American Railcar Industries' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.31.13 | About: American Railcar (ARII)

American Railcar Industries, Inc. (NASDAQ:ARII)

Q3 2013 Earnings Call

October 31, 2013 10:00 AM ET

Executives

Dale Davies – SVP, CFO and Treasurer

Jeff Hollister – President and Interim CEO

Analysts

Matt Brooklier – Longbow Research

Art Hatfield – Raymond James

Tyson Bauer – KC Capital

Justin Long – Stephens

Kristine Kubacki – Avondale Partners

Operator

Good day ladies and gentleman and welcome to the American Railcar Industries Incorporated Quarter Three, 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, this conference call is being recorded

I would now like to introduce your host for today’s conference, CFO Dale Davies. Please proceed, Mr. Davies.

Dale Davies

Good morning, I’m Dale Davies Chief Financial Officer, 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 Jeff Hollister, our President and Interim CEO. Our call today will include discussions about the railcar industry, our operations and financial results. Following these remarks, we will 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 Jeff Hollister.

Jeff Hollister

Thank you, Dale, and good morning to everyone. I’m excited to be joining you this morning and my new role with the company as President and Interim Chief Executive Officer.

Demand for certain railcar types in North America remained strong. The industry reported approximately 12,640 railcars were delivered and approximately 12,750 railcars were ordered during the third quarter of 2013, producing a book-to-bill ratio of 1.0. Industry backlog was approximately 73,840 railcars at September 30th, 2013, which is the highest since December 2007. The global inside industry forecast for North America expects new railcar deliveries to be approximately 51,790 in 2013 with tank railcars representing approximately 51% of deliveries.

The industry reported about approximately 7,580 tank railcars were delivered and 5,140 were ordered during the third quarter of 2013. Industry backlog for tank railcars we 58,910 as of September 30th, 2013, representing approximately 80% of the total industry backlog. Approximately 90% of the total industry backlog is for tank and covered hopper railcars. The industry backlog for covered hopper railcars is approximately 7,870 at September 30th, 2013 which is at its highest level since the first quarter of 2012. As of September 30th 2013 we had 6,300 railcars in our backlog including 2,430 railcars to be manufactured for firm lease orders. We continue to see healthy in quarry activity on tank railcars including railcar tops used outside of the crude market. In quarry activity for covered hopper rail cars is beginning to strengthen for plastic pellet, food grade, sand and powder ash railcar types as evidenced by our acceptance of a multi-year order earlier this month for 2750 plastic pellet hopper railcars for delivery from 2014 through 2016.

Consistent with industry expectations, we anticipate the plastic pellet demand to strengthen for delivery from 2014 to 2016 and tank railcar demand to remain healthy for the near term. We are extremely pleased with ARI produced another strong quarter, with increased revenue, earnings and adjusted EBITDA for the third quarter of 2013 compared to the same period in the prior year 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 direct sales shipments and more active tank railcar shipments as well as increased hopper railcar volumes when compared to the same quarter in 2012.

Demand for our railcar services has remained strong. On a related note our hopper railcar manufacturing facility continues to perform certain repair projects in order to more fully utilize the capabilities of this facility.

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

Dale Davies

Thanks Jeff. Third quarter consolidate revenues were at $199 million, versus $168 million for the same period of 2012, up 18% due to higher revenues across all three of our business segments. Manufacturing revenues increased to $171 million in the third quarter of 2013, compared to $147 million in the same period of 2012, primarily on higher direct sale railcar shipments, which were driven by higher shipments of both hopper and tank railcars.

During the third quarter of 2013 we shipped a total of 1,640 railcars, including 280 built for our lease fleet, compared to 1,460 railcars for the same period of 2012, which included 310 railcars built for our lease fleet. Revenues for manufacturing railcars built 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 third quarter of 2013 compared to $4 million for the same period of 2012. This increase was primarily due to the growth of our lease fleet, which increased from 2,190 cars at September 30th, 2012 to 3,780 railcars at September 30th, 2013.

Railcar service revenues increased to $20 million in the third 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 of $206 million for the third quarter of 2013, compared to $185 million for the same period of 2012. The primary reason for the increase in revenues from third quarter of 2012 were higher volumes of railcar shipments as well as a mix consistent of more jacketed tank railcars and improved general market conditions.

