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The Greenbrier Companies (NYSE:GBX)

F1Q09 Earnings Call

January 9, 2008 10:30 am ET

Executives

Mark Rittenbaum – Executive Vice President, Chief Financial Officer and Treasurer

Bill Furman – President, Chief Executive Officer

William Glenn – Vice President, Strategic Planning

Analysts

Frank Magdlen - The Robins Group

Wendy Caplan - Wachovia Securities

Todd Maiden - BB&T Capital Markets

Paul Bodner – Longbow Research

J.B. Groh - D.A. Davidson & Co.

Art Hetfield – Morgan Keegan

Analyst for Steve Barger - KeyBanc Capital Markets

Operator

Welcome to the Greenbrier Company's first quarter earnings release conference call. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Mark Rittenbaum, Executive Vice President, Chief Financial Officer and Treasurer.

Mr. Rittenbaum, you may begin.

Mark Rittenbaum

Good morning and welcome to our first quarter fiscal 2009 conference call. On today's call, we will discuss our results and make a few remarks about the quarter that ended on November 30. We will then provide an outlook for 2009 and beyond. After that we will open it up for questions.

As always, matters discussed in this conference call include forward-looking statements within the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2009 and beyond to differ materially from those expressed in the forward-looking statement made by or on behalf of Greenbrier.

Today we reported a net loss for our first quarter of $3.3 million or $0.20 per diluted share on revenues of $256 million. We also announced we are reducing our dividend from $0.08 per share to $0.04 per share.

Turning back to the quarter the results included a non-cash charge of $1.2 million pre-tax, $0.6 million after tax or $0.04 per share. The background on this is as a normal course of our business we have a policy of hedging our currency exposure over in Europe to lock in our margins on foreign currency sales. We have been doing this since we entered into European operations ten years ago. All of our hedge contracts and all of our hedging is economically effective but during the quarter we determined a small number of our contracts for technical reasons did not meet all of the requirements to be designated for hedge accounting treatment under GAAP. Therefore we are required to mark those specific contracts to market through the income statement and this resulted in a non-cash charge to interest in foreign exchange of $1.2 million.

Effective in January these contracts will meet the requirements for hedge account treatment and at that time we are no longer required to mark these contracts to market through the P&L.

Turning to liquidity our revolving debt balance declined by $40 million since quarter end and we have additional committed borrowing availability of approximately $138 million.

In addition to that our cash balance is $19 million.

We believe we have adequate liquidity to manage through this downturn. As both Bill and I will address in more detail in downturns such as this our focus is on liquidity and cash flow. We are making and will continue to take aggressive measures to pay down debt, remain liquid and rationalize the sizing of our operations and cost structure to reflect the current environment.

I will now turn the call over to our CO, Bill Furman, and then he will turn it back to me and after that we will open it up for some questions.

Bill Furman

Thank you Mark and good morning. On today’s call I am going to make some remarks about the quarter that just ended, Greenbrier’s competitive position, the current industry environment and the steps we are taking to improve our performance and liquidity in this difficult environment. Finally I will provide some qualitative outlook comments for the year ahead.

Turning to our first quarter the financial results were disappointing but our first quarter result, as Mark just summarized, reflect the very difficult economic environment in which we and other companies in America are operating. This is particularly true in new rail car manufacturing, a segment which continues to have a substantial revenue base for Greenbrier.

The less cyclical parts of our business which include refurbishment and parts, marine manufacturing, leasing and services along with our European operations helped dampen the effects of operating in this environment. However, as was reflected in our first quarter results none of our businesses are immune from that environment.

Our refurbishment and parts business was impacted by lower scrap prices and an unfavorable mix in lower volumes of work. Scrap prices have started to rebound which will benefit this unit as the pipeline clears from older materials and surcharges that have somewhat distorted the quarter for that unit. Revenues for this segment still grew 27% over Q1 2008.

Our leasing services business was affected by lower lease rate utilization and lower gains on fleet rail car sales. However, our own lease fleet of 9,000 cars under management services for an additional 37,000 cars provides us with stable earnings and cash flow.

Our manufacturing business was most impacted during the first quarter due to lower production rates, a less favorable product mix and higher cost of materials purchased earlier in the year. Additionally a loss contingency of $.5 million was reported on rail cars currently in backlog as reserves reported in fiscal 2008 were adjusted based on current expectations reflecting lower run rates and the mix just described.

On a more positive note, commodity prices have declined considerably in recent months in turn lowering input costs on new freight car construction. This may lead to some bargain hunting by customers. We do expect our new rail car backlog to benefit from a more favorable product mix and lower input costs for the remainder of the year.

Our new rail car backlog is 15,900 units of which 2,900 are currently scheduled for delivery in fiscal 2009. As is to be expected in this environment all customers are pushing back, seeking concessions and/or cancellations with their suppliers. We are certainly doing this with our suppliers and renegotiating costs on components given the very large swings in commodity prices and the variability and weakness in those prices today. Our customers are doing it with us.

Subsequent to quarter end we had one order cancelled for 300 new boxcars to be manufactured at our Gunderson facility in Portland. This order is excluded from our November 30 backlog as reported. The customer will be responsible for our costs and inventory associated with that order so the effect on cash and liquidity will be neutral after that settlement is made.

We are also in discussion with other major customers. However, we believe our rail car sales contracts to be sound for the large bulk of our backlog and we believe the company is adequately protected in the event of attempted renegotiations or cancellations of contracts.

I might say that this situation is the product of many, many stored cars and excess equipment in the system during the current part of this business cycle and we don’t expect this to continue or this kind of environment to continue indefinitely.

