank you.

Art Hatfield, Raymond James.

Morning gentlemen.

Just a couple things.

A follow-up on Peter's question about the maintenance accruals.

Mark, to clarify, that's not a change in how you are accruing for maintenance on cars that you own?

It was related to a specific contract with regards to a management contract?

Is that correct?

That is correct, Art.

Okay.

And that contract ended, so that was the true up related to that?

Is that fair?

That's correct.

Just on -- a couple other things.

On -- your lease fleet statistics, sequentially, the number of owned cars went down 1,000.

And I can't remember if -- how you do this or have done this in the past, but when cars -- when you have cars that are being held for syndication, are they historically -- have they've been counted as part of the owned fleet?

Yes, they have.

I think the other thing, Art, is that we're going to need to start rounding to hundreds rather than thousands because if we have 10,600 in one quarter and 10,100 in the next quarter, then we're rounding to thousands and it looks like the movement for a small fleet is a lot bigger than it is.

Thank you.

That was my follow-up question.

That explains a lot.

That's exactly kind of the magnitude of things there, so I think we'll start rounding to hundreds in the future.

That's very helpful.

Thanks.

And then finally back to the tank car production build, have you mentioned -- I apologize if you did answer this, but I was pulled off the call for a second.

Did you mention how many cars -- tank cars you manufactured in Q1?

I don't believe I did, no.

Could you give us that number?

No.

We didn't disclose that.

What we did say is that we've been building on one line -- and where we were -- on the one line that we have earlier said that we were ramping up to eight a day -- and that by the end of the year that we would be -- have the capacity at the end of the calendar year that we would be operating at closer to -- with two lines closer to 16 a day.

Got it.

Okay.

That helps.

And then another question on this, as I think about and try and wrap my head around the modeling for myself with regards to gross profit margin, you've been asked a lot of questions and answered a lot of questions on that, but just one other thing on that.

As you ramp up tank, is there anything that you can foresee that you maybe would be concerned about with regards to could create a hiccup, maybe something with the ability to get enough employees or maybe what your supply chain looks like?

Are you fully set up with regards to all the components and other raw materials that you need?

Is there anything that we should think about that could be something that may crop up down the road?

You sound like you've been in some of our operations meetings, Art.

We are in good shape on components.

It's just the execution, execution, execution.

Tanks are not the easiest car in the world to build.

And we've ramped heavily at between six and eight cars per day in this quarter.

So we just have to keep doing it.

We have to do it efficiently and continue to maintain the margins and the backlog.

And you are having no problem getting the needed employees to ramp up?

We don't have a problem getting employees at the current rate, but we had a lot of execution issues.

We're working with every day -- so I don't mean to be cautious about it, but it's an operations issue that sensible people concern themselves about every day.

Absolutely.

You don't have an issue where you're at with turnover, anything like that?

Just the normal --

No.

It's all normal.

Just normal operating stuff.

But it is still a very significant thing to take a facility like this, add an additional line -- it's not the cost of adding the line because the facility footprint was there -- it is the execution of the additional throughput while you're running -- we have been running two other lines there, covered hopper car lines, and we're now down to one line of covered hoppers and two of tanks.

So and transferred the covered hoppers over to Concarril.

So we are I think in a good, sound position to reach our goals, but we have to execute and that's where the margin efficiency comes in.

One follow-up to that.

You kind of mentioned today in your release and on your call that prior to today you've been talking about getting up to 3,000 car run rate.

Now you are at 3,800.

Given that, I know in the grand scheme of things an incremental 800 cars isn't much but do you worry that maybe if too much supply get out of the market that it may have an impact on pricing ultimately?

And may have an impact on the margins that you hope to get down the road?

I don't worry about it because it is a relatively small part of my total portfolio.

Others should worry about it.

If I were only building tank cars I would worry about late 2014 and 2015.

But --

You're not saying that because you're going to go out and wreck the market with pricing and that doesn't worry you, right?

