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American Railcar Industries, Inc. (NASDAQ:ARII)

Q2 2013 Earnings Conference Call

July 25, 2013 10:00 a.m. ET

Executives

James Cowan – President & CEO

Dale C. Davies – SVP, CFO& Treasurer

Analysts

Justin Long – Stephens, Inc.

Art Hatfield – Raymond James

Tyson Bauer – KC Capital

Kristine Kubacki – Avondale Partners

Operator

Good day, ladies and gentlemen, and welcome to the American Railcar Industries Incorporated Q2 2013 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 follow at that time. (Operator Instructions) As a reminder, today’s conference call is being recorded.

I would now like to introduce your host for today’s conference, Mr. Dale Davies, Chief Financial Officer. Mr. Davies, please begin.

Dale C. Davies

Thank you and good morning. I’m Dale Davies, Chief Financial Officer for ARI, and I would like to 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. 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 a 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.

James Cowan

Thank you, Dale, and good morning. Demand for certain railcar types in North America remained strong. The industry reported approximately 13,000 railcars were delivered and approximately 15,000 railcars were ordered during the second quarter of 2013, producing a book-to-bill ratio of 1.2. Industry backlog was approximately 73,700 railcars at June 30, 2013, which is the highest since 2007. The global inside industry forecast for North America expects new railcar deliveries to be approximately 50,400 in 2013 with tank railcars representing approximately half of all deliveries.

Demand in North America for tank railcars still remain strong even with the large number of tank railcars ordered in the first quarter of this year. The industry reported that approximately 6,900 tank railcars were delivered and the same amount were ordered during the second quarter of 2013. Industry backlog for tank railcars was approximately 61,400 at the end of June, and approximately 83% of the total industry backlog. Hopper railcar orders for the industry this quarter were at the highest level since the third quarter of 2011. Approximately 91% of the total industry backlog is for tank and covered hopper railcars.

As of June 30, we had 6,940 railcars in our backlog. including 2,620 railcars to be manufactured for firm lease orders. We continue to see healthy inquiry activity on tank railcars, including railcar types used outside of the crude market. Inquiry activity for covered hopper railcars is beginning to strengthen for plastic pellet, food grade, sand and powder ash railcar types.

Consistent with industry expectations, we anticipate the plastic pellet demand to strengthen late this year for delivery from 2014 to 2016 and tank railcar demand to remain healthy through 2015. We are extremely pleased with ARI -- that ARI produced another strong quarter, which included record operating margins for the second quarter of 2013, driven primarily by the strength of the tank railcar market and increased lease fleet revenues and earnings.

We continue to benefit from a favorable product mix of higher tank railcar shipments, which were partially offset by lower shipments of hopper railcars. Demand for our railcar services has remained strong. In addition, our hopper railcar manufacturing facility is performing certain repair projects in order to better utilize the capabilities of this facility.

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

Dale C. Davies

Thanks, Jim. Second quarter consolidated revenues were at $159 million, versus $154 million for the same period of 2012, up 3% primarily on higher revenues for leasing and railcar services. Manufacturing revenues decreased to $132 million in the second quarter of 2013, compared to $135 million in the same period of 2012, primarily on lower direct sale railcar shipments, which were driven by lower shipments of covered hopper railcars. The decrease in covered hopper railcar shipments was primarily offset by an increase in tank railcar shipments.

During the second quarter of 2013 we shipped a total of 1,310 railcars, including 380 built for our lease fleet, compared to 2,200 for the same period of 2012, which included 910 railcars built for our lease fleet. Revenues for manufacturing railcars for our lease fleet are not recognized in consolidated revenues as a railcar sale, but are recognized as monthly lease revenues over the term of the lease.

Leasing revenues increased to $8 million in the second quarter of 2013 compared to $3 million for the same period of 2012. This increase was primarily due to the growth of our lease fleet, which increased from 1,870 cars at June 30, 2012 to 3,500 railcars at June 30, 2013.

Railcar service revenues increased to $20 million in the second quarter 2013, up from the $17 million in the same period of 2012 due primarily to certain repair projects being performed at our hopper railcar manufacturing facility.

Our manufacturing segment revenues, including an estimate of revenues for railcars built for our lease fleet, were $177 million for the second quarter of 2013, compared to $219 million for the same period of 2012. The primary reason for the decrease in revenues from the second quarter of 2012 was lower total shipments of covered hopper railcars as discussed above. The decrease in shipments of covered hopper railcars was primarily offset by an increase in tank railcar shipments.

