The Greenbrier Companies, Inc. F1Q10 (Qtr End 11/30/09) Earnings Call Transcript

Jan. 8.10 | About: The Greenbrier (GBX)

The Greenbrier Companies, Inc. (NYSE:GBX)

F1Q10 Earnings Call

January 8, 2010 11:00 am ET

Executives

Mark J. Rittenbaum – Chief Financial Officer, Executive Vice President & Treasurer

William A. Furman – President, Chief Executive Director & Officer

Analysts

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

Steve Barger – Keybanc Capital Markets

John Parker – Jefferies

Paul Bodnar – Longbow Research

J. B. Groh – D. A. Davidson & Co.

Ben Brogadir – Imperial Capital

Operator

Mark J. Rittenbaum

Good morning and welcome to our fiscal 2010 first quarter conference call. On today’s call we will discuss our results and make a few remarks about the quarter that ended November 30th and then we will provide an outlook for 2010 and beyond and then after that we will open it up for your questions.

As always, as a reminder, matters discussed on this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout the discussion today we will describe some of the important factors that could cause our actual results in 2010 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

Today we reported our first quarter results and you may have noticed a change in the presentation on our P&L and this is a change only in nomenclature and at the bottom line loss which was formerly referred to as net earnings or net loss is now referred to as net earnings or net loss attributable to controlling interest. This is in accordance with GAAP not to confuse readers of financial statements. I do want to remind this is a change in nomenclature only and not in how earnings or EPS are calculated.

With that said our net loss attributable to controlling interest for the quarter was $3.2 million or $0.19 per share on revenues of $172 million. Net loss for the quarter included non-cash charges of $2.1 million pre-tax, $1.2 million after tax or $0.07 per diluted share for warrant amortization expense and amortization of convertible debt discount. Net loss for the prior comparable quarter included a non-cash charge of $0.9 million pre-tax, $0.6 million net of tax or $0.03 per diluted share for amortization of convertible debt.

If you are comparing this to our numbers previously reported for the prior year’s first quarter also in accordance with GAAP we restated that quarter for this new accounting pronouncement related to amortization of convertible debt.

Both of these amortization amounts are included in interest expense on our P&L and for the year as a whole these charges will run about $8.6 million pre-tax and at currently anticipated tax rates this equates to about $5.2 million after tax or roughly about $0.30 per share.

We continue to manage the company for cash flow and liquidity and our cash balances of $65 million and additional committed borrowing availability of $107 million are substantially unchanged from last quarter. In addition during the current quarter we will file our 2009 tax return for the year that ended and as a result of recent changes in the tax laws we will be able to carry those losses back a total of five years and this will allow us to realize a $14 million tax refund within the next 90 days of the filing.

We do continue to believe firmly we have the adequate liquidity to weather the downturn with the favorable debt covenants we were able to negotiate in the spring of last year and no significant debt maturing until 2012 and much of our debt maturing in 2015.

Now let me address some highlights for the quarter that supplements what you found in our earnings release. To begin, overall gross margin of 12.6% for the quarter compared to 7% in the prior comparable quarter with the improvement primarily driven by our manufacturing segment. In our refurbishment parts segment revenue declines were primarily due to lower sales volumes across all product and service types and a further decline in the price of scrap metal, both due to the current economic environment.

Having said that we are seeing and I am sure many of you have noticed the scrap metal prices have been rising in the recent past. Gross margin for the refurbishment and parts segment was 10.4% of revenues compared to 9.8% of revenues in the prior comparable quarter and the increase is primarily the result of cost reduction efforts.

Our manufacturing revenues continue to be adversely affected by the weak business environment and depressed demand. Current quarter deliveries of 350 units were down from 800 units in the prior comparable quarter but having said this we are pleased with the improvements in operating efficiencies in this segment. Our manufacturing gross margin for the quarter was 7% of revenues compared to negative 4.1% in the prior comparable quarter.

The gross margin increase was primarily the result of a more favorable product mix and improved production efficiencies partially offset by less efficient absorption of overhead at lower operating levels. In addition, the first quarter of last year we had accrued loss reserves of $0.5 million for contingencies for railcars in our backlog that we anticipated a loss on production. We are operating at stable production levels now and I am sure that we will be speaking to this as a result of our GE contract modification and we are really pleased with the performance of our GIMSA operating unit which was our principle unit for building new railcars in North America.

In response to the weak market conditions we continue, as I said, we will concentrate our production at GIMSA and we have shuttered our new railcar facility in Sahagun as far as new railcar production although we are doing some refurbishment and heavy fabrication work there. Similarly Gunderson will principally focus on railcar refurbishment and marine barge manufacturing and niche new railcar product opportunities.

Turning to leasing and services, our lease fleet utilization was up sequentially for the quarter to 91.3% compared to 88.3% as of the end of August and 93.3% as of the end of November 2008. Our gross margin for the quarter was 41.4% of revenue compared to 43.6% in the prior quarter of fiscal 2009, November 2008. This was a result of lower fleet utilization and lower earnings in certain car higher leases offset by gains on sales from the lease fleet. Our gains on sales for the quarter were $0.9 million compared to $0.3 million for the first quarter of 2009.

Selling and administrative costs were $16.2 million for the quarter or 9.4% of revenue versus $16 million or 6.2% of revenue for the same quarter last year. Excluding reversals of certain reserves for both periods, our S&A costs were actually lower in the current period than the prior comparable quarter due to cost reduction efforts and related lower headcount.

Interest and foreign exchange was $11.1 million compared to $11.8 million in the prior comparable quarter. The decrease was a result of declines in interest rates, lower outstanding borrowings and lower foreign exchange losses. In November 2008 quarter we had a $1.2 million foreign exchange loss that some of you may recall associated foreign currency contracts which did not qualify for hedge accounting. As a reminder, the amortization of the convertible debt and warrants are also included in these figures.

In that regard I want to remind investors warrant amortization expense relates to the warrants that were issued to WL Ross in the springtime as a result of the strategic investment that we made has been reported on our balance sheet at $13.4 million originally and being amortized over a three year period or roughly $4.5 million per annum. To the extent that our stock price exceeds the warrant price the number of diluted shares will be increased in profitable reporting periods. Lastly, there is a new accounting pronouncement again that affected the discount on our convertible debt.

We continue to be disciplined in our CapEx in the current environment and we expect net CapEx to run about $30 million in 2010 and our depreciation and amortization will run about $40 million. Based on current industry trends we continue to remain cautious and business continues to be challenging and with this backdrop we anticipate our revenues will be lower in 2010 than 2009 and while our visibility is limited in some of our product lines we currently expect EBITDA excluding special charges to be modestly higher in 2010 compared to 2009 principally due to higher margins in our manufacturing segment.

I do want to remind investors last year and in many previous years our financial results that we start the year off slowly and then the second half of the year is much stronger than the first half. We anticipate that the current year is going to play out similarly with the second half being much stronger than the first half and with our second quarter being our weakest quarter.

I will turn this over to Bill just with the overall reminder and firm statement that we continue to be very optimistic in the longer term about the fundamentals of our industry and in our positioning in the industry. I will turn it over to you, Bill.

William Furman

Thank you Mark. Welcome everyone to the conference call. I am going to keep my remarks fairly brief this morning. I am going to start out talking about railcar manufacturing and the status of the railcar manufacturing industry even though today Greenbrier is largely driven by revenues and margins in other segments, railcar refurbishment and sub-segments such as parts, particularly wheel services, marine and leasing services such as asset management.

For example, during the current quarter only 25% of our gross margin was derived from manufacturing and actually in the prior comparable 2008 quarter it was a negative contribution and all of our margin came from these other businesses. However, as earlier noted, the railcar manufacturing segment is a driver for much of the health of the railcar supply industry and therefore I want to start just talking a little bit about what has happened to us and to the industry in recent quarters.

