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

American Railcar Industries, Inc. (NASDAQ:ARII)

Q2 2012 Earnings Call

July 26, 2012 10:00 am ET

Executives

Dale Davies - SVP, CFO & Treasurer

Jim Cowan - President & CEO

Analysts

Brad Delco - Stephens

Mike Baudendistel - Stifel Nicolaus

Alex Walsh - KeyBanc

Tyson Bauer - KC Capital

Matt Brooklier - Longbow Research

Kristine Kubacki - Avondale Partners

Steve Barger - KeyBanc

Rishi Jain - Great Oaks

Operator

Good day ladies and gentlemen and welcome to the American Railcar Industries, Inc. Q2 2012 earnings call. At this time, all participants are in a listen-only mode. Later, we’ll have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Dale Davies, CFO. Sir, you may begin.

Dale Davies

Good morning. I would like to welcome you to the American Railcar Industries’ second quarter 2012 conference call. I am Dale Davies, the Chief Financial Officer, and I would like to thank you for joining us this morning. For those who are interested, a replay of this call will also be available on our website at www.americanrailcar.com shortly after this call ends.

Joining me this morning is Jim Cowan, our President and CEO. Our call today will include discussions about the railcar industry, our operations and financial results. We will also make a few comments about our joint ventures and our business outlook. Following these remarks we will have Q&A session.

This conference call includes forward-looking statements including statements such as estimates, expectations, intentions and predictions of future financial performance based on currently available information. Participants are directed to our SEC filings and press releases for a description of certain business issues and risks.

As a change in any one could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Also, please note that the company does not undertake any obligation to update any forward-looking statements made during the call.

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

Now it is my pleasure to introduce Jim Cowan.

Jim Cowan

Thank you Dale and good morning. Demand for railcars in North America remained strong. The industry reported that approximately 17,900 railcars were delivered and 16,400 railcars were ordered during the second quarter of 2012, producing a book-to-build ratio or 0.92.

Industry backlog was approximately 58,700 railcars at the end of June. Approximately 84% of the industry backlog is for tank and hopper railcars, which bodes well for ARI. Going forward, one industry forecast for North America expects new railcar deliveries to be approximately 62,000 cars in 2012 or a very strong year.

Demand for tank railcars in North America continues to be very strong. The industry reported that approximately 4,170 tank railcars were delivered and 13,720 tank railcars were ordered during the second quarter of 2012 producing a book-to-build ratio of 3.3.

Industry backlog for tank railcars was approximately 42,370 at the end of June or over 70% of the industry backlog. The strength in demand for tank railcars continues to be driven by the oil and gas markets.

There has been a recent slowdown of orders for covered hoppers and railcar builders are managing production rates to focus on fulfilling orders in the existing backlog. A recent report by the Chemical Weekly indicated that significant new ethanol capacity in the form of new plants will be coming online between 2013 and 2017. These new plants are expected to add over 20 billion pounds of capacity to the market. We expect this will generate new orders for classic covered hopper railcars as the industry currently has a shortage of this railcar type.

ARI’s backlog continues to remain strong with 6,800 railcars on order for both sale and lease at the end of June. We received orders for approximately 2,810 railcars during the second quarter of 2012. At the end of June, we had approximately 1,620 railcars in our backlog to be manufactured for our lease customers.

We continue to heavily invest in our railcar lease fleet, offering to our customers another avenue to use our quality products. We have booked our first hopper orders to be delivered in the first quarter of 2013 and we’re quoting new tank car railcar orders for delivery in late 2013 and into 2014.

We continue to benefit from vertical integration projects that we put in place over the past several years significantly improving margins as production volumes have reached higher levels. These projects included internally manufactured tank heads, railcar axels and castings producing other railcar fabricated components and assembling our own wheel sets.

During the past 18 to 24 months, we have hired a significant number of employees to ramp our production to current levels. These workers have been well trained and are working efficiently. Our railcar manufacturing facilities are in close proximity giving us the additional flexibility to move workers between hopper and tank railcar manufacturing plants as demand requires.

Our railcar services team has seen a recent improvement in work volume. We expect to see continued good performance from this group and are currently working to expand the business with the addition of a new repair facility by mid 2013.