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 $35 million for the third quarter of 2013 compared to $38 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 third quarter of 2013 were $36 million, compared to $30 million for the same period of 2012. Our operating margins remain consistent at 18% for both the third quarter of 2013 and third quarter of 2012. The increase in earnings from operations was primarily driven by a strong tank railcar demand and an increase in lease and services earnings.

Earnings from operations for our manufacturing segment were $42 million and 20% of sales for the third quarter of 2013 compared to $34 million and 18% of sales for the same period of 2012. Segment earnings from operations included $10 million in estimated profits on railcars built for our lease fleet for the third quarter of 2013 and $5 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 third quarter of 2013 compared to $2 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 50% in the third quarter of 2013, compared to 56% in the same period of 2012, driven primarily by higher depreciation expenses during 2013.

Selling, general, and administrative expenses had increased slightly from $6 million in the third quarter of 2012 to $7 million in the same period of 2013. This increase is primarily attributed to an increase in the share based compensation expense instead of this compensation and headcount increases [indiscernible] increase in production. As a reminder our share based compensation expenses revalued every period in track fluctuations in our stock process.

Adjusted EBITDA, which excludes share-based compensation and other income related to our short-term investments, was $43 million for the third quarter of 2013. This was $6 million higher than the $37 million for the third quarter of 2012. Interest expense decreased by $3 million in the third quarter of 2013 compared to the same period of 2012. The decrease was the result of savings realized form a lower interest rate secured as part of the lease fleet financing and a lower average debt balance as we retired our 7.5% senior unsecured notes earlier this year.

Net earnings for the third quarter of 2013 were $21 million or $0.98 per share, compared to $14 million or $0.66 per share for the same period of 2012. The increase in earnings was a result of increased earnings from operations across all three of the company’s business segments and lower interest expense as previously mentioned.

Total consolidated revenues for the first nine months of 2013 were $553 million, 10% higher than the $504 million for the same period of 2012 due to increases across all three segments of our business. We shipped 4,850 railcars, including 1,190 railcars to our leasing customers during the first nine months of 2012, compared to 5,870 railcars, which included 1,690 railcars to our leasing customers for the same period in 2012. Revenues increases as a result of higher tank railcar shipments and increase in our lease fleet and an increase in railcar services revenue.

Adjusted EBITDA was $129 million for the first nine months of 2013 compared to $101 million for the same period in 2012 with the increase driven by higher earnings from operations discussed earlier. Net earnings for the first nine months of 2013 were $63 million, or $2.93 per share, compared to $39 million or $1.84 per share for the same period in 2012. The increase in 2013 was driven predominantly by improved earnings from operations and interest expense savings of $9 million, partially offset by higher losses faced incurred by our Ohio Castings and Indian joint ventures.

Our strong earnings contributed to cash flow from operation of $118 million for the first nine months of 2013. Additionally we received net proceeds of $99 million from our second and third draws under our lease fleet financing. Other significant cash activity thus far in 2013 included the investment of $108 million and new railcars released for the growth of our lease fleet and the redemption of the remaining $175 million of our senior unsecured notes. As of September 30th 2013 we had a cash balance of $115 million. On October 29th, our Board of Directors declared a cash dividend of $0.25 per share of common stock of ARI to shareholders of record as of December 13th, 2013 that will be paid on December 20th, 2013.

At this time I would like to turn it back to Jeff for a few comments about our joint ventures and expansions projects.

Jeff Hollister

Thanks Dale. We experienced increase demand during the quarter for castings and axles produced by our Ohio Castings and Axis joint ventures. Axis reported the higher number of quarterly axel shipments since the second quarter of 2012. We expect results for these joint ventures will continue to be driven by industry demand for all railcar tops. Our Indian joint venture, Amtek Railcar Industries Private Limited has experienced delays in the initial startup of the business as well as delays in completing the rail connection from the joint venture plant to the main land.

The Indian Ministry of Railways issued a tender offer this month for over 11,700 railcars which was the first railcar tender issued since January 2012. Consequently the industry has seen a low volume of railcar orders. While we expect this event will likely have a positive effect on the Indian railcar market as a whole this tender offer stipulates that entities that have not previously delivered at least 500 railcars to the Indian Ministry of Railways are limited to a maximum order of 500 railcars which would apply to Amtek Railcar. Combined these factors have contributed to Amtek Railcar delivering financial results weaker than originally anticipated.