New railcar demand in North America remains soft. We believe that builders are continuing to burn through their backlog. As was earlier announced we completed satisfactory negotiations with GE which provided considerable value to Greenbrier. Our modified GE order took 8,000 cars out of the industry backlog and we believe that the GE order now represents about 35% of the estimated North American industry backlog for the fourth quarter of 2009 as of December has not yet been published. We are expecting it soon. However, assuming the same rate of decline as in previous quarters and removing 8,000 cars from the last published backlog information we put industry backlog at or under 10,000 units and therefore Greenbrier’s share of North American industry backlog now approaches 50% with a 4,500 unit North American domestic backlog.

So we are pleased in our manufacturing segment even though our emphasis has been on railcar repair, refurbishment, parts, wheel services, leasing and asset management and we have grown our asset management fleet. We are very pleased that despite our performance in manufacturing in terms of providing stability to our workforce to the entire business model is also above peer performance and we are pleased to have put behind us the stress of that GE negotiation.

With regard to manufacturing we continue to focus our new railcar production at our GIMSA facility in Mexico which is essentially an assembly operation for North American parts. We now have a solid backlog at that facility into 2013 running both cover hoppers and tank cars. Our Gunderson facility in Portland continues to be our flagship operation. It is doing smaller production runs and new cars on one line and is also operating the used car refurbishment line and some of the revenue and margin from refurbishment will be picked up in our refurbishment segment. The refurbishment line at Gunderson has a good backlog for 2010 as a result of the GE renegotiation.

In Europe the European marketplace has similar trends though comparable industry information is not readily available on production and backlog. Our outlook is stable we believe in Europe for 2010. We will be profitable and are planning to be profitable in Europe in the current calendar and fiscal year.

Turning to our other markets, while market conditions in all of our core markets are weaker than we would like there is some evidence of bottoming out in some of these markets. While 2009 railcar loadings in North America continued to be down and were down around 16%, that was lower than earlier statistics, Q4 loadings were only down 8% and for the last few weeks of the year were slightly up. Railroad executives remain cautious in their outlook for 2010 and estimates of railcars and storage have only slightly improved with current railroad source estimates at senior levels understating the officially public data and around 25% of the fleet estimated to be idle or less.

Having said all this we are starting to see some pockets of opportunity and inquiry in both North American and European new railcar markets. Perhaps we are at the bottom of the cycle or near the bottom or the beginning of the end of the cycle or something trite like that.

Marine operating performance has been very good and has been a reason for improvement in margin in our manufacturing segment over the year. However, new orders are scarce and demand is weak. During the quarter a customer cancelled an order for one barge to be built in fiscal 2011 due to weak demand. We may be able to reinstate that order.

At current production rates marine has a hole in its line later in this fiscal year and material order dates to protect that line at current production rates this year is fast approaching. So we will need to either slow down production, secure a new order, accelerate an existing order or build a barge in anticipation of an order in order to continue the level of operating performance that marine has provided for our manufacturing segment during 2009. Marine will therefore become a main driver for the year as a whole and a source of considerable management focus and attention over the next few months.

Turning to repair and refurbishment, this is also a sluggish area as customers are deferring or minimizing capital expenditures and lower rail volumes translate to lower repair and rail service needs. The good news there is that this segment is likely to be the first to benefit in a recovery and we see considerable upside in both the wheel and repair business and refurbishment business in the second half of 2010 and into 2011 if we have an economic recovery and we see the same sort of upside in manufacturing if we can return manufacturing to its previous levels of contribution to EBITDA and margin.

On the leasing side our leased fleet utilization increased to 91.3% compared to 88.3% at the end of our fourth fiscal quarter of 2009, just a quarter ago. So we believe the utilization is stabilizing albeit at depressed levels or lower rate levels than we would like to enjoy.

On the plus side, while market conditions are weak our revenues are transactionally oriented and derived where relatively small numbers of large transactions can have a major impact on revenues and earnings. Also the fundamentals for rail transportation remain very strong and we are more optimistic about the second half of 2010. Furthermore, management has been able to deal with a lot of defense issues and protective issues in 2009 and will now be able to devote energy to revenue generation rather than conflict resolution as a result of not only strengthening our balance sheet, protecting ourselves against debt covenants and completing the GE negotiation and other protective measures we have taken to try to strengthen the balance sheet.

So in other words we are now better equipped to play offense rather than defense in 2010 and as Mark has indicated and I repeated in my comments we are more optimistic about the second half of this fiscal year.

Our principle priorities in 2010 will be the efficient operation of our core businesses, enhance revenue and EBITDA and continued focus on liquidity and cash.

Turning to one other significant event which has been tracked by many of our analysts in fiscal 2009 concerning AutoMax, we sold 500 AutoMax platforms to BNSF under an arrangement whereby certain minimum earnings aggregating over $13 million were guaranteed through 2011. The full amount of this contingency which was derived from the transaction was accrued in 2009 and any earnings generated through marketing the cars will flow straight to margin and pre-tax earnings. The second half of last year a major and concentrated commercial effort was undertaken to place these cars in service, notwithstanding a very weak automotive environment.

I am pleased to report that all 500 platforms and 170 addition used platforms in Greenbrier’s leased fleet have now been placed in service on very economic terms, at least as favorable as those in our financial forecast. This is a real success in the current market and is important to our current EBITDA goals and our strategic plan for 2010 and 2011.

Turning just for a moment about strategic growth opportunities we continue to be very pleased with our relationship with WL Ross and we are having promising discussions concerning additional strategic opportunities. This relationship gives us access to capital capacity at a time when very interesting opportunities may exist in our sector to deploy capital. These are likely to be transactions which would allow us to grow our railcar services business which over the past year has grown from 137,000 railcars under management to 223,000 railcars under management.

Additionally, we will consider other opportunities in each of our other business segments if good investment opportunities arise. Mark I will turn it back to you for questions.

Mark Rittenbaum

Operator we will open it up now for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Arthur W. Hatfield – Morgan Keenan & Company, Inc.

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

I didn’t hear on the call, did you tell us how many new car orders you received in the first quarter?

Mark Rittenbaum

I did not give that figure. If you give me a minute I will get it during the call here.

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

While you are looking for that the follow-up I had to that was given what you are seeing from orders and from requests from customers can you kind of give us an indication of where pricing has gone to on new cars for the past few months?

Mark Rittenbaum

As of the past few months?

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

Yes.

William Furman

I would say there is not a considerable change. Pricing is still very soft and as other builders have lines that are shut down it will become easier to compete if we have lines that are running. That is the only significant event that I think is going to occur as many of our competitors are running lines out of backlog and shutting lines.

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

Can you give us an indication of where, I know there are many, many different car types, but generally where pricing has gone from where it had been at peak levels?

William Furman

That is a complicated question because not only have margins been compressed or eroded to cash contribution which could be in the 10% type range but there has been a substantial decrease in the price of certain commodities and other materials that go into the cars which has been dramatic. So in terms of peak levels we could be looking at 25-30% but the bulk of that would be from materials costs.

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

Do you think that through this path from the peak down to the trough when we were looking at the price of a railcar and what was going on with commodity prices, do you think you kind of through the cycle broke even on the price of steel or is it possible that there was a little bit of positive contribution to the company through that period?

William Furman

Well it was a very wild ride. Attributably I don’t have the answer to that question. I prefer not to go through that kind of cycle if I can avoid it. Again, I just don’t have a good answer for it. I think we came out okay but we took a number of hits on some contracts and we benefited from others. I’m sorry I just can’t really tell you. Maybe Mark can comment on it.

Mark Rittenbaum

I think the part where we might have benefited more would have been on the refurbishment and parts side of the business where we commented before that we had somewhat of a natural hedge on scrap and steel because of course it is an input cost on the new railcar side of the business and marine side of the business. On the refurbishment we realized some scrap benefits as well in our leased fleet. We took some hits on manufacturing. We have adequately protected ourselves and played catch up and in all of our backlog we are protected but we did have some benefit from refurbishment and parts that probably more than adequately covered us in leasing and more than adequately covered us on manufacturing. As Bill said it was quite a ride.

It is roughly 100-200 cars. It is a relatively small figure. Of course if you look at our backlog and do a reconciliation it won’t add to that, right, because we took 8,100 cars out of backlog related to the GE Contract.

Arthur W. Hatfield – Morgan Keenan & Company, Inc.

That is why I asked because it is hard to reconcile it.

Mark Rittenbaum

I think if you perform that reconciliation it is going to be 100 or so in that kind of range.

Operator

The next question comes from the line of Steve Barger – Keybanc Capital Markets.

Steve Barger – Keybanc Capital Markets

You mentioned in your remarks you might pursue some transactions to grow railcar services. Are there any other specific comments you would like to make about what direction your conversations with the Ross team might be taking in terms of strategic positioning?

William Furman

We have had very positive discussions about investments that would be compatible with their goals and our goals in each of our segments although I must say we have been focusing principally on our asset management capabilities which have grown really dramatically over the past year.

Steve Barger – Keybanc Capital Markets

Are you finding there are a lot of customers out there looking for those services or is this something that we will have to wait for the upturn?

William Furman

Obviously we have been able to grow almost 100,000 cars last year in this market and we think there are other customers that are interested in almost the unique capabilities we provide. Not only can we manage an asset and provide any sort of back office, maintenance and administrative handling of the freight car even for Class I railroads, and we manage assets for a large number of Class I and short-line railroads today. We can provide a repair network that has a geographic footprint very close to the entire rail system so we can provide economic and efficient repair and refurbishment services to those railroad customers and also leasing customers. So we have signed on this year major leasing customers. We have signed on railroads and we are intending to continue to target those markets. There are other opportunities in the area of portfolios that are stressed and companies are trying to reduce overhead or improve performance and we are of course looking at those in connection with WL Ross as well.

Mark Rittenbaum

As a reminder on that of our strategy and what we have said before is of course WL Ross gives us access to capital that extends beyond our balance sheet which of course does have some limitations on it and that there may be opportunities where we could co-invest on a more limited nature within our own balance sheet and provide products and services that would complement and supplement those investments. All of these would be in areas of our core competencies.

William Furman

Just to clarify further, almost all of the structures we would be looking at in one form or another would provide minimal direct capital investment on our balance sheet but we would be either an operator, we would have participation rights or we would be a manager of assets that principally would be invested by the Ross group. So the capital would come from them principally.

Steve Barger – Keybanc Capital Markets

Do you think there are opportunities also to grow the parts and service network from the current 38 locations or is that comprehensive enough you are in good shape there?

William Furman

No, we think organic growth in particular as opposed to acquisitions is probably the thing that will continue to occur. We have added few ramp operations in the last year so we do think we have quite a lot of opportunity for organic growth which has a higher rate of return than acquisition growth. Although there may be some attractive opportunities to enhance the model with acquisitions and we are open to looking at those.

Steve Barger – Keybanc Capital Markets

You stated you want to manage for cash which makes sense in this downturn. Are there still levers you can pull in terms of the parts and service network whether it is purchasing, increased efficiencies, is there more cash that you can take out of that business and ways you can bump returns or is it pretty much in good shape?

William Furman

Most definitely I am dissatisfied with the economic performance of that unit in terms of the potential with respect to the entire model. We are working on further integration efforts particularly in the commercial sphere to get those synergies to use that active expression, but also in terms of customer surveys near the end of the year we need to improve and really listen to our customers and improve the economic efficiencies in each of these operations. While we think we have done a good job of assimilating the large acquisitions which were a collection of in some cases mom and pop type operations we still have a flavor of that and we need to really have more consistency and stream the benefits out of this geographic advantage that Greenbrier has coupled with our asset management advantages with the railcars themselves.

So if we can both manage an asset with the lowest transaction costs in the industry for back office, car hire accounting and that kind of thing, and mechanical audits, if we can do all of that we can also help the railroad and leasing and other customers, even with whom we might compete, we can help those people optimize their repair business by using this model. I am not pleased that we still have a lot….I guess I am pleased there is still opportunity to improve but I wish that we had made a bit more progress in integrating and getting those benefits.

We are going to be really targeting that in 2010 now that we have more time and are in better condition to allocate that time to those kinds of opportunities.

Steve Barger – Keybanc Capital Markets

The 3,800 cars for the GE contract are I think scheduled over the next 3.5 years. Is that a level delivery schedule? Should I think about that as 1,000 per year or is that front or back loaded?

Mark Rittenbaum

It is a little bit more front-loaded than it is back-loaded. It would be a little more heavily loaded to 2010 and 2011.

Steve Barger – Keybanc Capital Markets

Is everything else in the backlog scheduled to go this fiscal year?

Mark Rittenbaum

I think what we disclosed originally…the answer to that is yes.

Operator

The next question comes from the line of John Parker – Jefferies.

John Parker – Jefferies

You discussed the pure margin effect of putting those railcars to work that you have reserved for already. Would that impact manufacturing margins?

Mark Rittenbaum

It will principally be in the manufacturing segment. A small piece of it will be in the leasing segment but it will principally be in manufacturing.

John Parker – Jefferies

Also, I think at the end of last year you gave guidance for manufacturing margins in the low to mid single digits and obviously you have exceeded that in the first quarter. Is there any update to those estimates for the full year margins on your business segments?

Mark Rittenbaum

I think as a whole the guidance of mid single digits is probably appropriate. We do expect the second quarter again is going to be our weakest quarter in manufacturing partly the way that marine revenues and percentage of completion, one marine closed through the financial statements, and as Bill pointed earlier, performance will be a driver and a key metric for the year. Mid single digits is what we are saying.

William Furman

It I could just jump in on that and add our second quarter is always a weaker quarter because effectively given the holidays and given our fiscal year end we lose almost ½ month production in terms of our manufacturing operation across the board. That is also true in our repair and refurbishment. Many of our repair and refurbishment operations with the affect of holidays and our quarter and the way that plays out it has traditionally been a bad quarter. So we expect our second quarter to be the low point of this year and those are the reasons for it.

John Parker – Jefferies

Can you give me a rough estimate of marine revenues during the quarter?

Mark Rittenbaum

Approximately $20 million.

John Parker – Jefferies

That is a consistent run rate right now. Assuming you are able to fill the hole you mentioned earlier right?

Mark Rittenbaum

Assuming we would fill that, it would be the type of run rate. Again in the second quarter we would expect that to be down and overall probably to run a little bit less than that for the balance of the year.

John Parker – Jefferies

Your working capital seemed to jump up a bit more than I expected. Is there anything going on with the inventory popping up there? Is there anything you can indicate to me of why that happened?

Mark Rittenbaum

The inventory going back up this quarter? Some of this was as we were ramping up some production on the new railcar side of the business and we were also buying some so as we are ramping up production and higher production rates on the new railcar side of the business and we were buying some materials a little bit ahead of time to get ahead of some of the increases in scrap surcharges. So we don’t see this until obviously when the economy picks up overall our working capital needs are going to be greater again but we don’t see this trend of increases really continuing in the near term.

John Parker – Jefferies

I think you have given us on prior calls, can you give us any guidance on scrap sensitivity and your revenues and gross margins in your refurbishment business?

Mark Rittenbaum

At this time we are less sensitive to it now than we were before as a result of some changes that we have made and also some changes in contracts. I wouldn’t want to give an algorithm at this point.

Operator

The next question comes from the line of Paul Bodnar – Longbow Research.

Paul Bodnar – Longbow Research

A follow-up on the leasing business there. Obviously you had a sequential uptick in utilization. Can you just talk a little bit about that and what we should expect here? How do you see both going forward in terms of utilization but also the pricing there?

Mark Rittenbaum

On the utilization side as we mentioned we are pleased our utilization has come up and we really have a concentrated effort there. We should see that be stabilized or slightly improving. Having said that, when we have a fairly modest lease fleet of less than 10,000 cars if you have 300 or 400 cars that are in between leases that obviously as an example can impact those statistics. We are pleased overall that we definitely believe we have hit the bottom and are on the way up. Part of that is increased opportunities and part of it is our concentration.

As far as lease rates as a whole perhaps they have improved modestly but I wouldn’t want to…it is still of course a challenging market with the surplus assets out there that Bill mentioned. I wouldn’t want to give a percentage of what that might be quarter-over-quarter. Obviously this compares to a couple of years ago the lease rates are down and down meaningfully.

