Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

American Railcar Industries, Inc. (NASDAQ:ARII)

Q4 2013 Earnings Conference Call

February 20, 2014 10:00 AM ET

Executives

Dale C. Davies – Chief Financial Officer, Treasurer and Senior Vice President

Jeffrey S. Hollister – President and Chief Executive Officer

Analysts

Justin Long – Stephens, Inc.

Matt S. Brooklier – Longbow Research LLC

Art W. Hatfield – Raymond James & Associates, Inc.

Eric Crawford – UBS Securities LLC

Tyson Lee Bauer – Kansas City Capital Associates

Operator

Good day, ladies and gentlemen, and welcome to the American Railcar Incorporated Q4 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference maybe recorded.

I would now like to turn the conference over to our host of today’s call, Mr. Dale Davies. You may begin. Mr. Davies, you may begin.

Dale C. Davies

Okay, thank you. Good morning. I would like to welcome everyone to the American Railcar Industries’ fourth quarter 2013 conference call. I am Dale Davies, our Chief Financial Officer. I would like to thank you for joining us this morning. For those who are interested, a replay of this call will also be available on our website, www.americanrailcar.com shortly after this call ends.

Joining me this morning is Jeff Hollister, our President and Interim Chief Executive Officer. Our call today will include discussions about the railcar industry, our operations and financial results. Following these remarks, we will have a Q&A session.

This conference call includes forward-looking statements, including statements as to estimates, expectations, intentions and predictions of future financial performance based on currently available information. Participants are directed to our SEC filings and press releases for a description of certain business issues and risks, as a change in any one could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Also, please note that the Company does not undertake any obligation to update any forward-looking statements made during the call.

EBITDA and adjusted EBITDA are non-GAAP financial measures we will discuss today that are reconciled to net earnings in our press release, which was issued yesterday. The press release is available through the Investor Relations page of our website.

Now, it’s my pleasure to introduce Jeff Hollister.

Jeffrey S. Hollister

Thank you, Dale, and good morning to everyone. Demand for certain railcar types in North America remain strong. The industry reported approximately 15,770 railcars were delivered and approximately 14,860 railcars were ordered during the fourth quarter of 2013, producing a book-to-bill ratio of close to 1 to 1.

Industry backlog was approximately 72,930 railcars at December 31, 2013. Approximately 92% of the total industry backlog is for tank and covered hopper railcars, the two primary markets in which we participate.

The industry forecast for North America predicts new railcar delivery to be approximately 60,310 in 2014 with tank and covered hopper railcars representing approximately 46% and 24% of deliveries respectively.

The industry reported that approximately 8,440 tank railcars were delivered and 4,910 were ordered during the fourth quarter of 2013. Industry backlog for tank railcars was 55,380 at December 31, 2013, representing approximately 76% of the total industry railcar backlog. The industry backlog for covered hopper railcars was approximately 11,510 at December 31, 2013, which is at its highest level since March 31, 2012.

As of December 31, 2013, we had 8,560 railcars in our backlog, including 2,330 railcars to be manufactured for firm lease orders. We continue to see healthy inquiry activity on tank railcars, including railcar tops used outside of the crude market. Inquiry activity for covered hopper railcars is beginning to strengthen for plastic pellet, food grade and sand railcar tops. We built the multi-year order during the fourth quarter for 2,750 plastic pallet hopper railcars for delivery from 2014 through 2016.

Consistent with industry expectations, we anticipate that the plastic pellet covered hopper market demand will strengthen for delivery from 2015 to 2017 and that tank railcar demand will remain healthy for the near-term. We are extremely pleased with another record year for ARI’s earnings. Over the past two years, we have ramped up production and operated at near capacity levels at our Marmaduke facility to keep pace with demand for tank railcars, primarily driven by increased North American crude oil production.

Additionally, we are beginning to ramp up production at our Paragould plant to meet growing demand for covered hopper railcars. In December, we sold our interest in Amtek Railcar, our India joint venture, resulting in a loss of $6 million pre-tax, our $4 million net of tax and a negative impact to EPS of $0.18. Due to delays experienced with the JV primarily in purchasing the land and gaining connection from the plant to the main rail line, the start up of Amtek’s Railcar’s operations was delayed from our original expectations.

During this time the Indian economy had worsened and the Indian railway deferred railcar purchases. As a result, the joint venture was in need of significant additional funding. In consideration of the delays encountered to-date and other factors, we reassessed our risk and determined to sell our interest in the JV. We wish Amtek Railcar the best in the future.