Turning to our competitive position our management team and board of directors have been through many such downturns and have a proven track record managing through business cycles. While we believe the current recession will likely have a larger or longer than average duration we remain confident in our ability to manage through this one as well. Later I will provide more details on how we specifically plan to do this.

However, the strategy which we pursued over the past few years to diversify revenue and earnings has and will stabilize earnings and cash flow and has improved our competitive positioning. We remain optimistic about the longer-term fundamentals of the railroad industry and about our competitive position in it and our business model.

Turning to the market environment and before I go into more detail about Greenbrier and the steps we are taking to combat the downturn I’d like to frame the current economic environment.

To begin with, rail loadings are a leading indicator of the health of the economy. North American rail car loadings are currently weak and have been for a while now. Particularly they have been affected by the massive commodity swings and weakness in commodities in recent months. Loadings of commodities in North America were down 9% in the fourth quarter of 2008 as compared to Q4 of 2007. Car loadings for forest products and automotive, car types in which we have a strong market presence have been even harder hit.

While we are also strong at double stacks in our modal out loadings we are down 7% in Q4 2009 versus Q4 2008. As a result of decreased loadings, tens of thousands of rail cars are currently being stored by customers and moved to the sidelines. Not all car types are affected equally but this phenomenon is natural in a downturn and we have seen it before.

Furthermore, customers are deferring capital spending and are in many cases opting instead to store damaged cars rather than repair them. Nonetheless we feel our GRS repair and refurbishment unit will be a strong performer during this part of the business cycle. We are happy we have expanded that segment to now account for the bulk of our profitable revenue along with marine and other parts businesses for Greenbrier.

Demand for new rail cars in North America is being hit hardest and industry forecasts are for 30,000 to 35,000 rail cars to be built in 2009 and 2010, rebounding in 2011 to a more normalized level. All of this compared to about 60,000 units expected in the final numbers for 2008. However, I personally believe these forecasts for new orders and deliveries for 2009 in particular may prove to be on the high side.

The scenario I just described is not uncommon to our industry. I would like to remind everybody and particularly our long-term investors of that fact. We have seen it many times during cyclical downturns. As the economy recovers there becomes a shortage of serviceable rail cars and velocity changes in all of our business units will benefit quickly and dramatically.

However, in the short-term while we are mindful of the opportunities and requirements to limit capEx there are opportunities to buy rail cars cheaply in the market, repair them through our system and our network and lease them out. When the market recovers the market value of any assets we put into such programs will increase dramatically.

One last comment I would like to make regarding the market environment has to do with the potential for an economic stimulus package or packages in the form of increased government support and spending on infrastructure tax credits or other programs such as this. If passed, this legislation could also stimulate demand for rail car types needed to support such programs which in turn could benefit all segments of our business and other businesses in the railroad supply industry.

We will be closely monitoring the status of federal legislation and the first important piece is a stimulus tax bill which we understand to be presently on a very fast track in Congress.

Our management and board continually conduct scenario analysis of our industry and the economic environment and its impact on our business. At present we believe we have a strategy in place to operate through these difficult times, a strategy that positions Greenbrier to succeed under various operating scenarios.

Throughout the balance of 2009 we have several important objectives. Let me turn to those.

Most importantly we will manage the company for cash and liquidity as we have done in earlier downturns. We will continue to take measures to improve liquidity, increase efficiency, reduce our operating costs, improve our balance sheet and conserve cash all appropriate to the current environment.

Last year in the first quarter of this year we slowed down production rates and eliminated $10 million of annual costs. We will aggressively continue this theme this year on multiple fronts. Specifically and number one we will reduce our 2009 capital expenditures appropriately at least by $25 million from 2008 amounts and we have the ability to go deeper as conditions may warrant.

Secondly, we plan to improve our working capital utilization by $50 million. Part of this is natural as inventories run down and receivables run down with lower levels of operations. However, we have put into effect over the past five months a very aggressive review and reorganization of our business methods to improve the efficiency of our working capital.

Third, we will continue to adjust production rates and consolidate production. If the outlook does not improve we will likely shut down or temporarily close one of our new rail car facilities until the market conditions do improve.

Fourth, we will continue to adjust our cost structure to the current environment. We will take out at least an additional $5 million of overhead and G&A costs as a first step.

Turning to the overall outlook while this economic picture is rather gloomy and while visibility is somewhat limited we anticipate the balance of the fiscal year to be better for us in the first quarter and we will be profitable, both a result of the internal measures I discussed and external factors.

Let me discuss those external factors in greater detail. Raw material costs have dropped significantly which should help our new rail car manufacturing operations. We have also started to deliver the first rail cars under our GE contract. These cars have been accepted and the contribution from our marine operations aided by a very strong backlog in that operation at Gunderson is expected to grow throughout the year.

Scrap prices have started to rebound off first quarter lows which will help our refurbishment and parts business and reverse the through put adjustments that clearing the pipeline with older costs has brought to that unit in the first quarter.

Volume in our repair and refurbishment business, particularly in wheels, remains strong. We have been awarded a significant new wheel contract in the southeastern part of the United States and we believe that higher material costs surcharges will largely be flushed through the system by the end of our current quarter or by the end of the quarter we are in.

So these factors along with an expected more favorable product mix should help improve margins. I will remind you the first quarter has traditionally been our weakest quarter due to product mix and that the year is back end weighted.

Looking longer term we continue to believe rail and marine transportation will compare favorably to other modes of transportation driven by a number of factors. We expect these to include increasing highway congestion, prospects longer term although not immediately are a weakening U.S. dollar which will favor railroading and commodities and exports in the United States, an aging rail car fleet, the lower cost infrastructure build and a higher emphasis on environmental factors under the new administration and Congress.

