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American Railcar Industries, Inc. (NASDAQ:ARII)

Q1 2010 Earnings Call

April 29, 2010 10:00 a.m. ET

Executives

Dale Davies - CFO

Jim Cowan - President &CEO

Analysts

Steve Barger - KeyBanc Capital

Paul Bodnar - Longbow Research

Tyson Bauer - Wealth Monitors

Art Hatfield - Morgan Keegan

Daniel Max - Trafelet & Company

Jeff Skoglund - UBS

Operator

Welcome to the American Railcar Industries Incorporated First Quarter Earnings Conference Call. My name is Christine, and I will be your operator for today's conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the call over to Mr. Dale Davies. Mr. Davies, you may begin.

Dale Davies

Thank you, Christine. Good morning. I would like to welcome all of you to the American Railcar Industries first quarter 2010 conference call. As Christine said my name is Dale Davies, I'm the Chief Financial Officer. I would like to thank you for being with us today. For all of those who are interested in the replay of this call will also be available on our website, www.americanrailcar.com shortly after this call ends. Joining me this morning is Jim Cowan, our President and CEO.

Our call today will include discussion regarding Railcar Industry, our plan operations and the Company's financial performance. We will also make a few comments about our joint ventures. Following this remarks we will move to the question-and-answer session.

Before we get started let me remind everyone that today's call contains forward-looking statements including statements as to estimates, expectations, intentions and predictions of the future financial performance. Participants are directed to American Railcar Industries, SEC filings and press releases for a description of certain business issues and risks.

A change in anyone of which could actual results or outcomes to differ materially from those expresses 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.

Jim, you please start the call with few comments about our industry and our plan operations.

Jim Cowan

Thank you, Dale and good morning. The weakness in the U.S. economy and resulting downturn in the Railcar Industry adversely affected new railcar deliveries in the first quarter of 2010. While the Railcar industry is still at a low point, we seeing new railcar loadings increase with the March average loadings per week being the highest level seen since November 2008.

While the ideal view as railcar fleet remains sizable at 25%. We saw more than 61,000 railcars coming out of storage in the first quarter. We believe this may indicate that we've seen the bottom of the downturn in the railcar industry. We anticipate that it will take several months of sustained growth in the economy before the railcar industry begins to see a significantly higher new railcar order levels.

Commodities showing the largest railcar load gains in March of 2010 over March of 2009 include grain up over 20%, and chemicals up over 15%. This data is encouraging because it supports our belief that the hopper and tank railcar markets will be among the earliest segments to show recovery.

We continue to core new order opportunities and have been successful in securing new orders in the first and second quarters of 2010 to further strengthen our backlog. In addition to the improvements seen in the railcar industry, we have also noticed the change in the energy and heavy equipment markets. This was evidenced by a significant increase in our steel foundry backlog since January of 2010.

ARI's management team will continue to navigate through this stage of the cycle and has positioned ARI to benefit from vertical integration projects, which have lower costs when the market recovers. Our plans continue to adjust workforce levels and affectively reduce costs.

With new railcar production at low levels, we will continue to use some of the available capacity at both of our railcar manufacturing plans for railcar repair work. This allows us to take advantage of our established workforce and our facilities with paint and lining capabilities well beyond at of most repair shops.

Our railcars services segment has seen increased revenue and improved efficiencies in 2010 due to completed expansion projects, which should further grow our presence in the railcar repair market and the use of our railcar manufacturing facilities. Our repair plans have seen improvement in demand doing parts of railcars that were idle and are now being repaired and returned to service.

I will now turn the call back to Dale for discussion of first quarter 2010 financial results.

Dale Davies

Thanks Jim. Revenues for the first quarter of 2010 were $52 million and down significantly from revenues of $157 million in the first quarter of 2009. Leverage for the first quarter of 2010 were approximately 340 railcars, and down from approximately 1,490 railcars for the same period of 2009.

The rates for revenues and deliveries resulted from depressed demand for new railcars. We expect that weak demand for new railcars will persist while we have slowed railcar manufacturing production rates; both of our railcar manufacturing assembly plants has maintained production throughout this downturn.