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

Dale C. Davies

Thanks, Jeff. Fourth quarter consolidated revenues were $197 million, down 5%, versus $208 million for the same period of 2012. The decrease in consolidated revenues was due to a decrease in our direct sale railcar shipment in the fourth quarter of 2013 compared to the fourth quarter of 2012 as a result of building more railcars for our lease fleet. This decrease was partially offset by increased revenues for the railcar services and the railcar leasing segments.

During the fourth quarter of 2013, we shipped a total of 2,050 railcars, including 670 built for our lease fleet, compared to 2,010 for the same period of 2012, which included 410 railcars built for our lease fleet.

Revenues for railcars built for our railcar lease fleet are not recognized in consolidated revenues as a railcar sale, but are recognized as monthly lease revenues over the term of the lease.

Manufacturing segment revenues which include an estimate for revenues for railcars built for our lease fleet were $253 million for the fourth quarter of 2013, compared to $237 million for the same period of 2012. The primary reason for the increase was the higher mix of tank railcars which generally sell at higher prices, due to more material and labor content, and typically have higher margins than hopper railcars.

Revenues for railcars built for our lease fleet are included in the manufacturing segment revenues based on an estimated fair market value as if they have been sold to a third party, and were $83 million for the fourth quarter of 2013, compared to $49 million for the same period of 2012. These inter-segment revenues for railcars transferred to our lease fleet are eliminated in consolidation. Railcar leasing segment revenues increased to $10 million in the fourth quarter of 2013 compared to $5 million for the same period in 2012. This increase was primarily due to the growth of our lease fleet with increase from 2,590 railcars at the end of 2012 to 4,450 railcars at the end of 2013, and an increase in average lease rates.

Railcar services segment revenues increased to $18 million in the fourth quarter of 2013, up from $15 million in the same period of 2012, due primarily to higher demand for paint and lining work at our repair facilities and repair projects being performed at our hopper railcar manufacturing facility.

Consolidated earnings from operations for the fourth quarter of 2013 were $44 million, compared to $41 million for the same period in 2012. The increase in consolidated earnings from operations is primarily due to increased earnings across all three of our segments. Our operating margins for the fourth quarter of 2013 increased to 22% compared to 20% for the fourth quarter of 2012.

Earnings from operations for our manufacturing segment before eliminations was $62 million and 24% of sales for the fourth quarter of 2013, compared to $47 million and 20% of sales for the same period of 2012. The increase was primarily due to a higher mix of tank railcar shipments and strong general market conditions. Segment earnings from operations included $25 million in estimated profits on railcars built for our lease fleet for the fourth quarter of 2013 and $7 million for railcars built for our lease fleet in the same period in 2012. The estimated profit on railcars built for our lease fleet are eliminated in consolidation.

Earnings from operations for the leasing segment were $5 million for the fourth quarter of 2013, compared to $3 million in the same period of 2012. This increase was the result of our progress in growing our lease fleet. Operating margins for the leasing segment were 52% for the fourth quarter of 2013, compared to 66% in the same period of 2012, reflecting primarily by higher depreciation expenses during 2013.

Earnings from operations for our railcar services segment increased by $3 million compared to 2012. Operating margin from the railcar services increased to 17% versus 13% for 2012, primarily due to higher demand for paint and lining work at our repaired facilities in certain railcar repair projects performed at our hopper manufacturing facility.

Consolidated adjusted EBITDA which excludes share-based compensation other income related to our short-term investments and the loss from the sale of our interest in Amtek Railcar was $52 million for the fourth quarter of 2013, compared to $48 million for the fourth quarter of 2012. This increase was primarily driven by increased earnings from operations as previously mentioned.

Interest expense decreased by $2 million in the fourth quarter of 2013, compared to the same period of 2012. The decrease was a result of savings realized form a lower interest rate secured as part of our lease fleet financing and a lower average debt balance as we retired our 7.5% senior unsecured notes in March of 2013.

Net earnings for the fourth quarter of 2013 and 2012 were $24 million or $1.14 per share. The loss on the sale of our India JV was approximately $4 million after tax or $0.18 per share. Adjusting to exclude that loss net earnings would be $28 million or $1.32 per share. The increase in earnings excluding the JV sale was a result of increased earnings from operations across all three of the company’s segments and lower interest expense was previously mentioned.

