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Executives

Mr. James J. Unger – Chief Exec. Officer, Pres. and Exec. Director

Mr. William P. Benac – Chief Financial Officer, Sr. VP and Treasurer

Mr. James A. Cawon – Chief Operating Officer and Exec. VP

Analysts

Peter Nesvold – Bear Stearns

Robert Lagaipa – Oppenheimer & Co.

Paul Bodnar – Longbow Research

Joe Box – Keybanc Capital Markets

Bryan Giwi – Giwi Asset Management

Peter Nesvold – Bear Stearns

American Railcar Industries (ARII) Q4 2007 Earnings Call February 21, 2008 10:00 AM ET

Operator

Good day ladies and gentlemen and welcome the American Railcar Industries Fourth Quarter Annual 2007 Earnings Conference Call.

(Operator Instructions)

And in would now like to turn the presentation over to the host for today’s call, Mr. James Unger, President and Chief Executive Officer, please proceed.

Jim Unger

Good morning, I would like to welcome all of those in the call as well as our audio webcast listeners today. For all those who are interested, a replay of this broadcast will also be available on our website at www.americanrailcar.com beginning shortly after this call ends. I am Jim Unger, the Chief Executive Officer of American Railcar and with me this morning is Jim Cawon, our Chief Operating Officer, and Bill Benac our Chief Financial Officer. We will open the call today with a brief prepared statement related to the Company's 2007 financial results, after that we will make a few comments on the status of our operations to update you on the progress on our capital program and comment on other events supporting to ARI.

Following these remarks we will open the conference to your questions. Bill, would you begin the conference with a review of the financial results for the quarter and year?

Bill Benac

I am pleased to present our 2007 Fourth Quarter and Annual Financial Results. 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 for a description of certain of the business issues and risks, a change in any one of which 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.

The fourth quarter was a good quarter for ARI in terms of both revenue and earnings. Revenues were $162 million for the quarter, down $3 million from the same quarter of the prior year but up $22 million from the third quarter of 2007. Deliveries of railcars in the quarter were strong, with 1,590 railcars delivered. Down 6% from the same quarter of 2006 but up 25% from the 1,276 railcars we delivered in the third quarter of 2007.

The decrease in railcar deliveries and revenues from the prior year was primarily attributable to a decrease in hopper car orders resulting from softer demand and increased competition. Partially offsetting that decrease from last year and driving the increase from last quarter were increased tank railcar shipments due to increased capacity in our Marmaduke facility and the initial tank railcar shipments under our ACH manufacturing agreement.

Overall, our 12% profit margin was 190 basis points higher than in the comparable period in 2006 and increased 60 basis points from the third quarter of 2007. Net earnings attributable to common share holders for the quarter were $7.9 million or $0.37 per diluted share. For the same quarter of 2006, we recorded net earnings attributable to common share holders of $6.1 million or $0.29 per diluted share EBITDA for the quarter was $16.9 million as compared to $12.3 million for the same period in 2006.

The increase in earnings was primarily driven by increased manufacturing and labor efficiencies across the board at our railcar parts and assembly plans. Partially offset by decreased production at our hopper railcar facility.

For the year, revenues were record high of $698 million $52 million higher than 2006. Railcar shipments for the year totaled 7,055 railcars, 108 more than 2006. The major reasons for the increase in revenues and shipments included the recovery from tornado damage in 2006 added capacity on our Tank Railcar Manufacturing facility and additional tank railcar shipments under our ACF manufacturing agreement that I mentioned earlier. These were partially offset by a decrease in hopper railcar shipments in 2007.

Net earnings attributable to common share holders for the full year 2007 were $37.3 million or $1.74 per diluted share, compared to $34.6 million or $1.67 per diluted share for 2006. The 2006 results included a $4.3 million dollar pre-tax gain or $0.13 per diluted share on the voluntary asset and the involuntary asset conversion, resulting from the insurance recovery of the tornado damage at our Tank Railcar factory.

Increased earnings were driven by the factors I mentioned earlier. EBITDA for the year was $76.7 million, 15% higher than 2006. The increase in 2007 EBITDA reflects higher tank railcar shipments due to the Marmaduke plant restart and expansion, partially offset by lower 2007 shipments of covered hopper railcars. And the absence of the $4.3 million pretax gain on involuntary conversion of assets that we have last year. EBITDA is a non-GAAP financial measure and is reconciled to our net earnings in our press release which was issued yesterday.

The press release is also available through our investor relations page of our website. This time let me turn the time over to Jim Cowan, our Chief Operating Officer to comment about the status of our plant operations.

Jim Cowan

I would like to begin by congratulating all of our employees for making 2007 another record-year for ARI. The team executed throughout the year on many planned opportunities to improve the business performance and efficiency. Our Marmaduke Tank Railcar facility played a significant role in our success in 2007. After completing our first capacity expansion in January of 2007, we successfully managed to ramp up with the existing Marmaduke plant with excellent manufacturing efficiencies.

Furthermore, we are excited for the future of our Marmaduke railcar manufacturing complex as construction on the flexible railcar manufacturing plant is complete and the plant has started production of tank railcars. The new plant is capable of producing tank, hopper, and other railcar signs.

Production of the new plant should ramp up during the course of 2008. As Bill previously mentioned, shipments from our Paragould Hopper railcar facility were lower in 2007 compared to 2006, for the quarter and for the year, due to a soft market for hopper railcars and increased competition with the net market. As a result, we adjusted the car production capacity in order to control cost.

Our management team has done an excellent job of managing those costs. Our railcar services business had another good year in 2007. Revenues of $50 million were at 4% from 2006 but gross profit was down modestly when compared to 2007.

The change in the mix of work throughout the year resulted in a brief decrease in gross profit. As the average age of the domestic railcar fleet continues to increase, repair volumes for ARI’s repair plants continue to be strong and we see both the leasing companies and shippers investing in maintenance and improvements for the railcars.

We are pleased with our manufacturing and repair of plan operations for the year. We have a number of projects in the pipe line. That should improve manufacturing efficiencies as well as further integrate our supply chain in 2008.

At this time let me turn the meeting back to Jim Unger our CEO to make a few comments on our capital plan and other events that may arrive.

Jim Unger

We had a great year in spite of a softer hopper railcar market. A new earnings record was achieved for the year driven by strong tank railcar shipments and margin improvements. We are very pleased with the results that our employees and management have delivered. Our railcar backlogs remain high and at December 31, 2007 were 11,929 railcars. We are forecasting higher shipments of tank railcars for 2008 and similar production quantities of hopper railcars for 2008 as compared to 2007.

To support our current business and to grow for the future, we continue to invest in the company. In 2007, we invested almost $60 million, a new capital for buildings and equipment to expand capacity and improve efficiencies. This included the new plant at Marmaduke as Jim mentioned earlier. Together with our joint venture partner we have invested equity in arranged plans and to build a new axle manufacturing plant.

All of the new state of the art robotics and production equipment has now been ordered sight, work is nearing completion is nearing completion and we will begin construction of the plant itself sharply. We expect this plant to be fully online by the end of 2008. Our other major projects include the new facilities finished axles and mounted wheels at our Paragould Arkansas facility and a tank head production facility at our Marmaduke Arkansas Tank Railcar facility.

We expect these facilities to provided significant cost savings to production and freight cost reductions as well as reduced inventory levels. The wheel and axle facility has received AAR approval and is now on operation. We expect the tank head facility to be completed and become operational during the second quarter of 2008.

We believe that our accomplishments in 2007 were significant and very important for the future of our company. Because of the focus and execution by our employees, we were able to deliver another great year, with record revenues and earnings and completed over $60 million of new investments in our facilities. All of these provide a secure foundation for ARI’s future.

ARI has an experienced management team, strong balance sheet and growing cash flow and for the last several quarters, we have been exploring various domestic and international strategic initiatives to put our resources to good use.

During January 2008, we purchased approximately 9.5% of the common stock of Greenbrier companies, amounting to $27.9. In the 13B filing that was made on February 4, 2008, we explained that we felt that Greenbrier shares were undervalued and that we were interested in having discussions with Greenbrier about a possible business combination. We do not intend to comment further or answer questions on this investment at this time but we will comment in the future as appropriate.

On the international side, after several months of sight visits and exploring business opportunities with various potential joint venture partners in India. We are very pleased to announce that we are moving ahead with such a venture. Earlier this wee our board of directors approved and we signed a non-binding memo of understanding with AMTEC, a well respected Indian company, who has aggressive growth plans in the railroad business segments in India and South East Asia.

India has a well developed and rapidly growing rail infrastructure and we are optimistic about the opportunities this affords ARI, we are working on a business plan that involves manufacturing and repairing rail parts in India through the design and construction of new facilities. Our management team has also invested considerable time and effort in developing relations and investigating similar joint ventures in both the Ukraine and Russia. These are not yet at the demo use stage, but are progressing.