Improvements in railcar loadings have declined in storage statistics, where we believe [have weakened] over demand for new railcars. Thus far in 2010, we have received an increased number of requests for quotations and have been successful on securing several orders.

As on March 31st, 2010 we had orders for approximately 500 railcars in our backlog. We substantially slowed our production rates of both plants earlier this year, and expect that our current backlog will take our production schedule into the third quarter of the year. Shipments after that will be dependent upon our ability to secure additional new orders.

Revenues for our railcar services segment were $17 million for the first quarter and up from $12 million in the same quarter of 2009. The increase can be attributed to railcar is been pulled out of storage and the need of repairs as the economy recovers. The completion of expansion projects at our railcar facilities and the utilization of our railcar manufacturing facilities for railcar repair projects.

Gross profit margin in the first quarter of 2010 decreased at 2% from the 10% for the first quarter of 2009. The decrease in margin reflects pricing pressures to secure new railcar orders along with the change in production mix and the impact of fixed cost and a low production environment.

The margin for railcar repair services for the first quarter of 2010 was 16%, up from 15% in the first quarter of 2009. The margin improvement during the quarter was a result of efficiencies and increased volumes generated by repair plant expansions. As previously stated, we are also utilizing excess capacity at a railcar manufacturing facilities for railcar repair projects.

EBITDA when adjusted to exclude gains on short-term investment activity and stock-based compensation expense was a loss of $300,000 for the first quarter of 2010 versus positive adjusted EBITDA of $14 million for the same period of 2009. The decrease was primarily the result of lower volumes and a decrease in gross profit margin as mentioned earlier, and increased losses from our joint ventures as was all partially offset by a decrease in our selling and administrative costs.

Let me remind everyone that EBITDA and adjusted EBITDA are non-GAAP financial measures that are reconciled to our net loss in our press release, which was issued yesterday. The press release is available to the investors' relations page of our website. Net loss for the first quarter of 2010 was $7 million or $0.33 per share, as compared to earnings of $3 million or $0.13 per share for the first quarter of 2009.

The Company's liquidity position is strong with $324 million of cash as of March 31st, 2010 with total borrowings of $275 representing our unsecured senior notes that are due in 2014. We're focused on managing overhead costs to all of our locations during these tough times, and we plan to continue to manage our costs and capabilities to match market demand.

This time I'd like to turn the call back to Jim for a few comments about our joint ventures and new business initiatives that maybe of interest to you.

Jim Cowan

Consistent with other events in the quarter, we continue to see an increase in the number of domestic and international orders at our axle manufacturing joint venture, Axis. Volumes are still low, but as the economy recovers and orders for new railcars begin to increase domestically, we are optimistic about the long-term prospects for this joint venture.

We continue to focus on international opportunities to leverage our expertise and to capitalize on improving global economic conditions. During the first quarter of 2010, we made a $9.8 million equity contribution to our India joint venture company of which we have a 50% ownership interest.

The joint venture also completed its financing during the quarter, and construction of a manufacturing facility near Kandahar is underway. We expect to build prototypes for the Indian market in the fourth quarter of 2010 to achieve certification and showcase the products we planned to deliver into the Indian market.

Management and the Board of Directors will continue to look at opportunities that will further diversify our product line domestically and expand our international presence. We will now take a few of your questions. Christine, would you please explain to our guest how they can register their questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Steve Barger from KeyBanc Capital.

Steve Barger - KeyBanc Capital

Hi. Good morning.

Jim Cowan

Good morning.

Steve Barger - KeyBanc Capital

I did miss the first couple of minutes. Sorry, but for the orders that you took, did you talk about what car types those are?

[Multiple Speakers]

No.

Steve Barger - KeyBanc Capital

Is that something you are willing to talk about?

Jim Cowan

It's about two third, one third and about two third on the covered hopper side.

Steve Barger - KeyBanc Capital

And when you think about inquiries here, your press release indicated that you're seeing increased inquiry activity. What car types are you seeing there?

