FreightCar America Inc (RAIL) 2009 Q1 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the FreightCar America first quarter 2009 earnings conference call. At this time all participant lines are in a listen-only mode. There will be an opportunity for your questions at the end of today's presentation.

Please note this conference call is being recorded. An audio replay of the conference call will be available beginning at 1 p.m. Eastern Daylight Time today until 11.59 p.m. Eastern Daylight Time on May 12, 2009. To access the replay, please dial 800-475-6701. The replay pass code is 997312. An audio replay of the call will be available on the Company's website within two days following this earnings call.

I'd now like to turn the conference over to Chris Nagel, Chief Financial Officer of FreightCar America. Mr. Nagel, please go ahead.

Thank you. Before we begin, we would like to remind everyone that statements made during this conference call relating to the Company's expected future performance or future business prospects, events, and plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties may cause forward-looking statements to differ from actual results including, among other things, the cyclicality of our business, adverse economic and market conditions, fluctuating costs of raw materials including increasing surcharges, and additional risk factors described in our earnings release for the first quarter of 2009 and in our annual report on Form 10-K filed with the Securities and Exchange Commission.

Forward-looking statements represent our estimates and assumptions only as of the date of this call. We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events, or otherwise. Our earnings release for the first quarter of 2009 is posted on the Company's website at www.FreightCarAmerica.com.

I'd now like to turn the call over to Chris Ragot, our President and CEO.

Thank you, Chris. Good morning. Joining Chris Nagel and me today is Ted Baun, our Senior Vice President of Marketing and Sales. We'd like to welcome you to FreightCar America's first quarter 2009 earnings call. I'm going to discuss the highlights of the Company's performance in the first quarter and some thoughts on the current marketplace. Then Chris will provide a detailed review of our financial performance.

In light of the challenging market conditions, we are pleased with our financial results the first quarter. Total sales revenue for the quarter was $40 million, while net income was $2.6 million, or $0.22 per diluted share. We continue to aggressively pursue market opportunities and maintain our strong market position. We are proactively reducing our cost structure in line with business activity, helping us to report positive operating results. I'll speak more to these actions in a moment.

Regarding the overall railroad market in the first quarter, commodity loadings for North American rails continued to decline while improvements to rail operating metrics have accelerated. Coal loadings decreased 5.6% compared to the first quarter of 2008 and 6.6% compared to the fourth quarter of 2008, but have declined significantly less than other commodities. Substantially, numbers of railroads are currently in storage and rail velocity metrics have increased, placing downward pressure on coal car demand. Recession-driven reductions, demand for electricity, ample utility stockpiles, lower production, decelerating export activity have all contributed to the decline in coal activity.

Not surprisingly, given these factors, order activity has declined for coal cars and for railcars generally. Economic headwind and attendant pressures are anticipated to continue to challenge coal markets in North America and around the globe throughout the year.

As I stated previously, notwithstanding continued recessionary economic pressure and uncertainty surrounding government policies, we believe the long-term fundamentals of coal demand are strong. There are approximately 27 plants, representing roughly 16,000 megawatts of coal-fired capacity, currently under construction, and we expect that coal will continue to provide roughly half the projected fuel source for total electricity generated during the foreseeable future. We believe that the long-term demand for our main products and service is healthy, and we are confident FreightCar America remains well positioned to capitalize on this demand.

In response to competitive market conditions and constrained lending market, offering railcar leasing to our customers on a selective basis continues to be important. So far in 2009, we have seen a continuing shift in customer interest towards leasing. In this period of economic uncertainty, our customers want to explore opportunities to reduce long-term capital commitments, and our ability to both manufacture and lease railcars to them is critical. However, we continue to be successful in working with our leasing partners to monetize our leases as opportunities present themselves.

Through March 31, 2009, the Company's net investment in railcars under operating leases increased by $48 million. Subsequent to the end of the quarter, the Company sold an additional $26 million worth of railcars under lease, bringing the Company's net investment down to $68 million.

Regarding our aftermarket business, I'm very pleased with the growth of our refurbishment and parts sales. We capitalized on refurbishment opportunities in the first quarter and hope to expand upon this opportunities going forward. In addition, our aftermarket parts business has grown by 54% compared to the first quarter of last year, and margins on these sales remain very good.

We are continuing to evaluate opportunities to acquire capabilities in the aftermarket sector since we believe there is a strong strategic fit with our overall portfolio of products and services. Over the long term, we believe we can enhance the value proposition to our customers by offering services that address the entire life cycle of the coal car.

On the international front, our joint venture in India continues to make good progress. We are working with Indian railways and other industry participants to develop a prototype aluminum railcar for use in the India rail market and have plans to deliver that prototype this year.

But while we are positioning the Company for future growth, we recognize that we are operating in a very difficult macroeconomic environment, one that requires us to continually look for ways to realign our cost structure and current business activity. We have taken further steps to do so in the first quarter and have additional actions planned for the short term. We also plan to temporarily idle our manufacturing facility in Roanoke, Virginia, starting midsummer, which will allow our plant in Danville, Illinois, to optimize production in the remainder of the year.

Our first quarter SG&A costs were down approximately 15% from the first quarter of last year. In addition, we are taking further steps to reduce costs in light of market conditions and are planning for 2009 full-year SG&A expense to be $25 million to $26 million, or 20% less than 2008 expenses. We will continue to assess market conditions and are prepared to make further reductions as necessary.

We also work diligently on cost reduction initiatives to generate margin improvements and have seen the positive impact on our first quarter results. Our margin improvement teams remain focused on identification and elimination of waste in our processes in order to foster a continuous cost improvement culture.

In light of the market, we have also made the preservation of liquidity and our strong balance sheet as a critical priority. Our mindset is firmly wrapped around maximizing cash, and we are dedicated to maintaining a strong cash position throughout this downturn. While our cash balance declined to $96 million at the end of the quarter, our cash balance at the end of April was approximately $130 million. Chris will give you more details on the first quarter cash flows, but part of the reason for the quarter-end decline in our cash balance was simply a matter of the timing and executing collecting sales of $42 million, which we received in early April. In addition, our two credit facilities remained untapped.

As I've mentioned, we expect the challenging economic conditions to continue throughout 2009 into 2010. However, we fully intend to emerge from this downturn in a position of strength. We are positioning for future growth while taking steps to further reduce cost. I believe that our actions demonstrate a proactive approach to dealing with the current economic environment and put us in the best position to capitalize on commercial and strategic opportunities.

Now I would like to return the call to Chris Nagel to address our first quarter financial results in more detail.

Thank you, Chris. Net order activity in the first quarter was 339 units, which represents a decrease of 1,367 units, or 80%, from the 1,706 units ordered in the fourth quarter of 2008. Although we expect order activity to be at reduced levels for 2009 as we continue to be challenged by difficult market conditions, we have picked up an additional order of 405 railcars in the month of April.

Railcar deliveries totaled 974 units in the quarter, including deliveries of 370 cars sold and 600 cars leased. That compares to 3,624 units delivered in the fourth quarter of 2008. Our total backlog of unfilled orders was 1,985 units at the end of the quarter, compared with 2,620 units at the end of 2008.

As Chris mentioned, our sales revenue for the first quarter of 2009 was $40 million, compared to $272 million in the previous quarter and $95 million in the first quarter of 2008. Included in our sales revenue for this quarter is a payment of $3.9 million received from a customer in connection with the reduction of a new car order. Most of the payment represents the lost margin on railcars we would have shipped during the first quarter.

While we consider this payment largely to represent commercial margin, it did have a significant impact on gross margin rate for the quarter. The rate for the quarter was 26.6% compared with 7.8% in the previous quarter and 9.8% in the first quarter of 2008. Excluding the impact of this cancellation payment, gross margin rate for the quarter was 18.5%. The increase in the margin rate reflects a favorable shift in the mix of new car sales, increased leasing revenue, and increased sales and expanded margin in parts and refurbishment business. We expect this increased level of parts and refurbishment business to continue at least through the second quarter.

Selling, general, and administrative expenses for the first quarter were $7.3 million, a 15% decreased from the previous quarter and from the first quarter of 2008. We have reduced headcount in line with the spending reduction over the past 12 months. The reduction in SG&A expenses for the first quarter reflects our continuous effort to minimize costs throughout the organization.

Our effective tax rate for the first quarter was 24.7%. The unusually low rate is due to the favorable impact of certain tax-deductible items on a relatively low earnings base.

Net income was $2.6 million or $0.22 per share for the quarter, compared to net income of $8.3 million or $0.70 per share in the previous quarter, and a net loss of $10.2 million or $0.87 per share in the first quarter of 2008. The loss in the first quarter of 2008 includes $18.3 million in pretax costs associated with the shutdown of the Company's manufacturing facility in Johnstown, Pennsylvania. Excluding these costs, net income for the first quarter of 2008 was $1.2 million, or $0.10 per diluted share.

As Chris mentioned, our quarter-end cash balance was $96 million, down from $129 million at the end of last year. The decrease in cash was driven by a build in inventory given the timing of sales around the end of the quarter and an investment in railcars under leases of $48 million during the quarter. As of the end of April, our cash balance was $130 million, as we shipped and sold $26 million of originally leased cars after the end of the quarter.

In summary, and as Chris discussed, we are pleased with our first quarter results and our management of cash given the challenging environment. For the rest of the year, we will continue to aggressively manage those things under our control while aggressively pursuing commercial opportunities with our customers. We will continue to reduce expenses and manage working capital to preserve cash and maintain the strength of our balance sheet.

With that, I would like to turn the call back over to Chris Ragot.

Thank you, Chris. As we face a challenging macroeconomic environment and intensive competition, our management team is focused on improving our cost structure and our competitive position, which will benefit FreightCar America going forward. In addition, our financial strength will allow us to withstand these difficult economic conditions.

In closing, I would like to thank you for your interest in our Company and for participating on this call. We look forward to updating you again during the next conference phone call.

We are now ready for questions, Rich.

Certainly. (OPERATOR INSTRUCTIONS.) And we're going to start with the line of Michael Gallo with C.L. King. Please go ahead.

Hi, good morning.

Hello, Michael.

The question I have is on the--I guess you were able to stay profitable in the quarter despite a pretty low revenue rate. Obviously, you had the benefit of the cancellation payment. I was wondering, as you look at your plan for the rest of the year based on where the G&A rates are going to be, one, where should we expect gross margins to be? It seemed like even excluding the payments, they were much higher than we would have expected given the level of shipments. And two, do you think you can remain profitable for the remainder of the year? Thank you.

Thank you, Michael. Listen, gross margins, it's a difficult market right now. But on new equipment sales, our expectation is to be in that mid-single-digit range. Although clearly some mix that we had in the first quarter, the margin rates were higher net on new car build.

When you talk about the aftermarket business, everything from refurbishment work, service work, and parts sales, the average margin there starts at around 15% and goes up to about 30%. So the mix of our cars in the first quarter overall were favorable. The forecast in the future, especially on the coal car side, would be mid-single digits. And any aftermarket side, as we continue to grow that business, we're in that 15% to 30% range. Sometimes we're a little bit higher than 30%, but in general, that's where we fall.

On a blended basis, 7% to 8% type margins that you saw, I think, in some of the prior quarters, or--? Obviously, it will vary, but just, is that as good a number to use as any?

Yes, this is Chris Nagel. Probably, I think it will probably tend toward the higher end of that range, Mike, just because of the mix.

Okay.

So with the lower level of car, new car sales, with parts refurbishment and leasing, you'll probably see a higher margin rate in general than you would otherwise.

All right. What were the ASPs on the units that were sold in the first quarter?

The ASPs?

Average selling prices.

Oh. I don't know. We don't normally give that type of information.

Okay. I guess what I was driving at, have you seen any of the pricing pressure level off? Obviously, you have aluminum prices coming down and steel costs coming down, but I was wondering what you're seeing on pricing relative to the prior quarters.

Yes, I think--this is Ted Baun--as we have seen Q4 come to a close and Q1 begin, there was quite a bit of pressure put on pricing, both from a raw material cost reduction, as well as just an intensely competitive environment. And Q1 and Q2, I would say Q2 will follow closely to Q1 going forward.

Okay. And then I think the other part of my question was the value from the first question, I'm not sure was answered, was whether you thought, based on the plan and based on what you're seeing in order rates, if you can continue to stay profitable for the remainder of the year?

In general, it's going to be tough. This is a very tough marketplace right now. We're not seeing the clear indicators that the market's turning around in any favorable way per se, although we did pick up a substantial order in the month of April, and we do have some other prospects.

We don't give guidance, but our job as a management team is to find a way going forward to make sure we stay profitable. Whether or not we can do that in this environment is questionable at this time. But one thing for sure that we do work on is to maintain our healthy balance sheet. So we stay focused on our cash, we stay focused on our balance sheet. In the meantime, do the best thin job we can to stay profitable.

Okay, great. And then just a final question. You had $48 million, I think, at the end of the quarter of leased assets held for sale. $26 million of those, I guess, were sold in April. Would you expect the remaining $20 million to sell this quarter, or any outlook on that?

We are currently right now--we've packaged, Michael, some deals right now that we have in front of some leasing partners. We feel very good about taking some of these packages we put together and have them sold and accounted for in the second quarter.

And you'd expect, then, assuming that closes, that your cash balances would actually probably grow second quarter from the first quarter, or even from April?

It's hard to say. Right now, we are definitely focused on cash. We are trying to find homes for some of these lease deals. We feel very confident that we'll be pushing some of those off our balance sheet into the hands of some of our partners. Our basic focus in life is just to stay focused on cash and maximize it where and when we can. And right now, we feel good that we are working with some key leasing companies to make that happen. And in the meantime, we continue to offer leasing, because we think it's operationally imperative for us to offer that in today's environment.

Okay, great. Thanks a lot.

And we'll now go to the line of Kevin Sterling with Stephens, Incorporated. Please go ahead.

Good morning, gentlemen.

Good morning, Kevin.

You mentioned your refurbishment and aftermarket parts business. It grew by 54% compared to the first quarter last year. Can you maybe share some color as to from what base this has grown, and how shall we think about this business going forward? Should we see similar type of growth? I know you're pretty excited about it, but maybe if you could give us an idea of a base that it's grown from?

Well, Kevin, we said the increase was really, the 54% we mentioned was really focused on parts. The refurbishment business, clearly, though, for us was also good here in the first quarter. We continue to pursue activities in a marketplace with our customers to grow our parts business. And the real reason that we're growing our parts business is because about a year ago, we decided to get focused on it. We've improved our delivery times dramatically. We've gotten more focused on it, both domestically and internationally, and we have seen a steady increase in our parts business. And obviously, it's a very profitable part of our business.

On the service side, we continue to explore the marketplace to see if there's opportunities to provide refurbishment and repair work for our customers. Although that's not moving along as fast as we'd like, we have seen improvements here in the first quarter, and we anticipate seeing further improvement in the second quarter. We're working really hard right now to continue that trend into the rest of the year.

Okay. Thank you. How is your India joint venture progressing? Do you anticipate this to still be accretive by 2010?

Yes. We've been taking a lot of extra time in the beginning of this year to make sure that the specs for the car, the engineering specs for the car, are dead-on right with our friends in India. We spent a lot of time with the industry rail officials just to make sure that was the case, and we've sent groups of people over there. We have our new Managing Director that started in January. So we feel confident that we're moving in the right direction, although I would say we've taken a healthy pause here in the last 90 to 120 days just to make sure that we're doing all the right things and we're designing the right car for the conditions in the marketplace.

That being said, we've done enough of that now and we're ready to move forward and the final design is coming together. And we hope to build and ship that prototype this year. And if everything goes well, we will find out, once that car is put into service, and then we're hopefully expecting 2010 to be the type of year we'll be manufacturing the car in India.

Okay. Great. Chris, how big was the canceled order in the quarter?

Roughly 100 cars.

Okay.

It was one of those things, Kevin. I just want to add to that. It was, our situation the fourth quarter, customer came back, came to us and said, "We're not sure if we need any cars." And then at the end of the day, this management team really worked it out. And we were able to ship a certain amount of cars to this customer and make it commercially right, not only for the customer, but for our shareholders. So there was quite a bit of work done behind the scenes to make that work out for all of us.

Okay. Had you already built those cars, or were you in the process of building those cars?

We had ordered the materials and we were--when, I would say we started building those cars in the first quarter. And they're done and already shipped.

Okay. You spent some time talking about leasing, and it seems like that's become a bigger part of your business plan. Could you share some color regarding lease rates that you're seeing? I'm not asking for anything specific, but just maybe a general ballpark of what you're seeing in terms of lease rates?

Yes, I think in general, the lease rates, we've seen quite a bit of compression here in the first quarter. As more excess cars become available in the market, that further compresses the rates. It's tough to give a ballpark, but I would say, on a new car, you're probably in the $400 to $600 range. On the more existing fleet--the cars of, say, three to 10 years of age--you're below that.

Okay, thank you. Are the majority of your leasing customers utilities?

Yes.

Okay. And also, the 405 orders Chris said you picked up in the month of April, are these leasing orders or are they new car purchase orders?

It's a purchase.

Okay. That's all I have. Thank you so much for your time today.

All right, Kevin. Thank you.

We'll now go the line of Paul Bodnar with Longbow Research. Please go ahead.

Just a follow-up on that leasing question. In quarters coming for the rest of the year, what percent of cars--what should be our expectations being what goes towards your lease fleet or gets built on that, and what is your new car builds for third parties?

I think, just to give some color there, for the past 18 months, we've been slowly looking at leasing. And in the past, about 10% to 20% of our orders have been of the leased variety. I think, going forward, that trend is going to increase slightly. We've seen more of a trend of the customers who have expressed interest in railcars going forward. They have preferred, they prefer to see lease solutions rather than a purchase price.

Okay. Would it continue to look like the first quarter, which obviously had a significant increase, jump in the number of leases, or just somewhere in between the two? That was two-thirds lease?

Right, I think 30% to 40%, roughly, going forward would be a fair number.

Okay. In another follow-up, in the last quarter you guys had mentioned delivering some cars for some tests internationally. Can you update on that order, what's going on on that front? (Inaudible) potential order there?

We did deliver some cars internationally. I don't really want to get into the specific market, but what we had told you in the first quarter has happened. We have delivered those prototype cars into the market that we designated, and we're going to be working it hard now over the next couple of months and seeing how the customers in that particular market react to our cars.

Okay. In the release (inaudible) on the cost reduction and SG&A line, and you gave us some guidance for the year, I would expect that to pace and slowly decrease through the remainder of the year? And SG&A, it's not going to be a quick fall, just in 2Q and then flatten out? Would that be accurate?

Yes, I think generally that would be the case. But I would imagine that the fourth quarter SG&A would be less than the first quarter, if that's what you mean, yes.

Yes. Okay. I think that's about it.

I thank you, Paul.

We'll now go to the line of Steve Barger with KeyBanc Capital Markets. Please go ahead.

Hi, good morning.

Hi, Steve.

One more on leasing. If you're going to see more leased cars relative to the mix that you're selling, are you going to start to draw down on the credit facilities, or is your plan to support that growth via your own cash on the balance sheet?

I think largely so far at this level, we've been pretty successful at not having to tap the facility in order to do that. I would say probably, looking at through the remainder of the year, anyway--I'm not sure we can make any guarantees beyond that--but I would say that in 2009, we don't anticipate having to tap the facility to support our lease investment at the levels we're seeing.

Right, so it's going to stay relatively small.

Well, yes, I guess that's--I don't, I guess your choice of the word "small," I guess, is--we don't think it's going to require debt funding. I think that we're comfortable that it will probably stay, the investment will probably stay no more than the $60 million or $70 million range throughout the year with opportunities to hopefully take it down from there.

Is the strategy to generally sell those lease packages to third parties as quickly as you can, or do you want to keep some of this to provide some of that revenue stability and grow that part of the business over time?

I would say that we still don't consider ourselves to be a long-term lessor. That's not our business model. So we'll enter into leases that we have to competitively, that make commercial sense. But by and large, I still think that we are, our business model suggests that we will be trying to work with our leasing partners to help us monetize those leases. I don't really think we're trying to move into a much larger leasing play. On new, with the portfolio, we'd have to grow the portfolio a lot to make a viable business model out of long-term leasing. I don't think that's where we are.

Okay. And you talked about what the margins were in terms of manufacturing and parts and refurb. Can you frame that up on the leasing side for us and maybe also talk about what the time terms are? Are these one-year, two-year, five-year leases, generally speaking?

Yes. Steve, the margins are very similar to new car sales of that particular time period in which we consummate the lease. And I think I'll just, the other thing I'll say is that had we not as a Company gone into the leasing market here and written some lease deals over the last 18 months, we would have seen a fairly significant erosion in market share and ultimately revenue and profit. So we've done a good job, in our opinion, of managing this as a small portfolio. We flip deals where it makes sense. We package deals where it makes sense. And in general, I think if you were to say what's the averaging remaining term of the lease deals we have, that would probably be in the three- to five-year range.

Perfect. Thanks. One more, kind of a big-picture question. Even beyond the current supply-and-demand challenge that you talked about, it seems like the political tone surrounding coal continues to just get worse. And so, as you talk to customers, what are they saying about spending for coal infrastructure or cars or whatever, in front of cap and trade or maybe some other regulatory headwinds that might be out there for that industry?

Steve, I think there's a lot of people on the sidelines right now trying to figure out exactly what all these messages mean. So does it have an influence on people and their thinking? Sure, it does. I think that's one of the reasons why you might see utility companies interested in leasing more than buying right now, because I would imagine CEOs for the utility companies are trying to really handicap all this.

From our point of view, we continue to watch the news. We listen to what's going on. We're being prudent. But I would also say that let's not forget, 50% of the--or approximately 50%--of the electricity generated in this country is using coal. So to change that dramatically in the near term is almost impossible. But certainly, what we're looking and trying to is get a better feel of what the effects of all these things that we're hearing will have 10 years down the road and beyond. So is it a concern? It's a concern. But the fundamentals, I think, are strong for right now, because there aren't really alternative solutions that make good economic sense in the next five to 10 years.

Right. Okay. Thanks very much.

Okay, thank you.

(OPERATOR INSTRUCTIONS.) We'll go to the line of Sharad Patel with Jefferies and Company. Please go ahead.

Thanks. I'm just trying to get a better feel for sales in the quarter. Can you give us an idea of the percentages between the leasing activities and refurbishment work and the overall sales (inaudible)? Was leasing and refurb 40% or 50% of the business for the quarter versus where it's been historically, or was it a lot less than that?

This is Chris Nagel. I think maybe it depends on whether you look at dollars or units. So, for instance, we delivered something around 1,000 cars, run rounding off, in the quarter, and about 600 of them were leased. So that was an unusually large swing toward leasing that we think is out of line with what we think the longer-term trend is, as Ted explained. So obviously, the lease revenue, in terms of dollars, is a pretty small percentage of the total $40 million in the quarter. But as I mentioned, it's obviously pretty high margin revenue.

Beyond that, I don't think yet the parts and refurbishment business is big enough that we're breaking that out. But we're watching it pretty closely, and we may give some more guidance on that as the year progresses.

Okay. And then, as we look at the Danville facility and closing Roanoke, you said a midsummer time period. We did talk about, in the beginning of the year, reduced work hours at the Danville facility. Am I correct on that?

Well, compared to the past year, let's say, at this time, that's probably an accurate statement. Oh, no--first, actually, Danville last year, first quarter, we had that temporarily shut down for, I think, it was approximately 30 days. But I would say, listen. We only have so much of production need, and our capacity is greater than that need today, so we take a prudent step, finishing some of our build-off in Roanoke in the second quarter. And in midsummer, there's a very good chance we're just going to mothball the facility until market conditions improve. And Danville, we're going to continue operating that organization with our future build.

Okay. And in idling the facility, what's the cost of just keeping it idle and just--do you have an idea of what that would be in the back half of the year?

We'll provide more information on that, I think, in the near future. We don't provide that detail of information. But I think in next fall we'll give a little more clarity on that.

All right. And then just finally on the activities that you guys are seeing, is it more from Class Ones or is it more from utilities? Is there a geographic kind of a feel for that as well?

I think the overall activity obviously is quite a bit reduced. But of the activity that's out there, we see more of a shift--at this point in time--toward utilities. But you just, it's tough to make a broad-brushed statement like that. It can really change on a weekly or monthly basis.

All right. I appreciate the time you have. Thank you.

Thank you.

We'll go to the line of Jason Feldman with UBS. Please go ahead.

Hey, good morning.

Good morning, Jason.

I know there have been a number of questions on this topic. I just want to make sure I understand, because it seems like there are three different businesses reported under one segment. I just want to make sure I've got this straight.

When we think about the net profitability of the leased cars relative to the sold cars, you said that the level of manufacturing gross margins for the new equipment are comparable. But what about when you resell the leases? Are there gains or losses on the sale of the packaged leases, and where does that show up?

All the leases to date, meaning approximately the last 12 months, all the leases have been sold on a profitable fashion, Jason.

Okay, so we shouldn't think of it as, you're booking comparable manufacturing gross margins on the leased and the sold cars, and what you're saying is that it's breakeven or better beyond that when they're actually resold?

They're profitable. They have all been profitable.

All been profitable.

Yes.

Okay. And I think earlier someone said that you expect about $60 million to $70 million lease book for the rest of the year, hopefully a little bit lower. If it's necessary, how large are you willing to let this business get? Or is it just kind of wait and see what the market brings, then respond?

Jason, I think at the end of the day, what we're trying to do is, number one, we're trying to offer a service to our customers, one that they're asking for us to be involved with these days. With the capital markets the way they are, the finance industry per se or lease industry a little bit upside down right now, we've been very prudent, and I think we've been very successful of what I call quote-unquote, "flipping" these deals to our leasing partners. So our relationships with our leasing partners continue to be very strong. Our end customer credit profile is very good. And we've been able to profitably sell these off to other leasing companies.

How big do we want to make it? We don't have an appetite to really grow this in a very big, strategic way. I think you'll see a kind of wave, a little bit back and forth, as the year progresses. But I do feel confident that in the second quarter, we're going to be able to take some deals we have now and sell them off to our leasing partners.

And I'm certainly not asking for specific names here--more kind of categories--but a couple of the bigger leasing companies have talked about trying to, at various points, get out of this business. Who's in the market for the (inaudible) leases? As it is, is it big leasing companies, is it private equity, is it other sorts of investors?

For us, Jason, it's predominantly operating lessors and some banks, to a certain extent.

Got it. And then the last question. Are there certain railcar types that you expect to recover more quickly than others? Coal car demand fell a lot earlier in the cycle than stack or other car types, probably first. Should we expect it to recover potentially before the demand for, say, tank cars or intermodal?

First of all, I'm not sure if I agree with the coal cars falling off earlier in the cycle. In fact, we didn't really see that fall-off with coals cars until recently. But we certainly saw intermodal and other car types start to fall off way before coal cars. So--go ahead.

I'm sorry, but in the statement on a relative basis, '06 was clearly the peak.

Oh, I didn't know how far you were going back. I'm just talking about the recent past in the last couple of years. Coal car activity and loadings have been pretty strong. Until recently, we've seen a fairly significant drop-off, but I'm not sure--I don't know, Ted, if you want to add something to that.

Well, I think you're comparing it, Jason, to a time where the stars aligned for everybody in this industry, and the industry built 22,000 coal cars. I think that's the peak of the curve.

That's '06?

Yes, in '06.

And all I meant, was that peak of the curve? And I know the stars were all aligned in '06, and it was a well-above-normal year, no matter how you would define "normal," but arguably for tank cars, that was a year or two later, for example. That was all I was trying to get a sense of is broad cycles. The last peak was, what, '99, and then '06. But for coal cars, that seemed to be a little earlier than for certain other types.

I think the long-term, I think the metrics for coal, Jason, I think coal is positioned to, it has taken less of a hit in recent months and years as other commodities that are hauled by rail, and I think it's poised to come back quicker than others. If you take a look at the numbers of cars in storage across the US, you hear numbers around 400,000 cars. The coal cars, while there are some in storage, they're nowhere near those levels on a percentage basis. So I think the coal market is going to rebound quicker than others would.

Okay, thank you.

Sure.

Thank you, Jason.

(OPERATOR INSTRUCTIONS.) We will return to the line of Steve Barger with KeyBanc Capital Markets. Please go ahead.

Thanks, Just one follow-up. Given the secular shift towards leasing that we're talking about, are you seeing lessors out there wanting to buy used cars in the market, or--? What I'm trying to get at, is there stabilization in used car prices at this point?

It's certainly trending that way, Steve. There are lessors looking for opportunistic purchases for existing cars. I think a lot, like everybody, they're waiting for that, the signs of an uptick, and you'd like to time that perfectly right before the market rebounds.

Right. Okay. Thanks. That's all I have.

Sure.

Steve, thank you.

And we have exhausted all questions in queue. Please continue.

Okay. Well, thank you, everyone, for joining us on today's call. Look forward to talking to, having everyone join us on the next earnings call. Thank you. Bye-bye.

Once again, ladies and gentlemen, an audio replay of the conference call will be available beginning at 1 p.m. Eastern Daylight Time today until 11.59 p.m. Eastern Daylight Time on May the 12th, 2009. To access the replay, please dial 1-800-475-6701, and use the replay pass code of 997312. Additionally, an audio replay of the call will be available on the Company's website within two days following this earnings call.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.