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The Greenbrier Companies, Inc. (NYSE:GBX)

Q3 2014 Earnings Conference Call

July 2, 2014 11:00 AM ET

Executives

William A. Furman - Chairman, President and CEO

Mark J. Rittenbaum - EVP and CFO

Lorie L. Leeson - SVP of Corporate Finance and Treasurer

Analysts

Matt Brooklier - Longbow Research

Justin Long - Stephens Inc.

Bascome Majors - Susquehanna Financial Group

J. B. Groh - D.A. Davidson & Co.

Ken Hoexter - Bank of America Merrill Lynch

Mike Baudendistel - Stifel Nicolaus & Company, Inc.

Salvatore Vitale - Sterne Agee & Leach Inc.

Operator

Hello, and welcome to The Greenbrier Companies Third Quarter of Fiscal Year 2014 Earnings Conference Call. Following today's presentation, we will conduct a question-and-answer session. Each analyst’s should limit themselves to only two questions. Until that time, all lines will be in a listen-only mode. At the request of the Greenbrier Companies, this conference is being recorded for instant replay purposes.

At this time, I’d like to turn the call over to -- conference over to Ms. Lorie Leeson, Senior Vice President and Treasurer. Ms. Leeson, you may begin.

Lorie L. Leeson

Thank you, Shirley. Good morning, everyone, and welcome to our third fiscal quarter 2014 conference call. Today I’m joined by our Chairman and CEO, Bill Furman; and CFO, Mark Rittenbaum. Mark and I'll provide a few remarks about the quarter ended May 31, and our outlook for the balance of 2014. And then Bill will provide some comments on the overall industry. We'll then open-up the call for questions.

In addition to the press release issued this morning, which includes supplemental data, additional financial information and key metrics can be found in the presentation posted today on the IR section of our Web site.

As always, matters discussed in today’s conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we’ll describe some of the important factors that could cause Greenbrier's actual results in 2014 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

The third quarter of fiscal 2014 was a record quarter for Greenbrier in revenue, net earnings, diluted EPS, adjusted EBITDA and backlog. Highlights for the quarter include adjusted EBITDA of $78 million, net earnings of $33.6 million, or $1.03 per diluted share on record revenue of $593.3 million driven by deliveries of 4,300 railcars.

Our tax rate for the quarter of 26.3% was driven by the geographic mix of earnings and specifically our GIMSA joint venture. Since 100% of GIMSA’s results are included in our pre-tax numbers, but we’re only taxed on our half of the earnings, the tax rate can be significantly impacted when GIMSA has an outstanding quarter as was the case this quarter. This is consistent methodology with prior quarters and our partner share of GIMSA’s earnings is reflected in non-controlling interest also known as minority interest on a pre-tax basis.

Since the last earnings call we’ve made several orders announcement. Orders for the third quarter totaled 15,600 new railcars valued at $1.64 billion, bringing broad based backlog to a robust 26,400 units valued at $2.75 billion. Our book-to-bill for the quarter was 3.6 to 1 and since May 31, the end of the quarter, we’ve received additional orders for 2,700 units valued at approximately $320 million.

In addition to the rail activity, Marine backlog grew to approximately $110 million this quarter. As part of our ongoing efforts to return capital to shareholders under our $50 million share repurchase plan, we repurchased 352,000 shares of common stock during the quarter at a cost of $16 million and average price $45.50 per share.

Cumulative repurchases under the program totaled 641,000 shares at a cost of $26.3 million or an average price of $40.98 per share. The activity during the quarter was muted as our trading window was closed for much of the period prior to the announcement of our repair joint venture. We do expect these share repurchases to continue.

Now I’ll turn it over to Mark for other highlights from the quarter.

Mark J. Rittenbaum

Thank you, Lorie, and good morning, everyone. In addition to our share repurchase program as part of our balanced approach to capital allocation, we also declared a quarterly dividend of $0.15 per share payable on August 5, 2014 to shareholders of record as of July 15, 2014. This is also in response to investor feedback and a strong signal to the market about our confidence in operations and cash flow generation through the cycle.

Over the past year, and in fact over the past year and a half since we announced our margin enhancement and capital liberation goals, we’ve been singularly focused on our strategic initiatives and operational efficiency.

This quarter’s results illustrate that our planning is paying off, our gross margin for the third quarter reached 16.3% significantly ahead of Q2 and far ahead of our stated minimum goal of 13.5% aggregate margin by the fourth quarter of fiscal 2014. This is also in addition to having exceeded our capital efficiency goal of freeing up a minimum of $100 million from our balance sheet.

Gross margins in all segments of our business were up sequentially, and we believe this momentum is sustainable. As demand continues to climb, so will our focus on maximizing value through all of our production facilities and particularly in manufacturing.

And our Wheels, Repair and Parts segment subsequent to quarter end we announced a JV, joint venture with Watco, the -- a GBW Railcar Services. This entity will have the largest independent railcar repair shop network with 38 locations across North America, including 13 certified tank car shops.

We are very excited about this new venture which we expect to close this fiscal year, and we look forward to meeting increased demand for general freight cars of nearly all types and for tank car repair recertifications, linings and retrofits. We will provide more details on this JV after it closes and it’s still too early to determine whether or not the JV will be consolidated on our balance sheet and on our financials.

Our Leasing and Services segment continued with its strong momentum. We continue to drive more volume through our leasing model, syndication volume that ultimately a large portion of it shows up in our manufacturing segment, but we also continue to grow our management services business while reducing the permanent capital invested in this business.

