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Executives

James Unger - President and Chief Executive Officer

Jim Cowan - Chief Operating Officer

Dale Davies - Chief Financial Officer

Analysts

Alison Wolf - Longbow Research

Todd Madden - BB&T Capital Markets

Phyllis Kamera - Pax World Funds

Keith Hogan - Pioneer Investment

American Railcar Industries Inc. (ARII) Q4 2008 Earnings Call March 5, 2009 10:00 AM ET

Operator

Good morning ladies and gentlemen and welcome to the fourth quarter 2008 American Railcar Industries Earnings Conference Call. My name is Rita and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the call over to Mr. James Unger, President and CEO. Please proceed, sir.

James Unger

Good morning. I would like to welcome all of those on the call as well as our audio webcast listeners today. For all those who are interested, a replay of this broadcast will also be available on our website, www.americanrailcar.com shortly after this call ends. I’m Jim Unger, the Chief Executive Officer of American Railcar Industries and with me this morning are Jim Cowan, our Chief Operating Officer and Dale Davies, Chief Financial Officer.

We will open the call today with a brief statement related to the company’s 2008 fourth quarter and annual financial results. After that, we will make a few comments on the status of our operations and comment on market conditions. Following these remarks, we will open the conference to your questions. Dale, would you begin the conference with a review of the financial results for the fourth quarter of the year-end.

Dale Davies

Thank you, Jim. It is my pleasure to present our 2008 fourth quarter and annual financial results. Before we get started, let me remind everyone that today’s conference call contains forward-looking statements, including statements as to estimates, expectations, intentions and predictions of future financial performance.

Participants are directed to American Railcar Industries’ SEC filings and press releases for a description of certain business issues and risks, a change in any one of which 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.

Now for the financial report, during the fourth quarter of 2008 and throughout the year, the Railcar Industry faced many challenges, including weak demand, increased competition due to troubled credit marks, and a slowing economy. This is evident in the low levels of orders in 2008. In spite of these factors, ARI was able to deliver strong results.

Railcar shipments in 2008 reached the highest level in the company’s history. Revenues for the fourth quarter 2008 were $203 million, up 25% from the fourth quarter of 2007. The increase in the prior year was attributable to higher shipments due to capacity expansions at our tank railcar plant and higher selling prices, primarily due to higher steel and component costs that we were able to pass through to customers on most of our contracts.

Revenues for the railcar services segment were up 2% from the fourth quarter 2007, primarily due to a favorable mix of repair work. ARI delivered a total of 1,870 railcars in the fourth quarter of 2008 and 18% increase from the 1,590 railcars delivered in the fourth quarter 2007.

The capacity expansion at Marmaduke, Arkansas railcar manufacturing facility resulted in additional railcar shipments during the fourth quarter of 2008 compared to the same period 2007. Additionally, during the last four months of 2007, and for all of 2008, we shipped railcars produced under the railcar manufacturing agreement with ACF industries.

The ACF manufacturing agreement has been terminated and the final railcar under this agreement is expected to be manufactured and shipped this month. Gross profit increased in the fourth quarter by $2 million or 13%, when compared to fourth quarter of 2007. Manufacturing gross profit margin for the fourth quarter of 2008 was 10%, down from the 12% in the fourth quarter 2007.

Margin declined from the prior year reflects the impact of a weak railcar market, which has increased competition and has resulted in lower margins for some of our railcar shipments. Throughout 2008, the company has focused on maintaining operating efficiencies and cost containment at its facilities.

EBITDA for the quarter was $20 million, up 21% from the fourth quarter 2007. The increase from the fourth quarter of the prior year was primarily due to profit from increased railcar shipments, which I mentioned earlier. Net earnings attributable to common shareholders for the quarter were $8 million or $0.35 per diluted share, a decrease of 4% when compared to the fourth quarter 2007.

Earnings from operations were higher in the quarter than the same quarter in the prior year, but an increase in net interest expense more than offset this gain. Net interest expense increased as a result of lower interest income, which was driven by lower interest rates in 2008.