Paul Bodnar – Longbow Research

To follow-up also on that business you had added a significant number of cars that you are managing now. How does revenue break down? Obviously there is gain on sales of cars in there but between management and just lease income at this point?

Mark Rittenbaum

Management maybe runs about $25 million per annum. Of course the balance being leasing including gains on sales.

William Furman

Management is very important however for other reasons. It both it gives us visibility into the traffic patterns in North America and opportunities for other deployment opportunities in both our repair and refurbishment network and our manufacturing network.

Even more importantly when you look at lease utilization the way Greenbrier effectively is operating it is almost a partner in the North American railroad industry so we have an ability to actually be in real time participation with our partners. We have some benefits as a result of that in terms of keeping cars utilized when other companies that aren’t integrated as we are would have to store those cars. For example, we don’t have any coal cars stored for now and we have renewed our leases on coal cars.

The management business really gives us a lot more clout than the bottom line contribution but that contribution is increasing and the marginal transaction cost is very, very low for us to add to the fleet.

Paul Bodnar – Longbow Research

It is obviously a higher margin business in your portfolio I guess? The management aspect?

Mark Rittenbaum

That is correct. Of course, overall leasing and management services are high margin businesses. But of course on the management services side there is very little invested capital.

Paul Bodnar – Longbow Research

Another follow-up on refurbishment parts, year-over-year there was flat but sequentially you were down. I may have missed some of the color on that. Was that largely lower fixed cost absorption compared to 4Q09 since revenues are down? If you can just talk about what is going on there for the rest of the year.

Mark Rittenbaum

It is. It was also a mix issue in particular on the repair and refurbishment side as compared to wheel services and parts. On the repair and refurbishment side the mix was less favorable and lower levels of utilization. We do expect and some of the reason for the optimism we expressed in the second half of the year is we do expect an improvement in that business both as demand picks up and also as a result of specific orders we are working on that would heavier in nature that would give us improvements on that part of the business.

Paul Bodnar – Longbow Research

Would margins be on par with last year’s levels or would they improve beyond that?

Mark Rittenbaum

I think similar to last year and obviously we have to have some of the pick up that I referred to achieve that similar to last year.

Operator

The next question comes from the line of J. B. Groh – D. A. Davidson & Co.

J. B. Groh – D. A. Davidson & Co.

On the lease utilization is there any seasonality in that or is it just a function of a relatively large chunk of cars going from being unleased to leased? Looking at it year-over-year versus looking at it sequentially maybe there might be something seasonal there?

Mark Rittenbaum

No. That would not be true on the leasing side. Certainly as Bill referred to on manufacturing the refurbishment and parts, there can be some seasonality.

J. B. Groh – D. A. Davidson & Co.

You haven’t changed your unit delivery outlook obviously from the update you gave last, correct?

Mark Rittenbaum

Correct.

J. B. Groh – D. A. Davidson & Co.

So would we expect to deliver a similar amount of cars in the second quarter or maybe a little bit more? How do we reconcile the low number this quarter with the lower numbers of days of manufacturing in Q2?

Mark Rittenbaum

I would expect actually that the second quarter would be higher than the first, notwithstanding the comment there is lesser number of days that both we had built some cars in Q1 that actually will record to revenue in Q2 because they were delivered in Q2 and we are ramping up one of our production lines to a little bit higher production levels that Q1 was our lowest level for the year.

J. B. Groh – D. A. Davidson & Co.

On the volatility in the refurbishment parts, you kind of went over this. Is there any scrap price impact still in there? Did that account for any kind of decline? How should we think about that in the next 9 months?

Mark Rittenbaum

We were further impacted in the quarter by scrap price declines and we will benefit to some extent as scrap prices have increased so we will see some of that on the refurbishment and parts side as scrap prices have grown.

Operator

The next question comes from the line of Ben Brogadir – Imperial Capital.

Ben Brogadir – Imperial Capital

Trying to get a feel for cash flow here. I am sure this will be disclosed in your 10-K but in terms of cash interest and cash taxes, do you have those numbers readily available? I noticed it looks like you had a tax benefit during the quarter but I’m trying to get to cash flow here.

Mark Rittenbaum

Cash interest was $12.9 million and cash taxes were down $250,000.

Ben Brogadir – Imperial Capital

$250,000?

Mark Rittenbaum

Yes. We will be filing our 10-Q later today and you will see those figures.

William Furman

One thing concerning cash is that the new legislation allows a carry back for longer periods and we do anticipate a refund which Mark might want to talk about.

Mark Rittenbaum

I referred to earlier that later on in the year we expect a $14 million cash refund. So obviously that will be a big [inaudible].

Operator

The next question comes from the line of Steve Barger – Keybanc Capital Markets.

Steve Barger – Keybanc Capital Markets

You mentioned scrap prices are ticking up. Are they high enough that you are seeing old cars start to exit the fleet for joining the steel mills or is it too early to talk about that?

William Furman

I was out talking to some of our railroad customers last month and they have continued to scrap cars even during the downturn despite lower cars but some of them have been holding onto cars. I think in terms of the decline in storage statistics there is a little bit more optimism. Cars have been coming out of storage and going into service in some of the western railroads although that is a mixed story. As these scrap prices come up I think there is a greater incentive to sort through the deck and scrap cars that have been otherwise stored. I think the answer is we are seeing an acceleration of that. That should tick down those really grotesque storage statistics.

An additional factor will be as business recovers velocity will probably not be as good as it is today so more cars will be required to carry the same tonnage and that will further put pressure downward on storage statistics.

Steve Barger – Keybanc Capital Markets

I just want to go back to the management business. How should we think about the revenue growth rate for services there? If the fleet were not to grow could you get pricing? Are there other revenue touch points you can use to get deeper penetration in the customer or once you have that car under management is that pretty much it?

Mark Rittenbaum

The management services business we offer various products and services. There is a whole menu, a whole array of items. The way we would grow those revenues on a constant number of cars is if we can increase the number of products or services we offer the customer. So with the existing contracts we run at the current rate. So that is the way you would grow it on the existing basis by increasing what we can offer the customer.

William Furman

In other words, a customer might be using one part of the catalog today and if we can have a successful launch on many of the new cars we brought under management they might take more out of the catalog once they have gotten a taste of what we can do and the services we are providing. So we have many, many different kinds of services and we have invested in the last couple of years quite a lot in software products which will help us really do a great job for leasing companies, other asset shippers and class I railroads in helping them manage their fleet. I think there is still share growth in the market for increasing the demand in services in addition to the organic growth you are talking about.

Steve Barger – Keybanc Capital Markets

Do you have a good track record of upselling or selling more of the catalog to the customers once you get them in the door?

William Furman

It is not an easy sell because there is a lot of inertia and this is a very integral part of the operating system so it really requires a great deal of trust particularly to have a railroad turn over to you components of the car management system. You have to demonstrate not only can you be more efficient on the transaction cost, which is relatively easy to do, but they have to be able to really rely on you because they are operating their network which is much more important to them than the cost of that individual service.

So if you foul up a car and it doesn’t arrive on time when it is supposed to be there or if it is not reliably dealt with that can be a big thing. So it is a slower sell. It can take years to really gain the confidence of one of these customers. There comes a point where there is a tipping point though where if one continues to do well you can increase the participation in that portfolio, if you will, for that customer and you become more and more mutually reliant. I think that is where the industry is going to go with many of its outsourcing initiatives is this mutual reliance with suppliers.

Operator

The next question comes from the line of Paul Bodnar – Longbow Research.

Paul Bodnar – Longbow Research

I think you said depreciation was ear marked at $40 million for the year. Did that include or exclude the amortization of financing costs?

Mark Rittenbaum

That does not include the amortization of the financing costs. So depreciation and amortization was $40 million and the financing costs are excluded from that number.

Operator

I am showing now further questions at this time.

William Furman

Thank you for your participation in today’s call. We appreciate your interest. Have a good day.

Operator

Thank you. This concludes today’s conference. You may disconnect at this time.

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