We're pricing to get orders.

And if others aren't following that, they're not going to get the orders that are out there.

We've been getting orders.

Okay.

So I think though that our margins in tanks are excellent.

And everybody else's margins in tanks are excellent to super excellent.

Okay.

They just have a lot more of them than we do.

No.

Good enough.

Thank you.

Thanks for your time.

Sorry for all the questions.

Not at all.

Just one point though following up on your questions, don't overlook on margins, on some of the questions, the tone of the questions on margins, the relative drag that the lack of intermodal orders for sale has been on the average Manufacturing margin.

As that intermodal market does come back on the sales side, that will be a solid contributor to the margins and will help us step up to those ranges that Mark mentioned earlier for the second half of the year.

Okay.

That's very helpful clarification.

Thanks.

Sal Vitale, Sterne Agee.

Good morning, all.

So the first question I have is on -- sorry to beat a dead horse but on the Manufacturing margin -- if I look at the step down sequentially, it was 11.8% last quarter, 9.4% this quarter, if I look at the deliveries it was down from 3,500 to 2,900.

So can you provide some color on, besides the operating leverage impact of having fewer cars, what else was going on that caused the margin to decline by over -- close to 250 basis points?

Right.

Part of it is mix.

Again, we did not have any external sales of intermodal cars this quarter and we did the prior quarter.

Part of it as well is we are bringing on capacity, so it does in part relate to your fixed overhead and ramp-up costs.

So we've been bringing on capacity at our two Mexican facilities and we have the fixed costs associated with the build out of those production lines and of training new personnel without the related orders.

So that is a drag, without the related not orders but without the related deliveries because we do have orders for all of those lines.

So we had the under absorbed overhead.

And then just the learning curve.

So it's a matter of mix, that fixed overhead that is associated with those additional lines.

And then the learning curve at the ramp-up of those facilities.

Okay.

Can you give any color without being -- or be, rather be as specific as you can be, those start up costs and the learning curve, how much would you say that was a contributor?

Well, I think Sal, I think it sounds like you are on a similar thread as the prior questions, and I think the best way that I could answer -- because everything is at a facility is so integrated, I think the best way you can look at it is to say that in the second half of the year that we would expect these margins -- our margins to be much closer to what they were in Q4 when we are ramped up at these facilities.

And have -- as well as have intermodal, as Bill mentioned, and then for the second quarter we would expect our margins to be closer to the first quarter.

Okay.

That makes sense.

And then just one question, I guess a clarification on the guidance, so you increased the deliveries guidance from a range of 13,500 to 15,000 to 15,000 and yet you left your EPS guidance unchanged.

Well, the EPS guidance was roughly flat with last year.

So are we to read into -- read anything into that?

Because you would think that if the deliveries are increasing, that your guidance would be a little bit better than what it was.

Is it just some conservatism built in there?

Or is there maybe one of the other sectors -- one of the other segments that's going to be a little bit lower than you had originally expected?

Sal, I think just to correct the numbers, I think we gave a range of deliveries -- I think the upper end of the range was 11,500 to 13,000.

And I think --

My numbers are wrong.

You're right.

I apologize.

And just put a stake in the ground at 13,000 to make it simple.

We are still -- this is a complex business with three moving parts including Leasing and Repair and Refurbishment.

We expect significant developments in both of those other businesses.

And we're focusing mainly today on Manufacturing from the questions.

Fair enough.

It's the major portion of the dog, if not the entire dog and the tail, but the point, though, that -- is that we were influenced in that earlier quarter by the overall economic tone in the economy, the global economy.

I think that while the improvement is marginal, it's still a significant improvement.

We're feeling more optimistic about the year.

We've received some additional vindication in the marketplace with some solid orders, filled in remaining holes in our order book for 2013 and into 2014.

And in tanks, we're all the way through out in 2014 at our capacity that I've announced.

So we're in good shape.

We're happy about that.

So it's just, today it's just execution, execution, execution, and addressing some of the concerns that all of you folks have told was we need to pay more attention to and we've been trying, but we're really getting into it.

Right.

I appreciate your response but I was curious if you increased essentially your guidance on the delivery side, why your guidance on the earnings and revenue and EBITDA is not also inching up a little bit.

To be clear, Sal, in the previous guidance we gave, was that deliveries of 11,500 to 13,000 cars -- and at the upper end of that range, at the 13,000 range, that we expected our EBITDA and earnings to be similar to 2012.

That makes more sense.

All right.

Sorry I missed --

Okay.

Sorry about that.

I think you said a very important word.

We tend to sometimes be conservative and we've seen the consequences of being overly conservative.

We do need to be more clear and we're going to try to be much more clear in these calls and in other communications with the street.

So thank you for your question.

I think it was a valuable question.

Okay.

Just one follow-up if I could.

The tank order delivery -- tank orders that you received in 1Q, when are they expected for delivery?

Should we expect that to be calendar '14 delivery?

The bulk of them would be calendar '14.

We don't want to be too specific.

In terms of the total orders, over one-third would be in 2013.

And probably not more detail than that.

But most of the tanks would have been in calendar 2014.

Okay.

Thank you very much.

Thank you.

Ken Hoexter, Merrill Lynch.

Good morning, it's actually Wilson sitting in for Ken.

If I could just touch on -- if I could touch on just the tank cars a little bit more, not to get ahead of myself, but have you started to receive any indications for order levels going beyond fiscal '14 or have -- or even any indications of interest just to try to get a sense for kind of the sustainability of it?

Obviously you have given a lot of thought -- we appreciate that, but any visibility or any comments you might have going into 2015?

I think in general the market's still considered to be very hot.

There are a lot of people interested in booking capacity.

And it's just difficult to interpret this beyond 2015.

I think the major thing is to look at pipelines, look at the supply side, how many cars -- how much capacity has been added to the industry.

When you get out past 2014, look at whether the demand would continue for transportation at the same pace it is today, for oil tanks.

So it's a very interesting and complex market that needs to be studied very carefully to interpret it.

We're talking about -- we're out through 2014 and we're restricting most of our focus on the calendar 2014 period.

Now, having said all that I think there's going to be a very solid demand for tank cars throughout the rest of the decade, but I think it's -- history demonstrates that it's not a good thing to believe that something that is swelling up like a balloon is going to last forever.

I think it's not going to be at the pace that it is in 2013 and 2014, for sure.

Right.

And I think we all kind of share that concern to a degree, more or less.

If I were to ask who are the major buyers from you at the moment for the tank cars?

Are they mostly the rails themselves?

Or are they shippers or leasing companies?

Could you give a little bit more color on that side?

Yes.

We've talked briefly about that earlier and don't supply specific customer information but the mix was a fairly even mix of railroad shippers and leasing companies for all of the cars.

And in the case of the tanks, it would be principally shippers.

Sure.

And if I were to switch gears a little bit, the Maintenance contract that you referenced in the earlier comments, $12 million, is that a new contract that's going to be incremental to the current run rate for the Maintenance segment?

Or was that replacing an old contract or any kind of color on that?

We're seeing solid demand for our Maintenance business.

And I think we have to pay attention in that business to margins, pricing, and other things.

You'll see that the margins and Repair -- in that business -- at least on the Repair side of that business -- we're seeing good demand.

So the incremental nature of the business, Mark, do you want to address that?

Yes, that is a new contract.

We would fill that contract in our existing facilities.

So it's part of our existing footprint, but it is -- it gets back to really mix of business for our Repair business and it's a good type of business for us to have as part of our footprint and as part of -- as far as our base.

Understood.

