American Railcar Industries' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.21.13 | About: American Railcar (ARII)

American Railcar Industries, Inc. (NASDAQ:ARII)

Q4 2012 Earnings Call

February 21, 2013 10:00 AM ET

Executives

Dale Davies – SVP, CFO and Treasurer

Jim Cowan – President and CEO

Analysts

Rhem Wood – BB&T Capital Markets

Art Hatfield – Raymond James

Justin Long – Stephens

Eric Crawford – UBS

Matt Brooklier – Longbow Research

Steve Barger – KeyBanc Capital

Tyson Bauer – KC Capital

Operator

Good day, ladies and gentlemen, and welcome to American Railcar Industries, Inc. Q4 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I’d now like to turn the conference over to your host, Dale Davies, Senior Vice President, CFO and Treasurer. You may begin.

Dale Davies

Good morning. I would like to thank everyone to this conference call for the fourth quarter of 2012. I’m Dale Davies, our Chief Financial Officer, and I’d thank you for joining us this morning. For those who are interested, a replay of this call will also be available on our website, www.americanrailcar.com, shortly after this call ends.

Joining me this morning is Jim Cowan, our President and CEO. Our call today will include discussions about the railcar industry, our operations and financial results. We will also make a few comments about our joint ventures and our business outlook. Following these remarks, we’ll have a Q&A session.

This conference call includes forward-looking statements, including statements as to estimates, expectations, intentions and predictions of future financial performance based on currently available information. Participants are directed to our SEC filings and press releases for a description of certain business issues and risks, as the change in any one could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

Also, please note that the company does not undertake any obligation to update any forward-looking statements made during the call. EBITDA and adjusted EBITDA are non-GAAP financial measures we will discuss today that are reconciled to our net earnings in our press release, which was issued yesterday. The press release is available through the Investor Relations page of our website.

Now, it’s my pleasure to introduce Jim Cowan.

Jim Cowan

Thank you, Dale, and good morning. Demand in North America for certain railcar types remained strong. The industry reported that approximately 11,800 railcars were delivered and 11,000 railcars were ordered during the fourth quarter of 2012, producing a book-to-bill ratio of 0.93.

Industry backlog was approximately 60,000 railcars at the end of December. Approximately 89% of the industry backlog is for tank and hopper railcars, which bodes well for ARI. Going forward, one industry forecast for North America expects new railcar deliveries to be approximately 55,000 units in 2013.

Tank railcars continue to be the dominant railcar type, driving orders in North America. The industry reported that approximately 5,300 tank railcars were delivered and 6,800 tanks were ordered during the fourth quarter of 2012, producing a book-to-bill ratio of 1.28.

The industry backlog for tank railcars was approximately 48,200 units at the end of December and approximately 80% of the industry backlog. The strength in demand for tank railcars continues to be driven by the oil and gas markets, but we also have orders for tank railcars to transport other products. During 2012, we have seen a slowing of orders for hoppers; however, today, there is interest for certain covered hopper railcar types, including plastic pellet, iron ore, food grade, potash and soda ash railcars. We expect the plastic pellet demand to strengthen starting the second half of 2013.

Our backlog remained strong for tank railcars. As of December 31, we had over 7,000 railcars in our backlog, including 1,800 railcars for our – for manufacturing for firm lease orders. The inquiry level for tank cars remains very active. We continue to invest in our railcar lease fleet and have closed the lease fleet financing arrangement in December of 2012 that has provided cash to retire our 7.5% senior unsecured notes next week, and we’ll fund additional railcars for our lease fleet for part of this year.

We continue to benefit from vertical integration projects that were put in place over the past several years and from a favorable product mix of more tank railcars. These benefits have been partly offset by softer demand in the hopper market, but still resulting in record margin levels for the year.

Our railcar services team has seen a steady stream of work this year, even though paint and lining work is lower compared to prior years. We expect the good performance that this group delivers to continue and we are exploring opportunities to expand the business.

In summary, our performance generated a fourth consecutive quarter of record-breaking operating earnings, driven by strong industry demand for tank railcar, which are core to our business. The increase in operating earnings led to a second consecutive record quarter for earnings per share.

I’ll now turn it back to Dale for a discussion of the fourth quarter.

Dale Davies

Thanks, Jim. Consolidated revenues for the fourth quarter of 2012 were at the highest levels since the third quarter of 2008. Fourth quarter revenues were $208 million versus $168 million for the third quarter of 2012, up 24% on sequential basis, on stronger railcar volumes.

Revenues for the fourth quarter of 2012 were up by $11 million, or 6% versus the comparable quarter of 2011, also on higher revenues for our manufacturing and leasing segments.

We shipped 2,000 railcars during the fourth quarter of 2012, including 390 to our leasing customers. Manufacturing revenues increased due to strong tank railcar volumes, partially offset by lower hopper railcar volumes. Leasing revenues increased due to an increase in our lease fleet from 490 railcars at the end of 2011 to 2,590 railcars at the end of 2012.

Revenues for railcars built for our lease fleet are not recognized in consolidated revenues as a railcar sale, but are recognize over the term of the lease. Our manufacturing segment revenues, including an estimate of revenues for railcars built for our lease fleet, were $237 million for the fourth quarter of 2012 compared to $208 million for the fourth quarter of 2011. The primary reason for the increase in revenues was a shift in sales mix to more tank railcars, partially offset by decrease in volume of hopper railcar shipments.

Revenues for railcars built for our lease fleet are shown at an estimated fair market value as if they’ve been sold to a third-party and were $49 million for the fourth quarter of 2012 compared to $26 million for the same period of 2011. These intersegment revenues for railcars transferred to our lease fleet are eliminated in consolidation.

Our railcar leasing segment revenues for the fourth quarter of 2012 were $5 million compared to $400,000 for the same period of 2011. The increase from 2011 reflects the progress we’ve made on building our lease fleet.

Revenues for railcars subject to lease are recognized monthly over multiple years on the lease based on the terms of the lease agreement. Revenues for our railcar services segment were $15 million for the fourth quarters of 2012 and 2011.

Consolidated earnings from operations for the fourth quarter of 2012 were a record $41 million, compared to $30 million for the third quarter and $15 million for the fourth quarter of 2011. Our operating margins were 20% for the fourth quarter of 2012 compared to 18% for the third quarter of 2012 and 7% for the fourth quarter of 2011.

The increase in earnings from operations was driven primarily by our manufacturing segment. Operating earnings for our manufacturing segment were $47 million for the fourth quarter of 2012, compared to $25 million for the same period of 2011. Segment operating earnings included profit on railcars built for our lease fleet is $7 million for the fourth quarter of 2012 and $5 million for the same period of 2011. These are eliminated in consolidation based on an estimated fair market value, less the cost to manufacture.

Operating margins from the manufacturing segment were 20% for the fourth quarter of 2012, compared to 7% for the same period of 2011. The increase from the prior year was primarily driven by higher sales mix of tank cars with higher selling prices, as well as operating leverage and efficiencies as a result of strong railcar production volumes for tank railcars, all of which were partially offset by softer hopper railcar volumes. We’ve continued to realize cost savings from the vertical integration projects we’ve put in place over the past several years, as Jim has previously mentioned.

Operating earnings from the railcar leasing segment were $3 million for the fourth quarter of 2012 compared to less than $1 million for the same period of 2011. The increase was due to growth in the number of railcars on lease by 2,100 railcars.

Operating earnings for the railcar services segment were $2 million for the fourth quarters of 2012 and 2011. Operating margins for the railcar services segment were 13% in the fourth quarters of 2012 and 2011, which reflects weak demand for coatings and linings.

Adjusted EBITDA, which excludes stock-based compensation and other income on short-term investments, set a fourth consecutive quarterly record of $48 million for the fourth quarter of 2012. This exceeded our previous record of $37 million set in the third quarter of 2012 and was double the $24 million for the fourth quarter of 2011.

Stock-based compensation expense was $1 million in the fourth quarter of 2012 compared to $5 million in the same period of 2011. Our stock-based compensation fluctuates with changes in market price for stock. Closing price for stock was $31.73 per share as of December 31, 2012 versus the $23.93 per share as of December 31, 2011.

Other income on short-term investments was $2 million as we sold approximately 70% of the investment held in Greenbrier stock, after strategic business discussions terminated. In January of 2013, we sold our remaining position in Greenbrier stock.

Interest expense was $3 million for the fourth quarter of 2012, compared to $5 million in the same period of 2011. Interest expense primarily relates to our 7.5% senior notes due in 2014. In the third quarter of 2012, we redeemed the $100 million of principal on those notes, utilizing available cash on hand.

The effective tax rate for the fourth quarter of 2012 was 39.3%, compared to 46.2% for the same period of 2011. The effective tax rate decrease in 2012 compared to 2011 was primarily attributable to significantly higher earnings before income taxes for 2012.

Net earnings for the fourth quarter of 2012 set a record of $24 million or $1.14 per share compared to the previous record of $14 million or $0.66 per share for the third quarter of 2012 and $5 million, $0.24 per share for the fourth quarter of 2011.

Total consolidated revenues for 2012 were $712 million, 37% higher than the $519 million in 2011. We shipped 7,880 railcars, including 2,100 railcars to our leasing customers in 2012. This was 51% higher than the 5,230 railcars shipped in 2011, of which – included 350 railcars to our leasing customers.

Our revenues of $712 million excluded an estimated revenue for railcars built for our lease fleet, which was $219 million for 2012. Revenues for railcars built for our lease fleet are intersegment revenues and are shown at an estimated fair market value as if they’ve been sold to a third party.

These intersegment revenues are eliminated in consolidation. The company recorded a $500,000 loss from joint ventures in 2012 compared to a loss of $8 million in 2011. The improvement was due largely to increased production levels at our castings and axle manufacturing joint ventures in 2012 compared to 2011

Adjusted EBITDA was a record $150 million in 2012, three-times the $50 million for the same period of 2011. Net earnings in 2012 were record $64 million or $2.99 per share, compared to $4 million or $0.20 per share for the same period of 2011.

Our record earnings have contributed to strong cash flow from operations, which helped fund the growth of the company’s lease fleet. As of December 31, 2012, we have invested $221 million in our lease fleet. In December, we finalized the financing of approximately $200 million in a delayed draw facility that is secured by certain assets of our railcar leasing business.

In conjunction with finalizing the lease fleet financing, $100 million was drawn on the facility in December – with the availability to draw up to an additional $100 million by December – excuse me, by May 15, 2013, subject to the terms and conditions of the loan, including sufficiency of the company’s lease fleet borrowing base.

Using our existing cash balance and cash from the lease fleet financing, the company delivered notice that it will redeem the remaining $175 million of outstanding notes. The notes will be redeemed at par plus accrued and unpaid interest on March 1, 2013. This early redemption will reduce interest expense due to more favorable interest rates on our lease fleet financing.

During December of 2012, we also reinstated payment of a dividend at $0.25 per share of common stock for ARI. Our February 19 board meeting, our board of directors declared a cash dividend another $0.25 per share of common stock for ARI stockholders of record as of March 18, 2013. That dividend will be paid on March 28, 2013.

This time, I’d like to turn it back to Jim for few comments about our joint ventures and our international activities.

Jim Cowan

Thanks, Dale. Our joint ventures for castings production, Ohio Castings, and axle manufacturing, Axis, improved from the prior year as demand for components produced by these joint ventures follow demand for new railcars. Going forward, we expect these joint ventures to continue to reflect industry demand for railcars.

On the international front, our India joint venture, Amtek Railcar, continues to show good progress. We are preparing to build railcars and also certain railcar parts for export at this facility. We anticipate production to start up for railcars this summer with shipments to follow.

Our consulting agreement with the India Railways Research Design and Standards Organization also continues to progress. We have built two prototypes for testing as part of this project. The next prototype for testing is expected to be built by mid-2013.

In January 2013, we entered into a purchasing and engineering service agreement with ACF Industries. Under this agreement, ARI will provide purchasing support and engineering services to ACF, in connection with ACF’s manufacturing and sale of certain tank railcars at its facility in Milton.

Additionally, ARI will provide designs and know-how required to manufacture and sell tank railcars, and in return we will receive a license fee for any railcar shipped from ACF’s facility and the share of the profits. The agreement extends through the end of December 2014.

Management and the board of directors will continue to look at opportunities that will further diversify and grow our business. We continue to focus on improving operational efficiencies, meeting customer demand for our railcars and significantly increase our railcar lease fleet.

Lastly, I will like to do a shout-out to thank our customers for their support and congratulate the ARI workforce for this record-breaking performance. This would not have been possible without the support of both groups.

Now, I’ll turn it back over to our operator, Mercy. Could you explain how the participants can register their questions?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Rhem Wood from BB&T Capital Markets. Your line is open.

Rhem Wood – BB&T Capital Markets

Hi. Good morning, guys. Congratulations on a good quarter.

Jim Cowan

Thanks, Rhem.

Rhem Wood – BB&T Capital Markets

Let me start with the manufacturing margins, those are over 22%, a nice improvement there. How much of this was kind of your own lean manufacturing and cost cutting, and how much versus favorable mix and pricing? And how much more improvement you think you can get here?

Dale Davies

Yeah. I think we built a lot of tank cars in this quarter and we have done a lot of work to get ourselves vertically integrated in our parts supply on tank cars. And that certainly helped us quite a bit on those products. And there has also been good demand for tank cars, as you guys know. And some of the cars that are being built now are bigger cars and, in some cases, more complex cars too. So, it’s been a lot of things coming together to give us the opportunity to make some pretty good margins on those cars.

Rhem Wood – BB&T Capital Markets

Okay. So, you see additional improvement here?

Dale Davies

Well, I mean things are – everything is working pretty good right now. So, I don’t know that I would tell you to raise your models in the future quarters, but I think what we’re seeing is going to continue for a while on the tank car side for sure. I think we had a decent run on hopper cars in the fourth quarter. That’s going to, probably, continue in the first quarter, might get a little softer in the second. But I think third and fourth is going to kind of come back and maybe come back pretty – a little bit better than what we saw this quarter with more demand in the second half of this year for the hoppers.

Rhem Wood – BB&T Capital Markets

Okay. So, you guys are seeing demand at this point pick – and I know you talked about the second half hoppers picking up. Are you seeing additional inquiries for these types of hoppers that you mentioned?

Jim Cowan

Yeah, Rhem, we actually are. I mean, I think this latter half of last year, the hopper market was fairly soft. I mean what we’re seeing in the first quarter here is quite a bit of energy in a lot of the commodities that I’ve mentioned, and clearly plastic pallets on the front end of that, and that’s in a early stage of a resin expansion in North America that we’re going to be a very excited to see unfold over the next couple of years.

Clearly, tanks are, as you can tell, booked for the next couple of years, at most of the tank car builders. But there still is a very good inquiry level on the tank cars side right now. So, this – how long this run goes, anybody’s guess, but it’s still pretty strong.

Rhem Wood – BB&T Capital Markets

Okay. Great. And then, on a leasing business, how are rates there? And the margins were pretty good there as well. I was kind of thinking in the line in 55%, 60% range, it’s kind of nearly 67%. Can you talk a little bit about that business?

Jim Cowan

Well, our comment on the leasing side in terms of lease rates and, obviously, as you probably can guess, tank lease rates are very strong. The hopper, it depends on the car type, but those are doing about historical ranges right now.

Dale Davies

As far as the margins, Rhem, these are brand new cars they’re putting in the lease fleet, so we have very few expenses on these new cars. I mean, if you’re talking about gross profit margins, you do have depreciation expense and both taxes, but there is not much (inaudible) selling expense for placing new cars in service. But there’s not a lot of expenses for these lease fleets, because the cars are brand new.

Rhem Wood – BB&T Capital Markets

Okay. One more longer term and I’ll turn it over. You guys – I’ve heard you talk about is – an India as a base to serve other overseas markets with old railcar fleets, such as Saudi Arabia, Turkey, Russia. Could you talk a little bit about the opportunity there and maybe how big that could be and the timing on that?

Jim Cowan

Yeah. I mean, clearly, from India, we’re trying to target the Indian market, that’s the priority. But we can service the Australian market, as you mentioned, the Saudi market, Turkey market, also Africa. Africa has got several inquiries out from a list of different countries. But clearly, like I said, with our project with RDSO, we’re going to be introducing or send in some new cars there, that will be over the next couple of years. The first one in testing should be approved in the year. I mean, just that one car has a 20% higher payload than anything in India. So, that should get a lot of energy. And we’ve got the private guys right now, now that we’re ready to go here, that are teeing up, looking for a better product, better producer. So, we’re really excited there. The facility can build about 2,500 units per year. It won’t do that this year, in our startup year, but it can certainly do that in two years out.

Rhem Wood – BB&T Capital Markets

Great. Thanks for the time. Nice quarter.

Dale Davies

Thanks.

Operator

Thank you. Our next question is from Art Hatfield from Raymond James. Your line is open.

Art Hatfield – Raymond James

Thank you. Hey. Morning, Jim and Dale.

Dale Davies

Morning.

Art Hatfield – Raymond James

Just quick on the backlog, as I look at the backlog at the end of the year and your comments kind of about the strength of the tank car market, am I way up by thinking that, at this point in time, that beyond Q1 that the backlog for covered hopper is pretty very lean at this point in time?

Jim Cowan

Yeah. No, it is. I mean, clearly, we have a very strong tank car backlog. And by the way, as I said, we’re looking for the right opportunities that’s kind of what we try to do with the backlog. And as you know, it goes and fits and starts 1,400 units in 4Q. It could be – you can always get quarter where it’s 5,000. So, we’re trying to get the right business for the facility and be a selective with the best customers that we can find.

Art Hatfield – Raymond James

And that’s helpful. And as I think – as we think about that and orders coming in, if you were to get – and you talked about you hope – I’m using the word hope, but I don’t know that you think that way, you’re probably more confident than us, just normally which you know. But that being said, as you look out in the back half of the year, in Q2, as you get orders for hoppers coming in, what kind of lead time do you need once those orders are placed when you can ramp production on those orders?

Jim Cowan

Well, it’s about a three months window, if you need to ramp up. And we’re currently running at – obviously, at a reduced rate at our hopper facility in Paragould. But that’s a facility that we’ve been able to ramp up fairly quickly with three separate lines in past days. So – and I think to realize also some of these pellet increase that are out there in the several thousand units. So, these activities – and I think a lot of those will be placed this year and early next year.

Art Hatfield – Raymond James

And to that point on the plastic pellet cars, Jim, in your comments you had made that you expect those demand to pick up in the back half, are you talking orders or production?

Jim Cowan

Actually, I’m expecting to have pretty good order – order taking place in the first half.

Art Hatfield – Raymond James

Got it. Okay. Eliminations, when I look on Q4, one of the differences between my estimate and what you guys reported was that I had over – I guess, over-assumed what you delivered to your own lease fleet. And as I look at the backlog about 25%, is it fair would be the best way for us to think about modeling going forward that that should be even on a quarterly basis, or is there something that you could help us out with where one quarter may stand out one way or the other?

Dale Davies

Yeah. Art, that will change from quarter to quarter. We sort of take these orders – when they comes in for a lease or for a sale, we take them. We put them into our production schedules as they come. And so, you may have a quarter where we’re a little heavier on lease and the next quarter might be a little lighter on lease. So, it’s really hard to tell you precisely how to look at that. And I think we get a pretty strong build of lease cars in 2012. I think there is strong demand for a lot of tank cars right now and we, for 2013, might sell a little higher percent in 2013 than we did in 2012 of our total production. So...

Art Hatfield – Raymond James

Okay. But is there anything in the – I know that the go-forward backlog can change that, but is there anything in the current backlog that stands out in any one quarter that we should be cognizant of?

Dale Davies

I don’t know if there is. I think I’d probably use a little lower percentage going to lease fleet for each quarter in 2013, but – than you had in 2012. But –

Art Hatfield – Raymond James

Okay.

Dale Davies

I don’t know if that stands out.

Art Hatfield – Raymond James

Okay. That’s helpful. And then, just I want to make sure I understand what – where you will be at with that at the end of the year, as I – not at the end of the year, but at the end of the quarter. Are you going to use just existing cash now to pay down the $175 million of debt, are you going to draw down additional on your lines in order to get that debt paid off?

Dale Davies

We took $100 million on this in December –

Art Hatfield – Raymond James

Right.

Dale Davies

...in the bank. We’ll take a little bit more in February just to have such sort of safe margin in the bank. And then we’ll pay the notes off on March 1. We actually wouldn’t have to take a little addition, if we didn’t want to. But I’d just like to have just a little more cushion there.

And then, we have the final draw on the financing we did prior to May 15. So, by the end of May – by May 15, we will have drawn about $200 million on that line, but we took $100 million number, we’re going to take another piece here in February and then we’ll do the final amount in May.

Art Hatfield – Raymond James

Okay. And then can you help us out kind of what the change in your debt cost will be once you get that paid off? I know it’s going to go down, but do you have a magnitude?

Dale Davies

Yeah. Well, on the – at the end of the year, we had $175 million outstanding on the notes at 7.5%.

Art Hatfield – Raymond James

Right.

Dale Davies

That goes away March 1 and we had $100 million drawn and the interest rate on that is less than 3%. And so, when we get to end of May, we will have drawn the full $200 million and it will be – at that – less than 3% rate.

Art Hatfield – Raymond James

Okay. That – and then finally, I know you – Dale, I know you told me this 100 times, but I can’t find it in my note again. But on equity comp, what’s the rule of thumb to think about debt? How that changes as the stock price changes?

Dale Davies

Let me think again. That’s – I’m thinking it’s about – I haven’t looked at the number recently, but I think it’s about $500,000 per $1 of share –

Art Hatfield – Raymond James

Okay.

Dale Davies

...share price.

Art Hatfield – Raymond James

That sounds about what I recall too.

Dale Davies

Yeah.

Art Hatfield – Raymond James

So, okay. Thank you. That’s all I got this morning.

Dale Davies

Okay. Thanks.

Operator

Thank you. Our next question is from Justin Long from Stephens. Your line is open, sir.

Justin Long – Stephens

Hey. Good morning and congrats on a great quarter, guys.

Dale Davies

Thanks.

Justin Long – Stephens

To start off, obviously, the tank car market has been very strong, but one of the things we’ve heard more recently is that there is going to be a pickup in Bakken crude move to some of the East and West Coast refineries. Is this something that you’re seeing impact your business in terms of the increase you’re getting? And could you talk about the incremental demand opportunity that could come from some of these announcements?

Jim Cowan

Certainly, the Bakken is an area that – it’s continuing to accelerate. The Canadian oil sands as well, there is a lot of energy there. Justin, I wish I knew the number that we thought this was going to do for this whole industry. I don’t. I mean, there is a lot of analysis out there, but we clearly are seeing a fairly long level of interest in additional tank car opportunities.

Obviously, with us, the announcement of the ACF restarting the Milton operation, they can do about 250, 300 units per quarter and they’ll be starting up in a few months. So, its still – it’s got a long runway.

Justin Long – Stephens

Okay. Great. And maybe on that note, you talked a little bit about that new agreement with ACF, but how should we think about that impacting your P&L going forward this year and next year?

Jim Cowan

Well, this year, certainly in the first half, it won’t have any impact; second half, it will start to. I would say they will probably be at a fairly good run rate sometime in the third quarter impact.

Dale Davies

We’re going to get a piece of the profit on that, not the whole profit. So, it will be significant, but it won’t be really big.

Justin Long – Stephens

Right. And is it 30%, is that the number?

Jim Cowan

That is correct.

Justin Long – Stephens

Okay. Great. Maybe this is for, Dale, but looking at the revenue per unit on what was delivered in 4Q, it was down some from what we saw in the prior quarter. But it sounds like you had a pretty favorable mix, tank cars in 4Q, could you talk about what drove that decline? And given the implied revenue per unit in the backlog, it seems like that’s a number that should jump back up looking ahead, but could you provide some color on all that?

Dale Davies

Yeah. I think it probably will go back up a little bit in the next couple of quarters here, next several quarters. I think our production mix is going to be heavily tank cars for the first and the second quarter of this year. We had quite a few hoppers still in the fourth quarter than we were running. And so, the hopper is selling – are selling for quite a bit less than the tanks right now. So, I think you’ll see it go back up a little bit.

Justin Long – Stephens

Got you. That’s helpful. And I think my last question is a little bit higher level. But over the last few months, we’ve had a lot of announcements as it relates to incremental capacity from the railcar manufacturers that’s being added to this market, including what FreightCar was talking about with their new facility in Alabama yesterday. But what’s your overall take and comfort level with the amount of capacity that’s in this industry today and maybe on both, the tank side and for covered hoppers and other car types?

Jim Cowan

Well, overall, clearly, the industry has enough capacity without the Shoals, Alabama operation producing any cars. So, that’s probably interesting activity that FreightCar has taken on and I’ll let them explain why. But clearly, on the tank car side, there has been some changes by some of the competitors, so we understand that. We’ve, of course, from a staffing perspective and different equipment at our facility, we’ve continued to accelerate over the past 12 months. And then, of course, just adding in the ACF Milton operation, that will be a burst activity, it won’t be for 10 years. But clearly, it will be as this tank car market stays very high.

So, I think there is – probably on a tank car side, it’s probably in the low-20,000 range right now per year. What we have as an industry and, obviously, with the backlog that’s present in other inquiry activities, this – even at that level, this can go on for probably through 2015 even. So, pretty good level of activity.

Justin Long – Stephens

Okay. Great. That’s helpful. I appreciate the time, guys.