We will now take a few of your questions. Operator, would you please explain to our guests how they can register their questions.

Question and Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Peter Nesvold of Bear Stearns.

Peter Nesvold – Bear Stearns

So when I looked at the third quarter and the fourth quarter, the first thing that jumped off the page is, to me, was that your deliveries are up about 300 units. And, it is not like, you are saying that your Covered Hoppers are still declining 3Q to 4Q but the increase was due to more tax. But when I look at the average revenue per unit, which is kind of a close as I can get to kind of a mix proxy or ESP proxy, it didn’t really change much from 3Q to 4Q, in fact, it was actually down a little bit, which would mean counterintuitive to a greater mix of tax, which are revenue per unit. So, what am I missing there, there is something on how you account for the ETF deliveries or is there something else that is going on?

Jim Cowan

No, Peter, it depends on the mix of hopper cars. Tank cars are not necessarily more expensive or higher revenues per unit than hopper cars. You know some of our hopper car production, the pressure differential cars and specialty design cars are very significantly higher in cost and in sales price and not in tank cars.

Peter Nesvold – Bear Stearns

So there was no, - concern is our little bit of 2008 production that might have gone forward in the 4Q, are you saying that that is not the case?

Jim Cowan

Absolutely not.

Peter Nesvold – Bear Stearns

As I understand that from the last call, 2Q is where we started to really see the Covered Hopper backlog firming based on what has been already out there. Is that still a case – your deliveries kind of moved sideways 4Q to 1Q and then start to improve again in 2Q, sequentially?

Jim Cowan

Improved in 3Q and 4Q of 2008.

Peter Nesvold – Bear Stearns

Okay, so maybe moving sideways here for a couple of quarters and then will improve further, 3Q to 4Q.

Jim Cowan

There is one other aspect to that area that you just described and that is why we did shift some cars under the Milton Agreement in Q4. The profits on those, basically, offset start of cost. You saw revenues without the associated profits in Q4 associated with that contract and that will turn profitable for us in Q1.

Peter Nesvold – Bear Stearns

And makes the margins even better in manufacturing, you know, what you put up this quarter. Stock compensation gain, can you explain what was put through the gain and is that a recurring item or is that kind of one time in the quarter?

Jim Cowan

That is a good question Peter and we tried to explain that in the reconciliation of the EBITDA and the press release. The options of course are priced on the Black-Scholes model and as the stock price varies and has no affect really on the way we booked the options expense. However, ARI issued stock appreciation rights in April of last year and stock appreciation rights are accounted for a little differently than options. So as the stock price goes up, the expense that we need to book on SARs increases conversely as the stock price goes down as it did in Q4 for ARI. The expense associated with the SARs reversed. So, what happened is as the stock price dropped in Q4 we actually picked up some income on the stock appreciation rights which was worth about $0.02 a share as a difference between Q3 and Q4. going forward we tried to estimate that a little bit, it really depends on the stock price to give you a rule of thumb for every $5.00 our stock price changes on a going forward basis, if it were to go up for example from the $19.00 that we closed out Q4 or to go up by $5.00. That would be about $0.01 a share on EPS.

Peter Nesvold – Bear Stearns

On the interest expense 3Q to 4Q, it looked like it improved. You would grow that sequential improvement?

Jim Cowan

A couple of things, the biggest thing was the fact that we had a tremendous construction in process balance in Q4, we were just completing our railcar plant at Marmaduke. We were completing the wheel and axle mounting facility so we had a tremendous construction in process balance. All of which reduced the interest expense so that is going to give a reverse in Q1 because we have now cut over both the Marmaduke plant and the Wheel national facility, both of those are operational so our interest in CIP will decrease in Q1.

Also just going forward, you also see lower earnings on our big cash balance because the Feds cut interest rates and rates on overnight deposits have dropped considerably.

Peter Nesvold – Bear Stearns

I respect the fact you cannot comment on the GBS situation, but I look at your CAPEX initiatives you still have several to go, you have the GBS with ABTEC(ph) Both of those are going to be probably reasonably capital – I would have imagined and then you are looking, you have accumulated some shares in another company. Do you have the cash on hand, to be able to accomplish all of these initiatives or are you going to really rely on some other kind of capital market activity in order to fund at least three very, certain initiatives and possibly a fourth one.

