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Executives

Dale Davies - SVP, CFO and Treasurer

Jim Cowan – President and CEO

Analysts

Joe Box - KeyBanc Capital Markets

Art Hatfield - Morgan Keegan

Alison Wolf - Longbow Research

Kristine Kubacki - Avondale Partners

Tyson Bauer - Wealth Monitors Incorporate

Presentation

Operator

Welcome to the American Railcar Industries Incorporated Second Quarter Earnings Call. My name is [Shannon], I’ll be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call now to Mr. Dale Davies. Mr. Davies, you may begin.

Dale Davies

Good morning, I’d like to welcome all of you to the American Railcar Industries second quarter 2010 conference call. My name is Dale Davies, I am the Chief Financial Officer and I would like to thank you for being with you today. For all those who are interested, a replay of this call will 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 results. We will also make a few comments about our joint ventures. Following these remarks, we will move to a Q&A 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 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 have caused 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.

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

Jim Cowan

Thank you, Dale. The weakness in the US economy and resulting downturn in the railcar industry, adversely affected new railcar deliveries in the second quarter of 2010. The first half of 2010 appears to be the low point for the railcar industry.

Although the reported idle US rail cart fleet remains sizeable at 24%. This is declined 4% since the first of the year. We have seen new railcar loadings increase from the prior year.

In addition, industry wide new railcar orders were almost 4900 cars, during the quarter with ARI capturing 22% of these orders. We anticipate, that it’ll take several months of sustained growth in the US economy before the railcar industry begins to significantly hire new railcar order levels as customers are hesitant to speculate on anything greater, than replacement demand. We continue to quote our new railcar order opportunities and were successful in securing orders for approximately 1080 new railcars in the second quarter of 2010.

Our orders during 2010, have focused mainly on specialty railcar orders, but many of these orders were taken at very competitive prices. ARI’s management team will continue to navigate thought this stage of the cycle. We are also hopeful that we will see benefits from vertical integration projects which have lower costs for parts used to manufacture railcars.

We plan to continue to adjust work force levels at our plants to maintain efficient operations. But our new railcar production will remain at low levels, we are ramping up production; at one of our railcar manufacturing facilities to meet our customer’s requirements.

In addition, we will continue to use some available capacity at our railcar manufacturing plans, for railcar repair work. This allows us to use our established workforce and our facilities to earn additional revenue.

Our railcar services segment experienced increase revenue and improved efficiencies in 2010, due to completed expansion projects. We hope that these expansions will further grow our presence in the railcar repair market.

Our repair plans have seen improved demand due impart to railcars that were idled and are now being repaired and return to service. However, we are seeing some customer’s limiting repairs to mechanical maintenance and deferring paint and lining work.

I will turn the call back to Dale for a discussion of our second quarter financial results.

Dale Davies

Thanks Jim, revenues for the second quarter of 2010 was $61 million and down from revenues that were $110 million in the second quarter of 2009. Deliveries for the second quarter were approximately 370 railcars and down from approximately 980 railcars for the same period of 2009. The reduced revenues and deliveries resulted from depressed demand for new railcars.

We believe that the recent industry trends of increased railcar loadings and reduction in idle railcar should support a rebound in the demand for new railcars. Thus far in 2010 we have received an increased number of requests for quotations and have been successful in securing orders for approximately 1080 railcars.

As of June 30, 2010 we had railcars orders for approximately 1210 railcars in our backlog, we expect that our current backlog will take our production schedule through the fourth quarter of this year.

Shipments in 2011 will depend upon our ability to secure additional new railcar orders. Revenues for our railcar services segment were $18 million for the second quarter and up from $15 million same quarter of 2009. The increase can be partially attributed to railcars has been returned to service with storage and need of repairs.

Gross profit margin for the manufacturing operations in the second quarter of 2010 decreased to a loss of 4% from a profit of 10% for the second quarter 2009. The decrease in margin reflects lower shipments competitive pricing pressures to securing the (inaudible) and the impact of fixed cost in a low production environment.

The gross profit margins for railcar services for the second quarter of 2010, was 24% and up from 22% in the second quarter of 2009. The margin improvement during the quarter was a result of increased efficiencies, volumes generated by our re-clarifying expansions, as previously stated, we are also utilizing excess capacity at our railcar manufacturing facilities, for railcar repair projects.

Adjusted EBITDA, which excludes gains on short term investment activity and stock based compensation expense, was $1 million for the second quarter of 2010, versus the $11 million for the same period of 2009.

The decrease was primarily result of lower volumes and a decrease in the gross profit margins.

Let me remind everyone that EBITDA and adjusted EBITDA or non-GAAP financial measures that are reconciled to our net loss in our press release, which was issued yesterday. The press release is available through the investor relations page of our website.

Net loss for the second quarter of 2010 was $6 million or $0.28 per share, as compared to earning of $1 million or $0.05 per share for the second quarter of 2009. Net interest expense for the second quarter of 2010 was $3 million or $0.13 per share as compared to $2 million or $0.10 per share for the second quarter 2009.

Net interest expense increased due to the sale of corporate bonds in the third and fourth quarter of 2009 that had earned a higher rate of return in our current cash investments.

For the six months ended June 30, 2010 revenues were 113 million down 57% from the six months ended June 30 of 2009. Manufacturing revenues down 67% when compared to 2009, primarily due to the downturn in the railcars industry driven by the week economy, revenues for railcars services were up 25% over the first six months of 2009 driven by increased volume.

Net loss for the first six months of 2010 was $13 million or $0.61 per share, compared to net earnings of $4 million or $0.18 per share for the same period of 2009. Adjusted EBITDA for the six months ended June 30, 2010, was $1 million, versus 26 million for the six months end June 30, 2009, and lowered due to a decrease in railcar shipments and gross margins partially offset by a decrease in selling, administrative and other expenses.

The company’s liquidity position is strong with $300 million, $320 million of cash as of June 30, 2010 and total borrowings of $275 million, representing our unsecured senior nodes which are due in 2014. We have focused on managing over head cost at all of our locations, during these tough times and we plan to continue to manage our cost and capabilities to mach market demand.

We have kept our capital spending low and have focused our resources on maintenance projects and any other projects that will reduce cost and better position us for improved profitability when the railcar market recovers. At this time, I’d like to turn back to Jim for a few comments about our join ventures that may be adventurous to you.

Jim Cowan

Thank you Dale, consistent with other events in the quarter, we continue to see an increase in the number of domestic and international orders at our action manufacturing joint venture and Axis. While volumes are still low due to the depressed railcars industry, we are optimistic about the long term price prospects for this joint venture, when the US demand for new railcar strengthens. To offset the impact of the weak US market, Axis International shipment have increased with Axis going primarily to Brazil.

We continue to focus on international opportunities to leverage our expertise, during the first quarter of 2010, we made a $9.8 million equity contribution to our India joint venture company, of which we have 50% ownership interest. The joint venture also completed its financing during the first quarter and construction of our manufacturing facility near Shahdara is under way.

We expect to build prototype for the India market in the second quarter of 2011, in order to achieve certification and showcase the products, we planed to deliver in to the Indian market.

US Railcar Company our joint venture that we expected to design manufacture and sell DMUs to public transportation authorities is currently preparing a bid proposal for its potential customer.

Going forward management and board of directors will continue to look at opportunities that will further diversify our business domestically and expand our international presence. John, the operator we will now take a few of your questions, please explain the people how to register their questions.

Question and Answer Session

American Railcar Industries, Inc. (ARII) Q2 2010 Earnings Call July 29, 2010 11:00 AM ET

Operator

Certainly, we will now begin the question and answer session, (Operator Instructions). And with the question from Steve Barger from KeyBanc Capital Markets, please go ahead

Joe Box - KeyBanc Capital Markets

Hey good morning everybody, this is Joe Box in for Steve. I have a quick question about railcar production. How should we actually think about the gross margin breakeven level at manufacturing? I know there is obviously going to be a lot of puts and takes there with more aggressive pricing and some of the cost takeouts that you've done in the past. I am just trying to get a sense of what that breakeven delivery level might be?

Dale Davies

Well Joe I think our cost on the first half of this year and even actually started 2009, but we’ve taken it down a little further this year. We are probably as well as we are going on terms of reducing fixed cost at our plants, we are taking orders and we are ramping production up, we don’t anticipate related to the fixed cost as we ramp up production we’ll be adding variable labor direct labor to build the cars, but as we also stated the cars that we’ve taken for the second half, we’re taking at very competitive price so. There is some positive contribution and in few cases you know we are recovering and get some positive gross profit in these orders. So to tell you how the second half looks, I don’t know it’s going to look whole lot different in the first half.

Jim Cowan

The only other thing I’d add to that Joe I mean so much of it depends on mix, so we got some car types that are more competitive than others, but clearly as we said and we tried to focus on more specially type cars, to have some higher level of contribution.

Joe Box - KeyBanc Capital Markets

And just a follow up to that, I mean in the past I think you guys have probably been able to be profitable in the 400 to 500 unit delivery number. It sounds like it could potentially be north of that than based on competitive pricing. Is that a fair statement?

Dale Davies

Well you know I haven’t really run the numbers on your 400 to 500, but there’s a little less profit in orders now than it was in prior years.

Joe Box - KeyBanc Capital Markets

Okay, Question for you on the 1080 units that you guys took in the quarter. Can you give us a sense for what the delivery schedule might look like there? And does it seem like it's more a function of immediate needs from your customers or are you seeing some longer-term, maybe more speculative orders from your customers?

Jim Cowan

Now, Joe, it’s immediate needs, people are looking for replacement demand, cars that are 40ish or so years old, that they are replacing so most of them are wanting the cars, fairly quickly, so when they place the order its usually 3 - 4 - 5 months, out.

Joe Box - KeyBanc Capital Markets

Okay. Last question for you and then I’ll turn it over. Jim, you had talked about 2Q potentially being the low point for the railcar industry. Is it your assumption that from here on out we could potentially see a book-to-bill north of 1?

Jim Cowan

Yes I think the answer to your question, I am really try to see what’s the first half, I think the first half is going to be the low point I don’t know 2Q or 1Q is, but at least I think from what energy that we are seeing on the (inaudible) EDAS six months ago, was pretty tough and then of course, today its still not robust, don’t get me wrong, but I think your book to bill number of over one is a good point.

Operator

Our next question comes from Art Hatfield from Morgan Keegan, please go ahead.

Art Hatfield - Morgan Keegan

Hey just a couple of questions, and I know the order rate is getting better, but it is small. Any kind of characteristics on the orders that you are seeing, like specific types of customers, is it mostly the rails or shippers or anything that stands out there? And, if not, are you starting to see any kind of request for pricing, a more aggressive kind of, how would I put it, window shopping from some of the larger potential buyers like leasing companies?

Jim Cowan

I think the orders the leasing increase were seeing its almost about a one third breakdown for each group being rail are third, shipments are third and leasing companies. those numbers are may be close, but and in terms of you know leasing companies looking for long term aggressive placement of orders, yeah there has been a few conversations with folks of head, but we have nothing to talk about or to announce there.

Art Hatfield - Morgan Keegan

And, I know you are probably, as you say there is nothing to announce, but from your standpoint what would be the trigger for you to be willing to take on an order that, maybe two years ago, you would have considered an order you wouldn't have wanted to take from a large customer?

Jim Cowan

It’s not very high, we are not looking to book out any large portion our capacity at rates that are not profitable. We can wait it out like I say the phone is ringing fairly briskly now and again don’t get me wrong here, its not robust, its not 15,000 car build per quarter coming, but people looking at demand and those demand needs are real.

Art Hatfield - Morgan Keegan

So, it's fair to characterize how you think about things given the strength of your balance sheet that right now, you are not willing to take any orders that two, three years down the road as you are fulfilling those orders, you are going to look back and say, Geez I wish we had not done that.

Jim Cowan

We don’t want to that none our board of directors; they got a lot of back bone, a lot of aged in this industry and know that they’ll be foolish on our part. No we don’t want to that.

Art Hatfield - Morgan Keegan

And then finally Dale, if you could talk about the SG&A line, very good this quarter. It was very good Q2 last year, but the other quarters have kind of basked around a little bit. Can you talk about how we should think about SG&A going forward and kind of what are the few things that may make that number jump up or down?

Dale Davies

Yeah, sure can, we are doing what we can to control cost and we have taken reductions in the past several quarters, to control that cost. There is one thing in there that causes it to go up and down and, we do have some stock appreciation rights and the accounting for those require you to record expense or income as the stock price moves up and down.

So that does have an impact on our number and cause it fluctuate, so when the stock price goes up then we have to recorded addition expense when the stock price comes down, then we approximately revere some of that and it shows up as income, so that’s a factor, we have also had a couple legal cases that we’ve had legal expenses on the last two years and those have kind of heavier in some quarters than others, the good news is that we are pretty much through all that we had a settlement last year on law suite, and have one this year and we actually won that case and its over, but the legal cost were somewhat significant on those two cases, so that’s been a driver in our SG&A cost also.

Operator

Our next question comes from Alison Wolf from Longbow Research. Please go ahead.

Alison Wolf - Longbow Research

This is Alison Wolf calling in for Paul Bodnar. I just have a question to get more detail on the entry into the passenger transit market and the DMUs. You said you were preparing a bid proposal. If we could get some detail on timing, scope, and expected margins?

Jim Cowan

Timing bid proposal are taking place in the next few weeks, that’s probably going to be a about six month process in terms of feedback, the feedback a little back and forth a few times, expected order placement is going to be end of this year or early in 2011.

Scope, these we are actually working on two projects but the one is active right now, it’s in the $80 million to $100 million revenue range to give you an idea and margins are I would say we are probably going to be hopefully in the teen category 15% - 18%.

Operator

Our next question comes from Kristine Kubacki from Avondale Partners. Please go ahead

Kristine Kubacki - Avondale Partners

I was just wondering if you could talk a little bit more about maybe the trend in orders and maybe quote activity so far. I mean, in respect to maybe the size of this orders, are you seeing if you said about onesie, twosie and kind of immediate needs, are you seeing maybe the total activity go up in size of the number of units that people are looking at and looking at future demand?

Jim Cowan

No I don’t think that I mean the orders that we look at can be 25 cars or can be 450 cars, and so they’re all over the map so that’s really hard to even give you any kind of item or answer on. But in terms of the quantity of order increase that are coming in as I mentioned a minute ago if you just look at 2009 extremely weak, if took out in the first quarter there was a about a 3000 car order with one customer and one car builder and if you took that out, this second quarter is about double. That activity and its about double three or four quarters before it, so in the industry it kind of shows I know again its not robust, don’t get me wrong there but clearly it has picked up even in the month of July we continue to see that trend

Kristine Kubacki - Avondale Partners

And can you talk a little bit about maybe the car types that are seeing the strength at this point? I mean is it going along with what we are seeing in terms of the commodity types on the railroads obviously?

Jim Cowan

Yeah, I mean, well of course covered hoppers and tank cars are bread and butter and then of course open top hoppers we’ve seen several of those increase come across as well.

Kristine Kubacki - Avondale Partners

Okay. And then, my last question a little bit longer term picture, but in terms of pricing starting to improve or moving upward I should say, I mean what kind of level is incoming order rate or backlog does the industry have to see, do you think in order to start to kind of become more aggressive and push back on pricing with customers?

Jim Cowan

That’s a great question and the backlog in industries, 15,000 units basically two orders out there, make up about half of that, so if you cut that down about 8000 and that’s a pretty weak backlog, this is going to bounce around until, that number probably has to be north of 20,000 or 25,000, before there is sometime of strengthening.

Operator

(Operator Instructions). And we have question from Tyson Bauer from Wealth Monitors Incorporated, please go ahead.

Tyson Bauer - Wealth Monitors Incorporate

Couple of quick questions. It appeared far better revenue per railcar shipped in this quarter than you've experienced in previous quarters. Is that just due to the highly specialized nature of the cars or were there more raw material pass throughs involved in this quarter that created that jump?

Dale Davies

Just the mix of the production we ramped for the quarter, actually the raw material, is probably down a little bit from what it was in prior quarters, so just a mix of cars, we are probably building a little bit bigger cars and little more specialty care mix.

Tyson Bauer - Wealth Monitors Incorporate

And can you provide any at least a range of what the dollar backlog is at this point?

Dale Davies

In the neighborhood of 90 million.

Tyson Bauer - Wealth Monitors Incorporate

Okay. Services capacity, you have talked about using some of your manufacturing capacity for that operations. You pretty well topped out on what you are capable of doing, as far as the number of cars and operations you can do there, and now it's just the function of maintaining that? Or do you have additional room to grow that services side from what we saw in the quarter?

Jim Cowan

A little bit we still have a little more work in our Canadian operation, to get it, where we’d like to see, but there is a little bit more room, but its not a major number.

Tyson Bauer - Wealth Monitors Incorporate

And a last question from me. Obviously, as you said, tank cars are part of your bread and butter. Should we see, which I think most people expect, eventually ethanol to go from a 10% to 15% blend waiting on the EPA's ruling there? Is there over-capacity still on the ethanol car side within the industry, or will that create a catalyst for the tank manufacturers?

Jim Cowan

It’s the latter its going to be the catalyst I mean I think a lot of the excess capacity that was out there for ethanol cars its been absorbed, so there will still be additional tank cars still for that product line

Tyson Bauer - Wealth Monitors Incorporate

Okay. And will that be immediate are there contingencies right now for when that ruling goes through?

Jim Cowan

I don’t know that I can answer that actually it’s in the next couple of years.

Operator

And at this time I show no questions

Jim Cowan

Okay, thank you John, we’d like to wrap up and, and we again thank everybody for participating and we look forward to a better quarter in the third and talking a few more months, thank you.

Operator

Thank you, ladies and gentlemen, this concludes today’s conference, thank you for participating, you may now disconnect.

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