Dale Davies

Welcome.

Operator

Thank you. Our next question is from Eric Crawford from UBS. Your line is open.

Eric Crawford – UBS

Thanks. Good morning, guys.

Dale Davies

Good morning.

Eric Crawford – UBS

Sorry, if I missed it. But could you talk a bit about – a bit more about your plans for production this year? What percent of the backlog do you expect to deliver this year and what’s that cadence is going to look like?

Dale Davies

Well, we’re going to lever up that. A lot of the backlog this year, I don’t have the percent in front of me. I guess, we’d probably have that in our K that will be filed shortly, but I don’t have it in front of me. But we do have some tank cars orders to go into 2014 too. So, all the hoppers in the backlog will be built this year. The tanks run into the first, second quarters, maybe even third quarter, and some of the types of tanks in 2014.

Eric Crawford – UBS

Okay. And on those tank cars, is the cadence pretty even?

Jim Cowan

Yeah. I mean, our capability is around 5,000 units per year and it’s going to be pretty even and we’ll run it pretty hard at our Marmaduke facility, so yeah it would be even.

Eric Crawford – UBS

Okay. That’s helpful. And just bigger picture, your share of industry orders has declined each of the past couple of quarters, while overall industry orders have come in a bit. Could you discuss what you’re seeing in terms of competitive or end market dynamics? Is there a shift taking place, or would – is it – would you just chalk it up to lumpiness?

Jim Cowan

Well, I would certainly chalk it to lumpiness. I mean, there’s clearly some product lines that we either don’t participate in or have less interest in. And again, obviously, we’re looking for the higher mix, tank cars, it’s got it all over the place. So, we’re very content with where we’re at on the tank car side. In the hopper mix, as I said, we’re looking at a very robust pellet market coming up. You don’t want to book your facility with a lot of low-margin product, when there is some higher-margin activity that’s looking like it’s coming. So, we’re selective in what we try to do, particularly in terms of increasing the backlog. But we’re pretty excited, like I said, what’s happening right now.

Eric Crawford – UBS

Okay. That’s helpful. And just one more for me, I mean, you mentioned active inquiries for tank cars, I’m curious if that’s trending higher or lower than what you experienced in 2012. I guess, I’m curious also if you’re finding it harder to get customers to pull the trigger on incremental orders at this point, given how far lead times are out.

Jim Cowan

No, no.

Eric Crawford – UBS

Okay.

Jim Cowan

I mean, customers are – I mean, obviously, at the ACF facility, they’ll have a little availability in 2013. There’s high interest in that and then, of course, any that we have in – a little bit left in the first half of 2014, still there’s a high level of interest. So, now, we’re seeing a lot of a tank car activities still continue.

Eric Crawford – UBS

Okay. Great. Thanks, guys.

Dale Davies

You’re welcome.

Operator

And next question is from Matt Brooklier from Longbow Research. Your line is open.

Matt Brooklier – Longbow Research

Hey. Thanks. Good morning.

Dale Davies

Good morning.

Matt Brooklier – Longbow Research

Just a question on inquiries in the first quarter. I’m trying to get a sense for the composition or the types of equipment within new orders, if that’s changed at all versus the inquiry activity that you saw in 2012?

Jim Cowan

No, I wouldn’t say it’s changed. I mean, tanks are all over – it’s from pressure tanks to coiled and insulated tanks to sleek tanks. So, it’s still got all three types with the robust energy there. So, again, very excited there. Just the hopper market that’s picked up, so if you look at fourth quarter inquiries slower, not as much energy, but there is more currently in this quarter than the last two.

Matt Brooklier – Longbow Research

Okay. So, for the most part, there hasn’t been a big shift in terms of the different tank equipment types that you’re getting inquiries on. Wanted to circle back to the ACF contract and understand the – kind of the timing, that particular facility, 250 potential deliveries a quarter. Does that – is that currently active or are they in the process of ramping up that facility?

Jim Cowan

No, it’s the latter. They’re in the process of ramping up. They’ve got employees being hired and they’ll be testing equipment currently. But they’ll be starting up actually in the few weeks with real production.

Matt Brooklier – Longbow Research

Okay. So, we should expect some deliveries in first quarter, is that fair?

Jim Cowan

No, no, not – no, when I say a few weeks, if you startup at the end of March, 1 of April, those cars will be in second quarter.

Matt Brooklier – Longbow Research

Okay. And then the agreement itself, can you remind us how it works? We’re not going to see deliveries within your actual numbers, we’re just going to see the profit sharing within the income statement, is that correct?

Jim Cowan

That is correct.

Matt Brooklier – Longbow Research

Okay. And then the – is there a portion of the startup costs that you’re responsible for –

Jim Cowan

Yeah.

Matt Brooklier – Longbow Research

...into the contract?

Jim Cowan

Yeah. I mean the startup costs have to be covered before the profits paid out to both participants. That’s in the agreement.

Matt Brooklier – Longbow Research

Okay. So, would it be fair to say we’d potentially see some of those profits – actually, the startup costs being booked in the second half of this year?

Jim Cowan

Yeah. Like I said, the first half, this is a non-event for us. So, don’t put anything in there even, if you’re modeling this. But it’s clearly third and fourth quarter activity for this year.

Matt Brooklier – Longbow Research

Okay.

Dale Davies

I’d say a little in the third quarter and then more in the fourth quarter is where it will work for us.

Matt Brooklier – Longbow Research

Got you. Turning back to the lease business that’s been growing nicely for you, could you talk, from kind of a high-level perspective, in terms of where your lease rate duration is currently and what pricing looks like and what that was relative to third quarter?

Jim Cowan

Durations are pretty typical in the industry, kind of five to seven-year window for most. As I stated earlier, from a tank car lease rate perspective, it’s still a fairly strong market. And on the hopper, it does depend on the commodity and car type. Some are fairly strong, but others are just in the general area where they normally would be.

Matt Brooklier – Longbow Research

Okay. So, there hasn’t been a change to the length of the lease contract or a big change on the pricing side?

Jim Cowan

Correct.

Matt Brooklier – Longbow Research

Okay. All right. Thank you.

Operator

Thank you. Our next question is from Steve Barger from KeyBanc Capital. Your line is open.

Steve Barger – KeyBanc Capital

Hi. Good morning, guys.

Jim Cowan

Hey, Steve.

Dale Davies

Good morning.

Steve Barger – KeyBanc Capital

Jim, you had said that the industry right now is delivering in the low-20,000 range. Do you think it stays there, or where do you think the industry can go on a quarterly kind of run rate basis, since everybody ramps up whatever capacity they have?

Jim Cowan

Well, you’re talking tanks, of course.

Steve Barger – KeyBanc Capital

Yes, yes.

Jim Cowan

Yeah. So, as I was then, too. I mean, it’s – I think it’s going to get near 6,000, I don’t know if we’ll surpass that, but that’s going to be a number we’ll probably get close to as an industry.

Steve Barger – KeyBanc Capital

Okay. And you said, on an annual basis, 5,000 is a good way to think about tank capacity. So, that’s 1,250 per quarter, plus or minus. I know, that can swing around with mix. As you think about the 2,000 that you just delivered in 4Q, can you hit that again in 1Q, or do you run through the hoppers that you have in backlog before that and that we should think that delivers are down a bit sequentially?

Jim Cowan

We’ll get close to that number in this quarter. And I think we mentioned, it will be a softer second quarter for what we’re seeing. But, yeah, we’ll get close to the numbers we just saw in 4Q.

Steve Barger – KeyBanc Capital

Okay. Tank pricing in production right now, is it getting better in the first half of 2013, or the tank cars you’re currently producing kind of catching up to the market price?

Jim Cowan

Well, no, I mean, the tank’s pricing you’ll see through the year of 2013 will actually increase. I mean, that’s been – those orders were taken for the most part almost a year ago in the summer area, probably. And now, the pricing should still continue to accelerate.

Steve Barger – KeyBanc Capital

Okay. And for the inquiries that you’re seeing and whatever orders that may be out there on the tank side, is pricing staying rational in the industry as some of these other competitors are bringing on capacity, or are you seeing some softness in price?

Jim Cowan

No. I’m still seeing rationality and so the pricing is still fairly stable. We might have pushed the needle as far as we can here, but – as an industry. But it’s still very, very good.

Steve Barger – KeyBanc Capital

And given, obviously, there’s lower fewer non-tank orders in the market, is that getting a lot of competitive as people kind of scramble for orders?

Jim Cowan

Yes, certainly, again, that does depend on car type. There’s some that are fairly aggressive on the price. Like I said, on the hopper side, there’s a few that are fairly, I would say, on the low side and some, historically, in a good range. So...

Steve Barger – KeyBanc Capital

Right. And obviously, the news is out there that FreightCar is leasing part of Alabama. Does that change your thinking at all by your ability to be a very strong player in the pellet market?

Jim Cowan

No, not at all. I mean, I don’t – didn’t hear anything about covered hoppers in their announcement. And there is no way that they could get into pellet market out of the gate, very difficult car to build. The car owner, they’re very facticity, if you will, on what that car does, because obviously there is a very rich payload. But we know who the competition is and they make a good product. We think we make the best, but – in that area. But no, I don’t look for any FreightCar noise there.

Steve Barger – KeyBanc Capital

Okay. Great. And last quarter, did you guys comment on bookings so far in the quarter?

Jim Cowan

No. In 1Q?

Steve Barger – KeyBanc Capital

Yeah.

Jim Cowan

No, no, we have not.

Steve Barger – KeyBanc Capital

Okay. Thanks so much.

Jim Cowan

Thanks, Steve.

Operator

(Operator Instructions) Our next question is from Tyson Bauer from KC Capital. Your line is open.

Tyson Bauer – KC Capital

Great quarter, gentlemen.

Dale Davies

Thanks.

Jim Cowan

Thanks, Tyson.

Tyson Bauer – KC Capital

In about three to four hours, you’re going to have one heck of storm at your way, that’s over here.

Jim Cowan

Yeah, we’ve heard.

Tyson Bauer – KC Capital

A couple of quick questions. You mentioned about 6,000 per quarter delivery rate as an industry for the tank cars, is there enough activity, or is that you’re seeing that you can maintain in industry book-to-bill at one or above? Are we starting to see some more cautious ordering as we get out into 2015 and beyond also with the advent that we may start to see a little more pipeline activities coming on in 2015, 2016? Do we start to see that kind of stabilize or tail off?

Jim Cowan

Well, I don’t think it’s going to tail-off anytime early this year. That’s not what I would predict. But clearly, if you are looking at the 48,000 tank car backlog that gives you a couple solid years here, 2013, 2014, again, I still think it’s going to be a fairly high level of activity in 2015. After that, probably, it will get back to maybe more normal tank car market around 10,000.

Tyson Bauer – KC Capital

So, from a 20,000, 24,000 down to 10,000, at that point, okay. In the meantime, obviously, you’re growing the lease side. Hopefully, the international will pick up. Should we see greater losses from the JVs as you get closer to actual production in India?

Dale Davies

I’d say, there might be in the third and fourth quarter a little bit higher, but then it’s probably going to turn around, go the other direction once cars start shipping out of that plant. We’ve got a little staffing up to do to get further along in the ramp up. But it shouldn’t be that significant.

Tyson Bauer – KC Capital

Okay. You delivered just shy of 8,000 cars in 2012. Is that kind of the target mark that you’re hoping to reach in 2013? Are we, plus or minus, a certain level of cars here?

Dale Davies

Yeah. I think we’re going to do probably more tank cars in 2013 than we did in 2012 just because 2012 was the year of ramping up from lower production rates to a very high production rate for the last month of the year there. So, we’re going to see that high tank production rate all year.

I think the big question is how does the third and fourth quarters back up on hopper cars. And right now, we’ve got a visibility into the first and the second, at this point. And we’re expecting things to develop here for the third and fourth, but that has to be proven out.

Tyson Bauer – KC Capital

Okay. A lot of attention paid to oil and gas and plastic pellets, hopefully, will come to fruition as we get to the back half of the year. Any other segment that you’re seeing, such as fertilizers or others, that you’re seeing good activity that looks like a prolonged cycle for them also?

Jim Cowan

Yeah. I would say the potash, soda ash market, both are going to have a couple of years of build. That’s been heating up over the past 18 months really with different car types being experimented with. Iron ore still is going to have some strength. We’ve been participating in that market the last – early three years. And then, just back to the regular food sector, we’re getting a lot of interest in just the regular food group guys, so the sugar cars, flower cars, that sort of activity.

Tyson Bauer – KC Capital

And I’ve one last question from me, Dale, we have the accelerated depreciation extended for another year, which seems to be yearly extension going on. Does that help with order activity or your own leasing metric as we go through 2013?

Dale Davies

Well, it certainly helps us, because I mean we have profits in our manufacturing business, and having the benefit of accelerated depreciation and the bonus on top of that allows to shelter some of our income from manufacturing by the lease fleet. So, it reduces the taxes we have to pay. So, it’s a nice help, making the investment in these lease cars. So, for us, leasing is good. I think for the big lease customers that we have, it also helps them a bit, because it gives them some cash sooner rather than later on buying these cars.

Tyson Bauer – KC Capital

Does that create a pull forward for you as far as orders or that type of activity?

Dale Davies

No, it really doesn’t, because we’re supplying cars to our leasing customers as they need the cars. It does probably help a little bit with us being able to offer them at an attractive rate and still make some money on the deals. So, it facilitates us growing the fleet and serving our customer needs. But I don’t know that it’s a full forward, but it probably does factor into the pricing a little bit, because everybody is getting the same tax benefit.

Tyson Bauer – KC Capital

Any reason we haven’t seen any major orders from ARL? You’ve typically had some good solid steady orders from them in years past? Last couple of years we haven’t seen anything. Does that rekindle or regenerate some orders here?

Dale Davies

Well, we did – we did have some orders from them in 2012 and there is an affiliate that they have, it’s referred to as AEP, and AEP is buying cars. They did buy some in the second half of 2012 and they’re buying more in 2012. So, I think it’s not necessarily an absence of orders from ARL, it’s just being purchased under a different affiliate that they have there. So, we still have the same group buying the cars, they just are put in a different company.

Tyson Bauer – KC Capital

Kind of sounds like you’re putting the whole Greenbrier deal in your back mirror and you’re just going forward on your own and forgetting that?

Dale Davies

We sold our stocks that we had in Greenbrier.

Jim Cowan

I mean, I’d say assuming – clearly, we’re always interested in growing the company and looking for good opportunities and we obviously thought that was one. And we’ve done this dance a few times and we know Greenbrier fairly well, very much and this conversation I’m sure will continue months and years ahead, and who knows.

Tyson Bauer – KC Capital

Got it. Thanks a lot, gentlemen.

Operator

Thank you. I’d now like to turn the conference over to Jim Cowan, President and CEO, for closing remarks.

Jim Cowan

Thank you, Mercy, and we just want to thank, again, all of our customers, employees. We’re real proud of all the activities taken place here over 2012. We look forward to the next several years of pretty robust activity as well, and we’ll continue to look forward to any kind of dividend activity from our board of directors, hopefully, in the future. So, again, thank you for your interest and we’ll talk to you next quarter.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may now disconnect. Thank you.

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American Railcar Industries (ARII): Q4 EPS of $1.14 beats by $0.36. Revenue of $207.7M (+6% Y/Y) beats by $22M. (PR)