And lastly a modeling question, the tax rate obviously is going to fluctuate depending on where your railcars are coming from and given your three tax jurisdictions -- as we think about more of your capacity going low cost in Mexico, directionally, where do you think the tax rate goes from -- about 25% that you guys did this quarter -- is it more downward considering the production lines that coming online in GIMSA and Concarril or do you kind of expect it to be flat throughout the year?

We would -- we would anticipate it to be about 34% for the balance of the year based on the mix of business and where we're producing it.

That's in our forecast, though.

Okay.

Great.

Thank you.

Matt Brooklier, Longbow Research.

Thanks, good morning.

Question for you on your lease fleet utilization.

That actually I believe improved sequentially versus going the other way in the prior two quarters.

I'm just curious if you could provide some color on what drove that improvement?

Yes.

So we produced some cars in Q4 for a lease fleet that were on their way to the customer, so they were not in -- they were not considered on lease in Q4.

They were placed in service in Q1, and that's the reason for the increase in the utilization rate.

And that statistic can be a bit volatile as we're going through a transition in intermodal.

We think there's a deep market for intermodal, gross statistics look good.

But the same intermodal comment that was made earlier -- as we're leasing some of those intermodal cars and as we put them into production, out of production into the -- into service we can have that bounce around a little bit.

Okay.

So all things being held constant, the lease fleet utilization and the move there was more a function of units and syndication versus absolute utilization levels?

Can you repeat that?

If we exclude some of the moving parts and the cars held in fiscal fourth quarter, and we remove that impact, I'm just looking at the fleet utilization.

If that was the predominance of the change and the improvement in the current quarter?

Correct.

Okay.

I know that coal railcars were a headwind in the prior two quarters.

Just curious if you could give us an update in terms of your coal railcar lease fleet.

And then maybe just a general overall color on the industry?

I'll speak to the lease fleet and a piece of it.

In our owned lease fleet, we only have a very small coal exposure, less than 500 cars.

And most of those cars are on lease, but indeed, the delta between the 95% and 100% utilization is due to some coal cars, principally due to some coal cars being off lease.

We do, as part of the WLR GBX fleet that we have an economic interest in and that we manage that fleet have a more significant exposure to coal.

Again, we have very high utilization rates there, but the lease rates still remain depressed in that car type.

And our strategy is to be -- to put equipment out on shorter-term leases until the market improves.

And as far as the overall market for coal, I don't know if you have anything else to add, Bill.

I think just, the only thing I'd add is that natural gas prices -- if those firm up, more coal -- should have some relief from its moribund position.

It's very -- certainly coal is not dead, but it certainly has a very bad cold -- or maybe something more serious than that.

And one has to be patient, we expect -- we don't expect growth in that market -- the best one could hope for would be solid replacement demand over time in the coal market, which should firm up lease rates over time.

It's going to be a long slog, I think.

Okay.

And with respect to recent new railcar orders, outside of anything I guess tank or energy or petrochemical related, where has there been the biggest change within the railcar industry?

Just trying to get a sense for where is there incremental opportunity over the next 12 months for both Greenbrier and the industry to produce more railcars?

Two things that just are really simple principles.

Cars follow specific needs.

So if you look at where the growth -- that's one.

Number 2 is to look at where the growth is in loadings.

The growth in loadings is in automotive, and in other chemicals, and other certain oil, and other certain commodities.

Intermodal is strong, and actually loadings in general, if you take out grain and coal are up 5.5% for November.

So I think you just have to look at the specific loadings.

Automotive is clearly one that we think through 2015 is going to be just as exciting as -- in its own way as the story for tank cars, because there are fewer participants in that market.

Okay.

That's helpful.

Thank you for the time.

Thank you.

Thank you, operator.

And with that we'll consider this any concluding remarks that we might want to make, Mark?

No, just as always, we'll be available after today's call to answer questions.

And thank you for your participation in today's call.

Have a good day.

Thank you.

This concludes today's conference.

Thank you for your participation, and you may disconnect at this time.