Greenbrier Companies Inc (GBX) 2014 Q2 法說會逐字稿

Hello, and welcome to the Greenbrier Companies second quarter of FY14 earnings conference call.

Following today's presentation, we will conduct a question and answer session.

(Operator Instructions)

At the request of The Greenbrier Companies, this call is being recorded for instant replay purposes.

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

Ms. Leeson, you may begin.

Thank you, and good morning, everyone.

And welcome to Greenbrier's second quarter of FY14 conference call.

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

We will discuss our results for the quarter ended February 28, 2014, and comment on our outlook for the balance of 2014.

After that, we will open the call up for questions.

In addition to the press release issued this morning, which includes supplemental data, additional financial information and key metrics can be found in a presentation posted today on the IR section of our website.

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

Our quarterly earnings of $0.51 per share are up $0.06 from the second quarter of 2013 and are sequentially flat with the first quarter of 2014, despite a number of headwinds during the quarter which were noted in our release.

These same headwinds led to a decline in our aggregate gross margin for the quarter and are consistent with our comments in prior quarters that reaching our 13.5% minimum aggregate gross margin goal by Q4 will be nonlinear.

Our gross margin goal of at least 13.5% by the fourth quarter is unchanged.

With these headwinds now serving as tail winds and as is typical for Greenbrier, we expect a significantly stronger second half of the year.

On the capital liberation front, we reduced net debt by an additional $75 million, bringing the total to nearly $170 million over the last 12 months, and our LTM net debt to EBITDA hit a new low of 1.4 times, down sequentially from 1.8 times at the end of the last quarter.

In March, last month, we refinanced $125 million senior term debt secured by railcars on lease, with new six-year, $200 million senior term debt, increasing our liquidity to over $500 million.

Our debt structure more appropriately ties to the assets on our balance sheet, with more appropriate leverage on the lease fleet and net corporate and manufacturing debt on a pro forma basis of only $54 million.

You can find further detail on this in our supplemental slides posted on our website.

As part of our ongoing efforts to return capital to shareholders, to date we have repurchased over 542,000 shares at a cost of about $22 million.

We expect these share repurchases to continue.

Now I will turn it over to Bill.

Thank you, Lorie.

Good morning, and thank you for joining our call.

I want to start out by acknowledging the miss.

However, I want to talk to a number of very positive forces which continue to act on the Company, and I think as Lorie has made it clear, we are still sticking to our goal on a 13.5% margin at the end of our fiscal year.

Our second quarter reflected very solid progress on many fronts, including a good book of new orders and a robust backlog.

This is consistent with our strategy of diversification of product mix, and net income for the quarter matched the strong earnings in our first quarter.

That was a particularly robust quarter, is a step up, and in our first half it's significant that we booked operating income of about $73 million, operating cash flow of $67 million, almost double cash flow from operations compared to the first half of our FY13.

In fact, that is a very positive story for Greenbrier, and as Lorie has referenced, our net debt declined by $75 million, bolstering the enterprise value available equity by almost $3 per share.

Our strong cash position was augmented post quarter by the refinancing of debt on favorable terms.

It simplified our balance sheet, allocating debt, as Lorie has said, more appropriately between manufacturing and leasing.

This is worth taking a moment and pondering.

As noted in Page 9 of our supplemental information, these separate but complementary businesses were made more transparent in their capital structures.

The real headline in this is very clear.

Our manufacturing business, the largest earner, along with our other businesses in corporate, have pro forma net debt of only $54 million and annual cash flow net of normalized CapEx of considerably less than one year's cash flow from operations.

This is a great place to be, especially during a market with the best forward visibility I have seen during my career in this industry.

Meanwhile, the leasing business has total assets of $437 million, annualized earnings from operation of $45 million at the second quarter rate, and unleveraged return on assets pro forma at just over 10% pretax.

A respectable return.

Leasing's pro forma leverage return on equity is close to 20% pretax, and its leverage ratio is about 70% of total assets.

This is a normal debt/equity ratio for a leasing company, but the story gets better as far as leasing is concerned.

Going forward, leasing will be a net generator of cash, not a net consumer of cash, due to its capital light strategy, which is relatively new.

And we are executing on it.

Leasing can grow rapidly with this strategy, throwing off accelerating rates of cash flow after tax for the company over time.

Leasing has considerable potential to add dramatically to its already positive present contribution to free cash flow and net earnings.

With reduced levels of net CapEx, leasing will be a clear creator of free cash flow and not a net consumer of cash.

Turning to the railcar market and market outlook, more positives are there.

Our improved backlog has been driven by increased demand for railcars across most car types other than coal and center beams.

Center beams in the forest products segment may be emerging from the doldrums, and box car demand is solid moving forward in the forest products area, a traditional area of strength for Greenbrier.