We continue to benefit from both cost savings and expansion capital projects that were put in place during the past several years. At our tank railcar manufacturing facility which is running at full capacity we have enhanced our capabilities by adding capital projects to increased production of jacketed tank railcars. Additionally construction of our Brookhaven, Mississippi repair plant is underway. We currently expect the facility to be operational by mid-2014 which will further expand our railcar repair capabilities.

Now we’ll turn the call back over to the operator and we will be happy to take questions. Charlotte, would you explain how our participants can register their questions.

Question-and-Answer Session

Operator

Certainly, (Operator Instructions) Our first question comes from the line of Matt Brooklier from Longbow Research. Your line is open and you may proceed.

Matt Brooklier – Longbow Research

Yeah thanks Jeff, Dale good morning. So I just wanted to look at orders in the quarter and also subsequent to quarter end. You guys talked about in your press release receiving a nice order, a sizable order for that matter for covered hoppers. I’m just curious as to if there are additional orders that you receive in October and maybe you can talk about if there are – what types of railcars have been ordered with you?

Dale Davies

Okay yeah you’re right we did get that nice order on those plastic pellet covered hoppers that was taken early in October it missed the one of third quarter but, implies early this month. Beyond that we’ve had several deals that we’re short of working on both leases and sales for some tank cars and there some opportunities on hoppers but we don’t have a lot to report at this time has been completed. I think they’re in progress I think thy will be completed but there is they’re probably going to be signed in November maybe even a couple of December. But, so there is some activity that we’re working through but I think at this point the Chevron or the CP Chem orders further on we have to comment about.

Matt Brooklier – Longbow Research

Okay but you are optimistic that there are, there is a potential for incremental orders and some of those order could include tank cars?

Dale Davies

Yeah that’s correct we’ve got several that are in the works and they’re actually nearing the final stages but just they’ve got to get to the final stage before we report on.

Matt Brooklier – Longbow Research

Okay I just, I guess my question really boiling down to kind of what are your thoughts on the overall tank car market, you highlighted it as being strong yet where I guess not seeing kind of as robust activity as we saw in the first half both the industry worldwide and also specific to your company. I’m just trying to get a sense and kind of gauge where we are in the tank car cycle and your thoughts on kind of the overall relative strength of the market right here versus may be three to six months ago?

Jeff Hollister

Fair enough this is Jeff. Yeah we recognize that the tank market has been very robust over the last year. We also recognize that orders in total have slowed down the last three to six months but we’re still getting quite a few enquiries every day, every week not only in the crude oil market but the other tank cars that we have the ability to build down Marmaduke plant. We set that plant up to be flexible to build several different types of tank cars both jacketed and unjacketed and we’re seeing several inquiries that fit across the product line there. So we feel comfortable that we’re going to continue to get orders going forward and we’re just being strategic selective on what order that we’re going to take that fits our business model.

Matt Brooklier – Longbow Research

Okay that makes sense. And then I was just curious to see if your contract with ACF if that did contribute in the quarter and particularly how much was the profit contribution?

Dale Davies

Yeah that business has been picking up their volumes in terms of shipments and we did actually had some proper, we recorded in the third quarter it was small for the third quarter its first quarter we’ve had profits from that deal. But it will be larger in the fourth quarter and they’ve gotten through their startup phase and they’re into shipping significant volumes of that plant and we actually did book some profit for September. So we’re anticipating that in the fourth quarter we’ll have additional profits to book I don’t think there are going to be real big numbers at this point but it could be $1 million plus or so something like that for the fourth quarter.

Matt Brooklier – Longbow Research

Okay so it sounds like things are ramping up there, okay. Thank you for the time.

Dale Davies

Yeah you’re welcome.

Jeff Hollister

Thanks

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Art Hatfield from Raymond James. Your line is open and you may proceed.

Art Hatfield – Raymond James

Thanks good morning everyone. Just can we get a follow up kind of or a follow up through on the India situation. I think originally you’d hoped that by the end of this year that that JV would be breakeven and it would be profitable next year. I’m taking from your comments today that the losses that we’re seeing now should continue in the 2014, is that a fair assessment?

Dale Davies

Yeah I think you got a pretty good assessment there Art. We’ve got a lot of delays in this joint venture. The plant is built its ready to produce some railcars we’ve struggled to get the rail connection completed and that’s impacted our ability to start building some cars over there. The other thing we’re sort of dependent on was the Indian Railways to come out with their tender offer and that’s for a couple of years there, there wasn’t much going on there now they in fact did come out at last week 11,728 cars. But of course I reckon restricted a very known only 500 because we’re a new entrant to the market place there.

So, I think what you’re probably going to see is that yeah we’re going to continue to see some losses the thing is now the construction is finished and that plant is doing a little work its making some parts in there and we’re selling those they’re not large revenue items but it isn’t considered in production and so we are recording depreciation every month and we are expensing the interest on the loan every month where during the construction phase that was capitalized so. You are starting to see the numbers get bigger on the loss like for the JV and that’s probably going to continue through 2014.

Art Hatfield – Raymond James

Okay and just on the new, the restrictions on new entrance on that tender offer that Indian Railway putout is that something that is normal course of business or is that just occur, did that occur out of the blue?

Dale Davies

No that’s normal that’s their procedure and that’s their requirements so.

Art Hatfield – Raymond James

Okay so that’s the way is what the delay in them putting the tender out is what really hurt you, if they’ve done it earlier in the year that you could have potentially had a more volume running through the facility in 2014 is that correct?

Dale Davies

Yeah if they had done with a, historically typically done, in the past year come out with their tender and use in April and then it’s been and that’s for production in the following year. If they continue to do that as an annual event we would have been probably bidding back earlier and but, the two things one is the delay in getting our connection and then second probably a delay in getting started its going to impact 2014.

Art Hatfield – Raymond James

Where you at with the rail connection now?

Dale Davies

It’s a small connection, I think it’s less than half mile has to be built and it has to be done by the Indian Railways or coordinated through them even if we use an outside contractor and we’ve been working with them for sometime to get that done and unfortunately it’s hard to get it up as high in their priorities as we need to get it finished.

Art Hatfield – Raymond James

Okay. Secondly on the gross profit margins in manufacturing, I’m assuming the sequential decline in those number and the over decline is mix as but can you talk a little bit about, I know that the last couple, last two, three quarters have been historically very strong and it was unreasonable to expect those kind of levels of margin going forward. But is there anything other than mix that impacted the movement from Q2 to Q3?

Dale Davies

Q2 is a really, really good quarter and kind of all the stars aligned there but I think Q3 what you’re seeing is just as you said it’s an increase of hopper cars in the mix of products that we shipped. So, that is dragging it back down a bit because the margins on tankers are much higher than the margins on the hopper cars so. As we increase our volumes on hopper cars the margin is impacted by that but I don’t think there is really any significant change in what we’re making on the tank cars we shipped.

Art Hatfield – Raymond James

Okay.

Dale Davies

But we, I will make a comment about tank cars at the end of September we had 50 tank cars setting in our plant ready to go they were finished but the railway failed to make the pick up on the last day there. So we had 50 cars that didn’t get counted in our third quarter that’s going to roll over into the fourth quarter so that had a little impact on the third quarter there.

Art Hatfield – Raymond James

Okay.

Dale Davies

Those were all tank cars.

Art Hatfield – Raymond James

So is there anything other than maybe subtle mix change that we should think about on the margin front?

Dale Davies

No I don’t think so. I think tank cars you should continue to expect what we’ve been doing and on the hopper cars I think what you’re going to see is, is us raise our volumes in the fourth quarter here from where we were and a little bit and then as we move into 2014 of course the mid-year 2014 will be starting into this plastic pellet order.

Art Hatfield – Raymond James

Right and that’s more of just an optical issue on the margins obviously the earnings grow as you build more…

Jeff Hollister

Yeah you’re going to see additional gross profit dollars just a percentage it be adjusted slightly due to the mix.

Art Hatfield – Raymond James

Right, got it. That’s all I got this morning thanks.

Dale Davies

Thank you.

Operator

Thank you. Our next question comes from the line of Tyson Bauer of KC Capital. Your line is open and you may proceed.

Tyson Bauer – KC Capital

Thanks for the call.

Dale Davies

Good morning.

Jeff Hollister

Good morning.

Tyson Bauer – KC Capital

Couple of questions. Jeff you alluded to a couple of things one and this maybe a relative statement some slowing in the last three or six months on the tank orders of course it was extremely robust at the beginning of the year and so that may be a natural flow there. But also you mentioned about being more selective on pricing as you look at the order flow going forward. Does that imply kind of a general reduction in the ASPs for these tank cars that are out there now that you are seeing coming out for bid and is that also as we hear from some of the leasers reflective in some of the lease rates also being lower now than where we were at the beginning of the year and certainly at the end of 2012?

Jeff Hollister

I guess now really on your first statement but then on the lease rate side yeah I mean the lease rates are coming down they’re still higher than they were historically may be a year ago. And we’re still getting plenty of enquiries but they’re just not as robust as they were at the first of the your and it’s no secret our competition jumped on several of those and took some bigger orders. And we strategically held back and we’re selective on what orders we want to take and fill our track space with. We’re trying to fill our leasing group up as well as our commercial business and we look at our margins and will return some good cash from our operations and we’re reinvesting that back into our lease fleet so. This is our business plan and we still have order space filled up for about another year on the tank car side and we see the enquires are going to be there to continue into 2015.

Tyson Bauer – KC Capital

Okay well let’s add on to that last comment. How many open slots do you have left in that tank car capacity for 2014 and how is that reflective and it sounds like some of your other tank car competitors are more or less through 2015 at this point in time?

Dale Davies

Yeah we, we’re pretty well booked in 2014, we got a few slots in the fourth quarter we could do something. As far as 2015 we do have a lot of open space in 2015 and we do have some competitors they’ve already taken orders in 2015. I think that actually what’s allowing us to stay clearly from on our pricing because there are people that are making enquiries that want these cars and as soon as they can get them so. I think by having some space available in 2015 it’s long as to sort of stick with pricing that we’ve been getting recently.

Tyson Bauer – KC Capital

So that’s, it’s a strategy that you’ve implemented to, if there is another wave of robust orders coming though you’re going to be the one main factor that has the manufacturing capacity available where others may not?

Dale Davies

I think as far as we said right now. We do have some space available and the question is well there will be those orders which we think there will be and I think I’m sure we can offer that space, we can offer that delivery and as such we’re continuing to see the pricing hold up so.

Tyson Bauer – KC Capital

Okay. On the CP Chemical order is that evenly split through those three years obviously that facility starts up in 2014 or is it more frontloaded with a trickle of orders going through 2016?

Dale Davies

No its pretty much 100 cars a month for us once it starts going.

Tyson Bauer – KC Capital

Okay. Am I correct on the ACF facility you guys do the procurement of order for that facility?

Dale Davies

We procure materials for that. The orders are actually procured by American Railcar leasing and they handled the marketing side for that business and they work through us on that. So when they have opportunities for orders they all will come to us and we’ll work with them to make the decision on where that’s an order that goes into an ARI plant or whether we put it into the ACF plant. Then once it’s put in there then ARI our purchasing group does buy the materials for that operation up there and we support them from an engineering standpoint also.

Tyson Bauer – KC Capital

And from a public shareholder standpoint obviously ACF is a 10% privately owned ARI is a public entity. How do those decisions get marry without some kind of conflict of interest where rebound slots opened in 2014 and a lot of slots opened in 2015, yeah we’re filling up their plant especially earlier this year so they’re operating more efficiently, what’s that balancing act?

Dale Davies

The agreement that we have with them give ARI the opportunity to take the order and its only if ARI cannot deliver in the timeframe that the cars required that it would be given to ACF. So that’s sort of one of those that are out of first reviews but it also is governed by what the customer’s requirements are on delivery.

Tyson Bauer – KC Capital

Okay. Thank you gentlemen.

Dale Davies

Yep thanks.

Operator

Thank you. And our next question comes from the line of Justin Long from Stephens. Your line is open and you may proceed.

Justin Long – Stephens

You touched on this a little bit but I was wondering if you could talk some more about the competitive environment for new railcar orders that you’ve seen in the last few months. I mean are you seeing any more aggressive behavior either on the tank car side or the hopper side and if so is that impacting your approach to how you manage the business strategically I know we have at least on the tank side a new entrant that’s just come online, so curious to get your thoughts?

Dale Davies

Yeah on the tank car side we kind of talked about it I think some of the well established players. And in some cases have orders booked in through 2015 and of course we have some open space but you’re right we see expansion from one player that entered the market place maybe a couple of two, three years ago on tanks and we see them continue to expand. But I think they’ve also taken orders at this point well into 2015. But there is a new player that has announced they’re going to make tank cars and I think they’ve begun some production but.

I think what we’re seeing right now is they’re still on that early ramp up phase so we haven’t see too significant impact from that. So right now I think that we’re seeing is those people that need cars in 2015 they’re still coming to ask for quotes and we’re still quoting to them both leases and sale. But it’s probably more shippers that are coming to us and asking for those quotes not the big leasing companies. And once in a while we get those too. But I think the mix for us is probably more shippers are interested in what we could do for them in 2015.

Oh the hopper price side I think the hopper car business is really competitive right now. All the builders have fairly short backlogs on hopper cars and so it’s reasonably competitive I think on the plastic pellet cars I think. We have a car that is the customers like and so we are getting a lot of enquiries for our plastic pellet car. We’re getting some enquiries on other types of cars too some food cars, some sand cars and those and some of those enquiries are from leasing companies also on the hopper side. So it’s competitive on hoppers I think on tanks delivery is pretty important so.

Justin Long – Stephens

Okay, great that’s helpful color. But on the tank side you would say that new tank car pricing is relatively unchanged from what we saw in the previous quarter for the industry?

Dale Davies

Yeah I don’t think well for us I don’t think has changed much because we’re still some space to think.

Justin Long – Stephens

Okay, great and as we think about mix and the impact that could have going forward I know you probably can’t comment on your margins by car type. But if you just looked at the overall industry where would you ballpark the spread between gross margins for a tank car versus a hopper car and I know it can vary based on the specifics. But I mean would you say in general that hoppers are half the margin percentage of tank or is the spread something over than that?

Dale Davies

There is a significant difference in the two. I think it depends on the car type itself and I don’t know if I could really comment on in general and give you a very accurate description there. But there is a fairly significant difference in the margin and part of it is just how strong the market is with those cars. I mean demand for tank cars has been very strong for a while and there is a lot of out there and so the pricing has resistance which is contributed to good margins for those types of cars.

And as we just spoke on the hopper cars the market is a little softer and there is a little more competition for the orders that are out there and so. The margins right now might be a little below what we would be typical on hopper cars I think they’ll get back up to what’s more typical in the near future but right now they might be a little bit lower with we’d say its historical averages. So we got tanks a little above, we got hoppers a little below so it spread a little wider maybe than it would historically have been.

Justin Long – Stephens

Got it and as we look into 2014 I know it may still be a little bit early but just looking at your current backlog and the activity you’re seeing in the market today. Do you think at this point your 2014 railcar deliveries will look similar to this year do thank you think they can be what’s your initial peck?

Dale Davies

I think they’re going to be a little bit stronger. I think what you’re going to see from us in probably a very similar delivery on the tank car side. But you’re going to see stronger results on the hopper car side. I think we believe that we’re going to see some come back on some well certainly the plastic pellet late in the year and then maybe some sand cars some grain cars so two cars and we have some ore cars that we’re going to build in 2014 too so. I think the hopper car side might be a little stronger probably not a whole lot but a little stronger and then tanks will be very similar.

Justin Long – Stephens

That’s helpful and one last question. I was wondering if you could provide an estimated value of the plastic pellet order you received in October I know will probably get that next quarter in the backlog but any initial estimate you can provide on that.

Dale Davies

No I’m sorry that’s not something that I can really share at this point. It will be part of the overall backlog numbers when they could come out but I can’t comment on the pricing for any specific order.

Justin Long – Stephens

Okay that’s fair enough. I appreciate the time today.

Dale Davies

Yeah you’re welcome.

Operator

Thank you. Our next question comes from the line of Kristine Kubacki from Avondale Partners. Your line is open and you may proceed.

Kristine Kubacki – Avondale Partners

Good morning I just had a question on basically you talked about this is still a good quarter activity on the tank side. How are the impending regulatory changes on the tank side with the DOT-111 possibly expecting kind of their order activity and I know it’s really early to speculate but can you kind of talk about what you see might happen and what impact it could have either on new orders as well as your repair and maintenance facilities?

Dale Davies

Well I think it actually could have a fairly positive impact for us because I think the regulations are going to require some work on some of the existing cars that are out there and I think it could be fairly significant work. It also is going to probably change the mix of cars that get ordered I think you’ll see our customers more interested in buying the jacketed cars because I believe that’s what is going to be required in the future and we still have to see what the final regulations are. But I think customers will be anticipating may be they need to buy the jacketed cars so that’s good for us because that’s a car type that we do very well with. But on the retrofit our repair work on the existing cars and that could be significant and that’s work that could come into our shops and it could be really good work for us. So I think the changes that we see coming probably good result and a lot of work for the builders.

Kristine Kubacki – Avondale Partners

Okay, thank you very much.

Dale Davies

Okay you’re welcome.

Operator

Thank you. Our next question comes from the line of Art Hatfield from Raymond James. Your line is open and you may proceed.

Art Hatfield – Raymond James

A lot of shippers come to you for looking at potential orders in 2015 due to – I thought you have are there – coming more at you as a direct buyer they’re also talking to you potentially doing the leasing bills with you?

Dale Davies

I think we’re seeing both. Some customers prefer to buy they’ve got a lot of cash to spend and they just prefer to buy they’re coming that way. But we have other shippers that they just they prefer to lease so we’re getting enquiries on, from both. And some fairly significant increase on the buy side from some shippers and then the leasing towards, the leasing generally comes in smaller quantities it’s a 100, 200, 300 how they want to lease where some of the buyers can get to be 300, 400, 600, 800 whatever so but we’re seeing both. We’re seeing enquiries from both leases and for sales.

Art Hatfield – Raymond James

Okay great. Thank you.

Operator

Thank you. Our next question comes from the line of [indiscernible] from Deutsche Bank. Your line is open and you may proceed.

Unidentified Analyst

Hi good morning and congratulations on the strong bid versus Bloomberg consensus. I had a couple of questions just wanted to start with pellet cars can you explain what the interest has been pellet cars also how can we look at back on paring a mix in profitability or margin versus hoppers and tank cars is it in the middle or is it on the low end?

Jeff Hollister

Yeah the plastic pellet cars is one of our bread and butter cars back in the late 90s early 2000s we built a bunch of these cars for the market. So it’s one that we pride ourselves on its quality car it has, these cars have to be lined on the inside to protect the product. So we’re very excited for this market to come back. I’m saying that we’re still looking late next year 2015, 2016, 2017 so it’s going to take a little while for this thing to get packed going but we’re really excited about that and very helpful that we’ll get our share of those cars. And the margins on those I mean those are considered a little specialty the margin is a little higher than a normal hopper car margin. So that will help us from that as aspect and it’s not going to hit the margins we’re seeing today on tank cars but it is on the high end of the hopper car product line.

Unidentified Analyst

Okay and then the…

Dale Davies

I was going to comment the real driver for the demand on the plastic pellet cars is expansions that are being put in place on plastics production there is a lot of expansion going on right now.

Unidentified Analyst

Until the timing that will be more of a 2015, 2017.

Dale Davies

Yeah that’s right yeah.

Unidentified Analyst

And then the other question I had is, certainly we’ve seen a lot of accidents in Canada with the crude by rail and there has been some talk about legislation that would increase the safety requirements and potential more expensive or more durable type of rail cars. Is that something that has lags or do you think has that even come across your desk as something that is potential?

Dale Davies

Yeah I think it’s that lags and I think there will be some new regulations that come out that they will require tank cars carrying crude and maybe other flammable products to have more different features on them probably different steel or maybe even jackets which is a layer outside layer outside of the main tank. So we’re, I think we’re going to see that and the question is how quick that comes and so that’s that was a comment we answered a bit ago on work that may come for us out of that and one is that we may see customers ordering more of the jacketed tank cars and then we may see rework on some of the existing tank cars that don’t have jackets to improve the safety features on most cars. So I think it has got lags I think there will be action taken on that and I think it will be acted on fairly soon and then there will probably a number of years of over which these changes have to be made.

Unidentified Analyst

Got it okay. Thank you. That’s all for me.

Dale Davies

Okay.

Operator

Thank you. And at this time I’m not showing any further questions. I would now like to turn the call back over to Jeff Hollister for closing remarks.

Jeff Hollister

I want to thank everybody for joining us today. And we look forward to talking to you next quarter. Thanks a lot.

Operator

Ladies and gentleman thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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