Jim Cowan

Well let me comment on the cash flow over all and then I will let Jim come in about where these capital programs are going, ARI’s cash flow from operations doubled from 2006 to 2007, and we had a big capital program in 2007, which essentially was covered by our free internal cash flow. The cash flow looks very strong as we look at 2008 and as we look at our capital programs, our internal capital programs are organic growth programs. Those would all be covered essentially by operating cash flow.

Jim Unger

I will just make one general comment. We have the resources, either internal or external to accomplish all our growth plans.

Operator

Your next question comes from the line of Robert Lagaipa of Oppenheimer.

Robert Lagaipa – Oppenheimer & Co.

I wanted to follow up on Covered Hoppers, I think you have mentioned last quarter that you had about 75% buff for 2008, 75% you anticipated in 2007 volumes, I mean, it looks like, you know, or at least estimate that, you probably did volumes somewhere a little bit 4,000 units. You mentioned that 2008 should be similar to 2007, I mean how much of that is actually booked, you know, because again, I mean you are looking for five volumes it does not appear to me that you have it all booked. What is the visibility there in terms of the additional orders to get there?

Jim Unger

I think most of its book here, Bob, it is mostly all books. The question becomes because of an increased competition in those markets. The margins made the difference.

Robert Lagaipa – Oppenheimer & Co.

Last quarter you mentioned you kind of held off, I would not say fallen victim to but you have mentioned obviously the competition then and I really did not participate in some of the pricing actions. Should I take that to me that you actually lowered prices on those products to get the additional volumes in 2008?

Jim Unger

On the hopper car volumes, yes. Yes, you have lower margins.

Jim Cowan

That is quite a kick in Q1. On the hopper car side, Bob, the same comment applies we made last quarter, no change really. We got three quarters of the expected production in ’08 booked.

Jim Unger

I would expect right now, based on bookings, we can run the same levels that we run in ’07. We are looking for some upside potential third, fourth quarter, as every manufacture it is.

Jim Cowan

Booking and activity and we are quoting in the marketplace, right?

Robert Lagaipa – Oppenheimer & Co.

What’s been new to our activity, so far here in the first quarter? Obviously, we are almost a couple of months into the quarter. I assume that three quarters of production comment as of December 31, how does it look so far early this year?

Jim Cowan

There are a lot of people out there looking and requesting pricing and trying to get in line. We are seeing a lot of order activity for specialized cars which were very good at manufacturing in our specialized designs, small quantities, and that is where we really shined in the marketplace.

The large car orders were still waiting for inquiries to come in with one or two end that we will be participating and quoting, that there are some other large quantity orders out there that will be very competitive.

Robert Lagaipa – Oppenheimer & Co.

Should I take that to reflect both covered hoppers and tank roll cars? Last quarter, you mentioned that tank roll cars were sold out well into 2009. Is all the 2009 production slots now filled?

Jim Unger

No, not for tank, all of 2008 built tank and a good portion of 2009 is built. However, it will be competitive we see in 2009. A lot depends on the demand for ethanol cars in the economy later on this year.

Robert Lagaipa – Oppenheimer & Co.

I just want to dig down a little bit deeper in terms of the CAPEX plans. What is your baseline CAPEX outlook or expectation for 2008? What exactly does that include?

Jim Cowan

The Capital Expenditure Program for 2008 looks approximately about $60 million similar to 2007. The plan itself shifts gears a little bit. In 2007, we spend a lot of time and effort on cost reductions, vertical integration, capacity expansions in the real car manufacturing segment.

We are very happy we did that. We got the capacity now to address a remaining strong demand in the tank car side. The cost reductions which we have been driving toward are under provision. You see that in the margins and we look forward to further improvements in our cost structure in 2008.

In 2008, the capital plan focuses much more on the railcar services area. We were looking at opportunities there to grow that business. It is a nice high margin business. It is a countercyclical business. You have seen that focus some of other capital markets, competitors. We are very pleased with the repair business we have got now, with the services business we have got now. We will be focusing a little more time and attention on that.

Jim Unger

We are hoping to look at both internal – we will be looking at external growth. We had plans to expand the capacity of the existing facilities.

Robert Lagaipa – Oppenheimer & Co.

Have all the cars been shipped, and has all the startup cost been accounted for associated with the joint venture on the tanks. In the day 1 of the first quarter, you will start earning the profits on these cars?

Jim Cowan

That is correct. We came in under budget on estimate on startup cost.