The large issue facing the industry now is almost certain major safety-related replacement and retrofit needs for the older version, DOT-111 tank cars, constructed prior to 2011.

As I said, I think this story is becoming very clear.

At the end of calendar [2013], there were about 350,000 such DOT-111 preprescription or pre-2011 constructed tank cars in North America in service, which 150,000, approximately, were in hazardous service.

Setting that issue aside, growth in demand continues in the energy by rail space, including crude and refined products such as ethanol by rail, and other car types, which have been squeezed out by oil cars during the last few years need to be built.

In keeping with our very bullish view about tank cars, we have expanded our tank car capacity at the same time making those tank car manufacturing operations flexible so they can be turned to other car types as this decade ends.

The forces that I've talked about, coupled with the return to normalized demand levels across multiple car types, and declining railroad velocity as the rail success story continues; all of this makes for a very interesting market story.

The need is substantive and comes in the nature of a solid supply/demand shift to opportunity, and it's likely to be sustained over many years.

These circumstances should lead to margin enhancement and other opportunities for the next several years for Greenbrier.

In Greenbrier's case at least, our strategy has succeeded so that we are now in a position where we are having to turn away some customers and turn away from even some traditional car types because pricing is not as robust as we can get in the energy and other markets.

But we will continue to follow a balanced approach, and today tank cars are probably the lowest percentage of backlog of any car builder, something in the nature of 40%.

But there are many other opportunities driven by downstream consequences of this energy renaissance in North America and global events recently in Europe.

We have watched with interest Trinity's recent movements into natural gas capabilities, and we agree that this may be a large market for other transportation and related applications, both marine and rail in the next two years.

A new view of gas as an environmentally friendly bridge to the next generation of Clean Energy will drive natural gas opportunities and bring many potentially attractive applications.

Overall orders of 8900 units during and after the quarter are robust, given the pent-up demand for tank cars and pending regulatory clarity.

But that clarity is coming.

The railroads have already spoken on the subject, and the Canadian government within the last few days has made important pronouncements that drive the mandate that now the US government has to deal with much beyond what the class 1 railroads themselves have said.

And many shippers have felt that those are too tough, those standards for what we call the tank car of the future are too tough.

But it's very clear that safety is necessary, if we are going to run oil by rail in high velocity service in America.

And while it's much more complicated than the tank car, we have to respond to that and the industry has to respond to it because America's economy depends on the railroad's ability, and they are mandated to haul this [core] product for the future economic growth in the United States over time.

They can't do it and risk their entire franchise, so that's why we believe this demand curve shift is occurring.

Turning to marine backlog, it grew to $70 million this quarter due to our previously announced 578-foot articulated oil and tank barge for Kirby Offshore Marine, as well as three additional vessels.

And we continue to see robust movement there.

The outlook for us, I think, is strong and steady.

There are also opportunities in the areas where we have faced headwinds and where tail winds are now developing.

During the quarter and in the first half, our Gunderson manufacturing unit underperformed expectations by a significant margin due to lack of volume against those expectations.

So we know the reasons why we are a bit under expectations, and we see that these are being addressed.

In the case of Gunderson, this is now correcting, as we ramp up double stack car production and marine production.

We're hiring aggressively at Gunderson today, and we expect Gunderson to return to expected performance levels.

This was a large part of the miss for the quarter.

During the second half, repair portion of the wheels, repair and parts segment has also been disappointing, as the fix, close and sell efforts have been working through the process.

Repair has been also a significant contributor to the financial disappointments in this segment during the half.

While things are improving there, we will need to pick up the pace with this portion of our business, and we are examining ways to increase scale in the tank car repair business to accompany our tank car manufacturing strategy, which we've earlier spoken about and is mentioned in the press release.

And we need to adopt that strategy to support the tank car designs of the future.

We expect better financial performance from repair in the segment in the second half and especially in our fourth quarter.

On balance, in conclusion, we believe we will still meet our margin and other expectations for 2014, and we are moving into the future confidently, particularly in the rail and marine spaces, where we believe we have considerable upside potential in 2015 and beyond.

So assuming we meet those goals, that is not going to be as good as it gets.

Our business strategy has been well suited to adapt changing market circumstances.

Along with progress made in the last year in capital efficiencies, improving margins and cash flows, safety and a stronger balance sheet, we believe the future is very bright for all Greenbrier stakeholders.

Back to you, Lorie, or Mark.

Thank you, Bill.

Good morning, everyone.

And as Bill and Lorie have noted, we're excited about our future, with the multitude of revenue growth and margin expansion opportunities.

Our free cash flow and liquidity of over $500 million of cash balances in the undrawn lines of credit give us the flexibility to seize these opportunities.