Total consolidated revenues for 2013 were $751 million, 5% higher than the $712 million for the same period of 2012. Revenues increased as a result of higher tank railcar shipments and increase in railcars in our lease fleet and an increase in railcar services revenue. During 2013, we shipped 6,900 railcars, which included 1,860 railcars to our leasing customers, compared to 7,880 railcars, which included 2,100 railcars to our leasing customers in 2012.

Adjusted EBITDA was at a record level of $181 million for 2013, compared to $150 million for 2012. The $31 million increase was driven by higher earnings from operations as peevishly discussed. Net earnings for 2013 were at record $87 million or $4.07 per share compared to $64 million or $2.99 per share for 2012. Excluding the loss on our India JV net earnings would have been $91 million or $4.25 per share. The increase in net earnings of 2013 was driven predominately by improved earnings from operations in interest expense savings of $10 million.

Our strong earnings contributed to cash flow from operations of $165 million for 2013. Additionally, we received net proceeds of $99 million of 2013 from our second and third draws under our lease fleet financing. We invested $162 million and 1,860 new railcars for lease. And we redeemed the remaining $175 million of our senior unsecured 7.5% notes.

As of December 31, 2013 we had a cash balance of $97 million. In January of 2014, we refinanced our lease fleet financing facility under an amended and restated credit agreement. In connection with the refinancing we received borrowings of approximately $316 million. Net of fees and expenses of this amount $194 million was used to refinance the original lease fleet financing facility and resulted in net proceeds of $122 million. The amended and restated credit agreement also provides for additional borrowings of up to $100 million subject to certain terms and conditions. In connection with the refinancing the applicable interest rate on the term loan was down by 0.5%.

Our interest expense in 2014 will increase, however, compared to 2013 as a result of the higher average debt balance. The increase interest expense is expected to be offset by additional revenue generated from railcars added to our lease fleet.

On February 18, our Board of Directors declared a cash dividend of $0.40 per share of common stock of ARI to shareholders of record as of March 21, 2014 that will be paid on March 27, 2014. This is a 60% increase over previous quarterly dividends of $0.25 per share.

At this time, I’d like to turn it back to Jeff for few comments about our potential growth opportunities and joint ventures.

Jeffrey S. Hollister

Thanks Dale. We expect our manufacturing operations to remain strong in 2014, filled by the strength of the tank railcar market and increasing activity in the hopper railcar market. Our December backlog is at its past level since the first quarter of 2008.

We currently expect to grow our lease fleet at a rate of 25% to 30% of total railcars produced. As of December 31, we had 2,330 railcars to be manufactured or leased in our backlog that we expect to deliver in 2014. With the addition of these railcars we expect our lease fleet to exceed 6,700 railcars by the end of 2014.

Railcar leasing has become a significant segment and we anticipate the recent refinancing of the lease fleet debt, to increase our borrowing capacity will continue to support the growth of this business. Demand for our railcar services remains strong and construction of our Brookhaven and Mississippi repair plant is underway. We currently expect the facility to be operational by mid 2014, which will further expand our railcar repair capabilities.

We are looking at new opportunities for our railcars services segment which we believe would be supported by increase demand from tank railcar retrofit and maintenance work, primarily for the crude oil industry. Our two joint ventures; Ohio Castings and Axis which produce castings and axles continue to provide is benefits. The Ohio Castings joint venture is running well, producing components for its partners. The Axis joint venture is improving production rate and experience higher sales volumes compared to 2012. We expect results for these joint ventures will continue to be driven by industry demand for all railcar tanks.

In closing, I would like to take this opportunity to compliment our employees. Our achievement of record earnings is a direct result of our employes efforts and their contributions to our current production levels and their commitment to quality. We sincerely appreciate your outstanding work.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Justin Long. You may begin.

Justin Long – Stephens, Inc.

Thanks. Congrats on the quarter guys. I was wondering, first if you could talk about the mix of railcars, you delivered in the fourth quarter. We saw manufacturing margins pick up sequentially, was that a function of a heavier mix of tank cars being delivered versus the prior quarter or is there something else driving that?

Jeffrey S. Hollister

Actually, I think in the fourth quarter we delivered more, what we did there was more tank cars.

Dale C. Davies

Yeah.

Jeffrey S. Hollister

We also saw some pick up in our hopper car deliveries too. But, yes, probably little heavier on tank cars. Yes.

Justin Long – Stephens, Inc.

