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Executives

William Furman – President, Chief Executive Officer

Mark Rittenbaum – Executive Vice President, Chief Financial Officer

Analysts

Paul Bodnar – Longbow Research

J. B. Groh – D. A. Davidson

[Joe Box – Keybanc]

John Parker – Jefferies

Art Hatfield – Morgan Keegan

[Philip Faccelli – Cantor Fitzgerald]

[Wayne Archembauld – Monarch Partners]

[Daniel Max – Chase]

The Greenbriar Companies, Inc. (GBX) Q2 2010 Earnings Call April 7, 2010 11:00 AM ET

Operator

Welcome to the 2010 earnings conference call. (Operator Instructions) At this time, I would like to turn the conference call over to Mr. Mark Rittenbaum, Executive Vice President and Chief Financial Officer.

Mark Rittenbaum

Good morning and welcome to Greenbriar’s fiscal second quarter 2010 conference call. On today’s call, I’m joined by Bill Furman our CEO and also sitting in on our call is one of our new directors, Victoria McManus who is based out of New York and joined the Board in May of last year.

On today’s call, we’ll discuss results and make a few remarks about the quarter that ended and then we’ll update our outlook for 2010, and after that, we’ll open it up for questions.

But first, as always, matters discussed in this conference call include forward-looking statements and I’d like to remind you that these statements are within the meaning of the Private Securities and Litigation Reform Act of 1995. Throughout our discussion today, we’ll describe some of the important factors that could cause our actual results in 2010 and beyond to differ materially from those expressed in any of our forward-looking statements and I invite you to look at the statements and risks factors as they appear in our SEC filings.

With that behind us, today we did report our results for the second quarter. I’d like to remind investors that when you look at our statement of operations, that the accounting world has decided to change a convention that has been in place since the beginning on mankind and net earnings and losses are now referred to as net earnings attributable to controlling interest, but it really is comparing apples to apples to what used to be know net income or net loss or the bottom line.

So we reported a net loss attributable to controlling interests for the quarter of $4.8 million or a loss of $.28 per share on revenues of $200 million. The results for the quarter include a noncash charge of $1.3 million net of tax or $0.08 a share related to amortization expense and amortization of convertible debt discount.

These charges are included in interest expense in our income statement, and excluding these charges, our loss per share would have been $0.20. These non-cash charges will continue to appear through the third quarter of our fiscal 2013.

As anticipated, the results for the quarter were weaker than our first quarter. We expect it to be our weakest quarter of the year, and in fact the second half of the year will be significantly stronger than the first half. And for the year as a whole, our outlook and guidance has not changed from the prior quarter where we do expect we will have modestly EBITDA before special charges for the year on lower revenues that in our fiscal 2009.

Now let me address some highlights for the quarter. To supplement the year over year comparisons you’ll find in the financial tables in the press release, I’ll add color on a sequential basis, that is related to comparing the second quarter of this year to the first quarter of this year.

In our refurbishing and parts segment on a sequential basis, compared to Q1, revenue increased modestly primarily due to improving business trends and higher scrap metal prices, both of which are consistent with improved macro economic trends.

Gross margin for this segment was 11.6% of revenue, essentially flat with Q2 of last year but up sequentially from Q1 of this year, again due to the same reasons I just mentioned, improving economic macro climate and higher scrap prices.

While we would prefer mix of business more weighted towards refurbishment rather than repairs, our shops are becoming increasingly full as cars are pulled out of storage and in need of repair as the economy recovers.

We are also bringing back workers as a result to address the increased activity levels. We expect that over time, as the recovery is sustained, the mix of work load will become more favorable and weighted towards refurbishment. As well, well volume should increase.

Now turning to our manufacturing segments, results improved from last quarter and we are pleased with the performance of this segment throughout; that is both with the performance of new rail car in North America and Europe and with our marine manufacturing business.

New rail car deliveries of 800 units were more than double the 350 units in Q1 and year to date new rail car deliveries are 1,150 units and we anticipate delivering 2,600 units for the entire fiscal year.

Overall, our gross margin for the second quarter was 7.3% of revenue, up a bit from the 7% of revenue we experienced in Q1 and our ability to ability to maintain the margins in the 7% to 8% range for the balance of the year will partly depend on maintaining marine production rates at current levels and Bill will speak to this a bit more in his comments.

We currently anticipate restarting new rail car production at our Mexico facility in our Concarril facility in the fourth quarter as a result of an increase in new rail car demand and orders received after the quarter end.

Turning now to leasing and services, our lease fleet utilization was up sequentially to 92.4% compared to 91.3% in our Q1, and for the quarter, our margin was 38.5% of revenue, which is down from 41.4% of revenue in Q1. The sequential decline is really due to two reasons; one is lower gains on sales of equipment, which flows directly to the margin line. Gains for the quarter were minimal at $.1 million compared to $.9 million last quarter.

As well, we took a rate adjustment, an annual rate adjustment for truing up rates that we charge at one of our management contracts, and that also impacted the quarter.

During the downturn, our strategy has been to focus on short term leases, so as to be able to benefit from the upturn and the strategy is paying off as evidenced both by increases in utilization rates and increased lease rates, and a stabilization of lease rates as compared to what we had been experiencing over the prior several quarter.

Selling and administrative costs for the quarter were $17 million an increase from the $16. 3 million for the same quarter of last year and the increase in G&A is principally due to higher activity levels at our GIMSA manufacturing joint venture.

Interest and foreign exchange was $12.4 million for the quarter compared to $11.1 million in Q1. The increase from last quarter was due to increase in foreign exchange losses of $.5 million and of $.6 million accrual of interest associated with the recording of certain tax reserves. On a more normalized basis, this line item should run about $11 million to $11.5 million a quarter.

We anticipate our net CapEx for the year to run about $30 million and our depreciation and amortization will run about $40 million for this year. We continue to manage the company with a view towards cash flow and liquidity, and ended the quarter with $68 million of cash and $103 million of unused additional borrowing capacity virtually unchanged from our prior and subsequent to quarter end; we received a $14 million tax refund.

Finally, one last thing before I wrap it up and turn it over to Bill, some of you may have noticed that we filed a $300 million universal shelf registration statement last night with the SEC. I wanted to address that. The shelf is of course still subject to review by the SEC and has not been declared effective.

It does cover a wide variety of securities including debt, warrants and convertible issues and equity. And we really put this in place as a part of our overall capital structure management strategy. I put in it in the category of just prudent management and good financial housekeeping. We don’t have any current plans to draw on the shelf and will continue to evaluate that as we go forward

Those are my comments. I’ll turn it over to Bill and then we’ll open it up for questions.

William Furman

Thank you Mark. I’ll comment briefly this morning on our results for the quarter and then turn the rest of my comments to the operations and the industry market conditions.

During the quarter, we had stronger than expected results from manufacturing both rail and marine, and this was partly offset by weaker than anticipated performance from our refurbishment and parts business.

Also as expected, our lower tax rate for the quarter gave us a little protection from a pre-tax loss of $5.2 million, converting this pre-tax loss to a net loss of $4.8 million. However, our EBITDA of $16 million compared very favorably to the $9 million of the previous quarter, same quarter last year.

Our goal for the balance of 2010 is to return to profitability and this plan remains sensitive as Mark indicated to actual marine backlog and run rates as well as expected improvements in our refurbishment parts business segment.

Turning to the market place and general market conditions, all of our core markets remained weak in the quarter, and visibility is still limited. However, in the last six weeks, one month following the end of the quarter and the last few weeks of the quarter, there’s been evidence of strengthening in all of our markets with early signs of increased activity and demand across all lines of business.

These improved conditions have been reflected in improved new order conditions both for rail cars and marine in our manufacturing and for wheels, repair and refurbishment in our refurbishment parts segment. In addition, lease rates are beginning to firm up on leased equipment and utilization statistics are increasing on our leased fleet.

Improvements in rail loadings and declines in storage statistics are helping fuel this increased demand. In the first 12 weeks of 2010 ending March 27, North American rail car loadings were up 4.8% from the same period in 2009. Most commodity groups showed increases except for coal, which was down 6.4%.

For example, grain was up 10%, metallic ores 33%, chemicals 33%, automotive 38% and inner modal containers 12%. Metals and products were also up 38%. Car storage has declined in the two western railroads and in at least one of the eastern railroads in significant amounts.

During the quarter, Greenbriar placed an order for a sponsored barge in our order for additional marine barges received from a third party customer, allowing or marine business to continue to operate at present rates of production.

In recent weeks, two separate orders were received in North America for a total of 300 new covered hopper cars. Some of these cars will be placed at our Concarril facility, which will be reopened on a limited facility in light of renewed demand. Our European unit received orders for 130 freight car wagons. The total of all this new business was about $40 million.

On a consolidated basis, Europe reported a small pre-tax profit exceeding its goal of breakeven during a difficult year in that market place. We reduced the breakeven rate level of that facility over the past 12 months so that we can breakeven at a run rate of only 600 to 700 cars per year.

This remains our goal for 2010 and we’re hopeful for improvement in that marketplace. Longer term, we hope to diversify our business base in Europe and we’re actively recruiting for additional senior management talent there.