In summary, our performance generated a second consecutive quarter of record breaking financial performance driven by strong industry demand for the railcar types that are core of our business.

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

Dale Davies

Thanks Jim. Consolidated revenues for the second quarter of 2012 were $154 million, up by $42 million versus the $112 million for the comparable quarter of 2011. We shipped 2,200 railcars in the second quarter of 2012 including 910 to our leasing customers; that’s more than twice of 1,040 railcars shipped during the second quarter of last year.

Our manufacturing segment revenues including an estimate of revenues for railcars build for our lease fleet were $219 million for second quarter of 2012; twice the $95 million for the second quarter of 2011. The primary reason for the increase were an increase in railcar shipments driven by strong customer demand, improved pricing and a shift in the sales mix to more tank railcars.

Manufacturing segment revenues for the second quarter 2012 included estimated revenues of $84 million relating to railcars build for the lease fleet; such revenues are based on an estimated fair market value of the leased railcars if they have been sold to a third party and are eliminated in consolidation. Railcars build for the lease fleet represent over 40% of our railcar shipments in the second quarter of 2012.

Our railcar leasing segment revenues for the second quarter of 2012 were $3 million compared to $200,000 for the second quarter of 2011. Revenues for railcar subject to lease are recognized monthly over multiple years based on the terms of the lease agreements.

Revenues for our railcar services segment were $17 million for both the second quarter of 2012 and 2011. Revenues for the second quarter of 2011 included $600,000 of repair work that was performed in our manufacturing facilities and those facilities have been fully returned to new railcar production.

Consolidated earnings from operations for the second quarter of 2012 were a record $26 million compared to $8 million for the second quarter of 2011. Our operating margins were 17% for the second of ‘12 compared to 7% for the second quarter of ’11.

Operating earnings for manufacturing segment were $41 million for the second quarter of ‘12 compared to $7 million for the second quarter of ‘11. Segment operating earnings include profit on railcars build for our lease fleet which is along the consolidation. And that was $14 million for the second quarter 2012 based on an estimated fair market value less the cost to manufacture those cars.

Operating margins from the manufacturing segment were 19% for the second quarter of ’12 compared to 7% for the second quarter of ’11. This increase was primarily driven by strong shipments, higher mix of tank railcars, operating leverage and efficiencies as a result of higher production volumes and improved pricing.

We have continued to see cost savings from the vertical integration projects that we've put in place over the past several years as Jim previously mentioned. Operating earnings from the railcar leasing segment were $1 million for the second quarter of 2012, compared to $100,000 for the second quarter of ’11 and that was due to an increase in the number of railcars on lease.

Operating earnings for the railcar services segment were $3 million for the second quarter of ’12 compared to $4 million for the second quarter of 2011. Operating margins for the railcar services segment were 20% in the second quarter of ’12 compared to 25% for the second quarter of ’11.

The decrease was primarily attributable to lower demand for exterior coatings and mining work in our repair facilities. Earnings from joint ventures were $500,000 for the second quarter of ’12 compared to a loss of $3 million for the second quarter of ’11. Our cash savings in axle joint ventures continue to benefit from strong demand for new railcars.

Adjusted EBITDA which excludes stock based compensation set a new record of $34 million for the second quarter of ’12 and was more than triple to the $11 million for the second quarter of ’11. Stock based compensation expense was $2 million for the second quarter of ’12 compared to income of $200,000 in the second quarter of ’11.

Net interest expense was consistent at $4 million for both the second quarter of ’12 and ‘11. Interest expense primarily relates to our unsecured, senior fixed rate notes due in 2014. Net earnings for the second quarter of 2012 were $13 million or $0.63 per share compared to $600,000 or $0.03 per share for the second quarter of ’11.

Total consolidated revenues for the first half of 2012 were $336 million, 71% higher than the $197 million for the same period of 2011. Consolidated revenues for the first half of ’12 excluded estimated revenues of $132 million relating to our railcars built for our lease fleet.

During the first half of ’12, we shipped 4,410 railcars including 1,380 railcars to our leasing customers which were more than twice of 1,720 railcars shipped during the first half of last year.

Railcars built for the lease fleet represented over 30% of our railcar shipments in the first half of 2012. Adjusted EBITDA was $65 million for the first six months of 2012 compared to $15 million for the same period of 2011.