Okay, okay. Great. As you look into 2014, how we should we think about your mix of deliveries between tank and hopper cars evolving. If I look at the orders that you received in the fourth quarter, I am getting to an implied revenue per unit around that $107,000. So it seems like the backlog is becoming more weighted towards hopper cars? But I am curious if you could give more color on that.

Dale C. Davies

Yes. Well one thing that does influence the number in the backlog is the hopper car orders that we took. It extends out for two and half years, so some of that backlog will be built in 2015 and 2016 in the hopper side anyway. So that sort of brings down the average number in the backlog, but I think what you could expect for 2015 is we were in 2013 pretty west roll out our tank cars. We are going to run 2014 roll out hopper tank cars.

You might see just a little bit of improvement in the average pricing for 2014 versus 2013, because pricing was going up there in the year of 2013 and we are starting now to 2014 some really good pricing levels for tank cars.

But also, you’re going to see the mix of hopper cars start to increase as we move through the year, because we have been ramping our hopper car plans back up. We started that before the end of last year for more hopper cars. We will continue to ramp up through higher levels of hopper car production there in the first quarter. So, I think margins as you move through the year, the dollars are going to probably be little better. But and for tonnage [ph] that might slip a little bit, because of mix changing. We are going to be somewhat flat, and production volumes, little improved on pricing of tank cars, but more volume on hoppers number throughout the year.

Justin Long – Stephens, Inc.

Thanks, Dale, that is helpful color and you kind of hit on my next question on, how margin progress. But, if I go back to 2011 before that your crude tank cars cycle really started to accelerate manufacturing margins for you guys were around 10%. I mean is that a good long-term average, to look at as we look out the next several years and we see more normal mix. Or do you think you can do something better than that?

Dale C. Davies

No, I think it’s going to be better than that. I think this, there is few other things coming into play here, if we have done a lot of cost reduction projects during this time period. And so we sort of improved our margins, the result of a lot of those projects that we’ve put in. So that is coming into play. But I think it gets longer term I guess we still see good tank car demand for several more years here. So, I don’t know that our view is that we are not going to sort of fall back into the 2011 margin real soon. I mean, I don’t know these longer term we fall back that far.

Justin Long – Stephens, Inc.

Okay that is good to hear. And I will ask one more and pass it along. But I did notice that affiliate revenue was over 50% of consolidated revenue in the quarter. Could you just give an update on how much of your current external backlog is dedicated to affiliates right now and how you see that trending going forward?

Dale C. Davies

Those numbers can’t move around a lot. It’s based on when the orders are placed and, but one of our good customers is an affiliate of our here American Railcar Leasing. They buy a lot of cars and they would always buy a lot of cars from us and from quarter-to-quarter I think it can go up and it can come down and sometimes it fluctuates depending on some lease deals that we might get into or lease deals they might get into and so we always had to make choices as to who takes the lease deals. But anyway we really don’t talk about what’s in our backlog very much but there are an important customer of us. I don’t know it will be quite as high it is, in the fourth quarter going forward.

Jeffrey S. Hollister

To point on that we were trying to build our lease fleet but we take a hard look at diversifying our fleet across the different commodity of cars, so if we take a strong look, what we’re going to put in our lease fleet and then, if we don’t put it our lease fleet then we work with A Rails to see if that’s an option on their side.

Justin Long – Stephens, Inc.

Okay, great. That’s helpful. I appreciate the time, I’ll go ahead and pass it along.

Jeffrey S. Hollister

Okay. Thanks Justin.

Operator

Our next question comes from Matt Brooklier of Longbow Research. You may begin.

Matt S. Brooklier – Longbow Research LLC

Thanks good morning. So, just wanted to drill down on ACF, how much did that contribute to total profits in the quarter, and what’s your expectations for ACF deliveries during 2014?

Dale C. Davies

2013 was the year start up for ACF and they got the plant started got to go on, share with all those profits starting up, and they did profits with us. They weren’t real big numbers for 2013, I don’t think we disclose that anywhere. But they weren’t real big numbers for 2013, but going forward that’s really all that start up period and they are still running the plant and deliver rates probably up to where it’s going to be at a steady. So we would expect 2014 to be better, but I don’t know that but I’m in a position to really give you numbers on what’s going to be 2014.

Matt S. Brooklier – Longbow Research LLC

Okay, but is it fair to assuming that what we see from Asia from the tank car deliveries that first back is that you guys are close to fill up and producing kind of the maximum amount of tank cars in 2014 at that facility?