Our relationship with GE Rail continues to be constructive, and GIMSA has settled into the agreed production schedules on this contract. Ancillary benefits are being realized as expected with repair work for our Gunderson facility in Portland, Oregon and other agreed work flowing from the GE settlement.

So at the close of our quarter we received orders for program and bad order work on almost 1,000 units of equipment for our refurbishment and parts segment valued at about $15 million as well as a number of other smaller awards. With this, and an increase in car loadings, we expect refurbishment and parts performance to improve during the second half of this year and into 2011. We were disappointed in the results for the first half.

The outlook at our major locations for repair as Mark has indicated, has improved considerably since the close of the quarter. We’re quickly moving from having considerable excess capacity in that unit to filling up most of our locations to the limit of present manpower and we are hiring in multiple locations.

We expect pricing and yields to improve as cars move out of industry storage and into service with many needing repair or rehabilitation after being placed in storage in bad order condition.

Our wheel business similarly had suffered during the six months as volumes declined. However, with higher scrap pricing and more volume expected, this is good news for our entire refurbishment parts segments and we expect wheels to also be a part of that.

During the quarter, we were successful in being awarded two important two important wheel renewal contracts. These will have the effect of protecting our base loaded business in that part of this segment. In our parts business, we also received important long term awards for bearings and cushioning units.

Turning to our leasing business, our lease fleet utilization continued to improve on our own fleet of approximately 9,000 cars increasing to0 92.5% from 91% at the end of Q1 as compared to 88% at the end of our August 31 fiscal year. We have remained as Mark said, short term on most of our renewals. As the economy improves, we have significant upside in lease maturities and therefore, will be seeking higher rates on renewals.

We continue to grow our managed fleet. We’re pleased with the assimilation of new business from the addition of major new customers in the past year.

Overall, we continue to manage for cash flow, and our immediate goals are to return to profitable operations in 2010. Our new shelf registration demonstrates our continued interest in our balance sheet. We will be ready for improved conditions for raising capital in the future as our operations improve and as the economy stabilized.

We will also continue our drive for increased operational efficiency during the balance of this year. Again, as Mark has indicated, we believe that our second half of the year will be an improvement over the first half and we’re cautiously optimistic about the near term upside in each of our business segments.

Back to you Mark.

Mark Rittenbaum

Thank you Bill, and operator, we’ll go ahead and open up for questions now.

Question-and-Answer-Session

Operator

(Operator Instructions) Your first question comes from Paul Bodnar – Longbow Research.

Paul Bodnar – Longbow Research

I wanted to follow up on some car types and where you see strength and it sounds like you had some orders for covered hoppers here in the quarter. I wonder if you could talk a little bit about what you’ve seen since the end, but also anything out there in terms of getting additional orders and activity on the small car side. I know you can build those car types post the GE deal.

William Furman

On the tank car side our production is pretty much committed to GE during the next two years, although we are in a position to accept additional orders. We see some strength in the GDE market, the [dry to stone] market which is related to ethanol, and in general you’re correct that there’s selective demand emerging for higher capacity and good operating condition covered hopper cars.

Paul Bodnar – Longbow Research

In the refurbishment parts business, is that kind of set to outperform? Has it come along with expectations of what your outlook is there or is it kind of recovered a little bit sooner. If you could just kind of compare that to what your thoughts were on the last call.

William Furman

Well as you know, refurbishment and parts, repair, this segment is intended to be less cyclical and to balance the more extreme cyclicality of our manufacturing segment. However, having said that, I’m disappointed in the actual performance of that unit in the first six month, particularly in the rail car repair sub segment.

Of course everyone in the industry has deferred CapEx. Many cars, when they were taken out of service were replaced with a bad order, or simply stored, and were replaced with cars that were operable, so there’s quite a lot of deferred maintenance in the industry that we’re now seeing the early signs of that coming back.

But we need to be more proactive in that unit at longer term repair or refurbishment programs that bridge the cycle. But having said all that, we’re optimistic that that part of the business will recover comparatively given the changes we’re making and the trends in need by our customers in the next six months.

Paul Bodnar – Longbow Research

So the recent results were a little bit disappointing but you’re pretty optimistic.

William Furman

Just to give you an example, the first five months of the year, our gross margin in that business was equal to the gross margin in the last month of the year in the repair sub segment, just for the repair part of it; not wheels. Wheels are a major driver of this segment in the current environment.

But on the repair side, we’ve seen just a real surge of business with pricing firming up and we’re able to, I think we’ve got much better visibility in that part of our business now, that piece of refurbishment and repair business.

Paul Bodnar – Longbow Research

On the wheel side in particular, these cars sit. At what point does rust become a factor. Is it at six months, a year and the wheels almost have to be replaced when it comes back or does that not happen. What part will we see that impact from?

William Furman

The railroads have done a very good job of storing cars. Occasionally they can have some vandalism depending on the location of the cars, but a car can remain in storage for quite awhile without deteriorating, so that’s not really a factor. Rust from that sort of thing can easily be cleaned up. If something sits for years and years, for 10 years or five years, it’s difficult to put it back in service.

I think more importantly, you have queuing problems getting long, long trains of equipment stored, getting a car out of the back of the queue, a series of cars in the back of a queue can be costly for railroads, so once cars are stored they can remain stored until they’re really needed.

What’s been happening again, is a lot of broken cars or bad ordered cars are put in storage and replaced by other cars. Now as at least in the western railroads, substantial amounts of cars are coming out of storage. Those cars, many of them have to be restored or repaired, at least in terms of their conditions. That’s filling up railroad shops and it’s certainly beginning to fill up the contract shops on the outside as well.

Paul Bodnar – Longbow Research

It looks like the shelf registration is up there and things are getting a little better. Can you give any further thought on just industry consolidation on the rail car side or any further on potential targets on refurbishment and parts, expanding that business?

William Furman

We’re always open to strategic opportunities. I think that it’s very important that we stay the course and keep our eye on the operational profitability. The pre-occupation with strategic things can – it’s certainly a matter of timing and opportunity. It’s difficult to consolidate in the manufacturing segment, and given the massive amount of over capacity it’s questionable one would want to take the trip.

I think there will be industry rationalization over time, but I don’t see that as a major strategic priority for us right now.

Operator

You're next question comes from J. B. Groh – D. A. Davidson

J. B. Groh – D. A. Davidson

Had a question on the car types you delivered in Q2. I think there was a lot of boxcars in there and it sounds like more of this stuff is shifting to Mexico, so is there a pretty significant geographic shift in terms of the number of units you’re going to deliver say in the second half of the year versus this quarter?

Mark Rittenbaum

No. There’s a couple of things here. One, we’re currently building hopper cars and tank cars. That’s where our focus is, and our focus is out of – this is on the new car side – out of our GIMSA joint venture facility.

You’re correct that we are shifting some refrigerated boxcars out of our Gunderson facility here that are winding down, and perhaps you saw some of those recently. But we’ll continue to focus our new car production, major production at our GIMSA facility.

I guess you’re correct that we’ll open our Concarril facility as Bill said on a limited basis and Gunderson will more focus on repair and refurbishment. But in the big scheme of things, GIMSA is still going to be the vast majority of production.

J. B. Groh – D. A. Davidson

I was just trying to get sort of a feel for how the margins could change in manufacturing with more production there versus here.

Mark Rittenbaum

I think in the shorter run, it is not going to be material. The bigger driver as Bill mentioned, was the ability to maintain our marine production rates at our Gunderson facility, which really ties in both to overhead absorption here into our Gunderson facility and the margins that we realize in the marine business. That’s going to be the biggest driver in the near term.

J. B. Groh – D. A. Davidson

I think last quarter you mentioned there’s a potential hole in your production schedule and I think you mentioned that received a barge order in the quarter. Is that correct?

William Furman

We did two things in the quarter. One is anticipating stronger demand in the second half of the year and working with some of our marine customers. We sponsored a barge which we’re hoping to syndicate and sell in the second half of the year, by year end.

Secondly, we received an order which plugged the hole we talked about last quarter. One of the things that’s really good about a marine operation is that using lean manufacturing and with a strong backlog, then very, very efficient and they’re able to get throughput through that facility very rapidly compared to our original forecast. So they’re performing better than we had expected.

But the bad news is that when they do that, they open up space earlier than anticipated and these customers that we have cued up for the backlog, which is sizeable, don’t want to take barges early, so they’re creating issues with their success.

So I think that the major thing to focus on as an analyst looking at us for the balance of the year is whether we’re able to maintain that marine rate of production. If we have to change it, and if it’s material as I would expect it to be, we’ll make some sort of announcement about it.

I’m hopeful though, that we can continue to do as we’ve done this quarter and secure new business that will bridge us into the backlog that we have.

J. B. Groh – D. A. Davidson

But when you make your guidance comment of slightly lower revenues, does that assume that that barge business stays stable?

Mark Rittenbaum

I’m sorry, when we made the comment about slightly –

J. B. Groh – D. A. Davidson

What you said, you’re I don’t want to call it guidance, but your sort of outlook says that slightly lower revenues but better EBITDA. Does that assume that a steady state at the barge business?

William Furman

A steady state at the barge business, production rates. We’re not increasing those rates. We expect to be able to maintain them. If that expectation changes, we’ll say something about it if it’s material.

J. B. Groh – D. A. Davidson

On this refund that you’re getting, that’s just a cash flow impact, right? There’s no earnings?

Mark Rittenbaum

There was in our tax rate for the quarter, there was about a, related to that refund, there was a tax reserve of about $1 million that affected the tax line as well and that’s why we had such a low tax rate for the quarter, and then there was about $.5 million of interest, and that just related to setting up a reserve against part of the refund.

Operator

You're next question comes from [Joe Box – Keybanc]

[Joe Box – Keybanc]

My first question is actually in relation to the leasing business. You mentioned earlier that there was actually a contract renegotiation. I’m curious if that was a onetime true up item that could be considered somewhat non recurring to the margin or is that something that’s actually going to be ongoing that could impact the margin going forward?

Mark Rittenbaum

It’s more the latter and just to clarify, it was not a contract renegotiation. We have a contract that’s been in place for awhile that at the end of the year based on the actual number of miles cars travel and how many of them are in storage, we true up and estimate a rate that we actually charge the customer in an actual rate, and at the end of this year, the true up actually resulted in a downward adjustment.

But that’s not an ongoing thing. That adjustment was about $700,000 so each year we would have some kind of true up plus or minus, but this is not going to be a recurring negative amount to each quarter.

[Joe Box – Keybanc]

On the aftermarket side, I would have actually expected this business to probably more closely track car loadings through the downturn, but it seems like it was off about twice as much as car loadings. As we look at car loadings sequentially improving, could this be a two times grower as we move into the upturn?

William Furman

Are you referring to two times on the revenue side?

[Joe Box – Keybanc]

On the revenue side, correct.

Mark Rittenbaum

I’m not sure that we would take it all the way to that. I think that we view with our current footprint, the peak of the market with our current footprint, we are running about $150 million a quarter of revenue from that segment. Scrap prices were a little bit higher but if you go back to 2008 time period, that’s kind of the levels we were operating at, and that might be a better type of an indicator.

William Furman

I agree. I think that would be a better goal to look at actually on a higher side in the near term. We’re constrained somewhat by labor availability and we’ll have to be bringing people back as well.

Mark Rittenbaum

But you’re correct that off $100 million, that’s still pretty substantial, or $94 million last quarter. That would be a pretty substantial increase, but not a double.

[Joe Box – Keybanc]

Can you talk a little bit about the number of inter modal cars in storage? I know it’s been a pretty quiet market over the last couple of years, but given we’re starting to see a nice acceleration in container loadings, is it possible that we could see some new car activity come into play or are we still looking at cut down work? Any color there would be helpful.

William Furman

I think that’s it really good news immediately for the cut down work. We’re tracking additional cut down work for Gunderson facility or expansion work where we would be lengthening 48 foot wells to 53 wells for domestic service.

We see strength in the domestic market and we expect that might be a source of the next round of orders in inner modal, and more importantly, we’re seeing a lot of inner modal equipment now coming out of storage and being put into service.

As that happens, that will drive both of those items; the mix of equipment that is required, more 53’s than 40 foot wells in the near term, but also a rush by railroads and other owners to try to make their equipment as efficient as they can so that railroad velocity won’t be impacted negatively by having the wrong size equipment in service and having longer trains than necessary.

Operator

You're next question comes from John Parker – Jefferies.

John Parker – Jefferies

Can you tell me what the un-amortized discount on our debt was at the end of the quarter?

Mark Rittenbaum

Why don’t we see if we can find that off the cuff here, and if not then perhaps I can take this offline with you. If I can, then I’ll answer it later in the call.

John Parker – Jefferies

You said in the first quarter of the year you thought – were you talking about the calendar year, because it did seem you showed some strength over the first quarter of the fiscal year. I thought I heard you say earlier in the call that you thought this was the worst quarter. This looks like it could have been the worst quarter of the year. Were you talking about the calendar year, because it seems it’s a little bit stronger than the first quarter of the fiscal year.

Mark Rittenbaum

We think – I was referring to the fiscal year, that we expect the second half to be stronger than the first half of the year and you know in Q1, we lost $0.19 and this quarter we lost $0.28 in Q2, so that’s we refer to that as worst quarter of the year, of the fiscal year.

John Parker – Jefferies

I was looking at EBITDA and revenues. You A/R numbers seems, your day’s sales outstanding seem to be staying persistently high. Can you give us any color on driving that down or is it just something that you don’t have a good handle on?

Mark Rittenbaum

I think the tax refund at the end of the quarter which, at the end of the quarter that $14 million was sitting on the balance sheet as A/R and I don’t think we’re certainly not seeing a deterioration in our receivables or our bad debt allowances, so that’s not what’s driving this at all.

Of course in this economy, we’re focused on credit review and managing working capital, but we’re not seeing a deterioration in that area.

John Parker – Jefferies

That $14 million explains it. I think in the past you’ve given the overall percentage of the fleet that’s in storage. Can you hazard a guess now or is it really hard to say?

William Furman

Statistics suggest that the fleet storage data has improved to close down to closer than 400,000 units stored. I don’t agree with that number. I think the actual effective storages less than that. Just anecdotally looking at three railroads we’ve seen movement out of storage, segments of the fleet in the last quarter 50% of the stored equipment on three separate railroads.

So I think that as we expected, when traffic does begin to bounce back, velocity changes, declines and railroads need more equipment to carry the same volume of traffic, and I think that trend will continue.

This snaps back faster than people expect. As it went into recession faster than people expected, it always seems to snap back faster. So I’m much more, as you can probably hear from the content of this call, much more bullish on the storage situation than some of the industry commentary.

John Parker – Jefferies

Earlier in the call, I think I missed some of this, you mentioned some subsequent orders to the end of the quarter. I wanted to clarify. I think you have one barge that you’re building. Was that included in the backlog or is that subsequent to the end of the quarter and then you had an additional barge order subsequent to the end of the quarter, is that correct?

Mark Rittenbaum

We had a barge order that was subsequent to the quarter end. When we place an order for a barge, which Bill refers to as a sponsored barge, that is not included in our backlog statistics. When it’s from a third party customer, it’s included in our backlog statistics.

John Parker – Jefferies

When you talked, in your disclosure you talked about $35 million of anticipated production for the rest of the year. Does that include both those barges, right?

William Furman

No, because the orders are all for 2011 production or very late in the end of this year, the orders that we’re talking about. We have long lead times in that segment for materials.

John Parker – Jefferies

It seems that your guidance has picked up. I thought at the end of the first quarter you had said you had $30 million of planned production for the remaining three quarters, but then you bumped that up to $35 million for the remaining two quarters. Is that just some of the other orders that came in during the quarter?

William Furman

You’re still talking about marine?

John Parker – Jefferies

Yes, marine.

William Furman

Well, you’re a very discerning fellow because we have become a bit more optimistic about marine than we were at the end of the last quarter. Perhaps that’s what you picked up on, just because of our ability to continue the production rate, at the high rate that we’ve been able to achieve.

John Parker – Jefferies

There’s a similar bump up in your production plans for the full year. Before I think you had them at 22,000 rail cars and now I think you’re coming in at 24,000.

Mark Rittenbaum

2,200 and 2,400 but yes.

John Parker – Jefferies

There were some additional rail car orders at the end of the quarter. Could you just recap those for me?

Mark Rittenbaum

There’s a total of 430 cars with a value of about $40 million that we received subsequent to quarter end and 300 of those are in North America and 130 of those are in Europe.

William Furman

In addition to that, we received about $15 million of major identified program or repair work plus a substantial amount of smaller contracts. That’s important directionally just because we’re seeing a reviving demand in parts of the business that affect positively both our new car manufacturing and our repair and refurbishment GRS segment.

John Parker – Jefferies

Can you comment at all on the nature of the buyers? Were they leasing companies? Were they rail companies?

William Furman

We prefer not to comment on that now just due to the nature of the agreements. They often prefer not to be published.

Mark Rittenbaum

I’ll answer your very first question. You asked about how much that discount is on the books and it’s $25 million of unamortized debt discount which is really shown as a contra to notes payable on the balance sheet.

John Parker – Jefferies

So that includes from $12 million at the end of the year.

Mark Rittenbaum

No.

Operator

You're next question comes from Art Hatfield – Morgan Keegan.

Art Hatfield – Morgan Keegan

On the expense side, I think you made some comments with regards to your ability to keep the gross profit margin in manufacturing in the 7% to 8% area. Did you make comments to that, and if so, could you reiterate them?

Mark Rittenbaum

I think our comments on the margin, we were in at 7.3% for the quarter which was up a little bit from Q1, and the comments really centered around our ability to maintain margins in the 7% to 8% range. Probably the greatest thing on that is keeping marine at current production rates, and Bill talked about that.

So far, we’ve been able to do that. We said at the end of our Q1 call back in January that we were concerned about our ability to do it, but we have been over the last three months. But we still have some hurdles to clear to be able to maintain those production rates, and that’s what’s going to be the biggest driver of our manufacturing margin.

Art Hatfield – Morgan Keegan

Thinking about the impact from rail car manufacturing on the go forward, if things get better and that picks up, first are there any start up costs related to getting the Concarril line back up and going?

William Furman

Yes, there are, but we factor that into the analysis and it’s more efficient to use that facility to defray the losses of keeping the facility closed. There’s substantial upside in that facility if we can just bring it to a breakeven.

We’re definitely anticipating more demand for that car type so that would be another driver for the next year of operations whether we can keep that factory open. We also developed a small business sideline there during the downturn that looks promising, so we remain attentive to keeping that momentum going in Concarril.

Art Hatfield – Morgan Keegan

As we think about rail car production improving, is there way, and I know this is a difficult question, being through a couple of these cycles, but is there any way to think about the incremental margin on say a certain number of rail cars being manufactured on the go forward?

William Furman

I’m not clear exactly what your question -

Art Hatfield – Morgan Keegan

On any incremental cars that you build on the go forward is there a way we could think about the incremental margin to the business or is it too complicated to get into?

William Furman

It’s so much driven by market conditions and whether we go after major big orders and fat pricing or we try to pick off selected higher yield opportunities, which is what we prefer to do.

Mark Rittenbaum

I agree with that. I’d say that one benefit that we have, because again we have a relatively strong backlog, which is a real benefit and blessing. You can see that is profitable backlog. That also gives us the ability to be very select in the orders that we take down, so some of the orders, larger orders in the near term might get taken down by others with a lot of the overcapacity out there may not be attractive business, and you may see that our market share, that we may choose to pass a number of those opportunities and focus on ones that are really going to give us a bang for the buck.

William Furman

Just to clarify, in an upturn, one of the common mistakes in our industry is to fill up factories with unprofitable business because it’s there and because you can take a big order down. We understand why companies do that because you can achieve operating efficiencies quickly and get a high run rate.

However, if you fill your – if you’ve got a long backlog with weak margin, you lose the ability to price moving up the cycle, so we tend to hold our fire until the very last minute if we can at this stage of the cycle and pick off transactions and move our production up a little more smoothly which allows us to be in many ways more efficient in restarting a factory like Concarril.

Art Hatfield – Morgan Keegan

If I were to look at your company right now and try and look at kind of as cyclical analysis on how you could, what kind of profitability you could have through a cycle, and I understand there’s a lot of variables to that, but given what you’ve done, alleviating yourself of the cost headaches related to Nova Scotia. Secondly I take it from this call that on a go forward, you’re really not going to do much new rail car production at Gunderson. With all that said, is it fair to say that all other things being equal, that you should be a much more profitable company through this cycle than you have in the past?

William Furman

There are three or four major points in that regard. First, if one assumes a little more optimistic slant on new car demand that the market is seeming to suggest with storage statistics today, and I’ve already said I share that. And secondly, if you accept the philosophy of timing as being important about being important in how we ramp up in that, and then you look at Gunderson and Concarril as the major upsides, but with a very stable base of backlog at GIMSA so if we play our cards right in the next six months, we should be able to optimize our pricing and fill our plants with more profitable business than unprofitable business if we’re selective.

So I think we have a lot of upside in manufacturing which, and just to correct one misunderstanding. We’re not saying that we won’t be building new cars at Gunderson. That continues to be our nerve center as far as engineering and other business is concerned.

We’re focusing on marine manufacturing today, which is using a lot of our plate steel capacity and we are doing repair and cut down work which is equally profitable, more profitable than new cars in the current climate. Gunderson will continue to be our primary double stack car producer.

Operator

You're next question comes from [Philip Faccelli – Cantor Fitzgerald]

[Philip Faccelli – Cantor Fitzgerald]

At the end of the quarter you had $68 million of cash and you received the $14 million post the end of the quarter so you’ve got quite a bit of cash sitting on the balance sheet. How much cash do you think you need to run the business and how much of that is cash that you could use for discretionary purposes like paying down debt?

Mark Rittenbaum

I don’t know that there’s a magic number that we say this is the amount of cash that we want on the balance sheet. We definitely want to maintain liquidity and managing the company for cash flow during the downturn.

Having said that, it does very little good to just sit there with $68 million or $75 million or $010 million and just have it sit on the balance sheet and you’re earning 1% interest over the longer term. So we are looking at ways to deploy that capital prudently, but we’re going to continue to be prudent during the downturn.

So I don’t know that I look at it as a magic number that we can’t go below X million of cash. We’re very liquid right now and we’re pleased with the liquidity that we have.

[Philip Faccelli – Cantor Fitzgerald]

In terms of restrictions to buy back your bonds, is there restricted payments that you’d have to get underneath to buy back at 8 3/8?

Mark Rittenbaum

No.

[Philip Faccelli – Cantor Fitzgerald]

So you’d have the ability to buy those back at any point?

Mark Rittenbaum

Yes, if we so choose to do.

[Philip Faccelli – Cantor Fitzgerald]

What was the balance on the term loan at the end of the second quarter?

William Furman

I can’t resist saying we would have been a lot better buying those bonds back when the yield was 25% or 30% than it is at 10%. However, we continue to look at that.

Mark Rittenbaum

Which term loan are you referring to or just term loans overall?

[Philip Faccelli – Cantor Fitzgerald]

I know there’s $75 million on the term loan due June 2012 and then there’s the original term loan that was in place prior to the Wilbur Ross investment.

Mark Rittenbaum

The total amount of notes payable are $527 million, and again we have about $25 million of debt discounts, so the face value of all of our notes payable is about $550 million.

[Philip Faccelli – Cantor Fitzgerald]

So about $140 million outstanding on that.

Mark Rittenbaum

But the first maturities really are the Ross maturities. So of that $550 million, there is $75 million maturing in 2012, $100 million maturing in 2013, about $140 million in 2014 and $235 million in 2015, s they’re pretty staggered maturities, an again as Bill said, the first one coming up in 2012.

Operator

You're next question comes from [Wayne Archembauld – Monarch Partners]

[Wayne Archembauld – Monarch Partners]

On the restart of the facility in Mexico, I’m just curious to know, was it the new activity at the end of the quarter that prompted you to get that started or had you thought that through early on in the prior quarter?

Mark Rittenbaum

Referring to the reopening of our Concarril facility, we had viewed that when GIMSA had reached high production rates and nearing capacity with near term demand that the next likely facility to product cars other than as Bill mentioned, double stacks, would be our Concarril facility. But the decision to reopen that on a limited basis is based on actual demand and actual orders rather than just speculation on our part.

So that order was received after quarter end. So we knew strategically that we’d be looking at Concarril, but the decision was made after quarter end based on natural orders.

William Furman

It’s driven basically by two things, just to elaborate on what Mark has said. The type of cars that we’re running at Concarril now on the production rate in the near term takes that, now that we are running at a high rate on covered hoppers at Concarril, unless we open another line there, we have to go to another facility for cars that are materially different.

And the two kinds of cars we’re seeing, each of those markets look like they’ll have legs, so we don’t want to move back and forth from one type of car to another. That’s why we really needed to open Concarril]

[Wayne Archembauld – Monarch Partners]

Is there any way you could open it earlier than you’ve mentioned?

William Furman

No. No, I think we’ll be able to open and if necessary we could close it down again very efficiently. We’ve got a very favorable labor agreement there that would allow us to do that, but I don’t anticipate that will occur. I think that we’ll have enough legs in that market to continue that line.

Operator

You're next question comes from [Daniel Max – Chase]

[Daniel Max – Chase]

Can you tell us what the split was in revenue that you booked for the marine business as a subsection of manufacturing and what the gross margins were for that piece?

Mark Rittenbaum

We don’t break out, actually we don’t break out either, but what we’ve said is marine is currently about a $70 million to $80 million a year business so you can pro rate that, but I’d prefer not to –

William Furman

All of our heavy, all of these barges that we’re building are heavy ocean going barges. They’re not river barges. They’re 4,000 to 5,000 ton minimum barges. They’re typically 400 X 100 two story deck barges or something similar, or oil barges. So that’s the general category of most of the barges that we have been producing, all ocean going.

[Daniel Max – Chase]

On the hole, or potential hole in production, are you clear through the rest of the fiscal year or are you facing a hole in barge production without getting new orders sometime in next quarter or for the fourth quarter?

Mark Rittenbaum

We’re faced with a material order date during the fiscal year that a decision would need to be made on, on a material order date during the fiscal year, which again would be driven – the decision to order those materials would either be based on a third party order. And then as Bill refers to, if we’re not able to keep the order booked at the current rates, that’s where we would be faced with the decision to slow down production.

[Daniel Max – Chase]

Can you talk about costs associated with restarting rail car production at Sagan?

Mark Rittenbaum

It’s relatively nominal. One of the advantages of that facility is that we lease the facility from Bombardier, and the employees are provided by Bombardier, and we have maintained during the downturn a key employee at that facility. But the cost in the entire facility itself, is not a cold facility because Bombardier continues to operate out of there and we’ve been doing some small non rail car related work. So it’s relatively nominal cost of start up of that facility.

I thank everyone for participating on the call today. As I mentioned, all the time we have online here, but I’d be happy to take calls offline and we appreciate your interest in the company, and have a good day.

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Source: The Greenbriar Companies, Inc. Q2 2010 Earnings Call Transcript
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