Jim Cowan

Steve, it's about the same. Tank cars are slower having been for the last couple of quarters, but we are seeing the covered hopper market gets some pickup.

Steve Barger - KeyBanc Capital

Any specific type? Is it the high capacity cars or --

Jim Cowan

It is the high capacity DDG. There is some strong needs for some stainless cars for sodium chloride business and believe or not even we've just got our quote for plastic pellet cars.

Steve Barger - KeyBanc Capital

And any notable activity since the quarter ended in terms of either bookings or inquiries?

Jim Cowan

Well notable, I won't say notable, but clearly where we've taken orders in the second quarter I guess that's the month of April, and it is starting to get a little better than its been for a long time for us.

Steve Barger - KeyBanc Capital

Any -- would you like to frame up the size or type of the orders that you've taken since in 2Q?

Jim Cowan

No. Steve, we will do that at the end of the quarter.

Steve Barger - KeyBanc Capital

Okay. Thanks. I'll get back in line.

Operator

The next question comes from Paul Bodnar from Longbow Research. Please go ahead.

Paul Bodnar - Longbow Research

Hi. Good morning, guys.

[Multiple Speakers]

Good morning.

Paul Bodnar - Longbow Research

It sounds like that; obviously margins on the cars that you've taken recently have been pretty low. I mean, is that pretty much what the margins are going to look like here on the bids you guys are currently making in this kind of pretty competitive environment, or do you expect that it's going to change or can you just talk a little bit around that?

Jim Cowan

Paul Bodnar - Longbow Research

Well on short-term, I think you are going to see it to be very competitive. I think our expectations are later in the year; it's going to start to pickup a little bit.

Paul Bodnar - Longbow Research

And then if I'm thinking of the actual joint venture, what kind of traffic or what kind of overall increases do you need? It was my understanding that is not at breakeven levels yet?

Jim Cowan

It's not. No. our capacity there it exceed over 100,000 axles. Right, we just had our first month of over 1000 axles, so that can give you an idea of capacity wise that were still 5% below 10%, but I think will have soon a month where we will exceed 2,000 axles. So, again the volume there is picking up domestically and we start to placing our orders there just a few months ago because o excess capacity. So, we are now a customer and then internationally we have been certified in over half a dozen countries around the world, and our largest delivery point right now is Brazil.

Paul Bodnar - Longbow Research

Okay. Now there's something would have been what's normal for that market? How much of that market goes to the OEMs of railcar manufacturers? Obviously it probably has a pretty good aftermarket piece. I don't know if you could talk a little bit more about that, just in general how large the North American axle market may be?

Jim Cowan

Well of course, the new car construction does dominate that as you probably can imagine. So, call it a more normalized market, the new car construction is probably on a two third range, and then you've got cost replacement, you've got locomotive, you've got transit as well that go in there, and we've also been qualified with transit axles and just recently locomotive axles. So, we are covering pretty much the whole gamut right now.

Paul Bodnar - Longbow Research

Okay. That's it for now. Thanks, guys.

Operator

The next question comes from Daniel Max from Trafelet & Company. Please go ahead.

Daniel Max - Trafelet & Company

Hi, good morning guys.

[Multiple Speakers]

Good morning.

Daniel Max - Trafelet & Company

A question on some of the vertical integration that you've done; in the past, year to two years really, whether it's with tank head process, the wheel shop or the axle plant, can you quantify what your expectations are for margin expansion on the upfront? I'm wondering if it's fair to say that in the downturn that some of that has been masked by weakness in units and what sort of expectations are, if you have any, for reaping any benefits.

Dale Davies

Daniel, this is Dale. We've put these projects in, and we've also analyzed, and very carefully before we made the investment, and our analysis was various significant savings for us in a couple of areas wanted in the cost of the partner. We were buying, so it's cheaper cost to manufacture those ourselves, but there was also savings in freight because we were bringing these parts in from different parts of the country, and so now we are manufacturing these parts right at our location. So, we save the freight.

There is significant savings we probably haven't published an exact number is to what that benefit is to us, but as you know we need to see the real car delivery quantities go up before we start to realize that, so the savings will be there when we start to see the volumes pickup, but at this point, low volumes, it's probably not helping the whole lot, but its there and it will really improve the earnings once we see the volumes start to pickup.

Daniel Max - Trafelet & Company

Okay, great. And just one more question on the Indian joint venture. Can you speak about what type of car capacity you're expecting at the facility, and sort of what your expectations are there for in terms in that Indian market in terms of sort of car pricing and margins versus the margins that you're experiencing or expect to experience domestically?

Jim Cowan

Sure. Our capacity is going to be a little over 2000 cars with what we are building there. In terms of margins because of the car types that we are actually going to startup on, our first order is going to be a fairly specialized product and those margins are going to be probably in the high teens, compared to the margins that are currently here in the domestic market they are certainly better. Now as we said on the prototype side, we really are going to be doing a construction and getting the facility certified in this year, so it won't make a contribution to 2010, but next year it will be several 100 cars and the year after that approached the 2000.

Daniel Max - Trafelet & Company

So you think you'll be able to get closer to 2,000 in two years?

Jim Cowan

Yes, in 2012, absolutely.

Daniel Max - Trafelet & Company

Okay. Thank you.

Operator

The next question comes from Tyson Bauer from Wealth Monitors. Please go ahead.

Tyson Bauer - Wealth Monitors

Thank you. Just a quick follow up on the last one. Obviously, you must have contingency orders in place based on certification in India to make those projections on your car manufacturing. Is that the case?

Jim Cowan

Yes. The answer is yes. again, we've been working with several not the Ministry of Rail, but several customers that are familiar with ARI, and like I said the car types they have requested are fairly specialized things that we've done here domestically or very similar to and that's I guess why we can say that.

Tyson Bauer - Wealth Monitors

And since we're on the foreign topic, any updates you can provide on CIS or Russian ventures of business either on the axle side or in the actual railcar side of the business?

Jim Cowan

On the actual side no, we haven't. That's a market that's pretty difficult to get into. We haven't been successful there. We have been in Europe, but not there or China, but in terms of railcar manufacturing we have been on our pursuit for a few years to find what I think can be the right fit. We do continue that pursuit, and hopefully we can get to some conclusion fairly soon.

Tyson Bauer - Wealth Monitors

Have you identified a short list of possible partners?

Jim Cowan

We have.

Tyson Bauer - Wealth Monitors

Good. The services outlook, you're expanding your capabilities on that side of the business that seems to be where the activity is. Give us a sense of what that incremental increase to that side, either in terms of top line or margin capability, you see going for the rest of the year?

Dale Davies

Tyson this is Dale. We see a lot of activity in our repair plans. We've expanded that you know and we've seen lowest expansions, so we are pretty good. We probably have a little room to continue to increase in that area. So, w could see a little more growth in the repair plans. We also as we stated we've been using in our manufacturing plants for repair work. We've been taken some fairly sizable projects and to those plans and will continue to do that for the balance of the year. I think we've got some customers that like the fact that we are doing this repair work in facilities. They have great paint shops and lining facilities and we can probably do work a little faster than you might get through your typical repair shop, so I think you might see us continue to do repair work and the manufacturing plants and also a little more capacity available in our repair shops.

Tyson Bauer - Wealth Monitors

Slight increment from Q1, but nothing too drastic?

Dale Davies

Yes, that's probably right.

Tyson Bauer - Wealth Monitors

Okay. Can you characterize how the progression -- obviously it's very early, size of orders and your bidding activity? Is it still kind of dribs and drabs at this point in time, and also the customer types, is it still the leasing companies, or are we really looking at end users or corporate owned type cars that you're doing at this point in time?

Jim Cowan

I wouldn't quite say dribs and drabs, but we've had the 45 car order and the several 100 car order. We've had, you've seen us in the past do the several 1000 car multi-year agreement. We haven't done that. There isn't a lot of appetite there and back to your second question; it's really not the leasing companies that are extremely active today. It's more the shipping community, so folks that historically don't buy cars for every five, seven or ten years so that the guys that are knocking on the door right now.