Indeed, the investments that we noted in our release today that we are making in our manufacturing footprint and in our repair units are indicative of the type of opportunities that we're taking advantage of that will add many millions of dollars to our margin and EBITDA in the future.

Both by giving us additional capacity on the margin, but by, as Bill has noted as well, more efficient capacity, lower cost capacity, and doubling our higher margin tank car business.

Part of this capacity on the tank car side will take place in our JV facility, and part of it also will take place in one of our 100%-owned subsidiaries down in Mexico as well.

When thinking about Greenbrier and our forward momentum, we have found that some investors focus on EBITDA, but tend to think less about our free cash flow and the impact on forward-looking debt.

When looking at our EBITDA enterprise value to EBITDA multiples on a forward basis, obviously every dollar by which we reduce net debt, we would create a dollar of shareholder value.

Over the last year, we reduced net debt by $170 million, creating $6 per share of value on about 28 million shares outstanding.

While we are not yet giving guidance for the next 12 months, we anticipate continuing to generate significant free cash flow.

Last quarter, as Bill noted, we began disclosing segment operating margin to increase transparency and continue to provide more information on a segment basis, including our capital structure to do this going forward.

Because of the integrated nature of our business, certain costs including G&A expense are excluded from the segment and included in our corporate G&A, and all of this is included in our supplemental schedules and the press release and our 10-Q, which will be filed later today.

Looking forward, our outlook for FY14 is unchanged.

We expect deliveries to exceed 15,000 units, revenues to exceed $2 billion, EPS excluding restructuring charges to be in the range of $2.45 to $2.70 a share.

Further, we expect continued gross margin improvement towards our fourth-quarter goal of 13.5%, and expect our third quarter aggregate gross margin to look closer to our first quarter than our second quarter, except our deliveries for the second half of the year to be slightly weighted more towards the fourth quarter than the third quarter.

Gains on sale for the balance of the year to be between $5 million and $6 million, and we could incur some modest additional restructuring charges of about $1 million over the next several quarters.

This does not include noncash gains or losses.

As noted in our release, we still have some operations in our repair unit that are underperforming, and we are confident that we're on the right track there.

But if we cannot reach acceptable levels of returns in these units and actually fix them to satisfactory levels, then we will reevaluate these units.

We expect annual depreciation and amortization of about $40 million, a tax rate of 32% to 34% going forward, depending on geographic mix of earnings.

Our quarterly earnings attributable toward our noncontrolling interest, our Mexican JV GIMSA will likely be more similar to the first quarter than the second quarter.

Given the capacity changes that we disclosed in our release today, our gross capital expenditures on a gross basis, again, will be about $100 million, $20 million higher than our previous guidance as a result of the manufacturing footprint changes we're making.

Proceeds from the sale of leased railcars equipment will be about $60 million, making net CapEx $40 million.

And obviously, with this guidance, the second half of the year overall will be stronger than the first half as is very typical for Greenbrier for those of you who have been following us for a long time.

With that, we will open it up for questions, operator.

(Operator Instructions)

Justin Long, Stephens, your line is open.

Good morning, guys.

It was encouraging to see the order strength this quarter and I guess in the past month or so as well, but if I look at your delivery guidance for FY14, it was unchanged.

Does this mean a lot of the orders you've received in recent months will be for delivery in FY15?

And if you can, maybe it would just be helpful to hear how much of your current backlog is planned for delivery in 2014 versus how much is expected to be delivered in 2015 or sometime beyond that.

Our order book this quarter was robust, and we have -- we are booking out into 2015.

That, of course, allows us to affect rates and improve rates, but I will have Mark talk to some of the specifics here.

Right.

So, Justin, it's a good question.

And when we gave guidance for 15,000 units for the year, or I should say in excess of 15,000 units for the year, and you go back to our last earnings announcement, not all of what we've given guidance on was firmly in the backlog.

So some of the orders that we received this quarter and subsequent to quarter end indeed round out our deliveries, round out our production for the fiscal year as a whole.

So if you take the guidance that we're giving here, then we're pretty much at our goal of 15,000, where we don't have any substantive polls for the balance of the year, so you can do the math.

If we were at a little over 7000 units of deliveries at Q1, and we have -- and we gave guidance of 15,000 for the year, then that implies about 8000 units as a backlog, or slightly less than that this year because we also have, as you know what we refer to as railcars held for sale in the balance sheet.

So a little less than 7000 of those would be for this year and the balance into next year and beyond, particularly when you're relating to tank cars.

That's helpful detail.

Thanks, Mark.

I think my second question was on the wheels business.

And I was wondering if you could just talk about the turnaround in that segment and how you see that progressing the next couple of quarters and into 2015.