Jeffrey S. Hollister

We are pretty much filled up at ARIs facility I think they’ve got a little space before the end of year.

Matt S. Brooklier – Longbow Research LLC

Okay and on the services side you had a really nice quarter, you’ve talked a little about the work you are doing on the lining and some other repair business just trying to get a little bit more color on that activity, how much more there potentially in 2014, and what’s kind of normalized margin do you seeing on that particular business?

Dale C. Davies

Yes, that business does go up and down quarter-by-quarter and it kind of depends on the mix of work, and also the volumes on the type of the volumes we’re getting paint and lining drives the next part of it, up and down. We’ve kind of said in the past that 20% of return is probably good margin we expect other business and now we’re higher in that this quarter, but I think long-term 20% all of which we are thinking about there.

Jeffrey S. Hollister

We also did some work at our Paragould assembly plant and with that’s ramping that plant backup that work is going away now. So a lot of that will back $1.2 billion to our normal repair chain, but probably mainly a little less margin that what we saw in the fourth quarter.

Matt S. Brooklier – Longbow Research LLC

Okay. And then incremental discussion on tank car renovations, kind of tying to get a sense of where you think we are when will we have more clarity on the potential final rule from a timing perspective, what is it imply for your overall business from potential new order are expected and also what you can potentially done around on the services side.

Dale C. Davies

I mean we are like everybody else, we are kind of waiting to see how this is going to shape out. We’ve been active in the conversations with the Tank Car Committee and the AAR, obviously there is a difference opinion between the shippers, the railroads and in the manufacturers and the car owners, what I can say relating to that, we are concerned about the derailments and the safety features, but we are supportive that if they move to increase the regulations or the designs of the tank cars carrying crude, we were ready at our manufacturing facilities to adhere to those.

We are making cars to the current 2011 standards, fortunately for us and our lease fleet is relatively new some, what crude cars we have in our lease fleet are at the newer standards of the current standards, but if they decide to increase those standards thickness of shells or added features we have the abilities and the capabilities at our assembly plants to implement those into our current designs. So we are ready to go there from our railcar repair standpoint, we are already there as well. They can make a decision to retrofit these legacy cars, the older cars, we have repair shops that we can add additional shells to those some of those smaller retrofits, and we are also looking at doing things that are bigger repair shops and our assembling plants to handle some of the bigger retrofit that are being discussed. So we are hopeful that something is going to be decided in the next 60 to 90 days, and we got a plan in place to move forward once they do that.

Matt S. Brooklier – Longbow Research LLC

Okay. And this is my last question, are you seeing a change in tank car demand activity ahead of regulation, or are we getting increased orders from maybe the players in the market that traditionally haven’t ordered or haven’t really been heavy in terms of tank car ownership i.e., we heard from one of the railroads their intentions to purchase tanks and run their own fleet given the upcoming regulations. Are you seeing more of that activity in the market? Is it a here and now type potential benefit for ARI?

Dale C. Davies

We just continue adding inquiries about tank car owners and I think what we have seen is the shift to the jack to tank car to probably 9,000 jack did instruments related tank cars looks seems to be everybody wants. But I don’t we’ve seen anybody at the pre-buy I think I was kind of waiting to see what the standard really is, from what we’re seeing any way maybe there are those that are out, but I am not aware of people trying to speak about this I don’t think they want to see what the final standard is.

Matt S. Brooklier – Longbow Research LLC

Okay, it makes sense and appreciate the time.

Dale C. Davies

Yes, thanks.

Operator

Our next question comes from Art Hatfield of Raymond James. You may begin.

Art W. Hatfield – Raymond James & Associates, Inc.

Jeff and Dale, Hey Dale did I hear you correct I think to answer one of Justin's questions that you expected deliveries in 2014 to be about the same level as 2013?

Dale C. Davies

That might reached to a little higher, part on the same on tank car is what I was saying but they will be higher on hopper part side.

Art W. Hatfield – Raymond James & Associates, Inc.

Okay, can you tell us right now of your backlog what percentage to that is expected to be delivered in 2014?

Dale C. Davies

Yes, backlog I guess I don’t have the percentage the CPChem order goes out through 2015 and 2016 and we got some tank cars in the first quarter of 2015. So on a percentage basis I probably don’t have it, but I can tell you that we’re delivering the CP Chem order over, I think it’s like 30 months at a steady pace and it was 2,750 cars. So if you just rounded that, so that’s 100 cars a month. You got 100 cars a month from that order in 2015 and 100 cars a month from that order in 2016 and then you got few tank cars in the first quarter of 2015. That’s how the way it breaks down.

Art W. Hatfield – Raymond James & Associates, Inc.

Okay. That’s very helpful. Just as we think about the, you had mentioned the mix and margins. If we think about the portion that you are delivering to yourself versus the portion that is scheduled to be delivered to third parties, is there a way we should think about how, does that breakdown impact the margin level or is it just mostly ultimately just an elimination that takes place with regards to operating profit?

Dale C. Davies

Well, it can affect the mix somewhat. We’re delivering to ourselves a different mix of cars than we’re selling to the outside. The mix change could impact there, but generally if you really want to kind of see the numbers, look at the segment data.

Art W. Hatfield – Raymond James & Associates, Inc.

Right.

Dale C. Davies

What we’re telling you on the segment data is what those gross profits are for all the cars we’ve built. The elimination, it’s where we remove the profit and the revenue from what we took to ourselves. That number does move around some and so you can see actually in the fourth quarter it went up quite a bit over what it was in prior year same quarter. I don’t know that it changes it that much unless we get ship in more. If we’re going to hopper tank cars to ourselves and we got a mix of tank to hoppers to the outside, yes, it could start to affect a little bit, but I think our lease fleet probably reflects generally what we run to the outside too.

Art W. Hatfield – Raymond James & Associates, Inc.

Okay, because that’s kind of where I was going because when you look at the, if I breakdown the backlog dollars relative to the backlog of cars for third-party, it looks like you got a much lower average revenue per unit from third-party sales versus their lease fleet and as a result I was just curious how I should think about that from a margin standpoint. You are telling me it shouldn’t have much of a difference. It only gets impacted on the elimination line.

Dale C. Davies

Yes. Are you looking at fourth quarter or what period are you looking at there when you…?

Art W. Hatfield – Raymond James & Associates, Inc.

I’m looking at the fourth quarter backlog. If I break it down you gave us some dollar numbers.

Dale C. Davies

You’ve got to be careful with the CPChem order, which is a hopper car order, the multi-year deal. So you almost got pull that out of your model and then the rest of them you can look at based on history I would think.

Art W. Hatfield – Raymond James & Associates, Inc.

Okay. That’s extremely helpful. Just last quick question on the JVs. It looks like after adjusting in Q4 for Amtek that both Ohio Castings and Axis at this point are kind of positive contributors. Is that correct? And if I do my math right, it’s probably a few, maybe between $400,000, $500,000 a quarter contributor. Is that a fairway to think about it going forward?

Dale C. Davies

Yes. You’re right on with your numbers there and, yes, I think they both are contributors. I think Ohio, it’s doing okay. It is seeing pretty good volumes because of good car demand and Axis the same, good axle volumes there.

Jeffrey S. Hollister

And what you got to take into account, these are key components that go into our railcar. So having that availability and deliveries and managing all the inventories on top of the profits that we’re now making, we’ve had two good strong quarters with both those groups. So we are very happy.

Art W. Hatfield – Raymond James & Associates, Inc.

And I am sorry. A follow-up on that with regards to Amtek. Does selling Amtek benefit you in any way on your SG&A line with regards to management time or travel taken up with dealing with that investment?

Dale C. Davies

Well, it certainly removes, I guess maybe, it frees up a lot of management time, put it that way. So we’re spending quite a bit of time on that. It frees up management time and it does probably reduce a little bit of travel, not a lot.

Art W. Hatfield – Raymond James & Associates, Inc.

Okay.

Dale C. Davies

We want to reallocate those resources into our North American plant to try to grow that.

Art W. Hatfield – Raymond James & Associates, Inc.

Excellent. Thanks for your time.

Dale C. Davies

Okay. You’re welcome.

Operator

And our next question comes from Eric Crawford of UBS. You may begin.

Eric Crawford – UBS Securities LLC

Thanks. Hi, good morning.

Jeffrey S. Hollister

Good morning.

Eric Crawford – UBS Securities LLC

As I think about deliveries for 2014, are there any irregularities to call out quarter-to-quarter? I mean you called out the ramp at Paragould. Is there more ramp left to go or are you kind of at the ramp you expect to, or at the run rate rather that you expect to have through the year?

Dale C. Davies

You're going to see us kind of ramping up the hopper car plant in the first quarter. So in terms of the way you should think about 2014, I think one of our stronger quarters from a profit margin standpoint is probably going to be second quarter because we’re going to be seeing pretty strong deliveries of tank cars in that quarter, but I think the hopper cars will continue to pick up as we move through the year.

Eric Crawford – UBS Securities LLC

Okay. That’s really helpful. And I guess next, appreciate the color on tank car safety and order activity and the uncertainty everybody is dealing with, I guess, on the regulatory front, but could you increase throughput at Marmaduke if regs spur demand for the new jacketed car?

Dale C. Davies

That’s a good question. I think we feel like we’re running at a rate where we’re putting out a lot of cars. We’re comfortable. We have good quality and good control on our processes at this rate. I’ll let Jeff maybe speak to whether we could be pushing little further or not.

Jeffrey S. Hollister

I mean, we’ve done some as far as a mix in 2013. That’s why actually we ramped up a little stronger on jacketed cars, the second and third quarter and actually to be honest got a little behind what our internal schedule was, and that’s why the fourth quarter we had a little push and why actually had a few more tank cars in the fourth quarter over third quarter, because our employees are pretty committed to hitting our schedules.

But to go further than that we kind of maxed out our facility. We are looking at what we can do internally bottleneck-wise to maybe do a few more jacketed cars. But to go above total throughput, over our current rate, we’re not prepared right now to do that the way we are looking at it.

Eric Crawford – UBS Securities LLC

Thanks, guys.

Dale C. Davies

And we got pretty ACF capacity beyond what we do.

Eric Crawford – UBS Securities LLC

Right. That’s right. Thank you. And lastly, there seems to be a little more competition now in the covered hopper market, but also certainly increased demand on all three types. So just curious how are the pricing dynamics playing out for you? Are you able to increase prices on new orders or is it more stable?

Dale C. Davies

Well, I think we were successful in achieving some pretty good pricing levels in 2013, particularly in the second half of 2013 and I think we’re seeing they’re so much stable with the end of 2013 pricing.

Jeffrey S. Hollister

I mean, let’s be honest. The hopper car margins are not what the tank cars margins are and it’s pretty competitive. Most of our competition still has some open space at the end of 2014, but a lot of the inquiries we’re getting now are for the plastic pellet cars that are coming down the pipeline with the more specialty car. It’s a land car. We made that car for over two decades. Our current designs are all I mean we build with these plastic companies in the past. So we feel comfortable, we are going to get our shares that and the margins will be acceptable from a hopper car standpoint.

Eric Crawford – UBS Securities LLC

Super helpful color, guys. And thanks in a great quarter.

Dale C. Davies

Okay, thanks.

Operator

(Operator Instructions) And our next question comes from Tyson Bauer of KC Capital, go ahead.

Tyson Lee Bauer – Kansas City Capital Associates

Good morning gentlemen and great quarter.

Dale C. Davies

Thanks.

Jeffrey S. Hollister

Thanks

Tyson Lee Bauer – Kansas City Capital Associates

A couple questions on backlog just picking up where Art was. If we look at the CP orders and then the implied orders that went into the lease backlog, it would, the math works about to 990 outside third party orders, which has been kind of where you have been in earlier quarters, but below where your shipping output is. Do you think that is because we are waiting on these regulations or otherwise and you would expect that to pick up in future quarters once we have more clarity or is that kind of the rate we are going to be sitting at for the time being?

Dale C. Davies

Well, I am sure there is some folks trying to figure out, we kind of call this your order. But there are those that do have an eco cars and they want to get their production, their order into the backlog and into the fractured schedules, so. It’s hard for me to tell you, I don’t know, Jeff. You have any feel for that.

Jeffrey S. Hollister

From our lease model we have lease rate threshold that we are kind of holding to. We feel like we have delivery stays earlier than our competition. So we want to accept many little higher price than what we would historically if the volume was there and the competition was there. So for you I think there is a lot of people there that are holding off waiting to see.

But there are some that is doing least thing. We were working a lot smaller orders of lot of different companies a lot of these brokers. And so, I think there is going to be a need there. We are also seeing a lot of enquiries on the non crude tank side as well. Now those rates are not as high as the crude rates, but they are still very acceptable rates. So we feel comfortable with these orders are going to be there over the next two to three years.

Tyson Lee Bauer – Kansas City Capital Associates

Okay And it would also appear looking at the backlog if we are looking at that 8500 number and given the numbers you provided for the CP as it goes south 30 months and also the additional tanks that go into 2015 looking at about 6,800 for 2014 in the backlog with 2,330 going to lease. That lease 4,470 is left for third-party. Do you happen to about 1,500 cars third party sales 500 and these are just averages for your lease fleet. So there is a, you certainly do have room and you talked about the tank car being filled. Do we only have about 50% of the hopper car or that plant's capacity filled for 2014? Is that the implication?

Dale C. Davies

Well, we are probably right now probably setting that about 50% in the order book our hopper plant. But we certainly have time taking orders in that plan. So to say where we are going to be on hopper by delivery this year is quite too early to call it. We have commented about ramping up that file up. We are doing that right now. I think the ramp up that we are undergoing now has put us in a position to build more cars than we have orders for this time. So, I think we’ll be able to take some additional hopper car orders for later in the year.

Jeffrey S. Hollister

In a more competitive environment.

Dale C. Davies

Yes. It’s having everybody look for orders, but I think we are going to be prepared to do that. I think to the extend that if they would stop at the hopper car orders out there for plastic pellets and we have a very good car and we know that a lot of customers like our cars, so I mean we have that offering to make and so that will make our offering the very attractive offering to them if they will have to compete for price and we know that.

Tyson Lee Bauer – Kansas City Capital Associates

Should we look at your order book in conjunction with ACF and are you able to give us what orders they see have got then in fourth quarter?

Dale C. Davies

I am probably not in the position to share what’s going on ACF, it’s different certainly although we do have an arrangement with them but, they are making only tank cars and I’m making hopper cars. And I think the comment I made earlier is that there is a space available for the end of 2014 and their production schedule tank cars.

Tyson Lee Bauer – Kansas City Capital Associates

Do you not assist them in getting those orders?

Dale C. Davies

We were participant and where the order end up, but we both work with American Railcar Leasing on securing lease orders and even on some sale orders we work with ARL for that, so we know, what’s going on there at just I feel little uncomfortable giving that information on different company that’s broadly.

Tyson Lee Bauer – Kansas City Capital Associates

Okay. That is fine. We know usually when paints services that is a better margin for your services. The liner side is that related because of the caustic nature of the Bakken oil, do you expect to see more liner services going forward for those tank cars for that particular area of service?

Dale C. Davies

And that’s a good question because I think there has been some corrosion that people have see in some of these tank cars for certain types of crudes that go out, and there has been a lot of discussion about approximately certain lining in some of those cars, I don’t really we are starting to see just yet. But there is a lot of discussion about that, so we are in forward that could mean tanker lining work for our clients but I don’t know that we seen it yet and I think but we’ve seen now so far is just our traditional paint lining and work going through our repair shop.

Tyson Lee Bauer – Kansas City Capital Associates

And last question. Given that we are not into the JV with India any longer, does that pretty well take off the table any International opportunities or are you still able to do cars say for Australia or box A cars for Saudi Arabia manufactured here and delivered or is that not economical?

Dale C. Davies

We know we still could do that. We delivered those motor cars to Australia, we did the bauxite, we still there is bauxite cars for Saudi. We could do more of that, but one of the problem is that it’s very expense to freight those cars from the U.S. over and so it may not be the strategy we pushed too hard to follow I mean it’s the pricing was right we might do it, but I don’t it’s big push for us right now and does the pricing makes it very attracted first to do that.

I think we are going to focus probably on the North America market and but there is there are opportunities from time to time to do engineering services out of the country and we been some of that successful doing that so but I don’t know the strategy is going to be do export price just pretty high.

Dale C. Davies

Initially we were tie that into the Amtek factory over in India and with the exit of the that now obviously it causes additional cost to that have to make them here and ship them over there.

Tyson Lee Bauer – Kansas City Capital Associates

Excellent. All right thank you gentlemen.

Dale C. Davies

Okay, you are welcome.

Operator

I‘m showing no further question, I would now like to turn the call back over to Jeff Hollister for further remarks.

Jeffrey S. Hollister

We want to thank everyone for joining us today and appreciate your interest in ARI. We look forward to another good year in 2014 and we’ll talk with you next quarter. Thanks.

Operator

Ladies and gentlemen this concludes today’s conference thank you for your participation and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: American Railcar Industries' CEO Discusses Q4 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts