Greenbrier Companies Inc (GBX) 2013 Q4 法說會逐字稿

Hello, and welcome to the Greenbrier Companies fourth 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 call over to Ms. Lorie Leeson, Senior Vice President and Treasurer.

Ms. Leeson, you may begin.

Thank you very much.

Good morning everyone, and welcome to Greenbrier's fourth quarter and fiscal 2013 conference call.

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

We will make a few remarks about the fourth quarter and fiscal year ended August 31, and comment on our outlook for 2014.

After that we will open up the call for questions.

Please note that we have provided additional financial information in our earnings release and a supplemental financial information slide deck on the Investor Relations section of our website, that includes key factors for the changes in the various figures.

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 of the important factors that could cause Greenbrier's actual results in 2014 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

A few highlights for the quarter include record quarterly adjusted EBITDA of $49.5 million, and net earnings of $22.5 million, or $0.69 per share excluding restructuring charges.

Economic EPS was $0.79 per share, which excludes the impact of the out of the money shares underlying our 3.5% convertible bonds.

We reduced net debt by $110 million during the quarter, and our Board approved a $50 million share repurchase program.

We are confident that our balance sheet and liquidity will support this program, and allow us to continue to delever and take advantage of growth opportunities.

Now I will turn it over to Mark to discuss progress on our goals.

Thank you Lorie.

I would like to take a few minutes to update you on our capital efficiency margin goals, and then we will turn it over to Bill, and then back to Lorie to provide outlook for fiscal 2014.

And then we will open it up for questions.

As a reminder, in April we announced initiatives to liberate at least $100 million of capital by February 28 of 2014, and grow our aggregate gross margin by at least 200 basis points to a minimum of 13.5% by the fourth quarter 2014.

The goal of these actions is to increase ROIC, something that we are very focused on, and in turn to enhance shareholder value.

We have substantially met our $100 million capital efficiency goal we outlined, and we will continue this focus.

During the quarter, we reduced working capital by $55 million, way ahead of our $25 million goal.

In addition we realized $35 million from the sale of lease fleet assets.

We expect more to come in 2014 in both of these fronts.

Make no mistake about the lease fleet sales.

We are committed to our leasing business.

It plays a vital role as part of our integrated model, and it provides stability and visibility to our earnings.

We continue to refine our leasing model.

Our plan is to drive more leasing volume as an originator and underwriter, we hold these assets short term on our balance sheet, then syndicate them up to investors and manage the assets.

We are reducing the permanent capital we invest in this business, and are increasing fee income.

In the fourth quarter we realized proceeds of $35 billion, as I just had mentioned,while retaining the management of these assets.

In the first quarter of 2014 we will continue this trend of selling assets that are no longer tax efficient, and going forward, we plan to make further refinements to this business.

In the Wheels, Repair & Parts segment, last quarter we said we identified 14 locations that thick sells, or sell that were underperforming, and not generating sufficient returns of margins.

We have now closed or sold four of these locations with head count of approximately 50 people.

So on the close or sell side, we are well on our way.

We have another three sites we intend to sell or close by the end of the second quarter of this fiscal year that employ about 150 people, with capital employed of about $15 million.

With the facilities on our fixed list, it is taking time to execute on improving these facilities, that don't generate sufficient margin or ROIC, and this is a big focus over the next few months, and the year ahead.

Some of the steps that we are taking include operational improvements, and renegotiating more balanced commercial terms with business partners.

While we remain deeply committed to serving our customers in this business, we are also deeply committed to improving capital efficiency, and resource allocation, and improving the performance of this business.

As such we will continue to evaluate the operations in this segment.

On the gross margin enhancement goal, we are hitting our stride on the manufacturing front.

Having achieved significant margin improvement through enhanced operational performance, a richer mix of business, and by enhanced lease syndication activities, driving more volume through manufacturing.

Overall gross margins were up 100 basis points during the quarter, which positions us to achieve our goal of at least a 200 basis point improvement by the end of 2014.

We expect continuing increases in gross margins through 2014, but we don't expect the improvements to be linear and particularly we expect gross margins will moderate in the first half of the year, due to a number of factors including railcar mix.

I will now turn it over to Bill, and then we will turn it back to Lorie, and then open it up for your questions.

Thank you Mark.

This seems to be a day for multi-tasking.

I am surrounded by folks in costume here.

I just have an orange sweater on.

Not only that, it is Happy Halloween.

And Happy days in Boston.

Plus I guess a cornucopia of railcar builders all coming out and talking to you at the same time.

Thanks to those of you who joined us this morning.

It seems like St.

Louis and St.

Charles have had a bit of bad karma, but remember, there is always another year.

I won't repeat my comments in the news release, nor dwell on the specifics that Mark will cover and Lorie will cover, but I will try to give some background on market dynamics, and our strategy and my views of things going forward.

The rail story continues to remain strong, with book-to-bill stable in the industry, in our case, and strong order activity.

More significantly the pipeline for orders, particularly is well-positioned for our strategy, which is the to diversify and place ourself in front of other demand waves, which have we have called right so far.

I want to remind everybody that orders are not linear in the railcar business, so you have to consider seasonality and longer term trends.

The activity in order inquiries and probable transaction remains strong, but particularly for us because of our diversified manufacturing strategy.

As we have been predicting, a diversified product and flexible manufacturing strategy is paying off.

We are now in the right marks with low cost capacity and new products at the right time.

Remarkably, 90% of our anticipated gross margin for manufacturing in our 2014 plan will be in three products, which were relatively new only two years ago.

And where we were not able to compete effectively or at scale.

These are automotive and covered hopper cars, especially for energy.

In addition this year will be, we believe a good reversal on the grain markets, and we are strong in those markets as well.

So automotive, covered hoppers especially for energy, will be strong buoyed by continued alternative cars, and a new plastic car which we have introduced and received initial orders on.

That is going to be a strong market moving forward.

Greenbrier can compete aggressively in that market.

We intend to compete aggressively in that market, and we have recently demonstrated, by hitting our cost curves and bringing down hours, and taking costs out of cars, we believe that these are all exciting things.

Finally, crude by rail is here to stay, but as JDX and others have pointed out, there is much more to the tankcar world than oil by rail cars.

Tanks are now a target for Greenbrier of production earlier than we predicted in our ramping and more significantly our margins are improving dramatically.

For example with some changes in component and sourcing, critical components taking out as much as $2,000 per car.

We really hit our stride in the fourth quarter where we had the capacity to produce between 3,500 to 4,000 tank cars annually, targeting a 20% to 25% normalized market share in a steady state market, which we anticipate will be 12,000 to 15,000 cars somewhere down the line after 2015.

We are also focusing on specially tank cars, not just general purpose tanks, and not just tanks for oil movement.

Recent developments are actually healthy for tank car demand longer term, and our backlog extends through most of calendar 2015, and that is our firm backlog.

Even better margins as I have said are now improving.

Inventory has been reduced for that reason, as we have hit our stride with steadily increasing efficiencies.

Hours are declining steeply as we hit that learning curve, and having increased the ramp, will not be slowing the ramp, so challenges of continuing ramping we will be past this.

So I think we will have in our fiscal 2014 and 2015 we will have firm backlog and very strong performance in those three product lines that I have mentioned, automotive, covered hoppers including plastics, and tanks,just due to the backlog.

In terms of forward views, I would say Greenbrier is bullish on the industry, and bullish on our strategy.

The real story is going to be continued innovation and cost reduction, with higher margins in the automotive, covered hoppers for energy in some relevant timeframe,the return of inner modal.

That is a big potential for us, and also seeing the stride hit in marine construction at our Gunderson facility here in Portland.

There could be some very interesting tailwinds driving higher performance for us, if those markets recover sooner than industry pundits are suggesting.

We are making serious stride to the use of robotics, global sourcing, and value engineering at Gunderson.

Took some pictures to take labor out of the cost of intermodal cars and other specialty cars, Portland is capable of competing with any factory in North America in the intermodal car type, and in some specialty cars.

More importantly for Gunderson, it is our only marine facility with deep water port access, and the inquiry book and contract negotiations that are active, such as it happens in the airline business, these have long pipelines looking very positive, and we have managed to keep the marine business functioning with a slight increase in our backlog there at Gunderson.

To illustrate how important Gunderson can be to us, in terms of possible upside in the 2012 fiscal year, EBITDA contribution was $22 million.

ROIC was in the high-25s, and in 2003 it had heavy headwinds building only 1,500 wells of double-stacked cars, yet we received 2,200 wells of orders, or about 90% market share for orders offered during that period.

Industry orders when normalized will be far above the 5,000 level, probably closer to 7,500 units or 8,000 units, and as velocity falls in a normalized market in many areas, we think that the intermodal market will come back earlier than industry forecasts, which we believe are overly pessimistic.

And not addressing underlying fundamentals.

We are bullish on intermodal.

We are bullish on marine.

However in our plan, we are assuming pretty much only modest improvement at Gunderson, so we believe that if those markets do come back, and we expect marine to come back earlier, then we will have some possible tailwinds moving us into this year.

None of which is really reflected in the guidance that Mark and Lorie have been giving, or will be giving in the press release.

Talking just for a moment finishing up on shareholder value, we have been listening to our shareholders from early in the year, we have made a disciplined effort to communicate with and listen to our shareholder base, and many shareholders, several with significant holdings, meaningful holdings have been very helpful in working with us in many ways, including even marketing referrals, which we always are happy to receive.

If others of our shareholders want to do the same, we are wide open to it.

We are trying to get a broad mix of investor categories, and we are really listening, and not only are we listening, the things that we are hearing and suggestions that have been made, are helping us to put more momentum behind our strategic plan.

As you know, as Mark has commented on, our strategic plan fundamentally is to have a transformation in our leasing business, recycle value in that business more efficiently, in terms of capital employed ROIC and transparency, so we can understand, we can explain to our investors the value of the important contribution leasing makes to our business model.

We are making major strides and headway in improving our ROIC, reducing capital employed in their business, and employing capital in a more efficient way.

We have embarked on a serious effort to reduce share count given our improved balance sheet.

The operating ratios and relevant capital ratios to EBITDA have been declining dramatically, and we will have ample cash to not only reduce our share count with a stock buy-back, and also invest in productive and more efficient projects for growth with the capital that we free up from these various programs.

We are going to overshoot the target of capital that Mark has just mentioned.

We are at around $100 million which was our target.

We have a couple of transactions in the works, that will easily reach another 50% of that in 2014, and we might go much beyond that in 2014.

So in summary, we are excited about the future.

Very proud of the our management team.

I want to thank them and all of our employees throughout the network, particularly our factory workers who have been struggling with very aggressive goals.

We really believe in them, and we appreciate their contribution, and finally, to our shareholders and other stakeholders who have been helping us build value through engagement in a positive, constructive and intelligent way.

Now I will turn it back to Lorie.

Thank you

Thank you Bill.

We are confident about our opportunities in 2014, and based on current business and industry trends, we expect higher deliveries in 2014, which should exceed 15,000 as a result of our product diversification and footprint expansion efforts.

We anticipate revenue will exceed $2 billion, and earnings per share excluding restructuring charges will be in the range of $2.45 to $2.70 per share.

We expect gross margin improvement, but as mentioned earlier, we don't expect the improvements to be linear.

Overall we expect 2014 will be stronger in the second half than the first half, and we expect our tax rate to be about the same as 2013.

We expect gross CapEx in fiscal 2014 to run about $55 million, with proceeds from sales of leased rail cars to be about $60 million, continuing with our theme to reduce the amount of permanent capital deployed in our lease fleet.

Depreciation and amortization will be about $40 million this year, and in order to better align with industry standards, beginning in 2014, our adjusted EBITDA will reflect a 100% of our jump to joint ventures earnings, instead of the 50% we previously reported.

We anticipate cash restructuring charges of $2 million to $3 million over the next several quarters.

This range does not include future non-cash gains or losses from facility reductions as they are not presently determinable.

As announced on our last earnings call, we will begin providing segment operating income beginning with Q1 of 2014.

We believe these figures will serve as important incremental information, and add transparency to our reporting that will help paint a better picture of our business, and measure performance within the various segments.

As you can see we are taking a broad and balanced approach to enhancing shareholder value.

There are plenty of opportunities in front of us, and management and the Board remain confident in our long-term growth prospects, our strategic initiatives, and the strength of our integrated business model.

One last note.

Bill and I will be participating in the Stephens Fall Investment Conference in New York City on November 12.

We look forward to the opportunity to meet with current and future shareholders.

And now we will open it up to questions.

The first question is from Allison Poliniak-Cusic with Wells Fargo Securities.

Your line is open.

Hi guys, good morning.

Good morning Allison.

On the gross margin improvement obviously a nice lift on rail.

Is there any way to quantify, I know you are doing a lot of work behind the scenes, but what was mix in the quarter in terms of that favorable upturn?

Can you repeat the question?

It is mainly the lift, the sequential lift in gross margin, and I am looking at the rail segment specifically.

Nice lift there.

You are certainly doing operational efficiency initiatives, and so forth.

But is there any way to quantify what the more favorable mix I guess with the tank cars if any had on that gross margin?

Well, Allison, I think there are three pieces of it.

One is increased, without quantifying that one is increased production rates, particularly in tank cars, so that we had some efficiency improvements that Bill mentioned.

And also with the higher mix of tank cars, which we have acknowledged is a high margin product.

And then the third piece would be an increased volume of lease syndications, which showed through our manufacturing segment, which we also acknowledge is a high margin product.

So all three of those are contributors.

I think also, Allison, just managing complexity of the ramp in tank cars, having a significant changes in internal process brought on by the addition of Martin Graham, and Alejandro's focus on performance, performance, and now that we have stabilized in several areas, the manufacturing margins ought to really kick in, and we have been slow to do that.

But in this quarter, everything gelled and the by-product of it was lower inventory as we had more stable production, and a stable platform in both of our plants in Mexico.

Okay.

Perfect.

And then the wheels and repair business, I feel like we have been talking about lower and lower and lower volumes in wheels.

Is there a point that you are looking to in next year in fiscal 2014, where we could maybe see a more positive inflection, maybe just even based on easier compares there?

A lot of that is being driven by coal demand.

There are some positive signs that energy of all types, not just tank cars.

People think about energy cars as tanks.

There are all kinds of interesting developments going on in the energy-related fields, including gas tendered locomotives.

Huge markets there potentially.

We are looking at frac sand cars.

We are an actually seeing in some of our customers, different techniques that are going to drive more demand for that.

So as those things occur, velocity on the rail will change, and we think that there will be a modest recovery in coal over time.

So it is going to be a driver.

More significantly though, in both our Wheels, Repair & Parts business, we have got a capital efficiency program that is driving everything.

Our margins in wheels are lower than they should be.

They have to be at least at our cost of capital.

And we have got a lot of capital employed in that business.

I am very optimistic about the management changes we have made in the last six months.

We are taking a few hits as we change out the leadership team, but we are focused on safety, safety, safety,efficiency and capital efficiency.

We had a lot of capital tied up in underperforming units, and all we did is we went to our customers and said we can't continue to do this.

We have to make some changes.

Our customers have helped with that.

We have also on pricing and on distribution and finally we are just closing and taking capital out, where capital needs to be taken out.

We are also looking at service design, location, and a more efficient integration, now that William Glenn is running this with our commercial strategy.

So we do have a plan for increased margins this year,reduced capital and more capital efficiency, but this will be a year of transition in that business, and it is a challenging area.

Okay, thank you.

The next question is from Justin Long with Stephens, your line is open.

Good morning guys.

Congratulations on the quarter.

As you look into 2014, looking at the guidance that you gave, can you comment about the level of visibility that you have to that guidance, and how much of the 15,000-plus railcar delivery guidance is already locked in?

Thanks Justin, and good morning.

You will see when we file our 10-K before the end of the week, that about as of August 31st, about 55% of our backlog is, or about 55% of what our guidance was in backlog.

Since that time, since August that number has grown to about two-thirds of what we have given guidance on, or about 10,000 cars that we have firm orders for now.

Okay.

That is helpful detail.

I would guess the remaining orders that are in the backlog for 2015 are primarily tank cars.

Are there any other car types that extend out to that timeframe?

Yes, automotive and other cars look very strong.

We have a very strong backlog into the most part of 2014.

And you are right.

To your point of 2015, Justin is you mentioned tanks and as Bill mentioned, automotive cars in particular.

And a little bit on the hopper side

We had a very strong launch of that Multi-Max product.

That is a knockout product, and we expect to have a very good market share.

There is a real need in automotive, and a very strong market for the kind of technology that we introduced, and we certainly have a jump on the competition in that.

That is good to hear.

And Mark, maybe one for you on CapEx.

With the progress you have made on the capital initiatives, and things tracking ahead of planned, how should we think about CapEx in 2014, and maybe if you could comment on net CapEx as well after we exclude asset sales?

Sure Justin, this is Lorie.

We expect growth CapEx in 2014 to be about $55 million, and then proceeds from the sale of leased rail cars to be about $60 million, so a net negative $5 million.

And the bulk of that $55 million is going to be primarily in our manufacturing side of our business, as we continue to invest for efficiency purposes.

We do have some CapEx associated with the Wheels, Repair & Parts business, and then a base load of activity within the leasing business.

Okay, great.

That is helpful color.

One question I had on the wheels and repair business.

It seems like you have a pretty sizable opportunity in taking advantage of an increase in potential tank car maintenance work.

Could you talk about the number of locations that are tank car certified today, and also where that number could go?

I have know you've mentioned potentially certifying additional facilities?

We are in the process of certifying our Cleburne facility in Texas, which is close regionally to where a lot of the demand is.

We have a robust team working on that.

We have four counting Cleburne we have good geographic dispersion.

The recent longer term relationship that we announced with CIT was one of those, and we have another Midwest plant that is really well equipped nor this.

We actually have a lot of capacity for HM 201 and retrofit, if that comes out of the regulatory process that industry is currently going through, as a result of the unfortunate and tragic accident in Quebec.

So I think that we are really focused on getting scale in that business, because the demand is going to be there and that is one of the possible things, well, that is one of the things that we all should watch in the industry is what is going to come out of the regulatory discussions.

Because that could require obsolescence over a period of time of existing cars, and major demands on the tank car repair business.

So we are really keen on focusing on our tank car strategy in that area, in that big area.

There are many, many drivers that are doing it.

That makes sense.

It seems like it will be a pretty big opportunity.

One last clarification and question I had was on the EPS guidance.

I wanted to make sure that the number you gave was a GAAP number, versus economic or cash EPS that would be obviously significantly higher?

It is a GAAP EPS, and again it exclude any restructuring charges related to our repair, our GRS unit.

But it as a GAAP number.

Perfect.

That is all I had today.

Thanks for the time, guys

Thank you.

Thanks for your time.

The next question is from Ken Hoexter with Bank of America.

Hi guys, this is actually Veronica Zhang sitting in for Ken.

Good morning, so on the tank car production side, you mentioned crude by rail is strong, here to stay.

I was wondering if you could update us on the capacity you are running at your Gimsa facility, and when you plan to hit that 16 per day target, and also on that same tangent, if you have ramped up production in any of your other facilities?

We are actually exceeding the 15 per day target now, and have been doing that for the last few weeks.

During the preceding month, we have been at 14, 14.5, 14.8 per day, and fairly stable.

We are moving, we will be at the targeted 16 per day sooner than we expected.

But certainly by the end of the year.

We are looking here for a stable production rate, where we can continue to keep our supply chain in sync with production.

We don't have disruptions that cause increased inventory.

Meanwhile, our labor hours coming down rapidly on the car, so we should see margins in that area more comparable to peers, as this momentum and stride has hit.

Actually we believe we can exceed the capacity if we needed to, but our targeted market share is in the range I spoke to, I think our actual capacity could be greater than that at Gimsa, because they have really turned that in the fourth quarter, that really turned into a money maker, and everything just kind of clicked.

It is really clicking along, knock on wood, as we speak.

Okay.

That is helpful.

And also I think last quarter you did mention that tankers slots were filled until 2015, so obviously if you keep this elevated level of capacity, you are targeted to hit that probably sooner, but I am just wondering with all of the additional orders that might be coming in the next year, what kind of delivery timeline you are now looking at for the increased backlog?

We have and reserved some as we do in all of our product types, some space for preferred customers that we anticipate them wanting to fill.

There would be excess demand for us, even as that market has slowed somewhat, because of the uncertainties over the derailment, and the so-called concern about the potential bubble after 2015 in oil by rail.

I think that is going to stabilize at a higher rate than many are predicting, just because the developments in energy, both the technology, and some of the uncertainties are really more stable than might have been expected.

So I think that plus the ramping we are doing at Concarril, with the new introductions of car types hitting our learning curve, should mean really good news at both plants through the year.

It reflected in our quarter.

Where it affects particularly in the last six weeks of the quarter, of change-overs and other things at Concarril, yet we still really had really great manufacturing margins and momentum, and we have a few issues there relating to our plant capacity that we are working on, and we expect Concarril to be as it was this year, a really high performer for 2014.

Okay.

That is also very helpful.

And just lastly, I just want to hit on your margin improvement guidance.

Obviously part of that is attributed by higher margin products in the mix and increased capacity.

But are there any sort of deficiencies that you are operating at these facilities, that are also attributing to the margin improvement that you can talk to?

Well, six months ago I guess we brought on Martin Graham, and he has been invaluable to Alejandro Centurion who runs the manufacturing group.

Just to give you another data point, we are going to have over $1 billion, about $1.2 billion of our manufacturing revenue, maybe more than that, in Mexico this year, and the supply chain and inventory management is paramount.

Transit times, just in time, back expediting.

These are things that his engineering background, value engineering, all of these things are really kicking in now that we have had the time to review our processes and streamline them.

And he and Alejandro are just doing a great job.

Those are some of the contributing factors.

Especially important to our working capital goals.

We can do much better on working capital, and we are going to do that, and that is the way that we are going to do it.

Perfect.

Thank you guys for the time.

Thank you.

Next question comes from JB Groh withD.

A. Davidson.

Good morning guys.

Just another way to ask that last question.

You have got this 200 basis point margin goal improvement.

Is there a way to sort of think of that in terms of what is mix and what is levers that you pull?

Is it half and half?

Is it two-thirds operations, one-third mix?

How should we think about that?

JB, this is Lorie.

It is really tough.

There are a lot of various moving parts within all of our operating units, but I think a high level summary way to think about it is about one-third of this is going to come from mix activities, so that is going to be the higher margin tank cars and automotive.

One-third of it is going to come from our increased syndication volumes, so again driving more business through that highly profitable approach to the market, and then another third is coming from efficiencies that Bill was just describing, with engineering changes, procurement changes, inventory management, logistics, inbound and outbound transportation.

Very helpful.

Thank you.

And then you call our here in the press release some of the sales, some of the cars, maintaining a management agreement.

Is that unique, or does that happen often?

That happens quite often.

That is a key part of our strategy with the integrated model, and in many of those cases, along with the management comes the maintenance as well.

Good, okay.

So that is not a big change or anything.

And then maybe you could, it looks like you got a barge order here in the quarter.

Maybe you could address that market a little bit more, I may have missed it if you did?

Right.

The one thing I want to clarify, JB is regarding the management and the maintenance.

It is a big change from, say where we were three or four years ago.

So it has been transformational with the last several years of driving more leasing product and syndication volume that we maintained the ongoing management and maintenance along with the syndication.

JB, particularly in energy-related products, there is a whole transformation of the demand curve on services, because the energy cars whether it is crude by rail, sand, there are a lot of people owning these cars, or leasing these cars that have never really managed a fleet before.

And they have maintenance requirements, and the corrosive aspects of high velocity.

It is going to affect wheel business.

It is just working through system.

We are a really targeting that market, and we have in addition to the maintenance side that was discussed earlier, we have made alliances with several shippers now that are producing several million in revenue annually.

Very high margins.

But we are supplying something that they absolutely need in a network, and we are underwriting the maintenance for that, and it is really a great product line for us, and a big growth area.

But there are probably ten points of like that under our strategy discussions, which is very robust involving the Board, where we see opportunities to improve EBITDA, and sustain it in $5 million increments, or $10 million increments.

So we are hitting our stride in many areas, and again, a lot of our shareholders and some of the analysts have helped us in advising us what to focus on, and again we are listening to them, and thank them for their input.

So there has been a little bit of a change in the profile of the buyer, and that has been an opportunity I guess?

That has been and as Bill mentioned as well, just to be clear beyond just our syndication activities, we have been focusing on expanding our management business, our management services business.

And a key part of that expansion has been on combining maintenance and management together, and examples of entering into those relationships would be in the shipper community.

And JB, I think you had a question on the barge side?

Yes.

Could you repeat that?

I heard the question.

Just some color on the pipeline activity.

We still have a nascent, you are here locally.

You are here living in Portland so you understand the politics of Oregon, and we have this rainbow thing going on with coal exports.

I have been in a lot of dialogue with the Governor about this, and he is not actively resisting that.

But they are having a lot of delay in getting those permits, and that project just keeps moving out.

So we are not really focused on that as much as we are big tandem or APB barges.

We have four or five major customers that have, nobody has received these, placed orders.

There is not enough capacity to build the demand.

This oil by barge and the energy distribution issue is quite complex.

But it is going to be a seller's market, it is just that we haven't received, and no builder has really received material orders yet, but it is going to occur.

And so we are bullish on that, really bullish on that and we have been bullish on it for a quarter or two, and we keep getting more and more people negotiating a contract with us, and negotiating contracts with their customers, but nobody has pulled the trigger.

I think that is going to be good news at least in the second half as that hits its stride.

And also since you are local, I think I ought to mention we filed an 8-K regarding our Chairman, Ben Whitely.

He has been our chairman since 2004 and a Director since we became a public company.

Ben is 84, has decided not to stand for re-election to our Board of Directors at the Shareholder Meeting in January.

We thank Ben for his years of service, and the Board has designated me the Service Chairman after Ben's departure.

I am honored by the Board's confidence.

I look forward to assuming the role of Chairman, CEO, and President, but this will allow us a more long-term succession plan for our Board, and coordination with our very strong management team that will position Greenbrier for developing that team further.

We will keep everybody updated on that.

But since you know the local scene here, I thought it would be appropriate to mention it before you got off the line.

Yes.

That is good.

Thank you Bill.

Thank you guys for your input.

Next question is from Bascome Majors with Susquehanna.

Your line is open.

Yes, good afternoon.

I was looking at your minority interest expense line, and based on that, usually there is a proxy, it looks as if profitability is as good as it has ever been on a net basis.

You talk about the success and the production ramp for the tank car lines here at length already on the call.

I was curious if my math is right, it looks like the overall railcar deliveries were a bit short of where you had expected they would be for the quarter.

If everything is going really well on the tank car side, what is driving that, and how much of this is timing, and extending that, what are your thoughts of where deliveries might trend for the current quarter?

Right.

So I am glad you brought that up Bascome, and I will take the first part of it, and let Lorie tabling take the second part.

Because we did give guidance for deliveries for the fourth quarter back in July, and you point out that we came up a little bit short on that end.

And we should have highlighted that ourselves.

This was not due to a production issue or falling short on our production goals.

Rather we had targeted some railcars for syndication in the fourth quarter that were built and placed into service, and the timing of that syndication got delayed until this year.

So that was the reason for falling short on the delivery goal.

It was not due to a production issue.

It was a timing issue.

So thanks for highlighting that for us.

Now I will let Lorie talk, I think your question was, how might we think about the sequencing of deliveries for fiscal 2014, is that correct?

Yes, you gave us a lot of color on the full year.

I was just curious, as to what the inventory in indexed deliveries, what we are looking at for the current quarter, since you are two-thirds of the way through it, and any other directional thoughts on pacing throughout the year?

Bascome, this is Lorie.

So again as we indicated about the same as our financial results, we would expect deliveries to be back half of the year weighted slightly, maybe a little bit growing throughout the fiscal year.

The one thing just as Mark was mentioning that is tough to always predict, is the timing of syndications, which will impact those deliveries because we don't count the cars as true deliveries until we actually syndicate those cars.

So that is where there might be a little bit of up and down, but we would expect a progress through the year to be slowly building to the second half.

Alright.

And just on that point, the syndication deal that slipped from 4Q to 1Q, is there any way to size to that up in number of cars, or dollar amount, or something like that?

It was about 400 cars.

Okay.

Alright.

That is all I have on that.

I did want to give Bill a question here.

More strategically and longer term.

Today's results were very good in the guidance sense that you are on track for continued improvement for next year, and hopefully into 2014 on your goals that you have set out earlier this year.

The Company seems to be headed in the right direction.

I am just curious what your thoughts are on who is going to run the Company when the work is done, and potentially when you might make some sort of announcement as to that transition process, and the period that it might be potentially be over?

I wouldn't read too much into the change in the stepping up to Chairman.

Our Chairman has been fantastic asset to this Company.

And walking in his footsteps will be difficult, but he is at a time in his career that he decided he didn't want to run again for another 3-year term, and we are going to be doing work, development work on our Board.

We are shrinking the size of our Board.

As Chairman, I am going to put a lot of energy into that sort of thing, and continuing to build the management team.

We have an excellent management team, so it will open up some space for others to step up and play stronger roles.

I am excited about the strategy.

I am excited about the execution of the strategy.

I am actually energized by the interaction with some of our very constructive large shareowners.

I still own 2 million shares in the Company, and some of the folks that have been giving really great input on return on capital, and there are several, so more than three have also similar positions of large stock holdings.

So I am interested in seeing this through, the strategy through but I am gradually resolving to have others develop in their strengths as well.

And we have got a great team, and so we are not setting timelines for any of this.

Right now I am enthusiastic and in good health.

But I ain't going nowhere anywhere soon, as long as things are going, as long as we are able to keep the momentum going.

So I think Ben, it was time for him he thought to go on with his life.

He has been with us for many, many years.

Since when we acquired Gunderson in the state of Oregon.

But we are moving in the direction again, we are listening to shareholders, we are listening to people who have suggestions, and we have a diversified Board.

We have a good Board, but we are going to do Board building and development of the management team.

All things must end at some point, so I am not going to be hanging on forever, but I am not going to go anywhere right now.

Alright.

I appreciate that discussion, and that is all I had.

Thank you.

Next question is from Matt Brooklier with Longbow Research.

Thanks, good morning.

Just a quick question on marine.

How much revenue contribution potentially should we be thinking about from marine in the $2 billion number that he gave for fiscal 2014?

We have in the range as Bill mentioned, we have some rather modest goals for this year.

We are still higher than 2013 that was not particularly robust, but probably around in the $50 million range.

And with the potential for some upside there.

Okay.

And then maybe just also if you could talk to, and you did a little bit of that earlier, but some of the potential upside drivers on the marine side, and potentially taking orders for tankers that will participate in petroleum markets, what could be the potential I guess magnitude, if those orders do come through in a meaningful way?

Do you think the timing on that, is a next calendar year event, or do you think it is potentially a 2015 event?

I think it is a 2014 event, calendar 2014 event for sure.

I really believe that.

I have been a little bit more bullish than the orders book has built, but it is clearly going to occur.

Let's just talk about two things.

Transformation of Gunderson, Mark Eitzen, he was first assigned marine.

He embraced Lean manufacturing.

We put CapEx into that facility.

It is easily able to compete with the Gulf, and in some cases to compete with Asian shipyards.

These barges that we are talking about for oil are big barges.

They are $50 million to $60 million.

180,000 barrels.

They are not as complicated as other barges we have built for example of that size, and I would remind everybody in the past, we have even built ocean going tankers for Chevron at that facility.

It is a great facility, and it has the ability, speaking to the facility, to run, it has got a huge burning capacity, heavy lift capacity, and it is capable of building multiple barges at the same time in modules.

It is pretty sexy stuff to the degree industrial America can be sexy.

It is pretty sexy stuff.

And it is also exciting.

It is a fun thing.

People like it over there.

So we could run two or three of these at the same time, and it just requires getting some orders.

So I think we are right at the threshold of that segment taking wind, and I would hope that we would hear something on the first announcement, within a quarter I would hope.

But we were optimistic about the coal export project too.

And politics in coal have created very strong headwinds for that project.

And clearly, the western part of the United States is politically aligned to put an imprint on coal exports from the West, but whether we will be able to do it under the law, it is really hard to say.

So if this project goes ahead, that is a real potential tailwind because, it is 60 million in the first traunch and another 60 million after that, and it wouldn't have happened, if it does happen, it wouldn't happen without our help, and I think it will happen, just when?

You can wait forever for some of these things.

So coal is not the most exciting area right now in the general public's view.

Okay, that is helpful.

Can you remind us and I think it is relatively minimal, but within your lease fleet, A, tank cars within lease, and then B, of those tank cars, what are potentially the DOT 111 cars that could face some increased regulation?

Yes.

We have about 200 cars in our fleet.

We are going to retrofit those cars in keeping with, we are not going to wait for the standards.

Some other customers are doing that.

This is a very serious thing that happened in Quebec.

To be clear, the car was not the culprit, but the car has been thrown under the bus.

There are safety improvements that the industry recommended to the government two years ago.

We have been building cars to that standard.

So the cars we have may not require extensive retrofit.

But I think that this is a big shoe that we will have to wait to see how it drops.

It will favor car builders who build tank cars, or it will favor repair shops who will retrofit, that can produce the standard of quality that will be required under the yet unknown regulations.

I disagree with the viewpoint of some of the industry associations.

I think that we need to embrace safety, and we have to do the morally correct thing.

And I think if we don't do that as an industry, we are opening ourselves up to questions further in any impact situation with higher velocity going on in these hazardous cars.

And more likelihood of incidents occurring.

That is why the Class 1 railroads have put more stringent recommends, in their recommendations that would effectively obsolete the current DOT 111 hazardous material cars if adopted.

We don't think that will happen.

But I think that the be our industry association has to man up, and look up at a realistic response based on data for fairly minor fixes, and the customers should be able to absorb this.

And it is the right thing to do.

So we are going to go ahead and do that.

And it won't be a major impact to us, but we are also going to position the Company so we can respond, because people say there is no capacity to fix tank cars out there.

That is baloney.

That capacity can easily be added, and we are going to get in the forefront of adding it.

Okay.

Appreciate the color, thank you.

Thank you.

Next question is from Sal Vitale from Sterne Agee.

Good morning gentlemen, and good quarter.

Thank you.

So quick question I guess starting gains on the sale of equipment,that was a big positive this quarter.

How do we think about that over the next few quarters?

You probably have some visibility into this I would assume?

Yes, Sal, so the question is on gains on sale, and you are correct, that it was a robust quarter in part tied to the capital liberation goals on the leasing side of the business that we said would continue into this year.

So for the year as a whole, we expect that 2014 will be another robust year, but not quite as robust as 2013 was.

We would currently anticipate that to be somewhere in the $10 million to $12 million range.

And that will be the weighted to the first half of the 2014.

So $10 million to 12 million for full year skewed towards first half.

Okay.

And I guess how much of that $10 million to $12 million is I guess, what you are thinking is planned due to your capital liberation process, as opposed to just the normal process of selling railcars in any given year?

Right.

So Sal, while it is a straightforward question may not be as straightforward an answer because we regularly sell assets out of our lease fleet, buy and sell assets out of our leased fleet, both for capital efficiency purposes, including tax efficiency.

And that number can vary from year-to-year, and you would see in prior years that number has ranged from $5 million to $8 million a year.

So that is a meaningful range in and of itself.

But if you consider maybe a $5 million to $8 million range is something that we have historically done, and then you look at something in the neighborhood of $10 million to $12 million this year, maybe that is how I would think of it is maybe that incremental amount over the $5 million to $8 million might be due to our capital efficiency goals.

But again, that really does vary depending on the market

When we say capital efficiency and leasing, a couple of higher level comments.

We are really transforming our leasing model, and getting in step with others who have higher ROEs.

Our ROE in the leasing business because of our portfolio policies have been lower, because we haven't been leveraging it, and it is all on our balance sheet, and we have had capital constraints.

Instead of putting $50 million into our leased fleet this last year, we have had a net change in our strategy, and it is not going into our direct portfolio, but we are going to be able to create considerable tax benefits, and improve the leasing model by redeploying the cash in the model to much, much higher returns.

And we are also going to be more transparent about that business, and do it in a smarter way.

So I think that this is a really exciting area for Greenbrier, and by the end of 2014, you should see the effects of it.

Okay.

That is helpful.

And then just looking at the overall guidance, I guess the first question on the margin progression, earlier you said that the margin, the overall gross margin progression should be lumpy, so it won't be linear throughout the year, and I understand that.

But I think one of the reasons you mention for that is, I think it was the lease business or the wheel services business.

What if I look at just the manufacturing business?

Do you think that you will have a steadier progression throughout the year?

Sal, this is Lorie again.

We do expect that because of change-overs and we do continue to ramp up production on tank cars, that even the manufacturing gross margin will not be linear either.

Okay.

Okay, that is helpful, and then I guess just overall, so if your overall gross margin in this past quarter was 12.5, and I guess the goal is 13.5 by the end of this fiscal year, I guess how do we think about what the upside to that could be?

What have you thought about in terms of what the main drivers of that are?

I would just think that given that your deliveries are increasing nicely in fiscal 2014 that you would have just the operating leverage alone, notwithstanding the favorable product mix and the operating efficiencies that you should be able to exceed that 100 basis point improvement throughout the year?

We have been accused of sandbagging on that number, and why don't you just say it plainly.

That is in the plan, man.

The 13.5 is in the plan.

We have tailwinds this year, as opposed to headwinds in 2013, plus 2013 as we said at the beginning of the year was going to be a year of consolidation and building, now we have done it and we think that there is going to be upside, but I am not sure we would want to give any more data or background on that, than what we have already given in the call.

Okay, understood there.

The last question is really just a clarification, I think you said earlier that 7,500 to 8,000 units per year, is that what you have done in the past in terms of intermodal deliveries?

We have had years almost that much, and we have had 60% market share historically in that market.

We are always being challenged by other people who would like to break into the market.

But we had an incredibly high market share this year.

Complicated market.

It is not easy to forecast what is going on there, but we can do, our maximum production in wells have been 24 per day at that facility year long, and we have run double stack lines now for 20 years I suppose constantly, and we are still running double stack lines.

I think our upside, it depends on the market, so if we get 50% or 60% of a 5,000 well, that would be almost 50%, well, it would be more than a 50% increase of the current production, or of the production for 2013.

And that would be a fairly modest normalized year for intermodal.

When we reach that position, we don't really know because cars with high velocity in the railroads, the coal business being down, no congestions to speak of.

The intermodal market has been thrown off.

There is very high demand in loadings, but the nature of the shipments have changed from international to domestic temporarilywe think, but as housing comes back and light goods are being shipped by rail, there will be a lot by intermodal and other things that are related to housing, we think that the actual car demand will come back much faster and much stronger than the industry forecasts.

I guess that is an interesting way to think about it because global container trade growth has been fairly anemic.

Well last year especially was about 3%, and this year it is trending to about something like a low-4% range whereas historically it has more been more like 7%, 8%, 9%.

I guess you are saying that a rebound in that, whenever that occurs should also bode well for your intermodal volume demand?

Yes, but on the other side of that, the plus side of that is the domestic containers, because intermodal cars are not intermodal cars, there is domestic containers have been really hot, shorter eastern railroads have had a great Renaissance in intermodal.

They are taking business off of the highways.

So the traffic patterns have shifted, which means that you can carry more with fewer cars, but that is going to have to stabilize.

It is just a basic supply/demand equilibrium that we are seeking.

After that, the growth in intermodal which has been very robust will drive all of this.

And the railroads will have to compete aggressively in intermodal.

So with lots of coal or slow-down in coal, that is their second biggest commodity, or second biggest traffic, and they have got it down to a science.

It is really a great place to be.

As long as we can continue to improve our efficiencies and reduce our costs in producing the car, and we have built that car at both locations in Portland and in Mexico.

Okay.

That is helpful.

And just the last question is suffice it is to say, it is probably fair to assume that there is not much in terms of you were guidance for deliveries for 2014, there is probably not much in the way of intermodal there?

Right.

That is correct.

Okay.

The big upside, keep in tuned to the double stacker, the intermodal marketplace and we will try to provide updated information as we see it.

All of these things are opinions of course.

And it is a very unusual car-type and marketplace.

And it can't be easily, it is not easy to dissect it.

I think we do as well as anybody else in the business.

That is very helpful.

I appreciate your time.

Thank you.

Next question is from Thom Albrecht with BB&T.

Hey, I know it is getting long in the tooth here.

I was just wondering if you could sort of give a big picture breakdown of the 15,000 cars you hope to build and deliver this year, so we know 3,500 or so are tank?

What would be kind ballpark-ish other car types to get to the 15?

Well, the three major car types would be as Bill referred to at the beginning, would be tank cars, covered hopper cars, which would be hopper cars for the sand and cement market and grain cars, and then the third would be automotive cars.

And those three would definitely be the lion's share of what would drive the deliveries and margins for this year.

Right.

I guess what I was really looking for if you had sort of approximate unit numbers for those, and even intermodal, even though that is Bill's comments were more kind of beyond 2014, I assume there is some build assumption there as well?

So let's do it this way.

Just imagine a virtual pie chart.

We won't give you the numbers.

But if you look at the big three, and then all other category, the big three are about equally distributed for two-thirds of the, one-fourth of the chart, and then the others will be represented by a modest amount of intermodal.

Some sliver of box cars.

Because we have capacity, we are diverting capacity to more profitable, frankly more profitable lines.

We can be that market more if we wanted to.

Marines and gondola cars, and the gondola cars being the larger of that little pie segment of the quarter of that chart.

All of other big three and where we are going to make our money, are again automotive and hoppers and tanks.

That is going to be big three.

Wildly important things would suggest we concentrate on long runs, efficient production of those three car types, and in the all other category fills in, and contributes to the big scheme.

Bill, it is like two-thirds or 75%?

Of total production?

Yes, I think you are directionally correct that it is similar to two-thirds to 75% of the totals

North American production obviously

In terms of profitability they represent a lot more than that.

It is a different chart.

So the big three produce more money

And then my last question would just be with the development of the new plastic pellet car, everybody sees what is going on in the Gulf Coast for 2015 and 2016.

How much of what is going to happen has been translating into discussions for plastic pellet cars at this juncture?

Well, a lot.

Initial orders have been placed.

ARI just announced its deal with Chevron Phillips.

Interesting background story on that one.

But I am sure they are going to do well on that order.

I am not sure everybody agreed they should accept it.

But it is a funny dynamic.

The fact is orders are being placed.

People are reserving space and we are getting started in that car type.

We can build covered hoppers and we will build them in Mexico.

We have got lining facilities at both of our plants.

Lining is key to it.

It has got to be absolutely perfect.

Paint and lining and quality are all very important.

So we believe we can compete in that car.

People said we couldn't enter the tank car market robustly.

We proved them wrong.

And I am sure there are a few people who are saying, well, that is a tough market because Trinity and ARI are so well-established in it.

I don't agree with that.

We don't agree with it.

We think we can make a lot of hay in that additional product category.

Thank you.

That is very helpful, Bill.

Thank you guys very much.

We appreciate your participating in our call today, and look forward to chatting with you over the quarter to come.

Thanks.

Have a good day.

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