Could you just talk on a high level about the best way to think about both the top line growth and the margins in that business as we go forward?

You're referring to our after markets wheels, repair and parts business?

That's correct.

I continue to believe there's opportunity for significant improvement there.

It's a little bit like we've acknowledged we've had issues there.

It's a little bit like remodeling your house and assessing it during the midst of everything being in disorder.

We had expected better performance frankly.

There was sequentially improved performance in the quarter, but there's a lot of noise in the repair side that has simply not met expectations and was partially responsible for the miss in addition to the other things noted.

Moving forward, we think there's going to be a lot of demand for tank car repair.

We're qualifying one additional shop, but we would like to see something happen on a major scale to be able to respond to the marketplace there.

At the same time, we have to just do a lot of blocking and tackling.

So in the second half, as I said during our last quarter, our expectation is that this will turn around and not be a drag, but will be positive.

However, the timing of that has been off at least as demonstrated in this quarter.

Having said that, I think the other areas that were mentioned, the Gunderson miss and some of the changeover issues that Lorie had talked to you, were also important contributors for the quarter.

But I continue to be optimistic we can turn this around.

It's a valuable part of our franchise, so we -- you will have to stay tuned.

We know where the weaknesses were.

We're taking very strong steps to remediate them.

But Bill, you would say overall you still feel comfortable with this business getting back to double-digit margins.

I think last quarter you mentioned maybe within the next couple of quarters or so.

Is that still your view?

The repair side of the business is the weaker part.

Parts and wheels.

Wheels will have difficulty getting to that, and they are a large part as well.

But the -- they can do it, and in the repair side, we definitely believe that that's the standard we're shooting for double digits, but more -- not just double digits.

We would want to be moving that bar up into higher -- lower on the scale.

So we just have a lot of work to do, and that includes base loading some of these factories, really weaning some of them out that are not performing, and I'm optimistic that our team will get that done and that we can step up in that business and have some positive news.

That's great.

I think I just have one more question, and then I will pass it along.

On the tank car capacity that you're planning to add, could you give a little bit more color on the time line for that capacity coming on, the capital commitment for that capacity, and then finally, what gives you the comfort in adding more capacity for tank at this point in the cycle?

Is it that you're more bullish on demand?

Is it more that you think there's going to be this boost from a regulatory change or phase-out or a combination of both?

Let me take the last part of your question first, and I might share the other parts with my colleagues here.

It's clear that there's been a significant demand shift in tanks due to the safety issue.

The old idea of a peak in 2015 or late 2014 and pipelines pushing out oil by rail has not taken into account the strength of this energy renaissance.

So we think that's a driver, but more importantly, the tank car of the future, that will replace capacity on these legacy cars with respect to the install base, where there obviously can be improvements for safety at any speed, and some of these improvements could be applied in retrofits.

This is going to be a transformational thing.

Oil by rail has crowded out many other, more boutique applications of tank cars, and that's a source of demand.

And then finally, there is the velocity issue that's coming from many different areas, which has transformed the demand curve.

So it's -- on the supply side, we see a shrinking base in replacement on older DOT-111 cars, opportunities for retrofit, high demand for services, and a more robust traffic volume in oil by rail and then the knock-on effects of this other stuff.

So we see this as a supply and a demand shift.

We will push the tank car demand out at least two more years from that which industry pundits were predicting six months ago.

We are very bullish on how all of this will play out for tanks.

Now, on the CapEx and the other things that you asked about, on the CapEx itself, we have three facilities in Mexico.

We have one which is leased, and we talked earlier about our desire to phase that out at the end of the year.

That will make that footprint much more efficient.

So that's a no-brainer-type CapEx with very high ROICs because we're replacing a lease facility that's expensive, and it's a good way to deploy capital.

We will add a line in that part of the network because we have plant one, plant two, we're building a plant three in the general area of [Saggoon], and then at the GIMSA facility, which is in Monclova, our primary tank car facility today, we are expanding a line there.

These are all bolt-on, so the CapEx is fairly efficient with high rates of return.

A very good use of cash flow that we have coming out of the strength of the strong backlog.

So I think the rest of your question, Mark, you might want to wrap up on that.

Yes.

So Justin, our total CapEx associated with this would be about $25 million, about $20 million of which we would spend this year.

And we would expect to start tank production later this calendar year on one of those lines and in early 2015 on the other line, and then about -- be fully ramped up by the year out from that.

Okay.

That's helpful detail.

I appreciate it, Mark.

Right.

I think that answers everything.

I know I've taken a lot of time, so I will go ahead and pass it along.

I appreciate it.

Okay.

Thank you.

J.B. Groh, D.A. Davidson, your line is open.

