FreightCar America Inc (RAIL) 2009 Q2 法說會逐字稿

Ladies and gentlemen, good morning. And welcome to the FreightCar America second 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 1pm Eastern daylight time today, until 11:59 pm Eastern daylight time on October 22nd, 2009. To access the replay please dial 800-475-6701. The replay pass code is 115800. An audio replay of the call will be available on the Company's website within two days following this earnings call.

I'd like to now turn the conference over to Chris Nagle, Chief Financial Officer of FreightCar America. Mr. Nagle, 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 amended annual report on Form 10-K-A 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 second 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. We would like to welcome you to FreightCar America's second quarter 2009 earnings call. Now that we have our restatement behind us, we are very pleased to have the opportunity to confirm and discuss our operating results for the quarter and what we see in the marketplace. I'll spend some time on these topics, then Chris will provide a detailed review of our financial performance.

First, let me address the financial restatements. As you have probably seen last Wednesday we filed a Form 10-K-A and a Form 10-Q-A with the SEC to complete the restatement of our prior period financial statements. As a reminder, we announced on July 28th, 2009 that this restatement was a result of errors that we identified in accounts payable that overstated our liabilities and understated our cumulative net income since the fourth quarter 2007. More specifically the errors resulted in the understatement of 2007 earnings by approximately $1 million, the understatement of 2008 earnings by approximately $6.8 million, and the overstatement first quarter 2009 earnings of $200,000.

While we are disappointed the situation occurred at all, we are pleased that we were able to address the issue in a timely manner which did not distract us from running the business and was resolved as expected. Let me assure you the Board of Directors, the Audit Committee and the entire Management team have taken this matter very seriously and we are focused on assuring that it does not occur again. We engaged outside experts to evaluate the process and controls in our new ERP environment and we are making all the necessary changes to remediate our material weaknesses and improve the reliability of the financial reporting. With our restatements complete, we anticipate filing our Form 10-Q for the second quarter 2009 by September 30th, and will answer any questions you have regarding the restatement during our question-and-answer session at the end of this call.

Now let's take a few moments to comment on our second quarter results. Given the continued depressed state of the railcar market, we are pleased with our financial results for the second quarter. Total sales revenues for the quarter were $104 million, while net income was $7 million, or $0.59 per diluted share. Favorable mix has improved our gross margin rate and we continue to reduce SG&A cost. Our cash position remains strong with a balance of $152 million at the end of June, and approximately $150 million at the end of August. As previously noted in our preliminary results, net order activity in the second quarter was 694 units compared to 339 units for the first quarter this year. Although we expect order activity to continue to be at a reduced levels for the remainder of 2009, we have maintained our strong market position during this period. Railcar deliveries totaled 1,207 units in the quarter, compared to 974 units delivered in the first quarter of '09. Our total backlog of unfilled order was 1,472 units at the end of the quarter, compared with 1,985 units last quarter.

Regarding the overall railroad market, while coal loadings have modestly improved in recent weeks, commodity loadings for North American rails continue to be significantly reduced compared to 2008. Coal loadings in the second quarter of 2009 decreased 12.6% compared to the second quarter of 2008. And 10% compared to the first quarter of 2009. But have declined significantly less than other commodities. The number of railcars that are currently in storage continues to increase, due to railcar velocity metrics, placing downward pressure on coal car demand.

Recession-driven reductions in demand for electricity, ample utility stockpiles, natural gas substitution and lower coal production have also contributed to decline in coal activity. Not surprisingly, given these factors, order activity has declined for coal cars and for railcars in general. These economic headwinds are anticipated to continue to challenge the coal railcar market in North America throughout the remainder of this year and well into 2010. We expected demand for coal cars to improve once the current recessionary pressures are behind us. Roughly half of our nation's electrical power is generated from coal and there is approximately 23 new power plants representing around 14,600 megawatts of coal-fired capacity currently under construction. The US Energy Information Administration has projected continued growth in domestic coal consumption for electric power generation through 2030.

Factors such as these suggest that our main product lines and services should be in demand for the foreseeable future. However, we acknowledge the uncertainty of the future government policies in this area and the potential of a long-term shift away from coal as the primary fuel source for electric power generation. Our strategic planning process take this into account. And other possible future scenarios we consider how best to position the Company to maximize long-term value for our shareholders.

As our customers other leasing opportunities remain limited, we continue to offer railcar leasing on a selective basis. In an uncertain market, many of our customers want leasing options as an opportunity to reduce long-term capital commitments. Strong capital position can help provide them with this flexibility. However, our strategy hasn't changed. We are not seeking to build and hold for the long term a lease portfolio for yield. Rather, we are working with our leasing partners to monetize our leases as opportunities present themselves. Through June 30th, 2009, the Company net investment in railcars under operating leases was $71 million, which represented reduction of $23 million since the end of the first quarter. During the quarter, we successfully sold $47 million of leases at a positive gross margin. We do not anticipate a significant increase in our investments in lease cars through the end of the year.

Our aftermarket business continues to perform well during this difficult period. During the quarter, both refurbishment work and the parts sales made important contribution to sales and margin. For the first half of the year, our aftermarket parts business grew by 28% compared to the first half of last year. We are continuing to evaluate opportunities to acquire capabilities in the aftermarket sector since we believe that this 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 of our customers by offering services that address the entire life cycle of railcars.

On the international front our joint venture in India continues to make progress. We believe that the market potential for aluminum coal cars in India is very strong and we continue our efforts to capitalize on this important opportunity. However, as we continue to pursue opportunities to grow and strengthen the Company, we recognize that amidst of an extended downturn given the variety of factors I've described, recovery of the railcar market seems unlikely in 2010 and in fact, orders next year may be down from 2009.

Facing this near term outlook, we have and will continue to align our cost structure with business activity. Our SG&A costs are expected to be down almost 20% this year as compared to 2008. Reflecting the actions we've taken to reduce spending and headcount. We've temporarily idled our manufacturing facility in Roanoke, Virginia. Reducing costs, allowing our (inaudible) Illinois, optimize production for the remainder of this year. We will continue to assess market conditions and are prepared to make further reductions as necessary.

In light of both the railcar and credit markets, the preservation of liquidity and our strong balance sheet remains a critical priority for us. We're dedicated to maintaining a strong cash position throughout this downturn. Our cash balance increased to $152 million at the end of the second quarter, compared to $96 million at the end of the first quarter. Chris will give you more detail on the second quarter cash flows in a few moments.

As I have mentioned, we expect a challenging economic conditions to continue throughout 2009 and 2010. However, we fully intend to emerge from this downturn in a position of strength. We are confident that we can align ourselves for future growth while continuing to take steps to further reduce costs. I believe that our actions demonstrate a proactive approach to dealing with the current economic environment and put us in a best position to capitalize on commercial and strategic opportunities. Now I'd like to return the call to Chris Nagle to address our second quarter financial results in more details.

Thank you, Chris. As Chris mentioned, our sales revenue for the second quarter of 2009 was $104 million, compared to $40 million in the previous quarter and $141 million in the second quarter of 2008. Gross margin rate for the quarter was 15.3%, compared with 26% in the previous quarter and 5.2% in the second quarter of 2008. Recall that our sales revenue for the first quarter of this year included a payment of $3.9 million received from a customer in connection with the cancellation of a car order that would have shipped in the quarter. Excluding the impact of this cancellation payment, gross margin rate for the first quarter was 17.8%.

The year-over-year increase in the margin rate reflects a favorable mix of new car sales, and the growth of our parts, sales and lease revenues, both in absolute terms and as a percentage of total sales. Selling, general and administrative expenses for the second quarter were $6.7 million, an 8% decrease from both the previous quarter and the second quarter of 2008. This reduction in SG&A expenses for the second quarter reflects our continuing effort to minimize costs throughout the organization.

Our effective tax rate for the second quarter was 24.5%. The continuing unusually low rate is due to the favorable impact of certain tax deductible items on a relatively low earnings base. Net income was $7 million or $0.59 per share for the quarter, compared to net income of $2.4 million or $0.20 per share in the previous quarter, and a net loss of $400,000 or $0.03 per share in the second quarter of 2008. The loss on the second quarter of last year included $1.6 million in pretax costs associated with the shutdown of the Company's manufacturing facility in Johnstown, Pennsylvania.

As Chris mentioned, our quarter end cash balance was $152 million, which is significantly up from our cash balance of $96 million at the end of the previous quarter. The increase in cash was driven by increased operating income, a decrease in working capital, and the sales within the lease portfolio Chris mentioned earlier. As of August 30, we have cash on hand of approximately $150 million, and our two credit facilities remain untapped.

In summary, and as Chris discussed, we are pleased with our second quarter results and our continued focus on the preservation of cash, given the challenging environment we find ourselves in. 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 and intense competition our management team is focused on improving our cost structure and our competitive position. In closing, I would like to thank you for your interest in our Company and for participating in this call. We look forward to updating you again during our next conference phone call. We're now ready for questions [Keely].

Thank you. (Operator Instructions) One moment, please, for the first question. And we'll go to the line of Michael Gallo of CL King. Please go ahead.

Hi, good morning.

Good morning, Michael.

Question I have on the gross margin line, I was wondering obviously a very strong gross margin number given the absolute level of revenue. I was wondering if there was any impact, any significant impact from, one, gains on sale of the lease fleet, two, any cancellation payments or order cancellations that were booked as you had in Q1 or any other unusual items that would have impacted the gross margins in the second quarter? Thank you.

Mike, this is Chris Nagle. I wouldn't say there was anything unusual akin to what we had in the first quarter like that cancellation payment. I think it was we had a good mix of cars and we were able to sell some of the leases, like we said, at margin. So no, in this case, I wouldn't say there's really anything unusual or one-time in nature.

As you go through the back of the year, I mean, given the mix -- I'm not sure you've ever broken out how much is now parts and services, given the absolutely low level of revenue. But given the mix of where things are at today as you ramp that business up, do you think you can continue to sustain double-digit type gross margins, assuming that you can sustain a similar or even somewhat lower sales revenue? Is that too optimistic?

Mike, as you've probably figured out, the math it works in such a way, actually, that as new car sales decline, it actually favorably impacts margin rate, as you figured out. So I think that what we saw here in the second quarter, I don't think is really that unusual relative to what we might see in the near term with continued relatively low levels of new car orders. So I would say that this margin rate probably is fairly indicative of what we see at this level of activity.

Okay. Great. And then could you give us an update on India, where things stand? I think the last update was that you hoped to have the prototypes done by the end of the year and approved. Any update on that? Thank you.

Michael, I would say we've been following a course here where we want to make sure the designs that we have for India are correct so we've spent a lot of extra time here in the last six months, working with the ministry officials and the other folks in the marketplace in India and I would say the prototype right now is scheduled to probably ship in the first quarter versus the fourth quarter. Have a slight delay only because we want to make really sure that the design aspects are correct and meet the India requirements. So still making a lot of progress, still moving forward. Good relationship with our joint venture partner but really at this time probably a slight delay in getting the prototype to India.

Final question. As we start to look at the balance sheet, obviously weathered the cycle to date with over $150 million in cash. You still have $70 million, roughly, tied up in lease fleet. Yet, you haven't used the credit facilities that you put in place on the leasing side. So I guess the question is is that something you plan to use at some point or is that just there temporarily? And I guess if I look at your undrawn credit facilities, combined with your cash and your leased assets, I could get to a higher price than the stock currently without even borrowing any money. So why not just look at options like taking it private and waiting for the next cycle? Just doesn't seem like the valuation really reflects the -- where you stand on the balance sheet. Thank you.

Yeah, Mike, this is Chris Nagle. I guess I'll take a shot at that. I'll put aside the strategic options of private or not for a minute and just talk about the balance sheet. Yes, I would say to date, as we've said, we spend a lot of time focusing on cash. We understand that in this environment, liquidity is very important and so we're pleased with what we've seen so far. In terms of valuation all I can figure is there's still uncertainty as to when this market is going to recover and how long -- and if it's protracted, this downturn, then there's probably a question hanging over in terms of will the Company go through a period where it just is generating negative cash flows and how much of that capital on the balance sheet, how much of that cash is going to be required to fund that. That's all I can think of.

And we're not in a position to really -- to speculate a whole lot on that. We don't have any plans right now in terms of drawing on our debt facilities. But on the other hand, it's nice to know they're there should we need them. So I don't think we probably won't speculate much more than that in terms of our valuation but right now we don't have any plans to draw on the debt facilities.

Okay. Very helpful. Thank you.

Thank you, Michael.

Thank you. And next we'll go to the line of George Pickral of Stephens, Incorporated.

Thanks, guys. Can you tell me the deliveries and new orders and backlog through August, I guess for July and August?

We're not prepared to go through that right now.

Okay. Is it something where you don't want to give it or you just don't have the numbers.

No, we don't normally give it until the quarter is over. I will say that the quarter activity for the quarter, incoming new orders has been relatively low.

Okay.

But we'll have obviously most likely we'll have our next earning call in about six or seven weeks from you now so we'll have -- we'll give you some more input at that time.

Okay. Thank you. And of the $25 million to $26 million in OpEx that you're still guiding for, was idling the Roanoke facility factored into that calculation?

Can you give a little more -- ?

When you say $25 million, $26 million of OpEx?

Right.

Is that what we said?

Yes. So I guess what I'm asking was that -- was the SG&A associated with the Roanoke facility factored into that $25 million to $26 million?

Yes.

Okay.

In terms of -- I think you're saying that we've been saying that we expect SG&A --

SG&A, yes.

-- to get to that $25 million to $26 million range, so the answer would be yes.

Okay. That assumed the Roanoke plant being moth-balled?

Correct.

And one more question then I have just a quick technical question. You've talked about building and maintaining your cash but you've also talked about expanding into other strategic alternatives. And then you just said you don't really want to take on debt. Can you maybe talk about how comfortable you are spending your cash and would you go all the way to zero or half or how are you thinking about that? Or does it just depend on the opportunity that presents itself?

Yes, I mean, I think, George, you hit it there. I think that our willingness to take on any debt in this environment would be directly in line with the attractiveness of the opportunity. When I said we don't have any plans right now to draw on our debt, I would think that that just has to do with our short-term operating outlook and our view of -- and what we can do with our balance sheet and generating cash. I wouldn't rule anything out at this point but on the other hand, we have no plans either to take on any debt so it's directly just be in line with the opportunity as it presents itself but there's nothing specific right now that we would speak to that would suggest otherwise.

Okay. And real quickly, on modeling question. Can you give a little guidance on the tax rate to use for the rest of the year? Is 35% a good number? Or should we bring that -- ?

The way the rules work as you probably know is that as you go along in a quarter, you're supposed to use the rate that is indicative of the full year and then you make changes as you go in the year as that estimate changes. So right now, we think the rate that you're seeing right now is indicative of what the full year rate would be.

Okay. Great. Thank you so much for your time, guys.

Thanks, George.

Thank you. And next we'll go to the line of Jason Feldman of UBS. Please go ahead.

Good morning.

Hi, Jason.

I think I heard you say in response to one of the earlier questions, as new car volume declines it helps the gross margin rate. I just want to make sure I'm clear on that. Is that because of the mix between new cars and refurbishments or is it related to the mix of new car production versus sale of leases? What am I missing there?

I don't think you're missing anything, Jason. I think the mix as new car sales come down, the rates that we enjoy on refurbishment work and parts sales and the drop-through we get on margin rate in terms of lease revenues becomes a greater portion of the total. So that's how it favorably impacts the margin rate.

Okay. And I mean, I understand with the single segment reporting structure where we've got these three somewhat distinct businesses together, you may not want to get too detailed. So then the safe conclusion to draw though is that gross margin rate is well above what the gross margin rate would be on the pure new car manufacturing part of the business.

That's correct.

Okay. So when I think going forward, we think that maybe 15% is a reasonable margin rate going forward on the gross margin line. I understand it's our job, I understand you don't want to provide guidance as to how many cars you're going to deliver but when I think about for example the sale of leases, should I assume that you're going to continue to sell the remainder of the leases you've got on your books over some period of time? Sounds like that's the ultimate goal.

Well, I mean, we have been doing that, Jason, now for quite a while and we continue to do that here in the third quarter. I think we've done so far to date in the third quarter, approximately $16 million to $17 million of additional leases that we've monetized or flipped. So as we explained before, we take a look at our portfolio, we go out in the marketplace and we see who is currently active in pursuing these particular leases and then we take it out to auction in a way. So we'll continue to do that in the marketplace. I would imagine over time, as the credit becomes more available and loosens up a little more that we'll be able to do that -- we'll be able to continue to do that on an ongoing basis but we've been successful to date and we continue to look at our opportunities each quarter.

Okay. So very rough way of thinking about it, is you've got I mean, what, is it about $70 million of railcars remaining under leases.

End of the quarter, that's right.

So when I think about the value of that based on how you've been monetizing them, again, over some period of time the expectation is you'll be able to sell that $71 million of leases at essentially be treated as revenue at some gross margin rate, somewhere in the general vicinity of the gross margins you've been delivering lately?

As a general rule, that's certainly been the case for us up to this point, Jason. But as you can imagine, the portfolio consists of a variety of different leases. And as we've disclosed in the past, we first entered leasing in the early part of last year in response to some of the actions that trinity was taking in the marketplace and then later in the year, less as a reaction to that and more to really supplement what was going on in the credit markets. Some of those early leases are more aggressively priced. So they would be harder to sell at a reasonable margin. So those are the ones you can imagine will probably be in the portfolio longer. So I think that the portfolio consists of a variety of leases. It's hard to say right now in general what the overall margin would be if we had to go out and sell those now. So that's, as Chris suggested, we're patient. We manage it as we need to and right now we haven't had to go out and force a sale in marketplace. So we are going to manage that as we go.

You've clearly demonstrated a commitment to unloading the leases when you can. I'm just trying to figure out, I think you can understand with the three businesses lumped in one segment it's a little tricky from a modeling perspective in terms of how to think about it.

It is tricky. We understand. Chris and I have been talking about how to provide more clarity in this and over the course of the year we'll do that.

I think the clarity will come in two areas. One, a little more clarity as we move forward on the aftermarket. And obviously a little more clarity regarding our leases.

Okay. And the last point is just, I mean, one conceptually is it fair to think about the leases that you have on the books, the $71 million and change, as it's almost income that you have delayed the -- not deliberately-- I understand why it's proper accounting but essentially delayed recognition of that income. Had those been sold instead of leased you would have realized the gross margin on those cars earlier but now essentially it's being pushed out because they, for a period of time, were put onto lease.

Generally, mechanically, that's the way it works. Obviously, different leases within the portfolio --

At different rates. No, understand. I'm not asking you to commit to a specific margin on it.

That's mechanics, right. As we're able to find arrangements with our leasing partners to monetize those, yes move those in and they get recognized at revenue and gross margin.

Okay. Thank you very much.

Thank you.

Thank you. And next we'll go to the line of Joe Box of KeyBanc Capital Markets. Please go ahead.

Good morning, guys.

Good morning, Joe.

Can you expand on your comment from earlier? It sounds like you're not planning on growing your lease fleet for the remainder of the year. Is that more a cash management strategy or is that more of function of weaker end market demand?

I think it's a combination of both. There's some deals that don't require us to put a lease proposal together. It's also due to some of it, to market demands. We don't facilitate leasing unless there's a requirement by the customer so not everything we do is based on leasing and then market demand is certainly a tough position right now.

Okay. Also, in a tough environment like this, do you think that it's possible to extract any more cash from your working capital or are we pretty much getting close to a base rate of inventory and receivable?

Well, Joe, you have to remember, I mean, Nick and the team are always trying to improve working capital. But remember, there's really no -- in a business like this, since we're make to order, there's really no base amount of working capital like in a different kind of business. So as order of activity declines, you'll see working capital continue to come down. As the business expands, it will go up. Because we make to order. We don't buy the stock. We don't have -- we don't have an inventory of wheels and axles and various other components that we keep on hand. So it's not the typical situation where you look to say can you take days of inventory out of those things.

Obviously, we want to try to reduce lead times, working with our suppliers as we order components for specific orders. But it's a different -- it's a little bit different model. So we'll continue to try to reduce working capital to the extent we can, but you can't apply the same working capital approach with days outstanding and so forth that you might with other companies.

Okay. And in terms of as you think about growing your parts and service business, have you had to grow your inventory there?

No, nothing significant in that area. Minor investments overall.

Great. Thanks for your time, guys.

Yes.

Thank you. And next we'll go to the line of Ross Haberman of Haberman Fund.

Good morning gentlemen. How are you? Two quick questions. Your backlog, I think you said you had a little over about 1,000 cars to deliver?

Yes, 14 and change.

Yes. What is the time frame in terms of delivering that?

Over the remainder of the year.

Okay. And what was that exact number again? I'm sorry?

1472 as I recall.

1472. And just a technical accounting question. What's the D&A on a quarterly or yearly basis?

Yearly basis, I think it's about $6 million.

Okay. All right, guys. Thank you very much.

Thank you.

Thank you. And next we'll go to the line of [Shirog] Patel of Jefferies & Company.

Thank guys. How large is the lease fleet currently? Are we talking 500 cars? Are we talking 1500 cars? Can you give us a feel for that?

It's about 1,000 cars, maybe just a little bit over.

Okay. And so back of the envelope math, I would say that you sold a decent portion of those over the course of the quarter and then you added a similar amount right back into it?

No, I mean, over the quarter, the number of cars definitely came down. Remember, the investment at the end of the first quarter was in the mid-90s and it's down to 71 now. So we did have a net decline of the number of cars in the portfolio.

And they sell for around the same amount as I would look for a new car to be sold or are we talking a little bit less. I know you said that margin -- there was positive gross margin but --

I would say roughly speaking we're able to sell them at about what we -- at similar margins to new car sales.

Okay. And then as we look into the aftermarket parts and refurbishment business, are you looking to expand out on those avenues in any aggressive way or adding, I don't know, into the PRB market, I think we had talked about way back in the day of adding some refurbishment areas so you could access that market a little bit more. Is there a move to that or is it -- ?

Well, as you know, I like the aftermarket space. I think if you apply a lot of focus and attention to that space, not only do we benefit our shareholders but our customers really like our performance in that area. What do I do in the future regarding that? I'm looking for opportunities. Will they be--are they big opportunities I would say strategically they'll be important opportunities. They'll be relatively small I think from an investment point of view but we continue to scope out the market and see where those opportunities are. Everything we've done to date we've primarily done internally. We've invested just a little bit of money and gotten pretty good returns and I think the market in the future here is going to be ripe for us to expand on that, but not in an aggressive way. More in a you prudent way.

I appreciate it guys.

Thank you. Next we'll go to the line of Jacob Strum of AYM. Please go ahead.

Hi, guys, congratulations on the quarter.

Thank you.

Quick question, just earlier there was discussion about how we're going to use cash and worrying about negative cash flow. If the business environment were to stay like it is today for the next year or year and-a-half, is there any way you guys would go cash flow negative?

Well, obviously depends on how low the order rate goes. We've been saying this year that we're targeting to be cash flow neutral in this kind of year. Now, that includes some big puts and takes, including sizable pension contribution and so forth. But generally, if you think about -- we've also said this feels about like a 4,000 car year. So you can equate those two. So if we go into a period where we're shipping significantly less than fewer than 4,000 cars, then it will certainly put pressure on our ability to be cash flow neutral.

And that's helpful. Thanks. So just in terms of you how you guys are looking at the cycle and some of the costs that you guys have worked on in the business throughout the cycle, if we were to look and, say, at a normalized -- more normalized environment, are you guys going to have higher margins going forward than you did last time around?

Well, there's a lot that would impact that. Obviously, you would start with the type of cars that are being sold, the mix of cars that are being sold. The positives to margin relative to maybe the last time the market went up would be the fact that our parts business will be much bigger, we'll have lease revenues that significantly impact margin positively. And we'll be very prudent about adding SG&A as the market recovers. So we're hoping all that should provide some leverage to operating earnings.

So if we're just talking about cash flow, our big focus as investors needs to be on determining where we are meaning on the amount of cash that you guys are going to burn through, potentially, through this cycle's downturn. We just need to focus on total number of cars?

Well, I think those two are pretty related. I think that the trick for all of us in this industry, you and the team and everyone involved here, is to figure out how extended is the downturn and 2010 what's activity going to be, 2011, what's activity going to be. So those are pretty connected. If we have a couple years of shipping 2,000 cars or if we have years of 4,000 cars or 6,000 cars, obviously those can have pretty big swings on cash flows. So I think they're pretty connected but I think you're right. I think in terms of looking at the stock, that's the essential question.

No, but I -- just from my standpoint, you guys have a much better feel on what the cars per year are going to be. I mean, you're inside the business every day. I have no way of gauging that. So I'm just trying to get a sense from you guys in terms of what -- where we are today versus where we were last year and where we are in a year's time. Is this -- is there any reason that next year cars should be below 4,000? Can you just put that into perspective for me?

Yes, sure. So last year, the market was difficult. This year, the market's more difficult. And next year, the market's going to continue to be difficult and the primary reason for that is we have a lot of cars in storage right now. Now, in coal cars, there is less in storage as a percentage to a lot of other car types out there but the bottom line is, you have a lot of cars if storage right now and that's probably going to continue for a while. How long? I don't know. It all depends how the owners of cars, they might increase their scrap rate over the next 12 months especially if they see scrap pricing going up and obviously in our particular space, we watch things like international coal shipments leaving from the East Coast and we've seen an improvement there lately.

But the way we're looking at the market right now is next year is going to be a tough year. We're preparing ourselves for this year. We continue to take out costs. So we're prepared in the fourth quarter here to take out additional cost going into 2010. The real issue for us long-term, medium to long-term, is how do we diversify our revenue stream so we don't just focus on making cars. We've proven to ourselves that we can do that and we think we can do much more of that as we go forward. We'll have to be patient. We'll have to see how that plays out.

Thank you guys very much.

Thank you.

Thank you. Next we'll go to the line of Paul Bodnar of Longbow Research. Please go ahead.

Hi, good morning.

Good morning, Paul.

It sounds like from Dave's question there that if we start going to deliveries at the current order rate, you guys are delivering at the current order rate, gross margins would shifts to be negative in railcar manufacturing.

Gross margins would be negative in railcar manufacturing? No, I don't think we said --

You can keep them positive at a delivered rate of 600, 700 cars per quarter?

Well, I don't -- you said gross margin would be negative? I don't think that we would enter into orders where we thought that we would lose money.

In terms of spreading out the fixed costs which kind of goes I guess to my next question.

Well, I don't mean to suggest -- we've not tried to suggest at all at various activity levels that margin rates would be negative. I mean, that's not what we're suggesting. We were talking about cash flows.

Okay. And then in terms of SG&A, how much more can you guys actually take out for 2010?

You will hear more from us at the next conference phone call, but we do understand that we need to take additional dollars out and we're planning on making another effort on that here in the fourth quarter. So you'll hear more about that as we move forward.

Okay. And then I guess last question, just in terms of the refurbishment parts market right now, is most of your work on the refurbishment side? Are you doing a lot on that? What are you seeing out there? Is that slowing dow? Was there a lot of work done as they were storing cars away and that will slow down through the remainder of the year?

It's interesting right now. A lot of people are sitting on the sideline with cars in storage but a lot of people are trying to figure out what do I do with the assets that I have right now that's on my balance sheet. So our dialogue with customers is pretty simple. You have some cars. Does it need some work? Do you need to convert the cars? Do you need to refurbish cars? Do you need to repair cars? We work at this pretty hard. But I would say that the market even for that is not as strong as we would like it to be.

So I think once the cars start coming out of storage and the benefits certain car types will be more robust than others, we pay attention to that and we put proposals in front of our customers and we've been successful to date in not only selling parts doing refurbishment work, but also selling some kits. That's something relatively new for us and we've been working with some of your key customers to sell some aftermarket kits. Our organization is really focused on trying to make lemonade with lemons in this market but so far so good. It's a tough market out there. It continues to be tough.

Okay. Just one last question in terms of who is buying in the quarter? I mean, is it largely guys just buying to replace cars that are old or what's the market there? Who is buying cars right now?

Shippers and relatively small amount of people are buying cars but we continue to assess the situation, be creative with possible trade-ins or moving used equipment. We look at opportunities that go beyond just selling new cars.

Okay. Thanks a lot.

Thank you.

Thank you. (Operator Instructions) And we have a follow-up from the line of [Shirog] Patel of Jefferies & Company.

One last question. Just on the cancelled orders, can you guys speak to who that was, by chance?

No.

Was it one order or was it multiple?

One order.

Thank you.

Thank you.

Thank you. And gentlemen, there are no further questions in queue at this time.

Okay. Great. Well, thank you very much and thank you everyone for joining us today on the call. Bye-bye.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for uses AT&T executive teleconference. You may now disconnect.