For the year, revenues were a record high $809 million, representing an increase of 16% from 2007. Railcar shipments for the year were also a record high at 7,965, and 910 higher than in 2007. Manufacturing segment revenues were up by 17% compared to 2007. And primarily due to increased railcar shipments and increased selling prices due to the higher raw material costs as previously discussed.

These increases were partially offset by lower selling prices on some railcars due to competitive market conditions. Revenues for the railcar services segment were up 3% over 2007, due to a favorable mix of work and expansion of our railcar repair facilities.

Net earnings attributable to common shareholders for 2008 were $31 million, or $1.47 per diluted share, a decrease of $6 million or $0.27 per diluted share compared to 2007. EBITDA in 2008 was $82 million versus $77 million for 2007. EBITDA increased due to gains from the sale and settlement of investments and lower stock-based compensation expense.

Net earnings were lower for the prior year due to higher net interest expense, which resulted from lower interest income. EBITDA is a non-GAAP financial measure that is reconciled to our net earnings in our press release, which was issued yesterday. The press release is available through the investor relations webpage on our website. Let me now ask Jim Cowan, our Chief Operating Officer, to review a few highlights for our plant operations.

Jim Cowan

Thank you, Dale. We are very pleased with the record revenues and record shipments that were achieved in 2008 in a spite of the strong competition in the railcar market. During 2008, we were able to deliver on initiatives, which contributed to manufacturing efficiencies and control of overhead spending.

These efforts include many lean manufacturing initiatives, our wheel and axle assembly operation, our tank head press, and our new flexible track at Marmaduke. As we look to 2009, we expect to maintain these efficiencies and continue to control overhead spending.

Our railcar backlog was $373 million as of December 31, 2008 and over 80% of this backlog is scheduled to be shipped in 2009. We have reduced production rates at our railcar manufacturing facilities and adjusted staffing as necessary for this lower level of demand. At this time, we believe our backlog and other project work will keep our plants operating through the year, but at lower rates than was experienced in 2008.

We continue to quote for additional work, but to add to the production schedules for these plants. We believe that we have a better cost position today than in prior years due to the investments made in the past two years to in-source several key components, which improves our ability to quote competitively.

Our previously announced growth projects in our railcar services group, which are expected to increase the capacity of our railcar repair network are on track. We expect to have all of these expansions in service by the end of the second quarter and expect these initiatives to drive higher revenues and additional profits.

Our new railcar development continues as we have recently completed and put in service with potential customers, railcar prototypes for a rapid discharge and rotary aluminum car, and intermodal cars. Our axle manufacturing joint venture is expected to begin production in the second quarter of 2009.

We expect initial volumes to be low due to the state of the railcar market, but we expect to see increasing demand in 2010 and 2011. We are excited about the long-term outlook and potential of this facility to enhance our competitive position and to potentially supply these products internationally.

During this period of lower production, we have focused our engineering team on international opportunities, including India and other potential markets. Our India joint venture company, of which we have a 50% ownership is progressing. This joint venture has been established to build a railcar manufacturing facility in India and to supply freight railcars and their components in India and to other companies to be named.

To support this international demand, we have had several of our U.S. employees working toward designing an efficient plant to produce railcars for the Indian market. At this time, let me turn the meeting back to Jim Unger, our CEO, to make a few comments on our results and other matters important to ARI.

James Unger

Thank you, Jim. 2008 was a remarkable year for ARI as Dale and Jim have mentioned. We achieved record revenues and record shipments for the year. We also completed several cost reduction capital projects, which we believe will improve our competitive position.

We expect the railcar marks to be very competitive for the next two years and anticipate we will be quoting aggressively for the orders that will be available during this time. Industry backlog was 31,921 railcars at December 31, 2008, which is the lowest industry backlog level since September 2003.

A weak economy and tight credit markets have resulted in fewer orders for new railcars. Current industry delivery estimates are low and are expected to be below 28,000 for 2009. We expect a rebound in railcar building to begin in 2010, and that a recovery or expansion in the railcar building would coincide with a recovery in the general economy.

When the market strengthens, our company should be in an excellent position to take orders for building a variety of railcar types, which includes coal cars, both aluminum and steel, intermodal cars and gondolas, we have expanded our product offerings for parts and components, which include new railcar axles through our access joint venture as well as railcar wheel [paramount] and components.

We expect to see significant international growth going forward. In addition to India, we are expanding our relationships in the Ukraine and Russia as well as Brazil. During my years in the industry, there have been several challenging down marks. I have an appreciation for the challenges and opportunities that these markets present.

The company currently has a strong liquidity position and we believe that our recent investments in component manufacturing facilities have improved our competitive cost position. We are poised to take advantage of market opportunities for investment and growth while reducing overhead, strengthening our balance sheet, maintaining liquidity and preserving cash, which may involve revisiting our dividend strategy. We expect to continue expansion in the international marks and look forward to this challenging year.

Our board met yesterday and for those who have not our 8-K filing, I am pleased to announce, Jim Cowan has been appointed President and CEO, effective April 1, 2009. Jim was hired over three years ago, and has worked with me to build this company to what it is today, and I fully support him in his new position. I will become Vice Chairman of the Board effective April 1, 2009, and will be working closely with management and the board towards a smooth transition, and will continue my relationship with the company to take advantage of strategic opportunities going forward.

We will now take a few of your questions. Operator, would you please explain to our guests how they can register their questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Alison Wolf - Longbow Research.

Alison Wolf - Longbow Research

I have some questions about the industry; it continues to be tepid in terms of order activity. What is the overall weakness, what is your strategy in terms of going forward to try and improve orders?

James Unger

Well, the marketplace is going to be what it is. Improving orders, we can’t improve the marketplace. I think you are going to see improvement in the marketplace with the general economy improving. What we will do strategy wise, is we will quote aggressively to make sure our production lines are balanced.

Fortunately, we have several large contracts with key customers that we have negotiated production rates that allow us to maintain stability in our production lines. Another advantage we have over competition, our two major plants are only 15 miles apart, they are non-union. We can easily shift workers between plants and between product types. So our strategy going forward is to make sure our production lines are balanced and our workforce is balanced and we conserve our cash and continue to control our costs.

Alison Wolf - Longbow Research

So it sounds like when you say quote aggressively, basically pricing is a main part of that tool?

James Unger

Yes, we’ll quote to where we’ll get our share of the orders what we need, what we perceive is out there, what we’ll need to balance our production lines. But we’re not going to take the losses just to keep people working. We’ll do what’s necessary to preserve our cash and liquidity and cut losses.

Alison Wolf - Longbow Research

And then in terms of cash is king, and you mentioned that cash and cash conservation is part of your strategy, is that going to continue or has anything changed along there?

James Unger

No, we’ll continue to preserve our cash, and we will take advantage of opportunities in the marketplace, but we will make sure we have plenty of liquidity to carry us through this down market.

Alison Wolf - Longbow Research

And just two quick last questions. In terms of your margin expectations through 2009, would you care to disclose that?

James Unger

Not really. We don’t comment on margins.

Alison Wolf - Longbow Research

What about your expectations for deliveries through 2009? Front, back-end loaded?

James Unger

Fairly even for the year.

Operator

And your next question comes from Todd Madden - BB&T Capital Markets.

Todd Madden - BB&T Capital Markets

I wanted to pick up on the bid environment a little bit. Has the quote activity picked up compared to December-January? Have you seen any pickup in February and March as we’re kind of getting further removed from a period of elevated steel prices or are we still kind of similar to what we were a couple months ago?

James Unger

I would say it’s picked up a bit, particularly for us where we now have aluminum coal cars in our product bag, and we have quoted aggressively on some of those coal car orders. So for us, we are quoting other car types. We see some specialty car types out there. Markets are still there for them, and that’s kind of our specialty, is the niche markets. Small quantities of very specialized cars that are difficult to build.

Todd Maiden – BB&T Capital Markets

Okay and then you mentioned pricing aggressively and then you talked a little bit about some of your, I guess being more price advantages to your final customer, I guess from a cost perspective and you are in the past. Can you kind of quantify I guess in a percentage of total final pricing that you would be able to go out and quote like what you picked out through sourcing and some of the other initiatives over the last couple quarters. I mean is there maybe not an exact percentage, but a feel of what you have been able to pick up there and how much better your final price could be without materially effecting your gross margins in the business.

James Unger

I really don’t want to comment on that, because we are in a very competitive market now and I don’t like to disclose margins or talk about pricing.

Todd Maiden – BB&T Capital Markets

So 80% of the backlog could be delivered in ‘09, you said that’s fairly equal rated throughout all four quarters.

James Unger

Yes.

Operator

Your next question comes from Phyllis Kamera - Pax World Funds

Phyllis Kamera - Pax World Funds

I had a question about the ACF contract that you had last year and I guess one you’re expecting it sounded like to ship one more tank or one more car out of that shipment. How many in total did you ship through 2008?

James Unger

Through 2008, Dale do you have that number?

Dale Davies

Total contract was 1,388 cars. So, it’s about 1,000 in 2008.

Phyllis Kamera - Pax World Funds

Were the margins better or worse than your overall margins generally for that contract?

Dale Davies

We shared the margins, they were similar.

Phyllis Kamera - Pax World Funds

Could you talk about and I apologize, if you mentioned this previously. I got on late. Was there a reason that this contract ended, was it just basically a pricing issue or was it just they only needed so many cars till the contract was over?

James Unger

It was a market issue, as far as market demand at the time we entered into the contract there was a strong demand for specialty type tank cars. We didn’t have the capacity, so we took the order and produced it at an affiliate company and shared profits. As the market contracted, we elected not to renew this contract.

Phyllis Kamera - Pax World Funds

Can you also talk about the India piece of your business and you mentioned some international business coming on. How is the India market, I think you’re going to be working through most of this year, I think to get the facility up and running there and then may be start shipping in 2010, is that what I remember.

James Unger

That is correct, yes.

Phyllis Kamera - Pax World Funds

How much are you going to spend on that contract for India?

James Unger

The entire project is in the $50 million to $60 million range, which we have a 50% partner in India.

Phyllis Kamera - Pax World Funds

Is there anybody else in India right now who is manufacturing railcars?

James Unger

Well certainly, there is a good half dozen companies in India that manufacture cars. Some stronger than others and we think with our combination with a local company Amtech that we’re going to be a pretty strong competitor going forward for many years.

Operator

(Operator Instructions) And your next question comes from Keith Hogan - Pioneer Investment.

Keith Hogan - Pioneer Investment

I really just one or two quick questions. I don’t know if I missed earlier any comments on CapEx for this year and next.

James Unger

We will be conserving cash, it will be substantially down. We completed all our major projects as Jim had mentioned by second quarter, our repair projects will have been completed. So, CapEx will definitely drop-off, we will positive cash flow for year-end, we anticipate positive net income.

Keith Hogan - Pioneer Investment

Okay let me ask this a slightly different way. Last year depreciation was running around $20 million, since your projects are done, any reason to spend about depreciation in this weak market?

James Unger

We got some carry over projects from last year, some of our repair plant growth projects will contribute to a little more spending than what depreciation is.

Jim Cowan

Just on the carry over, but necessary projects are less than $20 million.

Keith Hogan - Pioneer Investment

And at this point you are still sitting with a whole ton of cash on your balance sheet. Any thoughts on strategically what you want to do with that?

James Unger

Yes, Keith very exiting.

Operator

With no further questions in the queue, I would like to turn the call back over to Mr. James Unger. Please proceed sir.

James Unger

I would like to close by thanking all of the ARI employees for the contributions that they made during 2008, which resulted in another recorded year for the company. We expect a very difficult market for 2009 and part of 2010 and I ask for the patience of both employees and investors, as we manage through this period. We expect to tighten our belt where we need to and will manage to conserve cash during this time. Thank you for your attention and questions. This concludes our conference call.

Operator

Thank you for your participation in today’s conference. This now concludes the presentation. You may now disconnect and have a great day.

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