Net earnings for the first half of 2012 were $25 million or $1.19 per share compared to a loss of $5 million or $0.22 per share for the same period of 2011. Our leasing business is becoming more significant as we continue to invest cash in our lease fleet.

As of June 30, 2012, we've invested $143 million into railcars leased to customers. At the end of the second quarter of ’12, we had a strong liquidity position with $250 million of cash. We plan to make additional investments in leased railcars for the balance of this year.

At this time, I would like to turn it back to Jim for a few comments about our joint ventures and our international activities.

Jim Cowan

Thanks Dale. Our joint ventures for casting production Ohio Castings and annual axle manufacturing Axis continue to demonstrate strong performance.

On the international front, our Indian joint venture Amtek Railcar continues to show good progress. The second and third railcar prototypes will be completed in country by the end of this summer. Indian Railways will present its 2013 requirements in a tender offer in the next few weeks and we look forward to participating in this process.

Our consulting agreement with the Indian Railways research, design and standard organization also continues to progress with two prototypes expected to be completed and shipped during the third quarter of 2012.

One prototype is scheduled to be tested here in the United States and the second prototype will be shipped to India for testing there. Management and the Board of Directors will continue to look at opportunities that will further diversify our business. We continue to focus on improving operational efficiencies, meeting customer demand for our hopper and tank railcars and significantly increasing our railcar lease fleet.

In summary, we will continue to adjust as the business climate shifts and demand fluctuates for our railcars and services. Now we will turn it back to the operator to take a few of your questions. Could you please explain how our participants can register their questions?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brad Delco from Stephens. Your line is open.

Brad Delco - Stephens

Jim I guess the first question the big surprise obviously is how strong performance you had in the manufacturing margins. Can you talk about what drove that and how sustainable that is going forward or were there anything specific to the second quarter with the amount of leased vehicles you had relative to may be what we are expecting if that played any role in that manufacturing margin?

Dale Davies

Brad its Dale; I will answer your question there. We are seeing some things continue to improve for us as we are going through this year. One is the volumes that we are running at allowed us to really see the efficiencies in our operations; it’s also allowed us to see the benefits of these vertical integration projects we have put in.

We are running these plants, our new facilities that we have built over the last few years, a pretty high production rates right now and that’s helping us slower the cost of what we have to buy to put into a railcar, that’s been a big factor for us.

Also our production rates on tank cars has gone up that’s proved to be and helped us also, it also helps us in our parts plant because we have a lot of parts that go into the tank cars. So the combination of high production rates utilized in our vertical integration investments and I move into a few more tank cars along with the stronger pricing environments really contributed to the strength of our margins.

We also have some parts that we sell on the outside which have continue to be a pretty significant contributor to our business. It’s not just the parts that go into rail cars but we are selling some parts commercially too.

Brad Delco - Stephens

So I read that has to be recent performance is sustainable as long as production stays at the current levels?

Dale Davies

Yeah, I think we are feeling pretty good about the next couple of quarters this year that things are running pretty good. We just have to keep kicking up the rail cars like we have been recently.

Brad Delco - Stephens

And then I just ask another question on the balance sheet. I know you guys are using cash to finance the growth in the lease fleets, but there is a pretty high coupon on that debt, any thoughts on where things stand in terms of refinancing that if you were to kind of finance more of the capital outlay for these leased cars what type of financing rates would you be looking at?

Jim Cowan

Yeah, and that's something that we are very focused on right now too because we know that there is a way to lower the cost of borrowed money and we are actually, we are doing some work on that at this time. And it will come down a few percent when we complete that little project.

Operator

Our next question comes from Mike Baudendistel from Stifel Nicolaus. Your line is open.

Mike Baudendistel - Stifel Nicolaus

Just a follow-up to the last analyst question on the manufacturing margins, just wondering if there is any kind of further efficiency improvement initiatives you have in the pipeline that might even increase your manufacturing margins further that you can discuss?

Jim Cowan

Well we always have some, we had some very big projects in the past three years which we are actually seeing but it's an ongoing effort. We went after the big fruit if you will early on but we continue to go after smaller fruit all the time. So that's a charge to the manufacturing segment all the time and we are always trying to get that cost down.

Dale Davies

There are still more things going on.

Mike Baudendistel - Stifel Nicolaus

And then on the 910 railcars you produced for leasing customers, is that a little higher than you expect to produce for leasing customers in the next few quarters? Is that going to come down to the may be 600 or how should we thing about that?

Dale Davies

Yeah, it probably is a little high in the second quarter, you know it kind of goes up and down according to how we take the orders and put them in our production schedule. And I don't think we will probably sustain a 40% production rate for our lease fleet for the next couple of quarters. We are 30% year-to-date. I think what we've probably told folks in the past is that we would expect maybe 25% of what we do to go into the lease fleet. This year might be a little heavier than 25% because it really is our first year of significant volumes being built for our own lease fleet.

Mike Baudendistel - Stifel Nicolaus

Okay, great and just one final one that's a follow-up to that. I guess you don't have much net debt, but would expect maybe to increase as you take, produce more cars for the lease fleet, is there an ultimate level of net debt that you feel comfortable with over a few year period?

Dale Davies

I think the debt’s going to be driven by how many cars we put in our lease fleet. You know we are generating positive cash flow from operations from our manufacturing business and that's becoming the equity that we are putting into our own lease fleet and the rate of growth for the lease fleet is really going to determine the amount of debt we take on, but the debt will be back by the lease cars.

Operator

Our next question comes from Art Hatfield from Raymond James.

Unidentified Analyst

This is Derrick (inaudible) in for Art. As we look at the JV operations, we've seen a nice, steady improvement here over the last couple of quarters, are there any headwinds in the back half of the year that we should be concerned about, I mean we saw last year the castings issue, anything similar to that, that we should be looking out for and then also on your Indian JV or just your leasing operations in general, just curious if you have any plans to enter the Indian leasing market. I mean we've seen one of your competitors recently announced you know their foray into that market. If you can just talk about your plans, any plans there?

Jim Cowan

Your first question on the JV, you have kind of answered it with the second one, but we will see some headwinds in the second half really due to our India start-up. As we mentioned we have been building prototypes there starting the mechanical equipment, getting it ready to take off. So we are looking forward to getting the first few hundred cars in the backlog and then starting production in the fourth quarter and that will be a negative, certainly on the JV line for the rest of this year.

And to answer your last question on leasing in India, the answer is yes. We have evaluated that. We continue to look at that with our JV partner. They are very excited about it actually and it is a new entry into the Indian market. So we think going forward, it certainly can be a part of what we do in India.

Unidentified Analyst

Okay thanks for that color and then just on your backlog, as we look at the quarter here, what percentage of that is dedicated to the delivery schedule for the back half of the year?

Jim Cowan

Well I mean our run rate currently is about, as you noticed about 2200 units per quarter and we're going to be close to that in the next two quarters.

Unidentified Analyst

And then just one follow-up on that, did you get any new orders after the quarter ended and if so were they you know largely tank orders?

Jim Cowan

We have, we will leave it at that. It's been a very good July in terms of backlog additions. Tank as I mentioned in my comments are still very strong. The market as I also mentioned that we are looking at, getting quite a few enquiries are for covered hoppers, their plastic pallet. That market has a lot of energy. We are building plastic pellet cars now and we will look forward to building probably a couple thousand for the next three or four years going forward. So that's about where that market is headed. So we are pretty excited about that.

Operator

Thank you. Our next question comes from Steve Barger from KeyBanc. Your line is open.

Alex Walsh - KeyBanc

This actually Alex Walsh sitting in for Steve. First of, I just wanted to see if we could possibly can get an update on the capacity by car type? If that changed at all from it has been historically?

Jim Cowan

No, I mean it hasn't. I mean our hopper facility, we can do between 5000 and 6000, our tank car operations can do between 4000 and 5000, so there is no change.

Alex Walsh - KeyBanc

Okay I know it's been a little bit influxes, but is there any way to size up what the industry tank car capacity is right now?

Jim Cowan

Well obviously the industry built and delivered slightly over 20,000 units in 2007 and 2008. Now that was you know Trinity had, allow their wind tower operation dedicated to tanks. It sounds like they are moving back towards that. You have had a Greenbrier in the mix between that time period. So I would think that, that 20,000 is probably about the capacity for the industry.