So in summary, we remain confident about our business model, our strategy and our ability to navigate through this downturn. We have specific plans in place which I have enumerated which adjust to the current operating environment and as Mark will discuss in more detail adequate liquidity to operate in this environment.

As a result of these plans and the external factors I previously discussed we expect near term results to improve. Our competitive position is strong and our business model cannot be easily duplicated. Longer term we do remain optimistic about the marine and rail industries and our competitive position.

I will now turn the call back to Mark.

Mark Rittenbaum

Thank you Bill. As both Bill and I have mentioned we believe we have adequate liquidity to manage through this difficult environment and our focus is on cash flow and maintaining liquidity. I want to go into that in a little more detail and then after that I will go into our performance a little bit more but not do a deep dive in that as a lot of that information is contained in our earnings release.

First, our financial focus managing for cash. As Bill mentioned we have a number of measures in place to reduce our borrowings and improve cash flow. As we are in this uncertain environment we do have limited visibility. Therefore we have been and continue to stress test our forecast under different scenarios for various financial and financial covenants impacts to ensure we take appropriate measures to run the business and maintain liquidity.

Currently we have very little in the way of near-term debt maturities. This year we have less than $32 million maturing related to our European operations which we believe we can adequately manage through. Our $290 million revolving line of credit for North American operations matures in November 2011 and the earliest potential significant maturity of any of our notes payable occurs in May 2013 and this relates to our convertible bonds outstanding of $100 million.

We are in compliance with all of our financial covenants. Furthermore we have an excellent relationship with our lead bank, Bank of America, and long-standing relationships and excellent relationships with many in our bank group.

Now let me add some color on the quarter. First, while refurbishment and parts helped lessen the impact of weak manufacturing during the quarter it too was affected by the difficult environment. As such we are taking overhead costs out to reflect lower refurbishment volumes principally and a less favorable mix of repair and refurbishment work.

Secondly, as Bill mentioned, our wheel services business was impacted by a precipitous drop in scrap steel prices and as Bill mentioned we are seeing a pick up there which along with cost reduction initiatives should aid results in the future.

Turning to leasing and services our fleet utilization was 93.3% during the quarter compared to 95.2% at the end of our fourth quarter. The current quarter includes $0.3 million gains on equipment sales while the prior year’s first quarter included $0.8 million of gains. We do expect increased trading activity in the last three quarters of the year so our gains on sale for the year as a whole will run higher than the current quarter’s run rate of $0.3 million.

Now turning to manufacturing. As a reminder during the quarter we were still building rail cars for contracts in backlog which contain fixed prices and for which higher price materials were already purchased. Therefore a lot of our production was in that scenario. We had an unfavorable product mix and as Bill mentioned based on our current expectations for any of those contracts still in our backlog we increased our reserves by $500,000 for such contingencies where our costs exceed our sale price.

We did not accept any new fixed price orders in the quarter. We do have profitable work in our backlog. As Bill discussed the market is very competitive right now and any orders that are being bid are being aggressively priced with little or no margin and a focus on cash in these bids and making contributions to fixed overhead is principally what we are seeing out there which is also normal in this environment.

On a more positive note we are now delivering our first paint cars under our GE contract and the first paint cars that Greenbrier has built for the North American marketplace. We are very pleased by this obviously and now commencing with those deliveries along with lower input costs, continuing momentum in marine and stability in Europe this should all aid our manufacturing performance.

We expect our marine revenues to approach about $75 million this year, nearly a $20 million growth from the prior year. We have a strong backlog. Our cost reduction initiatives will stay in place. Our G&A expense after you take out less recurring items is on a $17.5 million run rate. That includes the $10 million of cost reductions realized in 2008 and we have plans to drive this down further with the initial step of reducing G&A and overhead by $5 million and further end contingencies for reductions if warranted.

Our working capital management plans did have specific metric targets, all with the goal of improving working capital utilization by at least $50 million. We reduced our capEx by $25 million from last year, still with our capEx at about $40 million. $20 million of that is leasing capEx. That capEx is discretionary and can be throttled back if conditions warrant.

We will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Frank Magdlen - The Robins Group.

Frank Magdlen - The Robins Group

Could you give us a little more guidance or help in trying to understand the significance of steel scrap pricing or proceeds you get in your refurbishment and parts business? I’m trying to smooth out the gross margin contraction that occurred in the quarter.

Bill Furman

There was quite a contraction particularly in scrap steel pricing and we receive a yield from scrap steel pricing where our business model works particularly in the wheel business and repair and refurbishment. We sell just in that unit approximately 10,000 tons of scrap steel each month. On a gross revenue basis you can calculate what a $10 change can do in the average price of scrap and so looking at simple terms a $10 reduction or increase in scrap can mean $1 million in the time frame that we are talking about per month.

However, it is not quite that simple and it has to do with the surcharges that are built into inventory and the cost inventory. Particularly in the first quarter there was a lot of moving parts and we expect as scrap prices stabilize and increase, which they have been doing, you have to distinguish between the domestic and international market in that regard when you are looking at scrap and you have to distinguish by region. Nonetheless there is a pronounced drift upward in scrap steel. This will have salutary effects on that unit so we think we took the principle hit in that unit in the first quarter.

The other business we have been awarded should generate between $10-12 million gross revenue. Of course not all of that will come to the bottom line. Those are some of the moving parts related to scrap. Basically the outlook in steel is more positive than it was a few months ago and scrap is still a fairly weak commodity market.