Revenues for railcars built for our lease fleet are shown at an estimated fair market value as if they have been sold to a third party, and were $45 million for the second quarter of 2013 compared to $85 million for the same period of 2012. These inter-segment revenues for railcars transferred to our lease fleet are eliminated in consolidation.

Consolidated earnings from operations for the second quarter of 2013 were $40 million, compared to $26 million for the same period of 2012. Our operating margins were a record 25% for the second quarter of 2013, compared to 17% for the same period in 2012. The increase in earnings from operations was primarily driven by a strong tank railcar demand for our manufacturing segment, an increase in lease earnings, and lower selling, general, and administrative expenses.

Earnings from operations for our manufacturing segment were $43 million, and 24% of the segment’s sales for the second quarter of 2013 compared to $41 million and 19% of the segment’s sales for the same period of 2012. The increase from the prior year was primarily driven by higher mix of tank railcars with favorable pricing, as well as operating leverage as a result of strong production volumes for tank railcars, all of which were partially offset by softer hopper railcar shipments.

Segment earnings from operations included $10 million in estimated profits on railcars built for our lease fleet for the second quarter of 2013 and $14 million for the same period of 2012. The estimated profits on railcars built for our lease fleet are eliminated in consolidation.

Earnings from operations for the leasing segment were $4 million for the second quarter of 2013 compared to $1 million in the same period of 2012. This increase was the result of our progress in expanding our lease fleet. Operating margins for the leasing segment were 49% in the second quarter of 2013, compared to 39% in the same period of 2012, which were driven primarily by higher expenses during 2012.

Selling, general, and administrative expenses decreased to $4 million in the second quarter of 2013 compared to $8 million in the same period of 2012, driven by a decrease in our share-based compensation expense. Our share-based compensation resulted in income of $3 million in the second quarter of 2013, compared to an expense of $6 million in the first quarter of 2013, and for the second quarter of 2012 we booked expenses of $2 million related to our share-based compensation. This fluctuation in share-based compensation was driven by a significant decrease in our stock price of $13 per share during the second quarter of 2013, following the $15 per share increase during the first quarter of 2013. During the comparable second quarter of 2012 our stock price increased $4 per share.

Adjusted EBITDA, which excludes share-based compensation and other income related to our short-term investments, was $43 million for the second quarter of 2013. This was 26% higher than the $34 million in the second quarter of 2012. Interest expense was $1 million for the second quarter of 2013, compared to $5 million for the same period of 2012. The decrease was the result of savings realized on our lower interest rate secured as part of the lease fleet financing and a lower average debt balance as we retired the remainder of our 7.5% unsecured senior notes earlier this year.

Net earnings for the second quarter of 2013 were $24 million or $1.11 per share, compared to $13 million or $0.63 per share for the same period of 2012. Share-based compensation resulted in income of $0.08 per share in the second quarter of ’13, versus an expense of $0.17 per share in the first quarter of ’13, and for the second quarter of ’12 share-based compensation expense was $0.06 per share. The remainder of the net earnings improvement can be attributed to our strong manufacturing performance and the continued growth of our lease fleet as discussed previously.

Year-to-date total consolidated revenues for the first half of 2013 were $355 million, 6% higher than the $336 million in the same period of 2012 due primarily to increases in our manufacturing revenues and our lease fleet revenues. Manufacturing revenues increased as a result of a higher mix of direct sale railcars and strong tank railcar demand. We shipped 3,210 railcars, including 910 railcars to our leasing customers during the first six months of 2013, compared to 4,410 railcars, which included 1,380 railcars to our leasing customers for the same period in 2012.

Adjusted EBITDA was $86 million for the first half of 2013 compared to $65 million for the same period in 2012. Net earnings for the first six months of 2013 were $42 million, or $1.95 per share, compared to $25 million or $1.19 per share for the same period in 2012. The increase in 2013 was driven by improved earnings from operations and interest expense savings of $6 million, partially offset by higher losses faced by our joint ventures.