Operator

Your next question comes from the line of Paul Bodnar of Longbow Research.

Paul Bodnar – Longbow Research

Hello, this is Kay Butcher, calling in for Paul Bodnar. I just wanted to ask you a quick follow-up question on the Covered Hopper production. I may have missed this when you are discussing it. I wanted to check in with you. Would you say that your fourth quarter production was in line with third quarter production of ’07?

Jim Cowan

Yes, approximately. On the covered hopper side?

Kaye Butcher

My second question is, could you give us a little bit of color on the India venture and what type of manufacturing production that you are looking for? And also, when do you think production will begin?

Jim Unger

We are planning production to start some time in late ’09. We will be building cars in India that will cover basically all their products that ship. Their designs are very simple designs that we blew up that there is design in depth. As you know, our company has roots that go back over 110 years. We got many designs on the shelves that we built cars in the past that could very well service their needs in the future and be a real upgrade to their existing designs.

Operator

Your next question comes from the line of Joe Box of Keybanc Capital Markets.

Joe Box – Keybanc Capital Markets

I just wanted to ask you a question on the raw material side. With steel prices potentially increasing, could you talk about some of your past through mechanisms and maybe your expectations for steel cost in ’08?

Jim Unger

We have steel price escalator clauses in all contracts except a few, the ones that we do not have a pass-through clause in. We have firm pricing from the mills so we are protected. The way we see steel prices going forward, we see it as a slight up take to the 3%. The unpredictable part of the steel price and the escalator clauses is the scrap surcharge. As you know, scraps have taken a real upturn lately and that is a hard one to predict but it is not a material part of our cost.

Joe Box – Keybanc Capital Markets

Can you maybe just build out a little your CAPEX plans with respect to your India JV that was announced yesterday? I know you said that you are planning $60 million roughly for 2008. What does that comprise of the total?

Jim Cowan

That really is not in that total. What we anticipate is that there will be an equity investment associated with the JV. I got to tell, we are getting a little bit ahead of ourselves here. We are still working on the Terms of Disagreement.

Generally, what we would expect is an equity investment on the part of both joint venture partners supported by financing directly into the business.

Jim Unger

And that $60 million is the total joint ventures so our share would be 50%, which the good part will be financed.

Operator

Your next question comes from the line of Bryan Giwi of Giwi Asset Management.

Bryan Giwi – Giwi Asset Management

My question was answered.

Operator

(Operator Instructions)

Your next question comes from the line of Peter Nesvold of Bear Stearns.

Peter Nesvold – Bear Stearns

With the passage of the Renewable Fuel Standard, what are those conversations like with leasing companies with other shippers? Is the market kind of satiated here with ethanol related tank cars for the next couple of years? What would be the timing if any benefit, is there any color you can provide to be helpful.

Jim Cowan

In the last two weeks, and this is due to the conversation with leasing companies, we have seen the pick up market activity.

Jim Unger

It was stagnant for a period of time but the last two weeks, there has been a pick up in activities. So, we think with the passage of that act, it should stimulate the tank car market. It is going to take a little time because people are very cautious right now with the economy. The people in the new startup plans, they are having a little problem in financing some of those facilities, but we see it definitely, it will create a positive going forward.

Peter Nesvold – Bear Stearns

Is the pick up and quote activity, is that from chemical colorings which have remained one of the sole areas in the rails that continue to grow very slowly year-over-year or is that the alternative energy type?

Jim Cowan

It is both.

Peter Nesvold – Bear Stearns

Finally, something we have not talked about for a while, but it was very topical at one point, non-normalize steel tank cars, is that pretty much dead. Do you think the opportunity to mandate replacement of those, or where does that legislation stand?

Jim Cowan

We are already seeing introductions on some of the new type of design cars.

Jim Unger

So, the demand for the replacement of those cars is kind of built in into this market demand that we see happening right now.

Peter Nesvold – Bear Stearns

But is that demand that legislated in or is that just prudent shippers that should have stronger cars if they are going to ship stuff?

Jim Cowan

I think it is prudent shippers to make sure that products that they get meet those new regulatory losses.

Peter Nesvold – Bear Stearns

The safety requirements?

Operator

That does conclude the question in the answer session. I will now turn it back to management for closing remarks.

Jim Unger

I would like to thank everybody for participating today. We think we still have a very, very bright future. It is going to be a really exciting year for us, and we are looking forward to it. Thank all our employees and shareholders.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation.

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