Frank Magdlen - The Robins Group

If I can clarify, every $100 was it just a slip of the tongue? Every $100 if we are shipping 10,000 tons a month then approximately every $100 equates to $1 million?

Bill Furman

I’m sorry, I did have a slip of the tongue. It is a significant item but the kinds of movements and it has affected us each month probably in this particular downturn by at least $3-5 million.

Frank Magdlen - The Robins Group

For the quarter?

Bill Furman

For the quarter.

Frank Magdlen - The Robins Group

Would we go back to prior guidance of something in the neighborhood of 14-16% margins? In ordinary times, and I don’t know what ordinary times are, but if you didn’t have the big volatility in scrap?

Bill Furman

Let me clarify that number because you have got a pricing effect and a cost effect. Probably the total effect of clearing the pipeline and the price decreases in this quarter was $11-12 million. Which pricing would be a component of that but costs as we clear higher inventory surcharges through the sales units would contribute to that as well. So we took a significant hit in the first quarter from just commodity pricing down. As that swings back up we will have a similar benefit in coming quarters.

Mark Rittenbaum

To the second part of your question on the margin outlook, yes earlier in the year or at the end of last quarter we gave guidance in the mid-teen’s. We are a little bit more cautious on that in part on the refurbishment side of the business. As we mentioned before we are seeing deferments in capital spending and so the product mix on the repair and refurbishment side is a little weaker. Scrap steel did drop down precipitously. It is coming back up but we are being more cautious probably on our view of the average price. We probably take it more down to the lower teens rather than the mid teens.

Frank Magdlen - The Robins Group

How many cars are less that are fixed price for production this year?

Mark Rittenbaum

I believe it is about 1,000 left in the pipeline that we have reserved for all of those and we believe we are adequately reserved for all of those at this time.

Operator

The next question comes from Wendy Caplan - Wachovia Securities.

Wendy Caplan - Wachovia Securities

The internal actions that you have been talking about, do you think that they will allow you to stem losses in manufacturing this year or are we really counting on the lever of refurbishment and parts to improve the prospect to become profitable for the full year as you describe?

Bill Furman

I’m going to let Mark address that and I might add some comments because manufacturing particularly with the momentum in our GIMSA facility will have a different profile than is apparent from these quarterly results.

Mark Rittenbaum

I think the answer is more the latter. For the year as a whole and for the quarters going forward which include G&A expense and operating costs below the gross margin line that it would likely not be profitable. We do see improvement in our margin which is now a negative margin to something closer to break even or low single digits. So it would be the other parts of our business that would principally be the contributors. Of course just taking the margin from the negative to break even or low single digits in manufacturing.

Wendy Caplan - Wachovia Securities

The tank cars you are talking about, just so I am clear of the 2,900 cars you expect to ship out of the backlog this year how many of those are the tank cars and given that the production start up and what does that say about profitability in that piece?

Mark Rittenbaum

On the tank car piece it is less than 500. I don’t have the exact number here but it is right around 500 that would be in there. I don’t want to go into profitability by particular car line obviously for partly competitive reasons. Certainly we have learning curve efficiencies and inefficiencies in the start up but we are also gaining traction in that area.

Wendy Caplan - Wachovia Securities

Just so we understand, as we are looking at the P&L where is that hedging charge you referenced on the P&L in the quarter?

Mark Rittenbaum

It is in interest and foreign exchange.

Wendy Caplan - Wachovia Securities

So it is lumped into the interest expense line?

Mark Rittenbaum

Yes.

Operator

The next question comes from Todd Maiden - BB&T Capital Markets.

Todd Maiden - BB&T Capital Markets

I wanted to follow-up, you had talked about I think 1,000 number of cars in the backlog that are subject to fixed price contracts. However, I just wanted to clarify this because on the fiscal Q4 call the number was 1,000, 700 of which were still outstanding. I think you came to an agreement with a customer on a good 300 of those cars. Did that cancellation not happen? Were there 300 new cars found? You meant you didn’t take any orders in the quarter that were subject to fixed price contracts so I just kind of want to pinpoint that number a little bit if I can.

Mark Rittenbaum

I think it is we just did not take any new fixed price contracts during the quarter and I was just rounding in both of those comments. So there were no new fixed price contracts and some of the fixed price contracts we had in backlog at the end of August we were producing this quarter so the number is less this quarter than last quarter.

Todd Maiden - BB&T Capital Markets

In that half million reserve adjustment I believe at the time on that 700 number out there in Q4, 700 cars still subject to fixed price contracts, the estimated loss was going to be somewhere around $3.9 million. So that half million reserve adjustment is that added to that $3.9 million?

Mark Rittenbaum

Yes it is.

Todd Maiden - BB&T Capital Markets

I didn’t hear, did you give a fleet utilization number?

Mark Rittenbaum

93.3%.

Todd Maiden - BB&T Capital Markets

Did you give the average age of the lease remaining?

Mark Rittenbaum

We did not. We have that in the 10K and it is around 3.3 years if I recall what we have in the 10K.

Todd Maiden - BB&T Capital Markets

Any waiting or what the fleet looks like currently as far as the mix by car type?

Mark Rittenbaum

We don’t break that out but I will give a little color on that because it may not be what you think from what we build. We are certainly forest products cars and hopper cars would be the larger portions of our fleet. We do not have, as an example, much in the way of double stack cars because most of what we build in double stacks we sell outright and we do not have much in the way of tank cars because historically until the GE contract we have not been a player in that market.

Todd Maiden - BB&T Capital Markets

Lastly, given the current environment where delivery forecasts have clearly come down and even where you mentioned you think over the next few years forecasts could trend lower than that, and the fact you have chosen to cut your dividend has your thinking changed at all about some sort of potential merger with you being the buyer or the seller?

Bill Furman

Has our thinking changed? No.

Operator

The next question comes from Paul Bodner – Longbow Research.

Paul Bodner – Longbow Research

Just to go back to refurbishment and parts in the quarter what was the organic growth and can that business grow organically during this year? It sounds like you think it can with scrap prices reversing.

Bill Furman

As I said in my comments we had considerable growth year-over-year by 30% but that wasn’t substantially organic. We have 39 locations. We have added one location with the last one railroad in Osawatomie. We have another location in south San Antonio where we are doing new work. So we have had two specific projects that have hit their stride in this quarter and will begin paying off. We do have a new wheel contract which is significant as I just described with a major customer and we are not disclosing that customer which will add about $10-12 million of gross revenue per year.

So, while those are modest achievements in the current quarter a lot of focus that we have been putting our operating people through is in cash conservation and liquidity because the one unforgivable sin in business is to run out of cash. We don’t expect that will occur at Greenbrier. Normally in a downturn of this, like ours with heavy manufacturing content, will run cash out so there is some automatic detection and we have been stress testing all of our businesses. So there has been some dampening on the organic growth.

Personally I believe this is the most exciting opportunity I have seen in the past decade. I think we have a really strong network in repair and refurbishment and linking it with our leasing business and coupling it with the substantial opportunities for arbitraging inefficiencies in the rail system as cars are shuffled, parked and not repaired irrationally so as capital budgets get set. This is a segment opportunity we have really exploited in the past and we are expecting to release our guys to do that in the future. We may have to do some specific project financing which will not drain our corporate liquidity to achieve that organic growth but we expect we will continue to open new operations and we will try to create those base loads as we have been doing with the three I just mentioned.

Mark Rittenbaum

Bill’s latter comment about businesses normally in this or manufacturing in this environment running cash out meaning the working capital will convert to cash so we expect at lower production volumes that a lot of our working capital will convert to cash.

Paul Bodner – Longbow Research

It sounds like in terms of buying discretion you mean by going and looking at specific asset backed debt deals or something along those lines to finance a purchase?

Bill Furman

We very seldom have done that kind of transaction debt. We have joint ventured with merchant banking companies in the past substantial project work. The Golden West program with Southern Pacific. The conversion of auto wreck cars to TOFC cars and backed ladder racks. These are the kinds of things we might encounter where we would not want to allocate our capital but could align with a party that would be willing and interested in investing in the upside of acquiring these assets cheaply or acquiring an operating interest in these assets cheaply and arbitraging the inefficiencies of having assets stored that ought to be in service.

We are not, and I want to make this crystal clear, we are not going to use our working capital or our borrowing capacity to go out and make new acquisition or to splurge in a time of famine. On the other hand in this time there are many, many opportunities so we do expect to find avenues for internal growth particularly in our GRS unit and if we find those avenues we would expect to finance them in a responsible way with equity financing of a project nature specific to the transaction and insulated from risk to us. We have a long history of doing that kind of thing.

It would also give us an opportunity to create a reserve of assets for later refurbishment and sale as we have done in previous downturns. So our model has always adjusted in a downturn from emphasis on selling to acquiring assets. We are very, very cautious about how we use our own capital in doing that.

Paul Bodner – Longbow Research

In terms of looking at facilities you mentioned you could close some capacity. What is your thought process on closing newer facilities? Which facilities would you look at or why would you look at one of the newer ones versus the Gunderson facility or something along those lines?

Bill Furman

I think it is important to distinguish between these facilities as pure manufacturing facilities or hybrid facilities. I think it is also important to understand the political reality of the environment we are operating in and the uncertainties of globalization. We have watched commodity swings. We have watched currency swings that have hit major companies and brought them to their knees. We have seen the investment banking business with so many intelligent people literally transformed and virtually destroyed as we knew it six months ago.

I think it is important as you think about what I just said to look at our facilities in two ways. One of them, Gunderson, is a flagship facility which provides substantial technical support to our global network not only in the new car side but also in the repair, refurbishment and leasing side and a core competency there is engineering. Gunderson also has the ability to do repair and refurbishment work itself and it has frequently done that and it is running a heavy marine business. Gunderson wouldn’t be by itself a candidate because of the marine business alone and because of the engineering and other capabilities that reside there for closure. Although we will aggressively reduce the overhead appropriate to scale at which we are operating.

So we would be looking at a potential of one of the two Mexico facilities. I think that leads us to probably the Concarill facility as opposed to the GIMSA facility which I believe is a very, very important cog in our future as we adjust the role of manufacturing in Greenbrier’s business model.

Paul Bodner – Longbow Research

One last question in terms of billing out your lease fleet. In the past three years you have added pretty significantly there just in terms of the balance sheet. Looking back it looks now like asset prices, I don’t know if you bought a lot of those cars new or not, were on the higher side versus historic levels. Is there a chance coming up here over the next year or two you say hey these car prices are way over-stated on our balance sheet and take a big write down in the quarter? Is that something I guess you can comment on the profile of the fleet there?

Mark Rittenbaum

I think we are comfortable with the carrying value of our lease fleet. If you look at our historic gains on sales and our trading activity there we have always believed that actually there is embedded equity in our lease fleet and that embedded equity does move up or down during various points of the business cycle so it is not what it would have been 12 months ago but we are comfortable with the carrying value of our lease fleet and I wouldn’t see a potential for a write down there from what we see now.

Operator

The next question comes from J.B. Groh - D.A. Davidson & Co.

J.B. Groh - D.A. Davidson & Co.

I had a question mark on the comment of the 2,900 cars included in the backlog scheduled for delivery. I think last quarter that was 3,900 and you mentioned a cancellation. Can you help me recognize the difference of 1,000 there netting out…

Mark Rittenbaum

Some cars we delivered 800 cars so there were cars also built that were held up on the balance sheet in that rail cars held for sale. You may recall in particular quarters we will build cars that will be delivered later on in the year so they are held up on the balance sheet and that is the difference between production and deliveries. You will also recall that we slowed down, and made reference in our release and our comments, we slowed down production so some of the cars that were originally contemplated to be built this fiscal year will be built next fiscal year. So we did actually have orders this quarter. It is just all those moving factors that lead to that reconciliation.

J.B. Groh - D.A. Davidson & Co.

Have you switched over at Gunderson? Is that doing mostly boxcars now? What is the status there?

Bill Furman

We are running one car line, an order at Gunderson. We had one cancellation. We have open space in the spring at Gunderson for boxcars and we have yet to settle on the final resolution of the announced cancellation. We are negotiating with that client which is typical of this environment as I have said. While we expect that to result in clearing all of the cash we would require there is still the possibility that we would continue to run a box car line there if we find an avenue that is vital and sound.

We also are doing repair work at Gunderson and we would anticipate Gunderson is equipped to do much more repair work and we will allocate manpower to our marine operation and see if we can get more through put in the marine operation during this particular time.

On that topic I think in the current Congress and current administration it would be unsound for us to as a U.S. company to expect to participate in some of the things that would be occurring in the legislative and regulatory front to commit to a footprint on manufacturing only in Mexico. It also would be imprudent for us to do that for political risk and currency risk. We have seen what has happened with wild swings in the Canadian dollar and I think we want to continue to have a U.S. footprint and to be a U.S. company in manufacturing during the current political climate.

But I think that the lower cost facility that we will have through the GIMSA operation will be a very positive asset and we would expect that to be emphasized longer term on manufacturing and Gunderson to become more of a mixture of marine repair and probably one new car line with the capacity to go to more and when the double stack market comes down. Gunderson is very, very efficient on double stacks but there is not going to be a requirement for double stacks at least in 2009 as we see it.

J.B. Groh - D.A. Davidson & Co.

So there was very little double stack activity in Q1?

Mark Rittenbaum

Correct. There was a little bit there. Some run offs from orders from the prior year. There was a little bit in the deliveries and we are done with that.

J.B. Groh - D.A. Davidson & Co.

So none foreseeable for the remaining three quarters?

Mark Rittenbaum

Correct.

J.B. Groh - D.A. Davidson & Co.

You mentioned your run rate on SG&A, did I get that right at $17 million roughly?

Mark Rittenbaum

$17.5 million.

J.B. Groh - D.A. Davidson & Co.

Finally, that charge shows up in interest expense which shows you a little bit under $10 million a quarter on interest. Is that where we should be thinking? You said debt came down a little bit.

Mark Rittenbaum

Under $10 million. It is nice that interest rates are as low as they are on our floating rate debt. So maybe closer to $9.5 million but under $10 million would be correct.

Operator

The next question comes from Art Hetfield – Morgan Keegan.

Art Hetfield – Morgan Keegan

Most of my questions have been answered. One quick rhetorical question. Given the environment I bet you are glad to see Nova Scotia in your rear view mirror.

Bill Furman

Yes we are. It is not entirely in our rear view mirror because we have quite a lot of book value wrapped up in it which should be released but for technical reasons because of the legal process up there it may be some time before we find that coming back into income and hitting our balance sheet as a positive contribution to our net worth. With that exception we are delighted to have it behind us.

Art Hetfield – Morgan Keegan

I don’t know if you addressed this. You talked a lot about the lease fleet but did you mention anything about what you are seeing with regards to pricing of leases currently?

Bill Furman

We didn’t mention it. No.

Art Hetfield – Morgan Keegan

Could you?

Bill Furman

They are not improving. The mix of our lease fleet has a component however of operating leases that are disconnected from direct negotiation and are instead set by car hire agreements as standards in the industry. So we have some automatic insulation but in nature of those particular operating leases. We definitely have seen downward pressure on leases and of course it depends on the kind of cars.

However, having said that we have been fairly successful at re-marketing our assets at reasonable prices. Maybe Mark can give more tangible color to those general remarks.

Mark Rittenbaum

We don’t break it out on a percentage on a car-by-car lease renewal basis. As Bill said we are definitely seeing, as you would expect, lease rates go down on any renewals and that is part of the reason we have staggered lease terms and a diversified fleet by car type.

Bill Furman

We have a fairly significant sized commercial operation compared to our competitors and that of course contributes to G&A. We are constantly weighing our emphasis on the commercial side of our business by integrating units. One of the things we are seeing as consequence of that, is we see most of the opportunities and they have done a very good job of getting us through at least so far this part of the downturn. We have do to that every single lease renewal but they have been fairly nimble in keeping our lease rates higher than the average bear.

Art Hetfield – Morgan Keegan

Do you have any portion of your fleet that is just on per diem leases or is everything term?

Mark Rittenbaum

Bill mentioned earlier and that is what he was referring to as he said these negotiated car hire rates and that is the utilization type of leases. It probably is less than 25% of our total lease fleet.

Art Hetfield – Morgan Keegan

You may have addressed this but SG&A was down in the quarter and you had a couple of things in there. Is that more general a level of what it should be over this year or is it going to kind of move back up to where it has been over the last several quarters?

Mark Rittenbaum

Our goal is to keep it at that level or bring it down. By that level I mean the $7.5 million.

Art Hetfield – Morgan Keegan

Do you have an estimate on how many stored cars you think are across the country at this time?

Bill Furman

I don’t. I know it is a lot. I think we say tens of thousands and there are no central databases where we can go and get that information. Maybe it is something we should know but maybe it is because we are afraid to ask.

Operator

The next question comes from Analyst for Steve Barger - KeyBanc Capital Markets.

Analyst for Steve Barger - KeyBanc Capital Markets

I want to ask a follow-up to Art’s previous question. Generally speaking if you assume an average 5-year lease are the new rates below their previous rate that they were being charged or are you saying they are below what the average market rate would be right now for that car?

Mark Rittenbaum

Can you perhaps clarify? I’m not sure I’m following the question correctly.

Analyst for Steve Barger - KeyBanc Capital Markets

I’m just trying to understand if somebody is going to end up paying less than what they were previously paying or are they just going to be paying less than what the current market would be?

Mark Rittenbaum

They are going to be paying less. For any renewal the lease rates are going to be down from the prior lease term.

Bill Furman

Maybe only slightly depending on the car type though.

Analyst for Steve Barger - KeyBanc Capital Markets

So even if it is something that they maybe signed up for 5-10 years ago they are going to be paying a little bit less on that?

Bill Furman

Let me explain how that works. The price of materials, even though we have seen a dramatic drop particularly with steel and other materials is still high relative to historical numbers. So to the degree we have older cars in our fleet the value of those cars is much lower than cars that have been built by others in recent years. To the extent we have newer cars those are higher priced. So lease rate factor is what we look at and it is a percentage of original cost. So when we look at yields and we average our fleet we have been hit most by lower utilization in both our operating lease fleet and then our renewals. We have been able to maintain a fairly decent yield. So the average prices are slightly down for us.

We also are embedded into the system much differently than other rail car leasing companies because we manage so many assets and we repair so many assets. We have access to transactions that others couldn’t engineer by nature of our network that funds into the U.S. rail system.

Mark Rittenbaum

I appreciate you clarifying your question. My answer was more quarter-over-quarter. That same rail car at least six months ago that was coming off lease today would have gotten a higher lease rate six months ago for that car than we would today. But if you are comparing to when that car was originally put in service, it depends how long ago that car was originally put in service. So for example if that car was a car that is ten years old add an initial ten-year lease to it, it is likely that rate today is higher than it was 10 years ago. If that car was built a year ago and under one-year lease it is likely that lease rate is lower than it was a year ago and it just depends where that car is in its life.

Analyst for Steve Barger - KeyBanc Capital Markets

I’d also like to ask a historical question here. Maybe how you think this cycle compares to past cycles? In your experience what is the typical variability in selling prices throughout the course of a cycle? I know it is obviously going to be very different by each rail car type but are we talking about a 5% change from peak to trough or are we talking about a 20% swing if you assume that end prices hold steady?

Mark Rittenbaum

That is the big assumption. Input prices. You are talking about keeping that steady but that is not necessarily the case.

Bill Furman

That is really the difference between this cycle and others. I think that we see a lot of rhetoric. In fact President elect this morning talked about this being the worst business cycle we have seen for 30 years and made comparisons to the Great Depression. In our segment this is not the mother of all cycles in any respect. 2001 with 9/11 saw order rates drop to 15,000 annualized units per year. In 1985 we survived an industry that had 5,000 cars ordered per year. These things have to be anticipated if you are running a cyclical business and you have to react very rapidly to them. This is the third worst so far. If these forecasts are true we will sail through this and perhaps all of this economic stimulus will eventually affect the value of our currency downward I think and will give us a false prosperity and happy days will be here again.

I am much more skeptical about that but I think this is not the kind of cycle we have seen at least so far where orders just drop and you can see in the last quarter where 7-8,000 rail cars. We don’t want to use rhetoric and fear mongering to say this is an unsustainable cycle. This is not the worst cycle I have been through. The worst cycle I have been through was when there were more cars stored. We came off a 100,000-car build. People didn’t need them. There was deregulation, mergers and nobody wanted to order any new rail cars yet Greenbrier prospered and survived during that period by changing its tactics. Not its strategy but its tactics. We will survive in this one as well.

Analyst for Steve Barger - KeyBanc Capital Markets

I guess to go back to the previous question and maybe we will just firm it up this way, in 2001 during that cycle right there what sort of peak to trough change in average car prices did you see?

Mark Rittenbaum

From peak to trough in that particular cycle, and again a good part of this was commodity related too, but in that case some cars went down in value 30% of the new car price. Now that is not all on the margin basis. A lot of that is in you could see a car that was selling for $70,000 sell for $50,000 and indeed in the current with steel and scrap prices coming down now as significantly as they have car prices are coming down just by that alone.

If you hold all of that constant you might think about it in terms of the remark I made earlier. In peak you can see by the public companies that double digit margins are out there and the comment I made on the call is that in a difficult environment people make a contribution to fixed overhead. So there is that kind of variability from peak to trough on just the margin side of the business.

Bill Furman

Part of that, however, is choice. We choose often to not operate as our peers do for the short-term but rather to sustain a line on the longer term. So we slow production often and husband our backlog. Therefore we are able to rebound a little bit better. You heard us describe today a strategy where we are going to be cutting our capacity. Obviously we are not sanguine about this current environment at all nor the prospects for recovery. If we slow our production rate instead of running our production out in the first quarter or second quarter looking at a longer term economic view that is going to affect our margins and affect our profitability. Yet, frequently that is the most sensible thing to do in our industry buying time to maneuver and do other things to keep the engines running.

Analyst for Steve Barger - KeyBanc Capital Markets

My last question relates to the potential for industry-wide cancellations or deferrals you eluded to. Again, I know this cycle is very different from the past and if the industry backlog is around 52,000 cars right now what would your expectation be for cars that could potentially get deferred or even cancelled out of the backlog?

Bill Furman

I don’t have an estimate of that. I can only tell you that over the last decade the behavior in our industry has changed. It was highly unusual in the past for a class one railroad or a major leasing company to not honor an agreement or to cancel an agreement. You can honor an agreement by canceling if you do it the right way but it wasn’t something that was typically quite common. In the current environment with the two massive swings up and down in commodity prices all bets are off. We are all negotiating with each other furiously and if we don’t we end up behind the 8-ball. We are doing all this with suppliers. We are pressing very hard for concessions to bring down our materials costs and our customers are doing quite sensibly the same with us.

I just don’t have any way of predicting how that will turn out. Anyone who doesn’t do that in this climate is rather silly whether it is a company or a company like us who is dealing with suppliers. You just are going to have to be hard nosed about it and look at the facts. The facts are the economic conditions are not as they have been and they could get worse.

Operator

The next question comes from Frank Magdlen - The Robins Group.

Frank Magdlen - The Robins Group

Could you give a little color as to what is going on in Europe? How many cars were delivered in Europe in the first quarter and what you expect for the balance of the year?

Bill Furman

We actually have our European head of operations, William Glenn, here and maybe Mark can summarize a little bit about the financial component of your question and William can add some color to it.

Mark Rittenbaum

There are several hundred cars during the quarter delivered out of our total of 800 and our backlog is 1,000 cars roughly related to our European operations. So that does go into the next year. We would see the bulk of that production being built this fiscal year.

William is there anything overall you would like to add about that?

William Glenn

The market is probably slightly better than it is here but it remains to be seen if that is a timing thing. It is definitely stronger but we will see if that is sustainable.

Bill Furman

It is probably true our competitive position is about as good as it has ever been and you are also looking at adopting a different business model in Europe so I think you have done a very good job of stabilizing Europe and you are more cautiously optimistic than you were when I assigned this to you.

William Glenn

We have gone from 3.2 a few months ago to 4.2 to the Euro so that obviously does very good things for sales into the Euro.

Bill Furman

I know your competition has basically vanished from the scene in terms of credibility.

William Glenn

Some of our competitors have had major, major problems and are way behind. One major competitor is now in the Euro zone so that is a big shift. They were out of it last year. So with all these swinging we are in a better position against them that is for sure.

Bill Furman

You are receiving new orders in Europe.

William Glenn

The pockets of demand and we have live negotiations going with customers where we hope we can turn it into new orders at the backlog. I would put the caveat it is hard to say what the current environment is going to sustain. I would say cautiously optimistic. We are holding our own. But the big question mark is the economy.

Bill Furman

One of our objectives two quarters ago was to ensure that Europe didn’t become a drain. We were having reported losses which are a tax disadvantage in Europe. William has addressed the tax issue, has restructured the business and has achieved the objectives of stabilizing the European operation. We are looking to see if we can build a platform there and longer term we will rationalize our investment and perhaps decide that Europe isn’t in our future but today we are very pleased to see the progress we have made in the last two quarters.

Frank Magdlen - The Robins Group

Does that mean you are profitable there?

Mark Rittenbaum

We were closer to break even which would be an improvement from where we were at the end of last year.

Operator

The next question comes from Wendy Caplan - Wachovia Securities.

Wendy Caplan - Wachovia Securities

Mark are you prepared to share with us the targets for working capital management you addressed?

Mark Rittenbaum

Not specific as to each of the ratios we have but that is how we are measuring them in either inventory turnovers or days outstanding.

Wendy Caplan - Wachovia Securities

Finally, Bill you addressed in passing that if may get worse from here. You have certainly been through this times before. What is your view at this point? Is it as bad as it is going to get or do you still think we have some room to go?

Bill Furman

I think the new car segment is going to be very, very difficult. I think we are very happy to have the diversity. I think I am much more optimistic than perhaps I sound on the opportunity side of this for us and perhaps for others if they can see those opportunities. We are particularly equipped to take advantage of opportunities because rail car values are not very well understood by people who are not in the business. I am kind of optimistic the rail industry is going to benefit from many things that are happening today legislatively, eventually commodities in North America will move and manufacturing will eventually recover just because of the picture that I see and the prospects for continued weakening of our currency as the result of some things we are having to do to restore stability.

I am pretty optimistic actually. We have a lot of dragons to fight and we always do during downturns. Will it get worse? I think the lag effect in the car orders it wouldn’t surprise me to see orders fall dramatically in the next quarter or two and stay languishing at that level through late 2009. Backlogs declining. I don’t know that is anything one wouldn’t expect in an environment like this. I don’t see that as getting worse. I just see that as a condition.

This is not as bad as 2001 when everything stopped. 9/11 they stopped. We have a very big business that can’t stop because the railroad have to run their equipment and they have a lot of inefficiency we can help them with.

Operator

At this time I am showing nothing further.

Mark Rittenbaum

Thank you very much for joining the call today. Good bye.

Operator

That concludes today’s conference call. You may now disconnect.

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Source: The Greenbrier Companies F1Q09 (Qtr End 11/30/08) Earnings Call Transcript
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