Our share-based compensation was flat on a year-over-year basis. Our strong earnings have contributed to cash flow from operations of $55 million for the first half of 2013. Other significant cash activity thus far in 2013 included the investment of $81 million for the growth of our lease fleet, the redemption of the remaining $175 million of our senior unsecured notes, and net proceeds of $99 million received from our lease fleet financing.

As of June 30, 2013 we had a cash balance of $94 million. On July 22, our board of directors declared a cash dividend of $0.25 per share of common stock of ARI to shareholders of record as of September 20, 2013 that will be paid on September 27, 2013.

At this time I would like to turn it back to Jim for a few comments about our joint ventures and our international activities.

James Cowan

Thanks, Dale. Results for our Ohio Castings and Axis joint ventures softened versus the prior year as demand for castings and axles produced by these joint ventures was lower. We expect results for these joint ventures will continue to be driven by industry demand for all railcar types.

On the international front, our India joint venture, Amtek Railcar, continues to show good progress. Amtek began limited production during the second quarter and is actively quoting orders. In the second quarter of 2013, our repair business broke ground on a facility in Brookhaven, Mississippi. We expect the facility to be operational early in 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 increasing our railcar lease fleet.

Now, I’ll turn it back to our operator. Janine, would you please tell how our participants can register their questions?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question is from Justin Long of Stephens. Please go ahead.

Justin Long – Stephens, Inc.

Thanks and good morning.

James Cowan

Good morning.

Justin Long – Stephens, Inc.

Just on the overall demand environment, I’m curious to get your thoughts on how you think things play out from here, if you look at industry order data it would suggest maybe we are seeing a slowdown in tank orders after what was a very strong first-quarter, but also a pickup in hoppers, is that what you are experiencing as well, and what is your best guess on how things kind of play out here in the second half?

James Cowan

Yes, that is what our experience is as well. Yes, I don’t know that I can give you a guess. Clearly, you know, you have had -- 26,000 tanks have been ordered so far this year, and about 6000 hoppers. I know the hopper market, as we mentioned, has several pockets. I would certainly expect us to have a stronger second half on orders. I don’t know that we can ever touch the 26,000 tanks, but there is still good interest in various crude opportunities, still some there, and the rest of the regular tank car business. So it is still a pretty good level on the tank car side.

Justin Long – Stephens, Inc.

Okay, and last quarter you highlighted a strategy of remaining price disciplined on the tank car side and that was the reason why your market share was maybe a little bit lower

than the norm, curious what you saw in terms of the competitive environment in the second quarter, you know, has industry orders slowed down a little bit in tank, would you say that prices were pretty competitive or are they just kind of holding firm on the new tank side?

James Cowan

No, the prices for tanks are still at very, very high levels. So I think our strategy has been okay, clearly we have some availability that is in early 2015 that is still very, very good for the marketplace. So we are feeling pretty comfortable where we’re at right now.

Justin Long – Stephens, Inc.

Great, and on the lease trade side, any major changes there just given we have seen spreads in there a little bit and maybe if you could comment on both the tank and the tank car side?

James Cowan

Well, the crude lease rates have come down some. They were at pretty high levels earlier in the year, but they are still very, very strong, very attractive. Any tank car lease rate is still a very attractive return. The covered hopper lease rates are, I would say, back in the more normal zone that we’re kind of used to. So, it is good.

Justin Long – Stephens, Inc.

Got you, and Dale maybe a couple of quick ones for you, if you don’t mind, the revenue per car load was -- per car was up pretty substantially. In the quarter it looks like it was around 140,000 per unit. Was this just the heavier mix of specialty tank cars and going forward is it fair to say that we see some moderation there? If I look at the manufacturing backlog it is closer to that $120,000 level, which would be a little bit closer to what we saw in the first quarter, I guess?

Dale C. Davies

Yes, you know, the second quarter had a pretty high mix of tank cars that -- which -- and also those tank cars that were produced in the second quarter were some of the more expensive tank cars, the bigger ones and the more complex ones. So it just kind of turned out that that was a quarter with some fairly high-priced tank cars being sold. I think going forward you will see maybe, you know, more of a mix of tank cars, but you are also going to see some hopper cars blend in little heavier into that mix of shipments. And so the hopper cars will be carrying prices lower than that the tank cars had.

Justin Long – Stephens, Inc.

That makes sense, and last one on the orders in the second quarter could you break out how many of those were received from AEP, and also of the current backlog as of the end of the second quarter how much is dedicated to AEP as well?