Hey, guys.

Thanks for taking my call.

Couple quick ones.

Is there any way to quantify the Gunderson changeover, as well as you probably lost, I don't know, maybe a day, maybe two days of production there.

Could we just look at that change in the production from Q1 to Q2 and assume that's pretty much all Gunderson?

Actually, our line changeovers occurred down in our Mexican facility, our [concoreal] facility in Mexico.

We will be ramping up our production in our Gunderson facility, both on the rail side and on the marine side in the second half of the year, and marine particularly in the fourth quarter.

But we really haven't quantified each of the pieces of line changeovers, the winter weather and the rampup.

So all three kind of combined, okay.

Fair enough.

And then on marine, can you tell us what kind of revenue got booked in marine in the quarter?

Of course we saw the big Kirby order, but can you give us maybe some detail on the size of the other three barges?

Hi, J.B. This is Lorie.

Marine revenue for the second quarter was fairly similar to the first quarter.

Again, we didn't have much of a rampup or much going on in marine during the second quarter.

So fairly minor, I would say, in the $5 million range.

The other three vessels that were booked into backlog in addition to the Kirby order were smaller, couple of I think 4 by 1, 400 by 100-foot.

Bill, you may have more specifics on the exact vessels.

Right.

So we don't want to break out what the value of those are because obviously that would lead one to back into the value of the Kirby barge.

Kirby, right.

And we prefer not to disclose that.

But we have robust marine quotation activity in terms of marine demand.

So we will have a chance for margin enhancement there we believe and also in the rail side.

We are now seeing a luxury of being able to be more selective about pricing and the kind of products we want to absorb.

These ATV units should be, once we get the learning curve on them, in the first one, we believe tack-on orders to that line is very efficient.

But we also have the capacity at marine, having put CapEx into it a few years ago.

We have the capacity to be very flexible and take the smaller barges, too.

400 by 100 barge, or 300 by 100 barge sounds small.

Those are feet.

But they are multistory barges.

They are ocean-going barges, and they are substantial units.

We've got lots of head room there.

The real problem at Gunderson this quarter was volume, and just -- they just didn't hit the overhead absorption, and it was disappointing according to our plan.

Right.

So you walked through that facility, and you have been through it a number of times and you know what it's capable of, and you know what it's operating at this past quarter.

Right, right.

Thank you.

Thank you.

Allison Poliniak, Wells Fargo, your line is now open.

Good morning.

Just Bill, your comments were interesting about turning away customers at this time with certain car types.

I know in the typical beginning of a cycle, pricing obviously is a bit lower and kind of moves up as we go through.

Do you think this changes the dynamic as we enter sort of a new free car cycle in terms of how you're going to be pricing and so forth as we go forward in terms of starting at a higher level right now?

Yes, I do.

And the reason is that, as you all know, there's been a lag in the general freight car business.

Even intermodal has been through tremendous doldrums.

There's been a lag over -- about 60% of the industry backlog has been tanks and lot of the rest in energy, like sand cars.

Now we're seeing broad-based demand.

While we have been very aggressive in the past and best -- we're best equipped to do for us products, the pricing and the inconsistency coming out of some of the major customers has caused us to be really tough about accepting those orders at what really are lower margins.

And there's a real risk that some of these customers who are taking for granted what's been true in the last couple of years are going to get squeezed out entirely.

I'm not going to say who they are, but you know enough about the business, Allison, to probably imagine who I'm talking about.

Right.

So we are really getting tough on pricing.

We have to because our margins reflect a diverse base and a diverse strategy, which we think serves the company well in the longer run.

If we do nothing but tank cars, as others have chosen to do, or energy cars, we think in the longer run, we will miss this opportunity for really good margins on a building base of business in more diversified.

Movements into automotive, movements into other markets will serve us well in that regard.

Sure, and then just on the tank car, the retrofit side of it, it seems like an elusive concept and number and folks are trying to get their hands around it.

Any color in terms of what you think industry capacity is?

Sounds like a ton of people are trying to add capacity on retrofits.

Sort of timeframe, sounds like we might hear something by maybe end of this year of when we could start to see that move forward a little bit or at least have a little more clarity on it.

Well, if you listen to the Canadian government, they are talking about phasing out all DOT-111 cars and hazardous service.

That's 155,000 cars, and anything in oil and ethanol in three years unless they are retrofitted to a very high standard.

This would be a difficult thing for shippers and for the industry, but it is an index of how the trend is going towards safety.

Now, that's the place where they had 47 people, and they all have names.

They are not fatalities.

These are individual lives that were lost in Canada.

And I think the US is going to be hard-pressed not to take into consideration in the rationalization of the Canadian and US laws because these have to be moving back and forth between Canada and the United States, the Canadian view.