During the quarter, we announced an alliance with Mitsubishi UFJ Lease & Finance along with other syndication partners both institutional investors and other leasing companies. MUL will acquire a portfolio of about $1 billion in leased railcar assets, both new and used, over a multiyear period. This is not incremental to our backlog, but will allow us to continue to drive more leasing volume through -- and throughput in the coming years ahead.

Our SG&A increased compared to last quarter driven by employee related cost associated with higher levels of activity, particularly in the tank car area that is a more specialized area, also reflects increased incentive compensation with higher earnings and certain non-recurring costs.

I will turn it over to Bill.

William A. Furman

Okay. Thank you, Mark. I’m going to break my comments into three parts. I’m going to talk first about orders received during the quarter and post quarter. We had a very strong quarter in that regard, and then I’m going to talk for a moment or two about tank car safety and our role in the tank car safety issue, which is very prominent today in front of our government and in the industry. And then finally I’ll just touch on a few of the drivers of our performance and talk about the reasons I believe that this level of performance is a new base and is sustainable as we’ve hit operating efficiencies.

Greenbrier advanced its backlog as Mark and Lorie have pointed out in the third quarter and post quarter, with both revitalized leasing model, including the initiatives with Mitsubishi and other funding partners, and with manufacturing awards across our entire product line. For Rail this included automotive, intermodal, tank and covered hopper cars as well as other car types.

Our Marine backlog grew to $110 million with forward momentum continuing and the opportunities we’re tracking in that area; particularly for energy related and chemical related products are substantial.

We received our first major rewards for dramatically safer tank car for hazmat, flammable service out of the total 17,700 awards during and post quarter, a substantial increase over earlier levels. 3,500 of those -- of the tank cars we received were for our new improved and markedly safer tank car of the future. And as Mark has indicated, we’re on the eve of launching our repair initiatives with Watco joint venture under the leadership of Jim Cowan, with the name GBW.

So next let me turn to a few marks about tank car safety. Greenbrier’s Board has made a conscious stand to face the responsibilities with the car building industry and the railroad industry for safer transportation of oil and flammable and all hazmat service. Our new tank car design is a dramatic improvement in safety from the present fleet carrying oil and ethanol and other flammables and as well as other hazardous material that total population of cars is almost 170,000 cars.

A more robust design is expected to be adopted directionally as a new standard when the U.S government issues its long awaited car design standards for approved equipment in oil and ethanol and we’re already there with our tank car of the future.

It’s important to understand that presently only the legacy DOT-111 fleet originally designed in the 1970s, is officially approved by the government as the standard for service. Due to operating and safety concerns, the railroad industry made mandatory an improved standard with the 1232 design in 2011, but that design has never been ratified or officially endorsed by the Department of Transportation. This action is required and it’s required urgently.

The Greenbrier design is up to eight times safer at any speed when measured against the legacy DOT-111 car now used predominantly in service for such flammable products and this is measured by Conditional Probability of Release or CPR, an industry accepted standard.

CPR measures the probability of breach of a tank car and spill of contents over a range of speeds based on historical records and statistical analysis and our car is roughly two times safer than the state-of-the-art insulated and fully jacketed post 2011 CBT-1232 car, which is the current best practice standard imposed by the railroads, not the government, but yet to be approved by the government. So the bullet here is we need government action on the tank car design. The Department of Transportation is trying very hard to get that done. This will be at the White House. It’s there now. Supporting information to my comments will be listed in our attachments to this morning’s earnings release and the terms of the chart on Conditional Probability of Release.

But just in short, Greenbrier’s proud of its leadership on tank car safety. This morning Minister Raitt in Canada announced new safety regulations or rail and dangerous good requirements. We urge the U.S government to follow that lead and to issue standards. It’s less important what the standards say than that the government issue them and we hope and trust that they will not combine that with speed restrictions which are very complex and which could damage the U.S. economy having knock-on effects in grain, intermodal, automotive, merchandise and many other service at a tremendous potential cost. We need these regulations and we need them now. And we do not need nor should they be bundled with speed restrictions beyond those speed restrictions the U.S railroads have already imposed. This is an imperative thing for our country, for our industry and for safety of the American public.

So let’s turn now to the quarter and the road ahead. Given the quarter, I want o remind everybody of our strategy and the goal set two years ago. I’m very pleased that we had the ability to listen to many of our major investors and to accommodate and adopt many of their suggestions. We are now executing well on the strategy that evolved and we’ve met or exceeded every goal earlier than expected. Performance for the quarter is sustainable directionally and is the result of strategy execution over those past two years. All parts of our business model now have wind in the sails.

While we still have ramping in the next two quarters as we double our tank car capacity in Mexico and expand other product offerings, we finally are seeing real operating leverage in execution as you can see in our margins. We believe that will continue directionally over the next two quarters sequentially or over the next six quarters sequentially and we have reminded everybody that our progress is not necessarily going to be linear, but sequentially over a sustained period of time, we have very good visibility and we expect this operating leverage and margin enhancement to continue.

So in summary, our strategy was to set metrically driven goals, diversify our product mix, create revenue and product diversity across all railcar types in manufacturing, not only energy and tank cars, but all types of railcars and drive production and leasing through lower costs capital light models. We think we finally have gotten our leasing model together and we’re really pleased about the results that we’re getting and we’re going to get and the new relationships we set with Mitsubishi and other funding sources.

We also most importantly set goals for capital efficiency and margin enhancement and we decided on a balance policy to return capital to shareholders. Our stock buyback program continues as announced earlier today and as commented upon by Mark and Lorie. In this quarter as you’ve heard, our Board has approved a dividend policy which would be equivalent to about 1.1% yield on yesterdays market capitalization.

We have strong cash flows from operations and the best [ability] [ph] I’ve ever seen in this business, so we will have ample capital to invest in growth while adding to shareholder returns through judicious stock repurchases and dividends. So in summary, some important points. Points that are much different than the environment of a year-ago, leasing is hitting stride, performing higher levels. Our capital efficiency and lease funding models has been enhanced and we have for the first time truly adequate capital to drive our leasing engine with a capital light model for the major announcements we have made.

Manufacturing operating leverage has kicked in and it’s moving upward. Capital liberation and margin goals have exceeded -- exceeded goals earlier than planned. Our underperforming facilities in repair are trending up and have a good future in this new GBW joint venture.

The Marine business has strong demand and strong backlog, our Gunderson unit has intermodal backlog and the outlook for stacks is up. Double stack orders have been received. The industry loadings for intermodal are all up and we’ve record earnings for revenue, net income, diluted EPS and backlog. I think the bullet there is more too -- there is more upside to come.

Finally, we’ve growth opportunities and these abound in related businesses such as energy and I think for that reason, we were very pleased with this quarter. We look forward to seeing this as a new base for further growth and see many opportunities in our space and expect continued strengths in the quarters and years ahead.

Back to you Mark.

Mark J. Rittenbaum

Thanks, Bill and we will let Lorie make some concluding remarks and then we will open it up for questions here.

Lorie L. Leeson

Thank you. And based on current business trends and industry forecast, we now expect the deliveries in the fourth quarter to between 4,300 units and 4,600 units, resulting in fiscal 2014 deliveries of 15,700 units to 16,000 units. Fourth quarter revenue to increase 4% to 6%, about third quarter revenue of $593 million resulting in annual revenue in excess of $2.2 billion.

Earnings per share for the fourth quarter in the range of $0.95 to $1.05, resulting in fiscal 2014 EPS excluding restructuring charges in the range of $2.98 to $3.08. The quarterly amounts do not total for the annual amount as each period is calculated discretely. Further, we expect long-term growth margin improvements that as Bill said, we believe the trajectory will not be linear.

Gains on sales to be minimum for the rest of the year. Our annual depreciation and amortization is still at about $40 million for the year and annual tax rate of 29%, depending on geographic mix of earnings. And fourth quarter earnings attributable to non-controlling interest, also known as minority interest, to be similar to the third quarter.

Our fiscal 2014 growth capital expenditure should be about 90 million driven primarily by North American manufacturing activity and net capital expenditures, so net of proceeds from sales out of our fleet, net CapEx of about 40 million. All these estimates do not reflect any purchase price accounting adjustments or one-time transaction related cost or other effects that may occur in conjunction with the closing of the GBW joint venture.

We will now turn the call back over to Shirley to host the Q&A. Again, as a reminder, please limit your questions to two and if you have further questions, please requeue and we will address if time permits. Shirley?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Your first question comes from Matt Brooklier with Longbow Research. You may ask your question.

Matt Brooklier - Longbow Research

Yes, thanks. Good morning.

Mark J. Rittenbaum

Good morning.

Matt Brooklier - Longbow Research

So I guess my first question here, you saw a really nice gross profit margin improvement. It sounds like that continues moving forward, just given the ramp in railcar production, and then you also have the Marine side of it kicking in a little bit more in fiscal 4Q. I’m just trying to get a sense for kind of how we should be thinking about margins sequentially. We think they’re going to get better, but also remembering that you’ve some start-up costs with those additional tank car lines coming on. So maybe just if you could provide some color in terms of the margins moving out, and how we should think about those start-up costs when they potentially hit and maybe the magnitude, if you could talk to that?

Lorie L. Leeson

Matt, this is Lorie. I don’t know that we said this yet, but we weren’t intending to give any guidance on fiscal ’15 until we do our fourth quarter earnings release. To your specific questions, I think we’ve said a couple of times that we don’t expect -- while we expected our margins to be sustainable, they may not be linear for many of the points that you just raised. There is a variety of things that can happen during the quarter when we do have some start-up. On the other hand we have Marine that should be kicking in very nicely during this fourth quarter at our Gunderson facility. So it’s for all of those reasons that we’re not giving specific margin guidance. In the fourth quarter we do expect the fourth quarter to be a great quarter, but we don’t have particular margin guidance to give. Mark, I don’t know if you want to supplement that?

Mark J. Rittenbaum

Yes, and similarly for next year, I think as we -- we’re not prepared to give margin guidance yet either. As we’ve said many times, this is a journey of many steps and so we still see a lot of opportunity for margin enhancement as you know that we will be moving into new facilities and those will be lower cost facilities. We will be adding additional tank car capacity which is a higher margin business. We will have the wind at our back for Marine and our European operations have a brighter outlook for next year. But having said all that, we’re going to withhold for now on that specific either for next year or on a quarter-by-quarter basis.

Matt Brooklier - Longbow Research

Okay. Fair enough. And then in the past, I think you talked to kind of a theoretical maximum in terms of railcar deliveries moving out into peak. What are your thoughts here, given kind of the run rate of what you are doing, the additional capacity that is expected to come on, is that number still in a 21,000 to 22,000 unit number or do you think you could do something north of that?

Lorie L. Leeson

Fair, I’m not certain about 21 or 22, I think what we’ve said previously is may be closer to 20,000, but that is very dependent on the product mix. So particularly in a year where we’ve a considerable amount of intermodal demand, we can definitely drive to much higher volumes. As you’re aware tank cars as well as the automotive products that we’re building in manufacturing, all take a larger number of hours, so the production rates on those still get up quite as high. So I’d say that theoretical it’s still somewhere in the 20,000 to 21,000 depending on the product mix. But that’s -- we’re just excited about where we’re for fiscal ’14 and we look forward to giving you guys further guidance on ’15 in a few months.

Matt Brooklier - Longbow Research

Okay. And then just to clarify the 20,000 to 21,000 that includes the additional tank car manufacturing?

Lorie L. Leeson

Yes, it does as well as Europe.

Matt Brooklier - Longbow Research

Got you. Okay. Thanks for the time.

William A. Furman

Thank you.

Operator

And your next question comes from Justin Long with Stephens. You may ask your question.

Justin Long - Stephens Inc.

Good morning and congrats on the quarter.

Mark J. Rittenbaum

Thank you.

Justin Long - Stephens Inc.

First question I had was on the backlog. I was wondering if you could break out the rough split between tank and non-tank in the backlog today. And then as a follow-up to that, looking into 2015, I know you are not giving specific guidance now, but clearly there is a lot of visibility in the backlog, could you just speak to how much build capacity you’ve left for 2015 or are you completely full at this point?

Mark J. Rittenbaum

So we will take this in parts Justin. This is Mark. Of our existing backlog about 40% of it is tank car and the balance a broad mix of the general freight cars as Bill described earlier. We do still with that backlog there is a multiyear backlog in there and obviously with 26,000 railcars that would stretch beyond the year even with simple math. We still have the open production slots for 2015. But again at the end of our year, we will break out how much of the backlog goes in is related to 2015 and how much of it is beyond that. With this backlog we have very good visibility into our 2015 and beyond obviously.

William A. Furman

I just want to hasten to add that while we’ve some open space on some lines in 2015 that this is very specific to car types and we’re running. Our goal is to run long runs of cars on each line so that the space available is selective to car types. In tank cars, we expect substantial demand for tank cars as the regulations are finally sorted out and we’re selling space selectively to our core customers in order to be able to meet their requirements.

Justin Long - Stephens Inc.

Okay, great. That’s helpful. Thank you. As my second question, one thing that you noted was the liquidity position. You noted that in the release and it seems like the free cash flow profile should be getting better too, given the visibility you’ve. Have you refined your thoughts at all on your plans for this capital? And also, when you’re looking at different ways to invest this capital, is there a certain level of ROIC that you are targeting?

William A. Furman

We are in a -- generally speaking in our -- reaching our operating efficiencies and getting operating leverage, we’re in a refinement phase now. We really saw this operating leverage kick in the last quarter, continuing in June and for that -- in that regard we’re looking at selective projects putting lot of attention to selective projects, (indiscernible), engineering enhancements, value engineering with very high rates of return for those selective projects. Those are basically no-brainers with multiples of -- in many cases returns in less than a year. And certainly a two-year payout with that kind of efficiency enhancing, margin enhancing, selective investment. We also see considerable growth opportunities beyond the capital we’re allocating for return to shareholders. We are going to throw off quite a lot of cash in the next three years, four years with visibility out effectively into that range. So we see selective opportunities in our core businesses, in both leasing, manufacturing, and repair, parts, wheels and in Europe.

Justin Long - Stephens Inc.

Okay, great. I’ll leave it at that. Those are my two, thanks for the time.

William A. Furman

Thank you.

Lorie L. Leeson

Thanks, Justin.

Operator

And your next question comes from Bascome Majors with Susquehanna. You may ask your question.

Bascome Majors - Susquehanna Financial Group

Yes, thanks for the time this morning. I wanted to ask a little more on the backlog and your visibility. You said you have some slots available next year. Is your additional tank car capacity sold out for next year at this point as you are bringing that on?

William A. Furman

Effectively it is -- I think we are -- when we’re selling these out we have some capacity reserved for leasing customers. So, we are optimistic that we can handle the customers that have brought us to the party particularly on tank cars. But we have very strong backlog for tanks, and we expect that the demand for tanks will continue to accelerate.

Bascome Majors - Susquehanna Financial Group

And to that point on the slots, you said you do have, you said it was available to or specific by car types. What types do you have some capacity left for that you could incrementally fill up next year?

William A. Furman

Well, I am not sure how granular my financial guardians here will allow me to be. So, I am going to turn that back to you, because you’re going to -- what we’re going to do here at the end of the year is give a lot more transparency. We’ve said that we -- a year and a half ago at a conference in New York, we said we were going to be much more transparent, explain our metrics. We are doing that and it's -- and it's not that I don’t want to answer the question, I’m not sure I want to answer it now. I know the answer, but I’m not sure I can tell you the answer yet, because he won't let me.

Mark J. Rittenbaum

And partly for competitive reasons too we don’t want to break out our open slots by car type of by product lines. I think it's, one area it's safe to say and comment on is that as compared to this time last year in intermodal for example we have much more visibility and a stronger intermodal backlog at the same time we’re there to the additional demand for intermodal cars which we’re very optimistic about, we could ramp up production further than where we’ve already planned to operate in 2015.

William A. Furman

We have some long standing customers, TTX is one. You know in our industry there’s mutual reliance, and so we want to be there for those customers as part of our service model. So, we work very closely with these customers and -- but in general the backlog is very strong and we have a -- we’re in a, in some respects in a rationing position which is frankly good on the pricing side, and that’s part of the margin enhancement we’ll see moving forward.

Bascome Majors - Susquehanna Financial Group

Okay. And just one more, on the leasing segment the revenues and profits were much stronger than they have been recently in the quarter. You mentioned in the slide deck some of this was due to syndicating third party produced railcars. Can you just walk us through what's happening there and whether or not this is kind of a sustainable base to build from or kind of a onetime spike?

William A. Furman

We don’t see it as one time at all. We have a pipeline of both capital and transactions that we’re driving more business through our leasing model. As we do that we’re also financing outside products as well in our space. We’re buying railcars originally built by others. We’re managing railcars originally built by others, and our management business and the leasing business is really taking off. We’re, in effect that’s a -- it's an emerging part of the business that is really very exciting. So, several elements contributed to the momentum in the leasing business. We see leasing -- the leasing business as a growth engine, and we’ve got a really good team of professionals running that business. They’ve done a great job of finally getting our model down. We have a capital light model. Our ROEs are very high and are expected to be very high. So, I’m very bullish on our leasing business and I think it's a sustainable model as is our manufacturing base with the current outlook.

Bascome Majors - Susquehanna Financial Group

Thanks for the time this morning.

William A. Furman

Thank you.

Operator

Thank you. Our next question comes from J. B. Groh with D.A. Davidson. You may ask your question.

William A. Furman

Hi, J. B.

J. B. Groh - D.A. Davidson & Co.

Thanks. I’ve just got a couple -- hi, how you’re doing? Mark, did you talk about the tax rate going forward. I know you don’t want to give ’15 guidance, but as more production goes to Mexico, I guess, it's probable that we’ll see that tax rate below 30%.

Mark J. Rittenbaum

It's a good question J. B., and I think that is correct. That as more goes to Mexico and more is driven through our GIMSA joint venture which has this, kind of funky accounting for taxes that ground around that 30% tax rate; this would be a good tax rate to use.

J. B. Groh - D.A. Davidson & Co.

Okay. And then can you talk about, and you mentioned some sort of onetime items on the G&A line. Could you talk about what's sort of implied in your Q4 number for G&A?

Mark J. Rittenbaum

Sure. I think implied in there is probably something a little bit less than what's -- a little bit less than in Q3.

J. B. Groh - D.A. Davidson & Co.

And then if I could sneak one more in. Could you talk about marine revenue in the quarter and how you expect that to ramp with the backlog that you’ve got over the next couple of quarters?

Mark J. Rittenbaum

Right. So, the marine revenue in the quarter was less than $10 million. We would expect that to be higher in the fourth quarter maybe up to double that and well again will differ overall next year. I think it would be safe to say for next year that -- so $15 million in the fourth quarter is an approximation. If you multiply that by four that’s $60 million I think as an annual run rate and we would expect in 2015 that that annual run rate would be higher than Q4.

William A. Furman

Can I go up a few thousand feet on that question, J. B, it's a good question. Actually our Gunderson facility in Portland is primarily a marine facility, and in intermodal facility we do make one other specialized car type there, mechanical refrigerator cars. All three of those markets are now much stronger. We’ve had a two year hiatus 2012 Gunderson produced EBITDA close to $25 million. It's been a drag on our manufacturing production in the last two fiscal years ’13 and most of this year, but now it's kicking in. And we see in 2015 compared to the current run rate lots of -- we think it can return to that level of performance. So, there’s probably $20 million of EBITDA in there if we can make everything work the way it's supposed to work, and we have the visibility which we believe we’ve got. But certainly have at marine -- we believe we have it with the kind of growth in intermodal. Growth intermodal has been strong even though overall car loadings for the last month on January were a little flat. You got to look at the specific car types and 4% growth in 2014, another almost 4% growth is expected in 2015. Velocity is falling in the industry, something that we all need to be aware of. And this whole energy issue has a big, big a potential impact on velocity and service availability to grain shippers, intermodal shippers, all kinds of folks. And as you know J. B, if we have velocity fall we need more cars to carry the same amount of service. So, it's a very complicated environment. We’ve had a disruptive event in the energy sector, and that’s going to have a ripple effect through the entire economy. So we hope that those in Washington who are pondering these great things, we need to get it figured out and make the right decisions otherwise we’re going to have some high demand for freight cars that a spike demand that the industry can’t fill. And lower velocities and that’s all -- that’s all giving us a lot of winner backs in the Gunderson and that’s probably expected over the next couple of years.

J. B. Groh - D.A. Davidson & Co.

Great, and thanks for your time.

Mark J. Rittenbaum

Thank you, J. B.

Operator

Thank you. Our next question comes from Ken Hoexter with Bank of America. You may ask your question.

Ken Hoexter - Bank of America Merrill Lynch

Great. Good morning.

William A. Furman

Hi, Ken.

Ken Hoexter - Bank of America Merrill Lynch

Just before I jump into the question, just a clarification. You mentioned the 170,000 number on cars. Is that what you think has to be replaced or is that just replaced and refurbished or retooled?

William A. Furman

That’s 170,000 cars that are current in hazmat service, the DOT-111, 1232 cars. And about a 100,000 of those are inflammables, of inflammables about 68,000 are in oil and ethanol. American Petroleum institute has said that all oil is the same; the Bakken is no more flammable or explosive than any other. I don’t agree. That’s what they say, and almost all of that’s going to have to be carried in an improved car. Turning to the other flammables, we’re seeing every day here in Portland, Oregon and in Seattle and in San Francisco stories about the threats to rivers, the environment from carbon. And if all of you haven't noticed it, there’s a real effort to kill carbon in all of its forms and by some of the more radical environmentalists. The rivers are very vulnerable. But I believe that this safety consciousness will be driven by those folks and we’re going to see a need for stronger protection for any cars that have hazardous material. And that kind of stuff could be things that are carried in the rest of the 170,000 cars that are flammable, such things as pesticides that cause the river -- the Sacramento River poisoning and for the turn over the last century, that risk and that threat is still there. All right, and so stronger cars as these older cars get retrofit and recycled into service they’re very suitable for hire and best use as the older cars get retired. So, it's a very interesting dynamics truly a disruptive event driven by high speed trains. And I think that that’s what everybody misses when they look at this issue. The railroad system today has to run at high speeds or they can’t carry traffic. You’ve got intermodal unit trains, you’ve got grain unit trains, you’ve got -- now you got oil unit trains. These things will weight 15,000 tons. And if they move at 50 miles an hour if everything is cool. They can’t do that through towns or cities and the railroads are responsibly adapting those policies. But the impact of all of this on the environment is something not to be -- I think our industry is really with the exception of the railroads have been very responsible about this. I think our industry has been very slow to realize the threat to the economy from deterioration of road service.

Ken Hoexter - Bank of America Merrill Lynch

Go ahead Mark, you were to say something.

Mark J. Rittenbaum

Railroads had been very -- they’ve really stood up to their responsibilities and I think it's time for the rest of the industry to do this as well. So, I think that there will be a trickledown effect into these other car types and that’s -- it's a very disruptive event that’s happened that affects all hazardous cars eventually. And we just have to with higher speed trains we need to have stronger cars, and it's just that simple.

Ken Hoexter - Bank of America Merrill Lynch

It's really helpful, just at least to visualize the tail on -- because there’s was only the 50,000 or so cars that are carrying the crude, then you’ve pretty much got that nearly covered with your backlog and the industry’s backlog, but that’s a great vision on how it continues.

William A. Furman

But that’s not really true. I understand why, that’s tempting to say that, but all of the cars that are being added today are for growth. Yet we haven't really touched the need to replace the legacy cars that have been out there, that are a major portion of the problem. If you’ve got a car that’s eight times more likely at higher speeds or any speed to release its contents the danger of pool fires like we’re having or seeing almost every month increases. And that’s why it's very important that the Department of Transportation go on with it, and they’re trying to and all we need to do is to get on with it and the White House needs to get on with it and issue some standards, so we all know what it is we’re supposed to be doing. So, we haven't addressed this issue whatsoever in many ways. This current backlog, we’re not even sure if it's going to be acceptable or be [ph] [elevated]. So the government has got to act and that’s really what is needed and a lot of us are going to be very frustrated. We’re trying to behave responsibly, we can’t. It's not unlike the situation with General Motors. I mean this is a safety issue that’s paramount. We can make the car safe, but we’ve been trying. We have to have the government accept it, and they’re trying to, but we need to get on with it.

Ken Hoexter - Bank of America Merrill Lynch

I appreciate that insight. Now on the -- it's my question on the triggers. You noted that your goal was 13.5% margins, you’ve moved up to 17%, and I understand it's not linear. But maybe can you dig into what occurred in the quarter that was maybe more permanent in nature because you’ve jumped so significantly from where you were a year ago. So what is maybe more permanent maybe what is more related to price and mix adjustments that can be that volatile in non-linear nature? So, kind of what is the new base rate at least just based on the changes that you and Cowan have made in terms of the operations?

William A. Furman

Well, Cowan is almost entirely preoccupied with GBW. He’s going to have 38 facilities and he is going to have his hands full of getting those between Watco and ourselves corralled and increasing their margin. We’re going to issue some guidance at the end of our fiscal year. And probably that’s the time to talk about being more granular on that kind of a question. I will say that the momentum -- the operating momentum we’re seeing was seen by others earlier. It wasn’t seen in our case because we’ve been in a constant stage of ramping and diversification in products. If you think about it, we’re totally a different company than we were five years ago. We have AutoMax, Multi-Max auto cars, we have the new plastic pellet design we’re just launching this week and we’ve been really innovating a lot. We want to have a broad foot grip with product diversification. We don’t want to be a one note samba and trade on the present margins for future uncertainty. So, I will now, as we have slowed our ramping, as we have longer runs in each individual car type we’re able to get operating efficiencies and of course the market climate has allowed slightly pricing adjustment to levels where they should be.

Ken Hoexter - Bank of America Merrill Lynch

But when you talk about non-linear, you’re not talking about going down 400 or 500 basis points. Are you talking about maybe it's a 100 basis points swing. I just want to understand the magnitude of, since you’re referring to.

William A. Furman

Yes, Mark.

Mark J. Rittenbaum

Exactly, Ken. All of the drivers here, production efficiencies, operating at higher volumes, mix, pricing, all those drivers are permanent in nature. And then we also talked about some other things that are positives, such as our Gunderson facility operating at higher rates and intermodal and then marine and Europe picking up. And at the same time you’re exactly right, that these are all more permanent in nature that we can’t see just as we bring down a line and bring up a line that you can have an up or down in one quarter, but directionally we believe this sets more of a new base than where we were earlier in the year.

William A. Furman

Yes. And what we’re really trying to say is that quarter-by-quarter I don’t think one not to expect an acceleration of this kind of increase that happened in Q3. We’re not talking about material declines either. What we’re simply saying is that nothing happened that was particularly different, in this quarter everything is just summing along and we’ve got a lot of wind at our backs now with Gunderson and marine and intermodal everything that we’re talking about the last year or so that was looking like it was coming together that the general freight car market is -- has got strength, has got legs on it. And we just have the luxury of executing, and we’re doing that and we expect over time margins to increase. But given that this is our third quarter, and at the end of the year we’ll set new targets and we’ll be much more transparent about what our goals are for the coming year.

Ken Hoexter - Bank of America Merrill Lynch

That’s helpful. And just lastly again another clarification if I can, you noted you would invest in growth. Are you talking about -- with your great cash flow you mentioned before, are you talking about adding more capacity to help meet the backlog or is it growth in another way?

William A. Furman

We are not entirely masochistic, no. We’re not tending to, other than selective capacity increases to meet specific markets, we have no grand plans to build out more capacity in the rail space, but we want to tune the capacity we have so we can improve our margin efficiency. And I think that’s where CapEx can really improve our margins and provide for growth. We make our base more productive and more efficient, so we can compete head-to-head with anybody in the business across the broad range of products. So, that’s our goal.

Ken Hoexter - Bank of America Merrill Lynch

That’s a great clarification, bullseye.

William A. Furman

(Indiscernible) you’re enhanced by our leasing model as well.

Ken Hoexter - Bank of America Merrill Lynch

Surely appreciate the insights and time. Thanks.

William A. Furman

Thank you.

Operator

Thank you. Our next question comes from Mike Baudendistel with Stifel. You may ask your question.

Mike Baudendistel - Stifel Nicolaus & Company, Inc.

Thank you. I wanted to ask on the service centers. It sounds like you’re performing retrofits with, for tank cars with added safety features is a big opportunity for you. Have you thought about how many cars you could retrofit in a given year or given your new capabilities?

William A. Furman

Yes. In fact the industry is studying that. Many believe that the industry does not have the capacity to retrofit the potential demand. Keep in mind that the government standards in Canada that were just issued today and the government standards, the United States is expected to issue will not, and are not expected to make standards on retrofits. Retrofits will be derived from improvements and the standards they make on, and the timeline they set or what type of car design they will allow in flammable service and that’s what this rule making is all about. There will be two markets for these retrofits. One will be the 1232, probably the non-jacketed car will have to be upgraded over some period of time, we think, and that’s one sub-market. And then there’s another market of, what do you do with the DOT-111 legacy cars. Many of those cars are newer. They have got a lot of fixed cost in those cars. They will not have to be scrapped. But with modest improvements in the -- in retrofitting those cars they can be used for an extended period of life, if not in high combustible service than in other hazmat service. So we expect a very strong market for safer products in retrofits there. If we look at which we don’t expect to happen at these DOT-111 cars to be totally compliant with what we expect and these standards might be, you’re looking at -- we have a capacity to do about 25% of the total need, several thousand cars a year. And we have a capacity turn on other facilities over a given year or two. So, it is fair to say that there will be capacity to do whatever is required, but the whatever is a very, very important thing to understand. We don’t have the standards in place yet. We’re not expected to get those standards from the government, but I think the industry will have to decide for itself, how safe do they want their cars to be in operation and that will drive that retrofit market. So, those adequate capacity do the retrofits that are required, and it will be an important but not a crucial part of our GBW strategy.

Mike Baudendistel - Stifel Nicolaus & Company, Inc.

Great, that’s helpful. And I also wanted to ask, there were some in the press releases in the quarter, I think one of them you mentioned that you have a new -- the tank car of the future has added safety features, but it doesn’t take away from the payload in the car, I know that’s been an area of controversy. Maybe if you could talk a little bit why some -- there’s been a difference of opinion there?

Mark J. Rittenbaum

Okay. Well, I’m really glad you asked that question, because it's something that’s personally annoying to me, and I’d love to -- I love to talk about this. The DOT-111 legacy car has plus a little more than 30,000 gallon car, it's not jacketed. It in some cases has some head shielding. The ones we built did, in some case it has none. And the car that we have designed is approximately 30,100 gallons. There are other competitors in this space that have that type of capacity. We’re fully jacketed, heavier steel car. The slick 1232 car has less capacity. It has a capacity for -- well the slick car has more capacity, 31,800 gallons, that’s the car that people are comparing to. But the slick car is not a car that’s expected to survive this in its current form. And it might be -- some of them might be grandfathered with some modifications over time, I mean that’s the retrofit market that people are talking about. But the basic car that is safe for use or will be safe for use if the railroads have their way and they should know, we ought to listen to the engineers not the political scientists here if will be about 30,000 gallons, exactly what we’ve been running in the industry for years for the last five years. And so, I don’t get this capacity argument. In any case it's certainly not more dangerous to have lower capacity cars and there’s a lot of just so many arguments going on out there that, it really get in the way of a sober and somber view of our responsibilities as engineers and car builders to produce a product that’s safe, that protects the public, and it's responsible.

Mike Baudendistel - Stifel Nicolaus & Company, Inc.

Great. Thanks very much.

Mark J. Rittenbaum

Thank you.

Operator

Thank you. And our last question here comes from Sal Vitale with Sterne Agee. You may ask your question.

Salvatore Vitale - Sterne Agee & Leach Inc.

Good morning. Thanks for taking my questions, I appreciate it. Just a quick question -- just a clarification on the marine revenue side, so I think on the last call you said that marine revenue was roughly $5 million per quarter in 1Q and 2Q, and now 3Q is little less than $10 million. So, should we think about the full-year ’14 being roughly say $35 million or so, is that the right way to think about it?

Mark J. Rittenbaum

Probably Sal, little bit closer to $40 million, but that $35 million is pretty darn close to $40 million.

Salvatore Vitale - Sterne Agee & Leach Inc.

Okay. And then that fiscal ’15 being roughly $60 million, is that a good ballpark estimate at this point?

Mark J. Rittenbaum

I think at this point that’s probably a minimum number. Sal, we said in Q4 we would be operating exactly at $50 million, so annualize that $60 million. But we would expect probably to be operating at higher rates than that in 2015.

Salvatore Vitale - Sterne Agee & Leach Inc.

Okay, that’s helpful. And then just refresh my memory, on the timeline in terms of when then additional tank car capacity is coming on. Are we still thinking, was it late calendar year ’14, is that the right way to think about it?

Lorie L. Leeson

So one of the lines will come on in late calendar ’14, and the other at our central Mexico facility where we’re transitioning a line that’s currently producing non-tank cars and we’re converting that over the tank cars. That will happen I’d say early-to-mid calendar 2015.

Salvatore Vitale - Sterne Agee & Leach Inc.

Okay, that’s helpful. And then the, just the touch base on the margin progression, very impressive in 3Q. Is there any potential for any issue to result in a sequential decline in margins -- on the manufacturing margin in 4Q?

Mark J. Rittenbaum

I think again just Sal, part of what we were talking about earlier of whether it relates to mix or line changeover or as we move out of our Bombardier facility into new facility, that from quarter-to-quarter it can move a little bit in one direction. But as it was asked earlier this represents -- this quarter represents closer to a new baseline than what we were operating there previously. We don’t expect to drop down to where we were in Q1 and Q2, but again from quarter-to-quarter it may move a little bit in one direction or the other. And as we have said before, we’ll give guidance on 2015 next quarter.

William A. Furman

But Sal, in terms of a little longer view, two, three, four quarters ahead we expect sequential strengthening of margin. That’s going to be a new goal. We’re not going to give guidance yet. We’re certainly happy that we exceeded our target of 13.5%, and we certainly don’t expect to go back down to that level even in any sort of variation that might be driven by some unusual event. Interesting thing about this quarter, again there’s nothing unusual about it. It's just business as usual with a lot more tailwinds and those tailwinds are going to really contribute to margin. When Gunderson starts kicking in you’re going to see really big improvements in 2015. So, we think that our challenge is to set realistic goals that our Board will accept and the street will accept as not being too modest in 2015 and beyond.

Salvatore Vitale - Sterne Agee & Leach Inc.

Well, now thank you for that insight. I appreciate that. And if I could just build on that, if we look out over the next few years, I mean where do you think the potential for [ph] [peak] manufacturing gross margins are at this point?

William A. Furman

Well, I think that we would benchmark the competitors that have been in some of these spaces longer than we running tank cars for example. We’ve been in it for six years. It's not an easy business to get into. The people what are going to try to attempt to get in it here in this phase of the market are going to have a really hard time, and I know we did. So we’re sequentially hoping to build our margins to be equivalent to our peers. I don’t think we will be able to meet the margins. Jim Cowan was able to obtain at ARI simply because part of that was pricing and the fact that he was selling a lot of that to the parent. But the trinity margins would be a good goal for us to look to certainly on the tank car side.

Salvatore Vitale - Sterne Agee & Leach Inc.

Okay, that’s very helpful. And Bill, if I could just ask one last question which you may have addressed earlier. On the 76,000 car universe of other hazardous material service cars which are non-flammable. Do you think that, that universe of cars is addressed by the regulations at a later date? So, do you think whatever regulation we get will be, I guess two tiered and first they address the flammable universe of cars and then the non-flammable?

William A. Furman

I don’t have an expectation yet. We don’t know what the government will do as it's obvious with the government. If we look at the turmoil in DC, I can say that secretary Foxx is doing his very best. He was handed this whole issue a year ago, after a month in office and he intents and if you read -- if you just watch the video that he had with the commentator, it's very clear that’s he’s going to impose a higher standard. Whether that will be picked up and taken for other kinds of cars will depend on many, many factors. But I would think that, all the publicity on this issue of tank car safety, what we know now about the relationship between speed manifest and the weight of the trains, you could expect that the General Councils Office of every shipper in America and every railroad in America would weigh in and say, safety is very important. So, I think the market holds that, that level either will be driven by -- will either be driven by government or more likely by the market itself for safety.

Lorie L. Leeson

Okay and with that we appreciate everyone’s attention in listening and all the great questions that we’ve had on our third quarter. Any further questions we can take those calls offline later this afternoon. Thanks again for all your time.

William A. Furman

Thanks everyone.

Mark J. Rittenbaum

Have a good day. Bye-bye.

Operator

Thank you. This does conclude today's conference. We thank you for your participation. At this time you may disconnect your lines.

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