Dale C. Davies

Well, we did get some orders from AEP, but I don’t know that it was a major part of what we got. I think, you know, a lot of our orders in the second quarter were to leasing customers. So…

Justin Long – Stephens, Inc.

Okay, thanks. I appreciate the time today guys.

Dale C. Davies

Yes.

Operator

The next question is from Art Hatfield of Raymond James. Please go ahead.

Art Hatfield – Raymond James

Yes, good morning Jim and Dale.

James Cowan

Good morning.

Art Hatfield – Raymond James

Dale, hey, can I start with you real quick, I apologize, but I was not writing fast enough, but can you go over real quick the equity compensation impact from Q1 to Q2 that you saw?

Dale C. Davies

Okay. I will do it in EPS. In Q1, we had cost of about $0.17 per share, driven primarily by the run-up in price. We had a $15 price increase, and in the second quarter we actually had income of about, I think it was $0.08 per share as a result of the price coming back down $0.13. Now those two numbers -- the cost impact of $0.17 has some vesting expense in there, which doesn’t come back when the stock price goes down. So that is the reason for the difference in the magnitude of those numbers.

Art Hatfield – Raymond James

Got it. Okay, that is very helpful.

Dale C. Davies

Yes, let me give you another piece of information just to show you guys it can be calibrated on a going forward basis. You are probably going to see an ongoing roughly $300,000 a quarter of vesting expense, and then for every dollar in stock price change they will move up or down expense by about $200,000. That will help you calibrate for periods going forward.

Art Hatfield – Raymond James

Okay, and then on the -- I don’t know if you mentioned kind of what your expectations are for production over the next couple of quarters, but within your backlog it looks like on the dollar amount about 40% is committed to leasing companies, is there a way we could think about how that may flow, you know, when those eliminations will hit the income statement, over the next few quarters?

Dale C. Davies

Yes that is pretty hard to pin down without giving a whole lot of detail, which we really won’t do. But I guess I would tell you a couple of things, one is in the third and the fourth quarter you are going to see the hopper sales increase a bit over what you have seen for the second quarter, probably more consistent with maybe the first quarter level of hopper shipments. Tank cars are going to remain at a level very close to where we were at in the second quarter.

So, I mean, as you think about your models and going forward your revenue should be up just a bit because of the additional hopper shipments. The margin as a percentage might come down a little bit because of a higher mix of hoppers in there. And the hoppers won’t carry as high a large a percent as the tanks did. Margin dollars will be higher because of more shipments, but I think that is the way to think about it. As far as the elimination piece for the leasing business, it is just kind of we have got lease cars mixed in with our sale cars, and I’m not sure I have got a good way of telling you how that is.

Art Hatfield – Raymond James

I know. I know it is kind of difficult because that can swing your reported EPS quite dramatically as…

Dale C. Davies

Yes.

Art Hatfield – Raymond James

So, just trying to get a feel for how we should flow that and at least it comes somewhat close to what will happen. I understand that you may not have a good idea or may not…

Dale C. Davies

But, I think, maybe just to kind of look at the backlog, I think we have told you the percentage of cars in our backlog are close to 40% in terms of our sales. So as you think about shipments of those cars, you know, maybe just as a rule of thumb 40% will be eliminated. Then obviously we won’t be exactly that every quarter.

Art Hatfield – Raymond James

No, that is very helpful. And then, I guess, I was going to ask about the gross profit margins in manufacturing, but you kind of alluded to that that we should think about that as coming down a little bit because of the mix change, but ultimately the dollars of gross profits should continue to grow.

Dale C. Davies

Yes that is right.

Art Hatfield – Raymond James

Fair enough, and just to make sure so I understand when you are saying about deliveries, are you -- you are not intimating that deliveries will get back up to Q1 level in Q3, are you?

Dale C. Davies

I think you are close, yes.

Art Hatfield – Raymond James

That is fair enough. Kind of the way you said it, it sounded like that that would be the case.

Dale C. Davies

Yes.

Art Hatfield – Raymond James

That is all I got for now. Thanks for your time.

James Cowan

Yes.

Operator

The next question is from Tyson Bauer of KC Capital. Please go ahead.

Tyson Bauer – KC Capital

Good morning gentlemen and great quarter.

James Cowan

Thank you.

Tyson Bauer – KC Capital

A couple of questions, obviously Q2 was a soft quarter for the hopper production, and we should see that ramp back up as you discussed. Can you give any kind of more data in regards to daily production rates, where you were in the quarter and how that has progressed as we get to the current date, and what you expect for the rest of the year?

Dale C. Davies

I can’t quote any numbers, but I would say on tanks we run about as hard as we can run in the second quarter, and we will continue to do that in the third and fourth quarter. On hoppers, we were at quite a low production level in the second quarter, but we’re bringing that back up some. So, you know, I think what you are going to see in the third and fourth quarter is hopper production probably closer to the first quarter levels on average.

Tyson Bauer – KC Capital

Okay, and it sounds like if I’m reading this correctly, because you had additional capacity at your hopper plant you utilized that to do some repair and services activities, does that imply then we will see kind of a shifting back to manufacturing revenues, and a little bit away from the servicing side?

James Cowan

No, we can still do both. So that will continue probably for the rest of this year. With our hopper business we think will be picking up next year, than we will find the point to pull that out. But right now we can still do both.

Tyson Bauer – KC Capital

And you have discussed in previous calls that you would expect a large increase in plastic pellet orders to start meeting those expectations of greater deliveries in ’14 through ’16, we are halfway through ’13, should we begin or expect to see a loss (ph), and that is going to increase in plastic pellet orders and bid activity as we go through the remainder of this year?

James Cowan

Yes, certainly we will, and that is really what is taking place right now at the inquiry desk. So that is keeping us a little busy there. So it is good news.

Tyson Bauer – KC Capital

So by the next call we should have some material evidence, or make it apparent as some of your competitors have kind of pushed this further back, you have been a little more aggressive in your timeline, does it become apparent that your timeline is correct at least for yourselves for the next half?

James Cowan

We think so Tyson, but you know, you still got to get the customer to the finished line. But no, there is a lot of inquiry out there and it is a competitive market. So everybody is slugging for it, but we will do our best.

Tyson Bauer – KC Capital

Then last question, you mentioned a more broad recovery from the industries you serve, outside of just crude that has been the main driver, a competitor mentioned that also earlier this month, is that more kind of your normal order flow, whether it is flour, sugar, powder ash, some of the ones that you have mentioned in the past, are we seeing the breadth of the market be a little healthier for you and give you a little more stability as we go forward as opposed to just crude only?

James Cowan

Yes, yes, I mean, clearly two years ago frac sand was all over the industry, and crude was just starting. You know, frac sand disappeared, now it has come back. There are certainly some orders that took place in the second quarter. But we have seen good strength in the commodities that you mentioned, we mentioned earlier. Obviously we talked plastic pellets because it has got several key announcements that other resin producers have made. But we are seeing good inquiry activity on a handful of different commodities. So it is a good feeling.

Tyson Bauer – KC Capital

Very well, and we will expect a healthy second half.

James Cowan

Okay, thanks.

Operator

The next question is from (inaudible). Please go ahead.

Unidentified Analyst

Yes, this is (inaudible). On your lease rates, what is the average lease rate of term right now, versus say a year ago, and then the lease rate about how much is it up versus a year ago?

James Cowan

Well, the term hasn’t changed to answer your question from a year ago. We normally are in the 5-year to 7-year window. That is kind of where we stay. Lease rates, I would say are about the same except for crude. Crude was at very high levels. It has dropped off somewhat, but not a lot.

Unidentified Analyst

Okay, next question. You paid off your 7.5% debt, and as your earnings are doing a lot better right now, is there any chance you may have a cash raise some time this year with debt or equity?

Dale C. Davies

Well, we are building a lot of railcars for our own lease fleet, and so that is pretty significant investment. We talked about how much we had invested so far this year and you can see from our backlog we still got a lot of cars to build for our own lease fleet. So, we will be raising some additional cash, and the way we do that is by doing a financing directly on those assets. That is what we did in December 2012, and with the -- we had three different draws on that financing, and we raised $200 million, and that money is financing the railcars that are on lease.

We have got several railcars that we have already built, and we are going to build some more this year, and we anticipate we will do the same thing to finance those railcars, the same as we did the first group back in December of ’12.

Unidentified Analyst

Okay, and the last question, Monday, your stock dropped a couple of points, two points recently this year, and I kind of think it might be because -- it is humorous comments that maybe because of the action up in Canada to get rid of all old cars, which I guess half the standing (ph) ones are retrofit, if you did have to retrofit old cars how would that affect you?

Dale C. Davies

Well, in terms of what we own in our lease fleet it wouldn’t affect us because we don’t own any. In terms of our repair business it could be a very, very busy time in the repair area if that actually took place. We don’t anticipate that, but the retrofit would be several thousand dollars per tank car. Some would probably get scrapped out. So that could continue the strength in the demand for tanks that is currently there. So we think it could be a positive effect.

Unidentified Analyst

Okay, then well thank you very much. You have done a good job.

James Cowan

Okay, thank you.

Operator

The next question is from Kristine Kubacki of Avondale Partners. Please go ahead.

Kristine Kubacki - Avondale Partners

Good morning.

James Cowan

Good morning.

Kristine Kubacki - Avondale Partners

Most of my questions have been answered, but I just kind of want -- you ran through it pretty quick Jim on the JV line, I was just wondering given the puts and takes, you talked about a little increasing production there, but then looking at India, is there any way that that would be -- that line could be breakeven by year-end?

James Cowan

No, I don’t expect that, part of the reason because we do have the India start-up hitting full stride right now. We have kind of said that several quarters in the past that India the ramp up would begin, it has, we have orders. We’re building those, so that is going to -- they’re not big orders and big quantity. So that learning curve is in front of us. And on the other two JVs, you know, as the industry kind of looks at about a 50,000 car a year, and I think next year probably should be north of that. So I think we will see some pickup next year in terms of our castings JV, and our axle joint venture, but not to get breakeven by the end of the year.

Kristine Kubacki - Avondale Partners

Okay, that is helpful. And then, just a little bit of a theoretical exercise, just kind of, you know, we are one third of the way through the quarter right now, I guess, you talked about inquiries being pretty solid, I guess, based on your inquiry level and kind of what orders you have booked to date in the quarter, do you have a feeling for kind of where orders for maybe given in a industry like where we see things kind of steady out here from kind of 2Q levels, or would you expect it to -- I realize it is choppy quarter-to-quarter on what gets booked, but what is your general feeling on how we close out the year in terms of order levels here?

James Cowan

That is a great question. I don’t know that I could help you there. So, I mean 37,000 orders in the first half, will that be double, I doubt it. But, you know, again it is still a pretty good, like you said, a level of inquiry activity for us, but Kristine, I don’t know that I could give you any guess, sorry.

Kristine Kubacki - Avondale Partners

Okay. That is fair. Thank you very much. I appreciate the time.

Operator

The next question is from Art Hatfield of Raymond James. Please go ahead.

Art Hatfield – Raymond James

Thanks again. Hey Jim, what right now or what could be over the next 12 to 18 months kind of your max capacity that you could build, total number of railcars at?

James Cowan

Well, our max capacity is between 10,000 and 11,000. You know that is about half tanks, half hoppers, and it depends on the hopper type.

Art Hatfield – Raymond James

Right.

James Cowan

So if it is a simpler mix we can get to 11, a more complicated mix, around 10. So -- but that is on a -- that is -- when I say that that is a full run rate for a 12-month period.

Art Hatfield – Raymond James

Sure, now I understood. I’m just kind of trying to think about longer term with as I think about your opportunities for growth both in your lease and third-party sales, and getting to that do you kind of have a max level of what you want your backlog or production to be to be dedicated to your lease fleet, or is that just -- it just depends on what kind of deals are out in the market place?

James Cowan

Well, you know, it varies by quarter based on what is out there. But I think our strategy has sort of been to look at about 25% of what we could do going to our lease fleet, you know and I think our backlog reflects a little higher percent than that right now. It is about 40%, but it also kind of depends on what the lease market is versus the sale market, you know, about 25% has sort of been what we have stated in the past as sort of being our target and we would like to kind of continue to do that every quarter, or you know, not maybe every quarter, but on a…

Art Hatfield – Raymond James

Over the long run, right, understood. Okay, perfect, perfect. Thanks again for your time.

James Cowan

Thank you.

Operator

Ladies and gentlemen, at this time we will end the call. Thank you for your participation in today’s program, and this concludes the presentation. You may all disconnect and everyone have a good day. Thank you.

James Cowan

Thank you.

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