So it seems to me that the issue really will be is this going to get tilted all toward new car replacement and they are simply going to throw all of these older cars under the bus?

Well, I would hope not, because there's a lot of value in there.

And these cars could be made safer at any speed.

So we're advocating for a sensible strategy to address the higher risk fixes that could be done at an economic price.

I think there's going to be a lot of opportunity in this area.

But even if there's not, the higher velocity traffic in crude by rail and the corrosive nature of some of the products that are getting carried, it's going to require a lot more repair and attention to the infrastructure support of tank cars.

So I'm bullish on that market as well.

I don't think it depends entirely on the US government.

I think shippers, the big shippers who are shipping chemicals and energy, while they are struggling with the issue today and they really don't like making a change and those folks who have a lot of legacy cars in their fleet, they don't care for this -- if we don't do it, how are we going to keep this energy boom and this energy renaissance in America alive?

The railroads cannot run these cars and threaten their whole franchise.

They need more robust cars.

And it's simply a fact that this is going to occur.

The debate about it, whether the government's going to act or not going to act or when they are going to act really doesn't matter, because it's de facto where we're going to be because the railroads themselves are providing that leadership.

And they have the ability to act unilaterally as we've seen in 2011.

That's great.

Thank you.

Bascome Majors, Susquehanna, your line is open.

Yes, thanks for the time this morning, guys.

With the footprint adjustments that you guys are putting capital towards over the next several months and into next year, particularly with the lease facility you're replacing in Mexico, can you remind us how much that lease is costing you per quarter today?

I don't think we published that, have we, Mark?

We have not.

I think we think more in terms of when we're fully ramped up and with the, at our new facility, as well as moving some of this capacity over to existing facilities, that we can really -- the efficiency gains can be in the thousands of dollars per railcar, depending on which facility and which car type.

Okay, then that leads into my next question, how much is capitalizing an operating lease and how much of your efficiency has related to production efficiencies and better variable cost leverage on new cars.

It sounds like you're leaning towards the latter there as far as the opportunity here.

Absolutely, yes.

No capitalization aspect of this at all that I can see.

It's just basically operating efficiencies.

The lease is expensive.

It's a long-term relationship we've had with Bombardier.

They give us the space.

The lease is costly and the labor is costly.

Directionally, can you help us perhaps bridge the gap between -- perhaps now that you're already at least recently operating at historically some of your highest margins in the manufacturing business, how great is the opportunity for this particular facility?

Just to maybe correct or understand your statement about operating at our historically highest margin levels, we have operated at much higher levels than we're at today, and we would expect that in the future, that we would remember there's a lot of forces here, including intermodal is still at very low, low levels of production.

In the past, we built as many as 8000 double-stack cars a year, and we're operating at a fraction of that volume today as an example.

So I want to just clarify that and if you're talking about -- was the second part of your question, Bascome, about what the new facility and manufacturing footprint change could mean to us?

Yes.

I'm just trying to understand -- walk us through the timing of those changes and when we should start to see margin performance stair step along with that based on you guys' plan.

So Bascome, this is Lorie.

We're going to be transitioning out of the Bombardier facility after the end of this fiscal year.

So that will probably start happening in September, to be out of there by the end of the first quarter.

The new facility obviously will be working on that this fiscal year, but as you have seen over the last several years, ramping up these lines does take a little bit of time.

So it will probably take I would say to early calendar 2015 before we're up to what we would consider a good rate on the line at the new facility.

I think as Mark mentioned earlier, per unit, this could be in the thousands of dollars per unit of lower costs, so you can convert that into additional margin.

And on a single-line basis, I think a good ball park is about 2000 units a year.

So you can go through the math as to what that would do to our margins on an annual basis once we get up to a steady pace.

We have to be careful, Bascome, to remember, we have a complex of manufacturing businesses in Mexico.

We're talking about the new plant that would replace the Bombardier plant.

We are not going to miss a beat on production because we're using GIMSA's line.

We have two covered hopper car lines there.

We've got capacity to augment any volume issues as we transfer over.

There's a lot of execution challenges on the Saggoon complex because we're going to shut down a plant, start up a different line, and we're going -- at plant 2, and then we're going to have this adjacent facility.

And then we're also going to increase capacity for tanks at GIMSA.

GIMSA's performing very, very well.

We met our volume targets.

We're exceeding them.

So we would see the timing of tank car production in the early part of our -- beginning to ramp up in the early part of our 2015 period.

These are bolt-on efficiency, very efficient additions of capital, and I think you got to look at the total.

So you're getting a contribution from replacement of the one complex around Saggoon, and then you're getting additional margin and volume from tanks also at GIMSA in early 2015.

Got you.

I appreciate the granularity on that, guys.

Thank you.

Thank you.

Sal Vitale, Sterne Agee, your line is open.

Good morning, gentlemen.

Good morning.

Just a quick question.

Just a clarification on the CapEx, please.

So I think your prior CapEx forecast for the full year was about $80 million.

Now it's $100 million.

So that $20 million increase, is that all for the new facility that replaces the Bombardier facility?

No, it's not.

It is -- because part of the CapEx will, that we talked about for both expanding tank car capacity and for our new facility will spill over into 2015.

All that increase is related to manufacturing, but it's the various pieces that we talked about of a tank car expansion and the new facility.

So there's no confusion about the earlier question, Mark, $25 million, which was a question about tanks.

There would be -- there's additional CapEx between 2014 and 2015 melded at the -- that would be general purpose for the Saggoon facilities.

So that's the -- we don't want that to be confused.

Okay.

So then just touching upon the tank car capacity expansion, so you're currently at about 16 cars per day, which is about 4000 cars per day.

Is that your current capacity?

Yes.

And so if I read the release correctly, you plan to expand your tank car capacity, basically double it, say, within the next 18 months.

Yes.

Is that correct?

Yes.

Okay.

We would be slightly under doubling it.

Rather than 8000, somewhere in the range of -- mid 7000 range, depending on whether the cars are heavier cars, pressure vessel cars, which are not to be confused with the car of the future and oil cars, but if we do pressure vessel cars, as we've been doing for many, many years in Europe, that would affect a number of actual units.

But the price would be higher.

So the pricing is probably more homogeneous than the number of units.

But it's directionally exactly what you're talking about.

Okay.

So then just on that topic, so if I exclude the CapEx that's related to replacing the capacity on the lease facility, how much total CapEx relates to this expansion of tank car capacity when all is said and done?

Sal, maybe if I can just take it, you guys will see this in the 10-Q that gets filed later today, but of the $100 million of growth CapEx that we're guiding to for FY14, $80 million of that is going to be in manufacturing.

$10 million is wheel repair and parts, which I don't think is a change from prior guidance.

And about $10 million is in leasing and services, which would be also not a change from prior guidance.

So the increase in our growth CapEx is coming all from manufacturing, but it is going to be, as Mark said, and Bill has commented, it's a combination of the new capacity that's coming online to replace the existing lease facility, as well as changes to some of our existing locations, some of which will happen in 2014, some of which will happen in 2015.

Right.

So just to simplify it all, if you look at tank cars as the highest margin car, GIMSA has really improved, it's hitting its stride, even doing better than expected at this stage.

Concoreal has had some issues with line changeovers and moving parts, but both of these are very strongly ahead of their plan.

If we add another -- if we double tank car capacity, we will have beaucoup margin and revenue and profit increase in 2015.

Now, what is the trick about this?

The trick is do we believe that demand will be there?

Yes or no?

If you believe it's there, this should be a very high ROIC.

Obviously, we believe it's going to be there.

And we believe it's going to be sustained over most of the rest of this decade.

If you don't believe that, then you would have a different perspective on this decision that we're making.

Nonetheless, these are relatively low costs for doubling our capacity because they are bolt-on, and I think we are going to do very, very well in tank cars, indeed.

Okay.

That's helpful.

Then the next question I have is on the capital structure side.

Given the free cash flow that you're generating, which is very attractive, how do we think about your plans to either increase your share buyback, your pace of buyback or initiate a dividend?

Which way are you leaning on that?

We are leaning -- we are looking at a balanced approach to using the cash.

First of all, there's a lot of organic growth that we're capable of, particularly with this energy renaissance, there's a lot of knock-on products that are coming down the road that are right in their space.

Efficiency improvements, if you can get a 30% ROIC as we expect in the expansion of bolt-on facilities in Mexico and in the case of Gunderson through robotics, we think we should be doing that all day long and think that's a really good opportunity for shareholders.

We also think we will have surplus cash and we will look at stock buybacks and dividends and other things, assuming all of this plays out the way our forecast is, as we are telegraphing here, do play out.

We're going to be doing -- we're going to be throwing off an awful lot of cash right now.

We have leasing properly leveraged, exactly where it should be.

It's very profitable and the return on equity base, and we're going to have the capability with partial year's cash flow to pay off the rest of the debt on the entire company.

So this is really an interesting cash -- the use of cash and use of liquidity, what do we do with it, great question, great question.

We're looking at all of the usual things.

But I think organically improving efficiency, margins, margins, margins, through better pricing, as we take advantage of this outlook, and reinvesting in robotics, even in Mexico, these are all exciting things we can do.

Okay.

Thank you.

That's very helpful.

The last question I have is on the marine side.

So you talked about what the revenue was for the first half of the year roughly.

Should we expect the second half to be about the same or a little higher maybe?

I would guess a little bit higher, but not tremendously higher, Sal.

Right, okay.

And then the $70 million of backlog, that's all deliverable in FY15?

I think what we've indicated when we did the Kirby press release is that that barge would start in June.

So the bulk of it would be -- some of it would be in the fourth fiscal year of this quarter, but the bulk of it in FY15.

The additional barges that we've received orders on would most likely be in this fiscal year.

Okay, and the Kirby barge, that's percentage of completion accounting?

Yes, they all are.

Okay.

Thank you.

Thank you.

And our last question comes from Thom Albrecht, BB&T.

Your line is open.

Yes, hi.

Good morning, everyone.

Lot of ground was covered there.

So I realize we're only halfway through FY14, but undoubtedly you've got to be thinking about some margin goals and production targets for FY15.

Can you give us a sense of maybe at least on the production side whether you would expect that to be greater than the 15,000 plus for FY14?

You're very naughty, Thom.

You know he doesn't like to talk about the 15 yet.

(laughter) But he's an awfully cautious guy, right?

So if I stay quiet, Bill will probably answer the question for me.

So you'd better talk.

(laughter)

Well, only thing, is I get asked and you don't want me to make up answers.

True.

You better get.

We really haven't given 2015 guidance yet.

He's saying we have the information, but he doesn't want to tell you.

I don't know why.

He doesn't want to talk, but he won't talk.

You can appreciate we've been making quite a few changes over the last quarter to be able to come out with the guidance that we're talking about with these changes in manufacturing footprint.

So while we do have some ideas about what 2015 is going to look like, it's not at a point where we're ready to give that firm guidance.

And again, we don't think that 2014 is the peak of this cycle.

We think there's a lot of legs yet to run.

Again, we've got great backlog.

That gives us good visibility.

So we feel really good about where we are on the orders and production side.

Again, the things that we've done on the balance sheet with liquidity that Mark was talking about, we think all of these things put us in a great position for many, many quarters to come.

Hey, Thom, I've learned a long time ago that you got to be optimistic in life.

I'm really optimistic.

And this is not as good as it gets at all, according to the team.

Well, I'm sharing the view.

I just wanted to have an educated view there.

So as we wrap up the discussion, though, there was a lot of discussion about Mexico, and I was writing things down, comparing it to former notes.

I'm going to just break this down real simply.

So Mexico, how many lines do you have and how many will you have within a quarter or two?

How many are dedicated to tank versus other cars?

I mean, it was such a kind of broken-up discussion, trying to bring that all back together, I want to see the clarity of Mexico.

And so let me just take the easy part first.

Right now, for tank cars, we're running two production lines.

Okay.

With the things that we have talked about, we expect that to come to four tank car lines.

That will not necessarily be a doubling of the output, depending on the mix of the kind of tank cars that we're building, just like with general freight railcars, different cars take different amounts of time.

But--

Yes.

That's where we get to the near-doubling on the tank car side.

Then we have probably five other production lines that are running right now, and we expect we would -- with these changes with tank cars, that would probably shift to about -- somewhere between 4 and 6. Again, it depends on the product that we're doing because the automotive cars, the racks and the flats, they take up extra production space.

So I think maybe a separate way to think about this, we've talked before about our theoretic capacity in North America once we got to 16 units a day on the existing tank car lines, would be somewhere in the neighborhood of 20,000 on an annual basis.

I think that theoretic capacity is closer to growing that by 1000 to 2000 units.

Okay.

All right.

And so then in terms of number of plants in Mexico, two in Saggoon and then the GIMSA JV.

Was there a fourth plant, or was that just a bolt-on line?

I got a little confused there early in the conversation.

That's very understandable.

No, so right now we're working at two facilities in Saggoon, one of those being the leased facility, the other being an owned.

We will be transitioning out of that lease facility into a wholly-owned facility.

There may be adjacent property that feeds component into each of those production lines, but it really wouldn't be additional full production lines.

Okay, and so that leased facility, that was the Bombardier situation, right?

I'm sorry, Thom.

I missed your question.

So on the leased facility, was that in conjunction with Bombardier?

Was that the one you're exiting by November?

Yes.

Okay, and then -- okay.

All right.

I think that clarifies everything then.

We can follow up a little bit in more detail after this call.

Okay.

Yes, I'm scheduled.

I might have one or two small ones.

Okay.

All right, thank you.

Thank you.

Thanks, Thom.

Thank you, everyone, for your interest in Greenbrier and participating in our call today.

If you have any further questions, we will be happy to chat with you following this call.

Thanks.

Have a good day.

This concludes today's conference call.

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