Tyson Bauer - Wealth Monitors

I'm guessing on the other side of the state it's just as windy as it is here, so I'd be remiss if I didn't ask, any progress on trying to secure a long-term deal on your wind structure venture?

Jim Cowan

No. we've got some grants in place. We've got some couple of areas that we're still trying to pursue in terms of geography and then of course on the customer front. We are still trying to pursue that, but we don't have anything that to announce.

Tyson Bauer - Wealth Monitors

All right, thank you gentlemen.

Operator

Our next question comes from Jeff Skoglund from UBS. Please go ahead.

Jeff Skoglund - UBS

Good morning.

[Multiple Speakers]

Jeff Skoglund - UBS

I just wanted to dive a little more into the quoting activity and the rail activity level. I think you mentioned that rail activity is picking up, and people are pulling railcars out of storage. One, did I hear that right? And two, what's your sense for the amount of parked fleet or parked railcars out there, and how long it might take to work through that before significant new orders start coming in for you guys?

Jim Cowan

Yes. The published data right now is about 390,000 cars we park, and that would be the beginning of April, April 1. Now that if you go a year ago, that number was slightly over 500,000. So, in terms of cars that have come back in the service or scrapped. It's gone from about 34% of the fleet to 25% of the fleet. So, there is 390,000 part some will never come back into service, but to answer your question it's got still a few more month of taking this cars out of storage and getting them cleaned up and or scrapped and though it's going to be a lot of pressure to get the new car order book ramped up, so its still improving. That we are excited about, and I think all the car builders are, but it still got a ways to go.

Jeff Skoglund - UBS

Could you clarify what that 34% rate you just mentioned was?

Jim Cowan

That was a percent of the North American fleet that was in storage a year ago.

Jeff Skoglund - UBS

Got it.

Jim Cowan

Yes. So, today that number is 25% on April 1st like I say it's over 110,000 cars, 120,000 cars have come out of storage in the past year.

Jeff Skoglund - UBS

And what percentage typically of the cars that are in storage right now? What percent do you think are getting scrapped or are likely to get scrapped?

Jim Cowan

The scrap rates that we are hearing are about 5000 a month, so it's running about 60,000 a year.

Jeff Skoglund - UBS

Okay. And I don't know if my math is right, but it looks like you've got about 290 new orders in the first quarter, is that right?

Dale Davies

Yes. The precise number is 285.

Jeff Skoglund - UBS

And the quoting activity is sporadic, and I know you don't want to get too specific, but can you characterize that 290? Was that just some sporadic orders, or should we expect some sort of a kind of a gradual build as the industry just gets more active?

Jim Cowan

No. I think you could say a gradual build. That was a handful of orders, and I can say they are not big, but it's continuing to accelerate.

Jeff Skoglund - UBS

Okay. And then the pricing on these orders relative to historical levels?

Dale Davies

The pricing is pretty competitive right now. I think all the builders are looking for business, and so pricing right now is competitive, and its probably going to continue for a little while that way, but as Jim mentioned toward the end of the year, we would expect the things start to pickup a little bit in terms of margin.

Jeff Skoglund - UBS

And I think another comment you made was the backlog would take you running through Q3, was it through Q3 or just into?

Dale Davies

Into Q3, and if we mentioned our backlog right now at the end of March is 500 cars, and we have as we mentioned earlier. We have slowed our production rates down quite a bit in the first part of this year, so that plus that would probably take us into the third quarter, but we are also taking some orders now in the second quarter here in April, and so its probably at this point going to extend even a little further than that, but we haven't reported on the new orders were taken and other than to tell you we have taken so.

Jeff Skoglund - UBS

You actually touched on the second part of my question which was -- does that take you into Q3 at the same 340 car per quarter delivery rate that you had in Q1, or is there a different rate that you guys [probably have]?

Dale Davies

If we have stopped at the end of marching since look forward at that point, it probably would have been same rate, but things could have happened here in April. We will probably be increasing in our production rates from what we had in the first quarter.

Jeff Skoglund - UBS

And lastly SG&A is there any opportunity to take some cost out over the near-term, or it's been relatively stable, is that an event of fixed level?

Dale Davies

You probably expected to be relatively stable. What we had a couple of reductions in for us the last year in this area, we are trying very hard to protect the expertise we're having in our engineering group and our purchasing group, which are really key to our operations, and also the other departments that support our operations, so we wanted to be capable of moving backup to the higher production rates, and some of this expertise is really key to us to been able to do that.

So, we are trying to do a good job of managing our cost yet, preserve our capabilities to. So, we did take a couple of reductions last year and we are also monitoring our spending very carefully, so but I think going forward you can probably say its going to probably be consistent what you saw in that first quarter.

Operator

The next question comes from Art Hatfield from Morgan Keegan.

Art Hatfield - Morgan Keegan

Good morning, gentlemen. Just some thoughts and I actually had to get off the call a couple times real briefly. So if I'm asking something you already talked about, I apologize upfront. But thinking about the cost structure going forward, it appears that we're clearly at the bottom here, and as you ramp-up production. How should we think about the split between kind of fixed costs and variable costs as you ramp things back up?

Obviously, the gross profit margin in this quarter was a tough one. Is that something that was unique to this quarter and could we see things ramp-up a little bit more quickly as we go through the rest of this year and into next year? Can you help me out with how I should think about that?

Dale Davies

We've had an advantage of our fixed cost down during the third and fourth quarter of last year and also the first quarter of this year. We are probably not looking at any significant change in our fixed going through the rest of the year, but what you should also be aware of is that some of the orders, as we mentioned earlier are been taking within margin, so I don't think you should count on any great improvement in margin and gross profit in the next couple of quarters. The fourth quarter is probably yet to be defined, so I think what we are doing is we are taking orders, we are keeping our plants running, and we are getting enough contribution of those orders to offset the good part of fixed cost, or maybe all of it in some cases.

Art Hatfield - Morgan Keegan

That's helpful. And when I look at first quarter -- were cars that you were delivering on thin margins in that quarter too. So the look forward should be similar just depending on how you price out new orders over the next couple quarters?

Dale Davies

On the first quarter, we probably had a few orders in there. That were priced a little better because some of those orders were coming off long-term contracts that has been taken couple of years ago.

Art Hatfield - Morgan Keegan

Okay, and so is there a way to think about, as we get orders coming in and production improves, is there a way to think about how fixed costs get layered back on as improvement is a function of certain volume levels? I know its kind of difficult thing to think about because mix of production is an issue, but is there a simplistic way we on the outside can think about how that may get layered back on?

Dale Davies

Yes. We don't have a lot of fixed cost in our manufacturing structure and we have trimmed it back soon. There will be some increase and things that we consider we count the count is fixed, but they do go up a little bit with production, but I don't think you are going to see a major change of fixed cost. The thing you have to think about is when we start taking more orders, there is a rehiring of employees that actually work on the line and there is a retraining of those employees and getting a few of them back to the welding school and all that, so we may incur some cost there to kind of staff up which we will and we may also incur a little inefficiency as you bring new workers back into the workplace for a few weeks until they are on top of the game. So, but I don't think you are going to see major increases in fixed cost even as we ramp back up as we expect to ramp-up during the second half of the year.

Art Hatfield - Morgan Keegan

Are you concerned about what the employment pool may look like in where the plants are as things ramp back up? Has anything changed structurally with regards to making it more or less difficult?

Jim Cowan

No, Art I don't think we are concerned about that.

Art Hatfield - Morgan Keegan

So going forward just volume and really how you're able to get pricing on the new car orders will be the key driver to what margins should look like?

Dale Davies

Yes. That's exactly right.

Art Hatfield - Morgan Keegan

Thank you very much. That's all I had. Thanks for the time.

Operator

(Operator Instructions). The next question comes from Daniel Max from Trafelet & Company.

Daniel Max - Trafelet & Company

Hi guys, just one or two quick questions to follow-up. One, relative to your comment about 25% of the fleet being parked in North America, do you have a sense as to whether or not the tank and covered hopper element of that is at that same level, or do you think the mix is different for your car types?

Jim Cowan

I will definitely think the car types so we specialize in probably on the lower side of that. You got about 25,000 coal cars parked, lumber cars probably 90% of them parked on the rack, so there is lot of contacts we don't really participate in very much that make up a good share. So, we think our tank car and covered hopper would be on the lower end.

Daniel Max - Trafelet & Company

Okay and just one last question. Any updates -- there's been some talk about possibly working on a deal towards with on some diesel multiple units and some DMUs with U.S. Railcar?

Jim Cowan

No. we are continuing to pursue that. The joint venture was formed back in February. We are actively pursuing an order with the State of Ohio. Our partners are from Columbus. They've done a lot of work there in the state, know that territory very well since our last call, and the State of Ohio didn't receive $400 million to move ahead on passenger rail service. We have met with the Ohio DOT to again present our bid package with them. It's a very, very detail, very sick document. They are now going through it, going to ask questions. We expect that to take several months, and then we will respond to that, and hopefully before the year is over. That will be our first order.

Daniel Max - Trafelet & Company

And that order should be nominally as it comes to about $80 million or $100 million is that about right?

Jim Cowan

Yes. Well, it would be on the high end to that. It could actually exceed $100 million, yes to answer your question. There are another half dozen areas around the country, different state cities, geographies that are actively looking at this type of product and the one that's I think the hardest for us is the one we mentioned.

Operator

The next question comes from Paul Bodnar from Longbow Research.

Paul Bodnar - Longbow Research

Just a follow-up and I'm sorry if I missed this. Any of these news orders or contracts, what's the situation with -- is this raw materials, are there still pass-through provisions in there? Are we taking some fixed price contracts, or what's the low lay on the land there?

Jim Cowan

On the raw material pass through, or surcharge if you will, that's on almost every single order. We've taken a couple of firm pricing orders only because the day the order was taken we could also buy the material. So, we knew the pricing going in, but surcharges are still an element of most of what our bidding.

Paul Bodnar - Longbow Research

Do you feel pretty good obviously in a rising raw material environment that you wouldn't get squeezed then?

Jim Cowan

I mean we have to. There is no with the history of where surcharges have been in the past few years on the components on steel. There is nobody, no car builder can take that risk.

Operator

The final question comes from Steve Barger from KeyBanc Capital.

Steve Barger - KeyBanc Capital

I just wanted to follow-up on the DMU comment. If you took a $100 million order, how many quarters would that take to deliver?

Jim Cowan

Six.

Steve Barger - KeyBanc Capital

And can you remind us the margin profile of that business?

Jim Cowan

Well, since we haven't done it, we are expecting it to be in the 20% range.

Steve Barger - KeyBanc Capital

Is the majority of that, for whatever the COGS would be there on the purchase component side, what's the percentage of stuff that you would buy versus what you I guess manufacture? I mean, presumably you'd be buying seats from another company and that sort of thing.

Jim Cowan

Yes absolutely. (inaudible). I don't know the purchase material is going to be pretty high in that because it's the engines, the transmissions, the control systems; it's going to be a lot of stuff that's purchased. It really is the body that gets fabricated buy us from the steel we purchased and painted and all the similar work is that, but the purchase component is going to be pretty high on the car like that.

Steve Barger - KeyBanc Capital

Okay. That's great. It's an exciting opportunity.

Operator

Gentlemen at this time there are no further questions. Please go ahead with any concluding comments.

Jim Cowan

We just want to thank everybody again for your participation and interest in ARI, and we look forward to the next few quarters and improvement ahead. Thank you, Christine.

Operator

You are welcome. Thank you for participating in American Railcar Industries Incorporated first quarter earnings conference call. This concludes the conference for today. You may all disconnect at this time.

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Source: American Railcar Industries, Inc. Q1 2010 Earnings Call Transcript
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