Alex Walsh - KeyBanc

I was also wondering if you guys could provide any sort of additional color around backlog whether you can provide even the dollar value of backlog or kind of what the implied ASP within there is or kind of any additional color on the mix would also be pretty helpful?

Dale Davies

Well our dollar value on our backlog is about $817 million for the 6800 cars and we really don't disclose by car type, but that to give you some indication of what the average selling price is.

Alex Walsh - KeyBanc

And then the last question I had was obviously a really nice quarter, an impressive quarter or the manufacturing margins. I was wondering if you guys could maybe size up what the -- may be just kind of directionally or I mean if you are willing to give any numbers, have you appreciated on the margin differential between may be tank cars and kind of what you're seeing at Paragould?

Jim Cowan

We probably wouldn't offer you any comments on that. I think you guys are aware tank cars are probably a little better than hopper cars, but that's probably about as far as we go.

Operator

Thank you. Our next question comes from Tyson Bauer from KC Capital. Your line is open.

Tyson Bauer - KC Capital

A couple of questions. In regards to India you mentioned that the Indian Railways will put out a, for bid in August with an award data. I think it is supposed to be at the end of August, so a pretty quick turnaround. In the past you mentioned private party orders, are we waiting for the Indian Railways to give you that first PO over there, so you can start manufacturing or have you received interest in orders from other entities utilizing that facility?

Jim Cowan

We have a lot of interest from private parties there. Actually a lot of them are wanting. Sadly new rail car designs which with our work; we have (inaudible) DSO. We are committed there to, with that project, so it's the lot of our engineering time. So, but anyway we are continuing to work with private customers. It will be easier on an entry basis with the Indian Railways looking for somewhere in the mid teens. You know their numbers are between 14,000 and 18,000 units that they are expected to order here in a few weeks and to actually enter there. So that's really kind of our –we don’t want to – I guess my point, we rather build a car that we have done a prototype with and it's more common than to do a brand-new car for a new customer.

Tyson Bauer - KC Capital

In previous calls you have talked about the opportunity in the Middle East and how that is growing with their bauxite mining. Is that something you have been able to capture to date?

Jim Cowan

Yeah actually you know we have received an order from the Middle East section in the last two weeks for just what you mentioned. There is a bauxite activity taking place, mining activity in Saudi Arabia. We have won that tender. You know they are looking to buy about 5000 to 6000 units over the next three to five years and so we continue to try to grow that market.

That will actually be built in the US and then that particular order and then going forward, we will decide whether it's more opportunistic to build it here or in India.

Tyson Bauer - KC Capital

When we see competitors expanding capacity on the tank car side, one of the fears is that this is a repeat of the ethanol, a big run-up with a significant decline. Are you getting a sense this is far more prolonged; this is a multi-year stable cycle this time around?

Jim Cowan

Yeah, actually,’07-’08 was too quick years and you quickly saw actually at the end of that cycle run where customers wanted to cancel orders and wanted to drag out delivery and that happened really the last half of ’08 and all of ’09; some orders actually trickled into ’09. It’s not at all like that now.

You've heard us say that we don't have too many spots left in ’13; its only really one car type. We make three major car types of 10 cars; two of them are sold out for ’13. We've taken our first orders into 2014 and the level of inquiry that is still there with numerous customers is still very large. So yeah Tyson, I expect this is going to be a very good ’12 for tanks, going to be great ’13 for tanks and certainly ’14 is going to be a very good year as well. It’s got a pretty strong run.

Tyson Bauer - KC Capital

And one last comment, not a question, more of a comment, your cash flow from operations in the quarter had been over $60 million was spectacular and really lowers that requirement for you to utilize that cash drawn down for your leasing fleet. Is that something that's sustainable or what do you think about the cash cycle as we work through this year?

Dale Davies

Yeah, we think that's sustainable. We are going to get a lot of cash for manufacturing business this year and if you dissected the numbers a little bit, you also know that our inventory levels were fairly high at the end of the second quarter and some of that was build up of raw materials or special run of cars we are doing in the third quarter. So we would expect our inventory levels to come back down a bit as we go through the third and fourth quarter of this year. So we did have some build up in inventories, and coming back down which is going to be back into the cash from operations.

Operator

Thank you. Our next question comes from Matt Brooklier from Longbow Research. Your line is open.

Matt Brooklier - Longbow Research

So it sounds like we are at the kind of top-end of production ability from a railcar unit perspective. You just walked us through a very strong tank cycle, hopefully the next couple of years you are getting some incremental international orders, things would be, demand seems to be trending very well and with some good visibility. I guess my question is what are your thoughts on your current production capacity and is there a possibility maybe over the next 12 to 18 months to add some capacity for the longer term?

Jim Cowan

That's not in our plan. We are still of the mindset, railcar builders today could build 80,000 units and anybody adding capacity, it’s really, really short-term thoughts; yeah and as you know these markets ebb and flow and some accelerate. You know right now what we are in the middle of is we've really added in the past five to six years a handful of new commodities in the rail sector from ethanol to frac sand to crude oil you know to LNG cars.

And yes in the past there was small amounts of those products moved on rail, but now in just the past five or six years a lot of volume is being moved on rail. So there's still a big rail sector out there that's going to have a lot of energy in it going forward, so we are excited about that. But again, the car builder and capacity we have the question you know, what they are doing?

Matt Brooklier - Longbow Research

Okay, and with some recent industry capacity additions specifically on the tank car side with [Breyer] transitioning some of its other facilities to produce more volume. Have you seen any impact on your ability to price your products? Has there been any near term price impact from those facilities coming online?

Jim Cowan

No, we haven’t seen it. Now again, they have only made these announcements. This takes a fair amount of time you know, to get that done. So, no, there hasn’t been any pricing changes.

Matt Brooklier - Longbow Research

Okay, is there anyway to quantify and you may have done it earlier in the call but quantify how much of incremental margin that the vertical integration initiatives added to the gross profit margin in the quarter?

Dale Davies

We probably aren’t going to disclose that but it is very a fairly significant help to us.

Matt Brooklier - Longbow Research

Okay. I guess where could margins go from here? You had an impressive quarter, maybe you can talk about from efficiency and production perspective, where are we on the tank car side or are we running at 100% efficiency or do you think you can get a little bit better there and maybe that adds some incremental margin in the second half of this year?

Jim Cowan

No, our tank car operation is not fully up to where we know it will be. We have been kind of springing that up kind of steady state for about the past eight months to nine months or last three quarters. It will get to a full state I think in the third quarter. So that will get that area pretty tight. The good thing that we are looking forward to I mean on the plastic pellet market, we have a lot of component trees throughout our entire food chain that’s involved in that. We make the premier outlook gate for the plastic pellet market and it’s a very good product for us. And so again with that, I think that can help us going forward into ‘13 and ‘14 to keep this going for quite a while.

Matt Brooklier - Longbow Research

And the plastic pellet component of what you are producing those specific cars that you are taking orders those deliveries expectations are for '13, '14 event?

Jim Cowan

As I mentioned the resin expansions in the country that evolve and announced are being startups of through 2013 to 2016 so £20 billion of resin added into the market, it's a very large quantity and there are no plastic pellet cars sitting idle today. So they are going to have to go forward some new production expansions there. So again we feel pretty good about those things.

Operator

Thank you. Our next question comes from Kristine Kubacki from Avondale Partners. Your line is open.

Kristine Kubacki - Avondale Partners

I guess we have spent too much time on this side, starring at our screens and focusing on what’s going on in Europe. I am looking at the rail data that came out today and we've seen just a general stagnation of in terms of freight traffic including base chemicals that coals a lot of that, but there is a lot of worry out there in the global economy and I guess it’s surprising to me that it sounds like the conversation has still remained pretty strong in July.

I guess the question that in my mind is how long does the conversations continue to be strong especially on the tank side, and is there any worries that it is creeping into your customers kind of conversations that reach we are seeing the oil and gas guys obviously with the prices being coming down, it sounds like activity from slacking and drilling is and people are starting to wonder are those CapEx budget is going to continue? So I was just wondering has there been anytime whatsoever in the conversations that you have had with your customers recently.

Jim Cowan

Kristine, very little on the negative side. Again it's as we've said the energy sector obviously had a lot of portion drive. It started with a fraction of end market that was out for couple of years. It's now coming into the crude market and on the L&G side as well so there is a lot of that activity.

I think $100 oil going to $85 yes, there is some pullback or natural gas going to $2 a MCF. We have it now with some drift in backup a little. So there is little bit of coming I guess effect in the energy sector but there is still a very aggressive I think schedule going forward there and again the resin groups I mentioned, they have made some very big plans.

So all those areas, I look at the freight statistics and if you take coal out of the mix, it's [up] over 3% this year versus last years. So intermodal has been a strong piece of that but there is still some good energy in the rail sector

Kristine Kubacki - Avondale Partners

And then I guess just a last question on the lease fleet. Can you generally talk about what lease rate trends have been recently as GATX has put up some very strong numbers of course they are talking about leases that are coming off more in downturn but just generally and then can you talk about kind of the average duration of leases that you are signing at this point?

Jim Cowan

I mean our average is probably six years, we've done some five, six, seven, 10-year leases, but the lease rates that we've seen have met our threshold. As we have a minimum and quite often are accelerating past that threshold fairly well, so we've seen a strengthening of lease rates as we've entered this market about a year ago.

Operator

Thank you. Our next question is a follow-up from Steve Barger from KeyBanc. Your line is open.

Steve Barger - KeyBanc

I just had one follow-up. Jim, if I heard you correctly I think you said tanks are going to be heading full stride in 3Q, probably be a little bit higher than they are now. But total production probably might be a little bit lower. I was wondering if we could you know talk through what mix of the balance there is that primarily frac sand cars?

Jim Cowan

Well, no. The frac sand market, we really are pretty much are finished there. We still as I said the plastic pellet market we've been building pellet cars all year long. We will actually build more in the second half than the first half. So that's going to be a good thing. Potash you know we've just taken a potash order, so we are entering into that market as well. And as I already mentioned we did receive an export order from Saudi Arabia. So those are all on the covered hopper side. But again the tank market will get to a very high, we are already at the highest run rate we've been at or we are going to go past that in our tank car operation in this quarter.

Steve Barger - KeyBanc

And I guess I was just asking, I think you said total production would be close to where it's currently running?

Jim Cowan

Yeah, the question I think somebody had asked, you know our shipments have been about 2200 units, 1Q, 2Q. And we are going to be near those levels, it could be slightly over, slightly under the next couple of quarters.

Operator

Thank you. (Operator Instructions). Our next question comes from Rishi Jain from Great Oaks. Your line is open.

Rishi Jain - Great Oaks

In the last call, you guys mentioned that a number of your I guess some of the chemical manufacturers were planning on sort of natural gas price in the $2-$3 range and so they were planning their expansions or different projects based on that assumption. The question I guess is what happens now with them with and the conversations you're having or what you are hearing from the industry with natural gas now or Henry Hub above three. And you know without Dow Chemicals forecasting in their last call and probably stabilizing around four.

And then you know I guess the second part of this question is I'm trying to figure out what percent of backlog is attributable to replacement, pure replacement of ageing car versus expansion of capacity for these guys to move the chemicals?

Jim Cowan

Well I mean the groups that we have found; they are very excited about the natural gas prices. As I've mentioned several times, the resin group, these are multi-million dollar expansions with about 15 different chemical companies involved and expanding. You know resin production in the US you know over 20 billion pounds which is enormous. So those things are announced, some are getting ready to start up in early 2013.

Some as I mentioned go out a couple of years later. I don't know those expansions can or will be slowed down. Another strong area is fertilizer you know in terms of that production, so again the natural gas is still very cheap, when you look at the price of it around the world, here in the US at the levels that you mentioned. So I think those areas are going to stay pretty strong.

Rishi Jain - Great Oaks

Okay and any idea, is it possible to even determine, let's say all things equal, if people were to just be placing orders for replacement of old vehicles, what percentage, do you think maybe of your own backlog or of the industry will that be?

Jim Cowan

No I don't know that I could even with come up with that. As I said earlier you know certainly the crude service and LNG are tied to these particular activities in the energy sector. It is probably well over half of the production space going on right now.

Operator

Thank you. I show no further questions at this time and I would like to turn the conference back to Jim Cowan for closing remarks.

Jim Cowan

Again I always want to thank everyone for your interest and support for ARII and certainly from our employee base that's making all this happen. Thank you and we look forward to our next call.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.

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

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

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

Source: American Railcar Industries' CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts