Greenbrier Companies Inc (GBX) 0 Q0 法說會逐字稿

Hello, and welcome to The Greenbrier Companies Third Quarter Fiscal Year 2013 Earnings Conference Call.

Following today's presentation we will conduct a question and answer session, until that time lines will be in listen only mode.

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

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

Ms. Leeson, you may begin.

Thank you, Sherry.

Good morning everyone, and welcome to our fiscal 2013 third-quarter conference call.

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

We'll discuss our results, and make a few remarks about the fiscal third quarter ended May 31, 2013; and we'll also comment on our outlook for the remainder of our fiscal year.

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

Please note that we've provided additional financial information in our earnings release, and a supplemental financial information slide deck on the IR section of our website that includes key factors for the changes in various data.

Quarterly result comparisons to comparable prior periods can be found on our SEC filings.

Matters discussed in this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of '95.

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

Mark?

Thank you, Lorie.

I'll take a few minutes to summarize our results, then turn it back over to Lorie for some more granularity on our goals relating to margin enhancement that we announced last quarter; and then we'll turn it over to Bill and open it up for questions.

Just briefly at a high level, our third-quarter revenue was $433.7 million, and our EBITDA for the quarter was $39.6 billion, or 9.1% of revenue, up sequentially from Q2 EBITDA margin of 8.6% of revenue.

Net earnings for the quarter were $0.50 per diluted share, excluding good will impairment charge related to what we now refer to as our wheels repair and parts segment.

This impairment charge was $71.8 million net of tax.

Incidentally, the change in what we refer to this segment is only a name change that we believe better describes that segment, as compared to any kind of reclassifications within the segment.

Results for the quarter also include a $1.6-million after-tax charge, or $0.05 a share, related to balance sheet adjustments at a certain wheel and repair shop location.

Despite some headwinds near term and manufacturing and in the wheels repair and parts segment during the quarter, we saw a sequential improvement in margin in both of these segments.

Our diversified order book remains strong.

In the third fiscal quarter, we received orders for 5,500 cars valued at $575 million, and our booked to bill for the quarter was about 2.2 to 1. Since June 1, the beginning of our fourth quarter, we've received orders for an additional 2,100 rail cars, valued at over $150 million, and our orders continue to trend up, with the diversified range of rail car types; and tank cars only accounted for 37% of the orders in Q3 and the first part of Q4.

During the quarter, we also diversified our offerings with the successful introduction of our new Multi-Max auto car, which continues to receive strong interest.

As a result of the strong order book, our backlog was up sequentially at 14,200 units, valued at $1.57 billion, up from 11,700 units, valued at $1.3 billion at the end of last quarter; and the average sale price remained unchanged at $111,000 per car.

Our new deliveries during the quarter were 2,500 units, this is down from the second quarter and some previous guidance that we had given.

This was primarily due to near-term softness in the intermodal market, although we received orders after the quarter end for 1,500 units.

Those will be delivered in Q4 and in Q1 of fiscal 2015, and we did not have any intermodal deliveries in Q3 of this year.

We also had some slower-than-anticipated ramp-up at our tank production at GIMSA, and this slower ramp-up also affected our manufacturing margin for the quarter.

We are addressing these items at GIMSA head on, and Bill will also elaborate on this.

In our wheels repair and parts segment, our revenue was up 17% sequentially due to favorable product mix, improved wheel volumes, and sale of some excess inventories.

Our margins were also up sequentially, notwithstanding the drag of the $1.9 million pretax charge, or $1.6 million after-tax related to the balance sheet adjustment item I previously referred to.

In our leasing segment, utilization was 97.9%, up from 97.5% last quarter.

Revenues were up to continue growth in our management services activities, and our margins were down slightly.

This was due to lower average volume of rent-producing leased rail cars for syndication, which have no associated costs of revenue.

As a reminder, as we pointed out on our last earnings call, we'll begin providing segment operating income and segment operating margins starting in Q1 of our next fiscal year.

We believe this will address providing more transparency to investors, as well as providing important incremental information.

As you'll note, we updated our outlook for the balance of this year based on the slower-than-anticipated ramp of tanks, and lower-than-anticipated deliveries of intermodal in 2013; and that we now expect to deliver between 11,750 units and 12,250 units; and the revenue to be in the $1.75 billion to $1.8 billion; adjusted EBITDA to be in the range of $150 million to $155 million, and that CapEx, which we define as gross CapEx less lease fleet sales, to be down significantly to $25 million, from the previous expectations of $95 million.

The EBITDA range that we have given excludes any cash restructuring charges associated with facilities reductions.

The leadership changes we announced today, we expect those to be -- those charges to be in the range of $3 million to $5 million over the next several quarters, and this $3 million to $5 million of cash charges does not include any non-cash gains or losses from facilities reductions.

I'll provide a brief update on our strategic initiatives and turn it back over to Lorie.

As you know, today we announced the first step of our multi-step plan to enhance margins by 200 basis points, and reduce capital employed by at least $100 million.

We're gaining traction on the $100-million capital reduction, and have accelerated the time line to February 28 of 2014.

This $100-million reduction will come from three sources -- $25 million from wheels, repair and parts via the sale, fix, or close of 14 under-performing facilities identified today additionally, $25 million will come from working capital improvements primarily in manufacturing and the remaining $50 million would come from refining our leasing model to get assets off the balance sheet.

A brief note on the margin side, where we announced 100 basis -- or a goal of a 200-basis-point improvement.

The sale or closure of the eight under-performing sites will improve segment margin by 100 basis points, and improve the aggregate margin -- that is, the aggregate Company-wide margin of 30 basis points -- and as part of the overall 200-basis-point goal.

Lorie is going to now provide more detail on that goal, and then we'll turn it over to Bill.

Thank you, Mark.

As Mark indicated, since we announced our initiatives in April, we've had various requests for additional color on how we expect to achieve the minimum 200-basis-point gross margin improvement goal by the fourth quarter of fiscal 2014.

We've included additional information, as well as a bridge to our 13.5% aggregate gross margin, in the supplemental information available on our website.

As a reminder, and as demonstrated in these quarterly results discussions, at times our operating results can be impacted by growing pains and learning curve inefficiencies.

Therefore, while the bridge provides specific basis-point targets for each identified activity (technical difficulty - no audio).

Not surprisingly, we expected the bulk of the improvement, or about 100 basis points, will be achieved through direct improvement in our manufacturing structure and processes, including procurement streamlining and global sourcing, as well as value engineering, and increased emphasis on lean manufacturing processes.

As Mark indicated, we expect operational improvements in our wheel, repair and parts segment to contribute about 70 basis points, with 30 basis points being ascribed to the eight under-performing facilities, again to aggregate gross margin percentage.

We expect the remaining margin growth to come from a combination of operating efficiencies and from structural changes in customer arrangements.

We do acknowledge that our back log -- the rich mix of our backlog will provide a piece of our achieving this goal, being a richer mix of rail car production, specifically the growth of our tank car production and margins, and automotive-related products, which together are expected to contribute about 50 basis points of the growth by the fourth quarter of fiscal 2014.

Now over to you, Bill.

Thank you, Lorie.

Well, we've had a busy quarter and a lot going on.

We've increased our backlog by about $200 million to $1.6 billion, with orders for 7,600 units counting those received during the quarter and subsequent to quarter end -- including, very significantly, a double-stack car order for 1,500 wells.

It's been a very lean year for double-stack cars.

We're gratified to receive this order; looking forward to a stronger year for intermodal next year.

I'll give some more flavor to that in just a minute.

With the successful launch of our new Multi-Max, a proprietary automotive car for finished vehicles which is easily converted to carry passenger vehicles in a tri-level mode, or sport utility and other large vehicles in a bi-level mode.

This is a very significant development.

It's a great product.

As most of you probably know, finished automobiles are primary product for the railroads for delivery.

The automotive market is strong; and heretofore, these kinds of passenger and sport utility vehicles have been carried in different kinds of racks or cars.

So we believe this quick-change automotive car will be a real winner.

We also took decisive action to address declining margins in our under-performing wheels, repair and parts segment, with leadership changed announced this morning, and restructuring plan for about 40% of our facilities.

That includes over one-third of our work force in that segment, and substantial amount of capital.

Manufacturing deliveries for the quarter fell slightly compared to our Q2, as opposed to earlier announced plans for growth sequentially, due to issues -- and the reasons for this were issues at our Mexico new car manufacturing facilities, both of them.

This included a wildcat strike at Concarill's Bombardier facility, as we have two facilities there -- our own and one which is leased from Bombardier.

Then secondly, slower-than-planned ramp-up of production rates at GIMSA in tank cars, plus curtailment of some covered hopper car production, so that we can concentrate on the improving ramp in tanks.

Margins in our manufacturing segment improved slightly, despite those headwinds.

The production issues at GIMSA were significant in terms of their impact on margin, in the targeted car types.

They were -- and it also affected our working capital, leading to excess working capital by the failure to meet ramping targets, and the reduction in covered car, hopper car production.

As we succeed at meeting our production targets in Q4 and the first quarter of 2014, we should see improving margins from tank cars back to our targeted margins, also declines in working capital, as inventory is absorbed by the scheduled remediation, and manning is matched to production levels achieved.

We are over-manned for the current rate of production and that has caused pressure, as I mentioned, on margins.

At this point, we have now restored the one line of covered hopper car production at GIMSA from six per day to eight per day.

In terms of our situation at GIMSA, this is a delay in expectations.

We reported a production level last quarter at around 10 per day.

We are caught in a -- about the same production rate for this last quarter as that rate.

We are taking a number of steps, as Lorie referenced, relating to systems, process, manning, and smoothing the line.

There is not any single thing that is causing that delay in ramp.

It's simply a delay, and we do expect to achieve our targets.

We're working closely with customers to do so, and are taking aggressive action.

Turning to the industry, the outlook for the industry remains very good, particularly for Greenbrier, with our diversified product strategy.

This has been two years in the making.

We're very proud of what we've achieved in developing, as I said earlier, the Multi-Max and other automotive car products, which is selling well into a strong automotive market.

We see a broad base of traffic categories, including intermodal, forest products driven by housing starts, selected chemicals and plastics, covered hopper cars from various applications.

In addition, we see increased inquiry activity in our marine business for oil by barge, and advanced two distinct steps regarding the regulatory approval for coal by barge on the Columbia River.

Essentially, the -- we have an order for, conditional order -- for 15 coal barges, approximately $60 million.

The two steps that were advanced this quarter were the issuance of an Oregon draft permit by the Department of Environmental Quality, which is still -- which is now under public hearing, and will be, we believe, approved; and an announcement that the Corps of Engineers, which is the governing regulatory body, and will make the definitive permitting for this project, that they will not do a systematic environmental review of coal's effects on the environment, as environmental activists have been requesting, stating that it is not essentially in their charter.

Unless the White House now intervenes or this -- there's intervention at the national level, it appears this project will go forward, albeit with some delays.

Industry tank car fleet additions in North America over the past two years have been robust, leading to a wave of need for maintenance certification and car management services on the nation's tank car fleet.

We have been beefing up in that area, believe this is the next wave of big opportunity emerging from the crude by rail story, and the North American energy revolution.

2014 will be a good year for our marine business, as I've said, and just as we believe we'll see added strength in our double-stack orders and some forest product categories.

This year, just to put intermodal in perspective, we received a market share of 90% of industry orders, which only represented 2,100 cars thus far for 2013.

Contrast that with production alone at our Gunderson facility in fiscal 2012 of 4,000 wells, which represented a little over a 50% market share, or 55% market share.

We expect that over the next 12 months, there should be a return to more normalized demand for intermodal cars, in as much as the traffic, data, and supply demand and balances should be corrected.

Anticipating success in our goals for freeing capital in our overall strategy and cash flows from operations going forward, we discussed with our Board of Directors at last week's meeting a stock buy-back program.

We will revisit that subject at a meeting this fall, as our cash flows materialize as planned.

We remained optimistic, as Mark has reported, on the success of our strategy to improve margin, and we're pleased with the progress this quarter in working on the wheels, repair and parts segment in doing so.

Thank you.

Mark, back to you.

Yes, operator, let's open it up for questions now, please.

(Operator Instructions)

Our first question will come from Allison Poliniak with Wells Fargo.

Your line is open.

You mentioned in the comments in your earnings release about refining the leasing business.

Anything that you can give us a little more color on with that?

We've been working aggressively in the last 18 months to change our leasing model to attract capital and to do, in effect, securitizations.

But our primary effort in those -- during that period of time -- has been to find additional efficient sources for syndication out of our portfolio, and for our ongoing syndication activities.

We've now turned to an off-balance sheet structure, which we believe will be able to consummate the first transaction soon.

As I believe we've said in the press release, we're looking in the neighborhood of a $50-million liberation of capital from that structure.

We'll have more details on that as time unfolds.

Great.

Go ahead.

Allison, on the off balance sheet where we'll maintain ownership in the asset.

Okay, so you'll -- okay, I understand.

Then obviously rail manufacturing, despite the issues you mentioned, gross margins were fairly strong still.

Can you give us a sense of what that impact was this quarter in terms of the issues that dotted GIMSA and intermodal?

Yes, there were a couple of issues that hit us hard in manufacturing.

We took a separate write-off of $1.9 million pre-tax apart from the impairment in this segment, due to an accounting and control issue at our Mexico City shop, which should not be returning.

I'm sorry -- that wasn't in the manufacturing segment.

That was in our repair segment.

But at GIMSA in particular, and at Concarill, we had a couple of separate issues that impacted margins considerably.

In Concarill issues, some of this will be possibly impacted in the next quarter.

We've probably had two separate issues that had $1 million worth of margin impact that are now behind us, one of which was a strike, and another one was a start-up on one of the car types.

Turning to GIMSA, the major production issues at GIMSA has been process flow, appropriate manning, which affects margins, and we have devoted considerable resources in the quarter to working that out.

It's always difficult to say exactly where you'll be in these production rates.

We're unhappy about them, but we're making progress in reaching the goals, and we're making sequential progress week by week.

So we're putting a lot of time, as Lori indicated, in on process and particularly inventory, manpower process, training, and we've had at least 10 expatriots and new hires during the quarter to address the issues.

Allison, probably if you look at the manufacturing margin overall, probably the slower than anticipated ramp-up, of course, affected the deliveries and efficiencies.

But it was probably in the neighborhood of about 100 basis points.

Okay.

Of a drag on manufacturing margin.

Do you have an estimate for how much working capital it might have tied up?

Oh, probably about $25 million of the working capital, as well.

Okay, great.

Thank you, guys.

Our next question will come from Art Hatfield with Raymond James.

Your line is open.

I got a couple of few just real quick questions, and I'll just kind of blurt them out and let you answer them.

First and foremost, have you seen any change or softening in demand recently in tank car?

That's one.

Secondly, if so, would you attribute any of that to some of the ramp-up issues that you're having down in Mexico?

Thirdly, can you comment on what you've seen in lease rates, both generally speaking and maybe tank-car-specific within your lease business over the last quarter?

Thanks.

Sure.

Well, on the second point, I'll take that first.

The demand for tank cars and our production rate has nothing to do with each other.

We've got an ample backlog in tank cars.

We still have inquiries for tank cars.

However, on the first point, demand for tank cars, we've seen a pause relatively speaking.

There's still a lot of business potentially out there.

I think this is being driven by a number of factors --just the saturation effect of the heavy build for a considerable period of time, and I would say that is in a pause category, or a slower category.

It's not -- I don't think it's a permanent disruption.

Then the spread between West Texas intermediate, the US crude benchmark and Brent crude, narrowed to under $5 a barrel just yesterday, which is its lowest level since January 2011.

That has a lot to do with traffic patterns, and it's creating a -- it's removing a differential that made some of the shipping strategies, particularly for some geographic producers, more attractive by barge -- strike that, by tanks, by tank cars by rail.

We also have the Magellan midstream partners, Longhorn Pipeline from Crane, Texas, that is expected to carry 225,000 barrels a day to the Gulf of Mexico by late September, for example.

So there are some moving parts there that have slowed the relative hectic pace of tank car inquiries, but have not eliminated.

And I think that's the operable thing, slowed and not eliminated it.

And I see it as kind of pausing to take its breath a bit.

This plays well into our strategy.

We had for the last two years studied this market very carefully.

We believe that diversification and balance is really important, and we expect to continue to be in the tank car business.

But again, we're not slowing our production because of a lack of demand.

We could still sell tank cars if we had earlier production.

So we're determined to get our production rates up to the levels and targets we had set earlier, with the acceptable targeted margins and working capital associated with that.

So that's really a positive thing in the sense that we haven't been able to meet a goal, and we should be able to meet it, and we're working very hard to meet it.

If I can follow up on that, with the narrower spreads, have any customers at all come to you and asked for the potential to push back delivery on any equipment?

No.

No cancellations, no suggestion of that.

In general, it's still a seller's market in tanks, particularly out in the next 16 to 18 months.

I anticipate that we will be able to deliver the -- at a higher rate of production, the tanks that we have in order.

We'll have to wait and see what happens on the demand side.

Art--

Finally, any comments on leases?

Mark's going to handle that.

Okay.

The lease rates, Art, I would say it's still car-type specific as to what direction that they are headed in, or the relative strength and softness overall.

Generally speaking, lease rates would be up for the car types and stronger demand, as the types that Bill previously referred to and car types such as coal and then lease rates would still be on the softer side and center partition cars, that is, that market is strengthening.

But it would -- and they would be up over previous short-term lease rates, but down from long-term, longer-term lease rates of leases that would have been put in place five to seven years ago.

Okay.

Mark, it's kind of interesting.

We had a tough quarter, but given the headwinds we had in the quarter, and if you take out some of these unusual items, particularly the Mexico City repair and wheel shop, we pretty much met expectations.

So we have these headwinds.

As they are removed, and we get some of the tail winds I have talked about, I think our 2014 should be looking really a lot better.

Great.

Thanks for your time today.

Next question will come from Bascome Majors with Susquehanna.

Your line is open.

I'm trying to understand the guidance adjustment that you made on deliveries.

If I recall, last quarter you were targeting around 1,300 cars for the fiscal year, and said you had about 2,000 slots to fill of that number.

If my math is right, you got about 4,000 orders during this calendar quarter, but you also took down the delivery guidance by about 1,000 from where it was previously.

I'm trying to understand -- I know you gave a little color about the intermodal, but can you help us in a little more detail about what's changed?

How much of that is really just a shift from something you thought you would get this year to something you'll probably deliver next year?

I think it's the -- all of it is the latter.

We're going -- just a delay.

It's not a change in plans.

It's not an inability to do it.

We are just delayed on our schedule.

There are two major factors.

One would be the ramp in tank cars, which we've talked about.

We're still at the same rate that we were at last quarter.

We're working hard on continuing the ramp, and sequentially week by week, we're getting there as we speak.

But that's had an effect on margins and it's had an effect on working capital.

Second major factor was the timing of intermodal this year.

Again, 2,100 intermodal wells is a very low level of demand.

That's what we received this year, which is 90% of the total orders so far.

We didn't get that intermodal order until very late in the game, so we had to slow and ultimately leave a hole in the line at Gunderson, where we're building that car, during most of the quarter -- the quarter to come, the fourth quarter.

So those are the two drivers of that, and they are both just in the nature of delays.

Okay.

Maybe a little bit about the Multi-Max product which you talked some about.

Can you give a little more color on the customer interest?

Maybe -- have you already taken orders for this?

Is that part of what we're seeing this quarter?

Maybe just give us a little directional info on sort of where that's priced, versus a vanilla buy or tri-level rack; and sort of what your market expectations are that over the next couple of years, as you get that product out in the market place?

Well, first of all, the automotive market for the next several years looks very robust.

Just a lot of articles last week and this week about auto sales and the aging fleet of American automobiles -- 11 or 12 years is the average age of the US vehicle population.

The product itself truly is a brand-new design compared to industry standard.

It's totally compatible with the current fleet.

It costs about the same, and it is capable of delivering a lot better service quality.

The acceptance by customers, major customers, has been exceptionally strong, and we've had endorsements, public endorsements, from several major railroads and major automotive customers for that car.

We have at least 300, if not more, orders in backlog for Multi-Max already, and we've got very strong inquiry levels.

There looks to us to be another round of orders, in the neighborhood of 2,000 to 2,500 units coming up this fall, in late summer.

Into next year we expect the pace to be something at that rate every year.

When I say 2,000 to 2,500, that's the total market place.

But we -- we're targeting a hefty percentage of that market place.

So far, we're excited about the prospects for that car.

Is the number you threw out -- I'm sorry, go ahead Lori.

Oh sorry, Bascome, I just think you were also asking about pricing.

I was just going to say Multi-Max is similar to other auto rack and the flat cars.

It's kind of -- the pricing runs in the low $100,000 range.

Right.

Okay.

When you said 2,000 to 2,500, was that just the racks, or are you including potential flat cars that might be sold with those?

Well, that would just be for the racks, but there would be another equal number of cars that would have to go with those, as well.

So it's a significant number of units.

That's basically just the ones we're tracking.

I don't know that there is a formal industry survey, other than the usual sources, about how many units will be added next year.

But we're tracking an awful lot of inquiries.

You raise a good point, Bascome, that we build both the rack -- we have multiple offerings in this space, so it's not just Multi-Max.

We build the Multi-Max rack.

We build the flat car.

We build our Auto-Max car, and then another proprietary car type.

When we talk about building a rack, we're also, in most of those cases, also building the underlying flat car, as well.

Between the Multi-Max and the Auto-Max, which are really designed for different customers and different uses, applications, we really have that segment bracketed.

It will be interesting to see what happens in the next 18 months as we push that product very hard.

All right.

Well, I'll cut it off with that.

Thanks for the time this morning.

Thank you.

Our next question will come from Justin Long with Stephens.

Your line is open.

It was another strong quarter from an order perspective.

You just mentioned demand in auto and what you anticipate there.

But could you comment on the recent inquiry levels for other car types?

Just based on that, do you think this order strength we've seen over the course of the year is sustainable in 2013 and then headed into next year?

If you look at the categories of rail car loadings, and you look at two of the major drags on rail car average loadings -- if you look at coal, which is a huge commodity for rail, and you look at wheat, those have been very much diluting the average industry loads.

But if you look at the specific loads for a number of different commodities, and if you differentiate grain from wheat, barley, other kinds of commodities, we see a reasonably good harvest for everything so far but wheat, which should drive more demand in that car type for grain and some derivative food products.

The -- we've talked about automotive, forest products, the housing starts are driving, are going to be driving, more forest products business in the future.

We're still seeing reasonable demand for sand cars and other car types like plastics cars, which are -- is a new entry, and we've received our first order for those cars, as well.

There's a number of those out there in the market place.

We're tracking right now about the same level of order inquiries as we had at the beginning of last quarter.

It hasn't changed very much, and has spread very thoroughly completely around all of those.

Having touched already on tanks, while the bloom may be slightly off that rose, it's still fairly robust.

We continue to think there will be some tank car activity in the coming quarters that may not be at the pace that it has been, but it will still be there.

That's helpful.

I appreciate it.

On the backlog, it's jumped a couple quarters.

It seems like visibility is getting a lot better.

Could you comment on any open-build slots you have in the fourth quarter?

Maybe looking beyond that, how much of the current backlog is allocated to 2014 -- I guess fiscal year versus some time beyond that time frame?

Justin, we haven't broken out the backlog by fiscal year, at the end of our fiscal year, part of our 10-K disclosure, we will be.

As we previously as mentioned, that in tank cars we do go out to our fiscal year, all the way out through calendar 2015.

In other car types we would not go that far out.

That would depend on car type in line by line.

As you reference, we do have some open production slots in -- remaining in our current fiscal year.

We only have a couple of months left in it, of course, and that might be in the range of 300 to 500 slots that are available.

Then you could back into that from our delivery guidance overall.

Then the balance, again, depending on the production line, would go out some time -- excluding tank cars -- would go out sometime in 2014.

Great.

I think the last question I had, you mentioned this in the release that demand for crude barges is heating up.

I was wondering if you could just talk a little bit about that market -- what your capabilities are in terms of the size of the barges that you can build at Gunderson, and any details on the throughput or capacity you have there on an annual basis?

Okay.

Well, that unit in the past has reached upwards of $75 million or $80 million a year in revenue.

So it has the potential of being ramped up to probably $100 million.

The number of inquiries we are receiving currently on crude by barge is kind of stunning.

There's a number of 130,000- to 170,000-barrel crude buy, or crude barges and refined-products barges being studied by multi -- by a large number of -- or not a large number, but a significant number of different companies who are interested in that market.

What's happening is the distribution pattern's somewhat constrained by the availability of tank cars and other distribution requirements.

There's a lot of projects going from midwestern and other locations to the Pacific northwest.

There's been one refinery shut in Hawaii that will precipitate a finished product move out of Los Angeles.

So there's just a number of those, and there's been quite a bit of industry information on that subject, if you Google it.

We expect, in combination with the coal project and this, to have a fairly active 2014.

It's going to take another quarter probably before those orders materialize, and really, we can report a stronger backlog in our marine business; but we are expecting that to occur.

Great.

The right way to think about margins on that business, it's kind of 2 X what you typically get on the rail car side, is that right?

Well, not for tank cars, but some place in the category of where a desirable tank car margin would be.

It's in the high, mid to high teens in those -- in that product.

Okay, great.

That's all I had.

Appreciate the time.

Thanks.

Our next question will come from Matt Brooklier -- your line is open.

Thanks.

Good morning.

I think you spoke to the gross margin impact from A, the facilities strike, and then B, some of the issues with ramping up production at GIMSA.

Are you able to talk to what deliveries would have looked like if you hadn't had those issues in the current quarter?

Well, if you look overall at the change -- are you referring to the strike, or are you referring to the strike and the ramp-up of production at GIMSA?

I'm referring to both.

I mean, you had 2,500 units delivered in the quarter.

I'm just trying get a feel for what that number could look like, now that we have those issues resolved, or partially resolved?

Right, and again, it would -- certainly the strike is behind us.

We continue to ramp up production.

As background again, as Bill referred to, we in our last conference call, we were up to a rate of about 10 tank cars a day at our GIMSA facility.

By the end of this calendar year, our goal is to be up to a rate of about 16 a day.

Since the time of our last call, up until currently, we've had modest progress from that 10 per day.

That is a delay that we remain committed to getting to that 16 a day by the end of the calendar year.

When you look going forward, you would have to go all the way to the 16 a day rather than where our plans were initially for the quarter that ended.

If you look at the quarter itself, our deliveries were impacted by about 500 cars due to the strike, and to the slower-than-anticipated ramp-up.

And the intermodal cars, I'm assuming that's included in that, too.

Yes, intermodal, if you add intermodal on to that, while we didn't have a specific number, we were certainly operating at lower production rates than if the orders had been in hand.

As Bill indicated as well, we also ceased production after the quarter in a temporary cease in production until -- and a slow-down, a further slow-down of production.

Okay.

That's helpful.

Then with respect to the -- I think you sold some excess wheel services inventory in the current quarter.

Are you able to quantify how much that contributed to the quarter?

Oh, that was -- it's not a huge number -- maybe in the neighborhood of $5 million to $8 million.

Okay.

Of revenue, not of margin.

Okay.

That comment was principally related to some of what was going on in revenue side.

On the margin side, it was lower than the aggregate margin for that segment overall.

So it's a low single-digit margin on that.

Okay, and then just my final question.

Your gains on sale of equipment was a little bit above what you did last quarter, and I think what you typically do in a given quarter.

Were there any anomalies, or what drove that number to be a little bit more of a benefit during fiscal 3Q?

There's nothing in particular per se going on there.

We've indicated before that timing of sales out of the lease fleet, they are generally opportunistic in nature, or a re-balancing of the portfolio.

You're correct that last quarter was a more robust quarter and on the higher end of what we might typically see.

This quarter, we expect that number to be probably at the lower end -- this quarter being Q4.

If you think of a range of $1 million to $5 million this quarter, we probably currently anticipate we'll be at the $1 million to $3 million level rather than the $3 million to $5 million level.

Okay.

That's helpful.

Thank you for the time.

Thank you.

Our next question will come from Ken Hoexter with Bank of America.

Your line is now open.

Good morning, Ken.

Good morning.

Hi, actually, it's Veronica Zhang on for Ken.

Okay.

Good morning.

Good morning.

So most of my questions--

I'm glad that it's not Ken on the other end of the line.

Not feeling well today.

But just one more thing on tanks, even though most have been answered.

Just given the robust pace you've been seeing in getting orders this year -- I know you mentioned a slight slow-down recently -- I was wondering if you could put some color around the size of your customers that have already placed orders?

Additionally, if the pace does pick up, if you would even potentially turn down orders for a short period of time since you've already sold your production slots through '15, or if you would just add additional capacity concurrent to more orders?

We have been regularly passing up opportunities to quote tank cars.

We just can't -- don't have the capacity, and having the slow-down in ramping rate doesn't make that any better.

I would like to be clear on that.

We -- what was the second half of your question, Veronica?

Well, if the -- if you already have production slots filled through '15, if you could add additional capacity concurrent to any orders coming on?

We would not contemplate adding additional capacity in tank cars.

We have at the GIMSA facility, we can build covered hopper cars or tank cars back, and we can do that fairly interchangeably with three lines down there.

But we think, since we're having issues with the ramp on tanks, we're going to stick to our knitting and target getting to an efficient level, with efficient working capital and ROIC on the tank car market niche that we've targeted, which is around 20% of the total market.

Got it.

Just the first part of my question, if you could put some color around the size of customers that have already placed the orders?

I'm sorry, yes.

Most of our tank car customers are quite large.

Mark, do you want to add any more color to that?

Right.

So we -- going back into the history, we entered the tank car business with a major operating lessor, GE Capital and GE Rail Car.

Our customers today are largely the leasing companies.

We do to much smaller scale, we're leasing directly to the shipper community.

Again, the tank car market is primarily a leasing market rather than a direct-sale market, and the customers that -- so the leasing companies that we're selling to are all the big players in the leasing business, and the shippers that we're leasing directly to are also the big shipper players in the market place.

We don't believe that we have much in the way of credit exposure in this market.

As long as they're purchases, right?

Yes.

(inaudible) leases.

Does that answer your question?

Yes.

Thank you.

Our next question will come from Sal Vitale with Sterne Agee.

Your line is open.

Just a quick question.

Number one, so your target is to get to a tank throughput of 16 per day by the end of 2013.

Can you increase this throughput level beyond 16 in 2014?

We don't believe so, no.

We are targeting 16 and we are having some issues in getting our ramp, as you've heard, and that's affecting our margins and our working capital.

What we are trying to do now is operate the plant efficiency with the backlog and the market share targets that we already have in place.

Sal, again, and the reason being is that as well, we have two lines and we just brought on the second line this quarter.

Indeed, with the opening of the second line, that's where the, we've seen the challenges and the ramping up of production.

But we look at it as about eight cars a day on each line, eight tanks a day on each line, and we're only devoting two lines out of our total of nine to 10 lines to tank cars.

As Bill referred to earlier, that's -- we don't intend to add any more lines to tank cars.

Got it, okay.

It wouldn't require additional capital expenditures to do so.

Correct.

Okay, so that makes sense.

The other question, just a little more granularity on the deliveries guidance reduction.

I guess first, a clarification.

You said you have 300 to 500 open slots for fiscal '13.

Does the current guidance include or exclude those open slots?

In other words, does your current guidance assume that you fill those 300 to 500?

Sal, this is Lori.

That's part of why we gave a bit of the range.

We have obviously some very strong inquiries going on and activity going on.

But as you've seen, as you look at us from quarter to quarter, orders can be lumpy.

So whether they come in during this fiscal quarter or it slips into next fiscal year, that's part of it.

So it's -- there are several moving pieces that we take into consideration when we gave that guidance.

Okay, and then just -- and you touched upon this earlier, but I was just hoping to get a little more granularity if you could.

In terms of the reduction in the guidance, how much would you say is attributed to the intermodal -- I guess timing of intermodal orders, and how much would be attributed to tanks?

You said tanks, 500 cars, 500 of the deliveries shortfall, let's say, in the current quarter, in Q3, was due to tanks.

But is that something that spills over into Q4, that 500?

There's a number of moving pieces, Sal, because at the beginning of the year, we gave guidance to about 13,000 rail cars.

Then of course as the year has evolved, there's a number of moving pieces and demand in that mix.

Indeed the mix, because it's a dynamic market, we also have a higher dollar value mix than we might have seen at the beginning of the year.

But overall, this year we'll be delivering about -- we delivered 600 cars last quarter.

We -- I'm sorry, in Q2, 600 platforms.

We also said that about a third of the current order would have been -- would be delivered this year.

So roughly a thousand intermodal wells overall.

At the beginning of the year, we might have thought that number could have been double; but similarly, at the beginning of the year, we thought that tank car production would end up higher than where we are currently ending up.

So that's going to add out to well over 1,000 cars shortfall that on the other hand, we have the higher orders in other car types than we would have anticipated at the beginning of the year partially offsetting it, the auto market being notably one of them.

So it's a bunch of moving pieces that when you say that we're off from our guidance of -- at the beginning of the year at 13,000 cars to now the range of 11,750 to 12,250, tanks and intermodal are certainly lower than we would have anticipated at the beginning of the year, and by more than 1,000 cars, and that's partially offset by higher demand for other products, including automotive cars.

Okay.

That's helpful.

The last question staying on intermodal.

I guess to what factor would you attribute the dearth of intermodal orders?

You actually got and order for 1,500 post-quarter end, but we thought you would have seen a more significant increase at this point, given that intermodal volumes are actually pretty strong?

There's several forces.

The intermodal orders are not strong.

In fact, this has been one of the weaker years for intermodal car orders.

Loadings have been strong.

But you have to parse it through a bit, because there has been very good increases in rail car velocity on the railroad system, so they require fewer cars.

There were heavy builds last year in 2012, and the year before there were builds.

So the supply/demand equation has been off in 2013.

We expect that to be equalized in 2014, and have a stronger year industry wide.

So we have built, or have received orders for, or have built 2,100 cars this year, 2,100 wells.

Last year we built 4,000.

Last year, our market share was close to 55%.

This year, it's close to 90%.

We -- it's clearly that the, the supply side hasn't caught up with demand yet.

But the demand is fairly robust, and we expect it to continue to be that on a secular basis.

Okay, thank you.

And our next question in queue comes from Thom Albrecht with BB&T.

Your line is open.

I want to look into fiscal '14 a little bit, since that starts August, or September 1. What do you think the likelihood is that your total production next year will be at or below the production for fiscal '13?

I'm going to call fiscal '13 about 12,000 cars, using the mid-point of your range.

At or below, or above?

Well, I'm starting with the negative side.

At or below.

Maybe that will get you to expound a little bit?

It depends quite a lot on intermodal.

Just depends.

That's usually the answer to all questions, right?

But it depends on intermodal.

We see the -- we can identify what the possible tail winds are, the real big boosts -- automotive, intermodal, if it comes back as we expect it to, would be a strong driver; and we would -- tank cars, because they're so large in the picture for the last couple of years, would also be a factor in that.

But I would think our production -- why don't you talk to that, because I don't want --

Yes.

Thom, we'll give an outlook next quarter, at the beginning of next quarter.

As we see it today, we certainly see growth opportunity next quarter as compared to this quarter -- or next year, as compared to this year.

Part of that certainly is through margin enhancement goals that we have set out, but partly overall, we see growth opportunities.

As Bill said, there is a number of moving pieces.

Intermodal would be a bit of a wild card.

Certainly the European market is, I'm sure you've noted, the European economy has suffered more than our economy, and we're not anticipating as a robust year in Europe next year.

But we believe that will largely be offset by marine.

While that's not the rail piece, and that's not part of the deliveries that you asked about, today marine is fairly moribund -- about $25 million of revenue, which also affects overhead absorption.

It's not only the margin question that was previously asked, but a big dial-mover in overhead absorbs in our Gunderson facility as well.

So that would be a piece up.

If you had to have a simple-minded answer to it, I would say at or above this year.

Okay.

Because the revisions in our expectations for this year.

I am feeling much more optimistic about the broadly based market, a little less optimistic about tank cars for crude.

On tank cars, there are a lot of cars that have been crowded out.

So there's probably a lot of specialty cars that will be added to the books that haven't had an opportunity to get that.

Okay, and I've got just a follow-up question then.

On --

Let me just add that in terms of our production, it depends on our ability to get to the production rates efficiently that we are targeting, and obviously this quarter we've had some -- we haven't reached the ramps we wanted to, nor the efficiencies affecting margins and working capital.

So tanks are out of the equation in terms of our production next year, except if we can't produce to our targeted levels.

Right.

Well, that's the question I wanted to follow up on.

Given that there is a bit of a pause, or however you want to phrase it, within the tank market as it digests the cars that have already been ordered, et cetera, do you really want to get to 16 a day, which I think the goal would have equated to about 3,800 annual?

Would it also be prudent to see annual tank production be stretched out and maybe not a bad thing if you don't get to 16 a day?

Oh no, most definitely we want to get to 16 a day.

We think the market's strong enough to, with our strategy, to sustain a reasonable market share.

Once we get to 16, if we need to, we can pull back.

But we want to -- we've got a fairly robust backlog now, and we should, we should get to the targets that we're at and stay there for a time, no matter what the market does.

Okay, and then lastly, Mark, I know you addressed some of this in the question about the direction of lease rates.

But I think a little more specifically on the tank side, I think you just kind of answered it generically.

The discussion is that lease rates may be off recently 30% to 50% for tank cars.

Can you talk a little more specific to that question?

That definitely sounds like on the high end.

We certainly have seen and heard of lease rates being off of their peaks, but --

Talk about the term, Mark, because the term is relevant.

Right.

Short-term, talking about the short-term lease rates that have been so high since the crash.

Right.

Some, we have not been leasing in the very short-term market.

We have been leasing in the seven- to 10-year market.

While there may be some more modest pull-back in the seven- to 10-year market, or in the longer-term market from the peak rates, that perhaps the fall-backs you're referring to is in the markets that we're not playing in, and that would be in the very short-term of either month-to-month to a year-type term, where those rates could have been reported as much as double the long-term type rate.

But again, not a market that we would play in.

Okay.

That's helpful, thank you.

Our next question will come from Steve Barger with KeyBanc Capital Markets.

Your line is open.

Thanks for taking my question.

I'll be quick.

EBITDA guidance went to $150 million to $155 million.

The prior look was similar to FY '12, which was $159 million.

Just wondering, how much of that reduction, if any, is based on closing or selling some of those eight locations?

Or is that all based on the reduced deliveries?

Steve, this is Lorie.

The bulk of that revision is going to be based on reduced deliveries.

The fixing and closing that guidance -- I'm sorry, the EBITDA guidance -- that Mark gave earlier is exclusive of any cash or non-cash charges associated with any of those closures that might occur by the end of this fiscal year.

Yes, I'm talking about operating EBITDA.

I guess the question is, what's the EBITDA headwind that you'll see once those eight locations are gone?

How much are you going to lose if you just close them today?

Do you expect you can quickly replace that with improvements from the remaining locations?

Not much EBITDA is expected to be lost.

That's part of the issue with those facilities and why they have been targeted, is they just have not been performing.

So we do believe that by closing those facilities or selling them, it will be essentially neutral, if not beneficial to EBITDA.

Got you.

We think that will be any, any impact, any headwinds from that, would be offset by the operational efficiencies that we expect to receive through William Glenn, and Rick Turner's focus in this area.

Okay, and last one.

You -- Bill, you made the comment that 2014 should look a lot better when the headwinds turn into tail winds.

Since you brought it up, I'll try and compare it to the $200 million EBITDA consensus number.

Does that seem like an achievable number when you look at the positive swings you see coming in mix and operational improvements?

My CFO won't let me talk about numbers like that.

Nice try, though.

Appreciate it, thanks.

He might say some wishy-washy things about them at this point.

I think you can certainly infer that on flattish revenues this year on the 200-basis point margin enhancement that what that might mean on a run rate, but we'll be giving, I guess in all that, the granularity next quarter, we'll be giving an outlook for 2014.

We definitely see 2014 growth at this point in EBITDA, but we'll give specifics on our next quarter call.

All right, gentlemen.

Thanks for the time, and Lorie, you, too.

That concludes our questions.

Thank you very much.

Thank you.

That concludes today's conference.

Thank you for your participation.

All lines will now be disconnected.