The Greenbrier Companies (GBX)
Q1 2009 Earnings Call Transcript
January 9, 2009 10:30 a.m. ET

Executives

Mark Rittenbaum – Executive Vice President, Chief Financial Officer and Treasurer
Bill Furman – President, Chief Executive Officer
William Glenn – Vice President, Strategic Planning

Analysts

Frank Magdlen - The Robins Group
Wendy Caplan - Wachovia Capital Markets
Todd Maiden - BB&T Capital Markets
Paul Bodner – Longbow Research
J.B. Groh - D.A. Davidson & Co
Art Hatfield – Morgan Keegan
Joseph Bastone (ph) for Steve Barger - KeyBanc Capital Markets

Presentation

Operator

Hello and welcome to the Greenbrier Company''s first quarter earnings release conference call. (Operator Instructions) Following today’s presentation we will conduct a question-and-answer session. Until that time all lines will be in a listen-only mode. At the request of the Greenbrier Company this conference is being recorded for instant replay purposes. At this time, I would like to turn the conference over to Mr. Mark Rittenbaum, Executive Vice President, Chief Financial Officer and Treasurer. Mr. Rittenbaum, you may begin.

Mark Rittenbaum – Chief Financial Officer

Thank you and good morning and welcome to our first quarter fiscal 2009 conference call. On today''s call, we’ll discuss our results and make a few remarks about the quarter that ended on November 30. We’ll then provide an outlook for 2009 and beyond and after that we will open it up for questions. As always, matters discussed in this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some of the important factors that could cause our actual results in 2009 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

Today we reported a net loss for our first quarter of $3.3 million or $0.20 per diluted share on revenues of $256 million. We also announced that we were reducing our dividend from $0.08 per share to $0.04 a share. Now, turning back to the quarter the results included a non-cash charge of $1.2 million pre-tax, $0.6 million after tax or $0.04 per share. The background on this is as a normal course of our business we have a policy of hedging our currency exposure over in Europe to lock in our margins on foreign currency sales. We have been doing this since we’ve acquired, entered into European operations ten years ago. All of our hedge contracts and all of our hedging is economically effective but during the quarter we determined that a small number of our contracts for technical reasons did not meet all of the requirements to be designated for hedge accounting treatment under GAAP. Therefore we are required to mark those specific contracts to market through the income statement and this resulted in a non-cash charge to interest in foreign exchange of $1.2 million. Effective in January these contracts will meet the requirements for hedge accounting treatment and at that time we are no longer required to mark these contracts to market through the P&L.

Turning to liquidity, our revolving debt balances have declined by $40 million since quarter end and we have additional committed borrowing availability of approximately $138 million, in addition to that our cash balance is $19 million. We believe we have adequate liquidity to manage through this downturn. As both Bill and I will address in more detail in downturns such as this, our focus is on liquidity and cash flow. We are making and will continue to take aggressive measures to pay down debt, remain liquid and rationalize the sizing of our operations and cost structure to reflect the current environment.

I will now turn the call over to our CEO, Bill Furman, and then he will turn it back to me and after that we will open it up for some questions.

William Furman – Chief Executive Officer

Thank you, Mark and good morning. On today’s call I am going to make some remarks about the quarter that just ended, Greenbrier’s competitive position, the current industry environment and the steps we are taking to improve our performance and liquidity in this difficult environment. Finally I will provide some qualitative outlook comments for the year ahead. Turning to our first quarter and actually these results are disappointing but our first quarter result, which Mark just summarized, reflect the very difficult economic environment in which we and other companies in America are operating. This is particularly true in new rail car manufacturing, a segment which continues to have a substantial revenue base for Greenbrier. The less cyclical parts of our business which include refurbishment and parts, marine manufacturing, leasing and services along with our European operations helped dampen the effects of operating in this environment. However, as was reflected in our first quarter results none of our businesses are immune from that environment.

Our refurbishment and parts business was impacted by lower scrap prices and an unfavorable mix in lower volumes of work. Scrap prices have started to rebound which will benefit this unit as the pipeline clears from older materials and surcharges that have somewhat distorted the quarter for that unit. Revenues for this segment still grew 27% over Q1 of 2008. Our leasing services business was affected by lower lease rate utilization and lower gains on fleet rail car sales. However, our own lease fleet of 9,000 cars under management services for an additional 137,000 cars provides us with stable earnings and cash flow.

Our manufacturing business was most impacted during the first quarter due to lower production rates, a less favorable product mix and higher cost of materials purchased earlier in the year. Additionally a loss contingency of $.5 million was reported on rail cars currently in backlog as reserves reported in fiscal 2008 were adjusted based on current expectations reflecting lower run rates and the mix just described. On a more positive note, commodity prices have declined considerably in recent months in turn lowering input costs on new freight car construction and this may lead to some bargain hunting by customers. We do expect our new rail car backlog to benefit from a more favorable product mix and lower input costs for the remainder of the year. Our new rail car backlog is 15,900 units of which 2,900 are currently scheduled for delivery in fiscal 2009. As is to be expected in this environment all customers are pushing back, and seeking concessions and/or cancellations with their suppliers. We are certainly doing this with our suppliers and renegotiating costs on components given the very large swings in commodity prices and the variability in those prices and the weakness in those prices today. Our customers are doing it with us.

Subsequent to quarter end, we had one order cancelled for 300 new boxcars to be manufactured at our Gunderson facility in Portland. This order is excluded from our November 30 backlog as reported. The customer will be responsible for our costs and inventory associated with that order so the effect on cash and liquidity will be neutral after that settlement is made. We are also in discussion with other major customers. However, we believe our rail car sales contracts to be sound for the large bulk of our backlog and we believe that the company is adequately protected in the event of attempted renegotiations or cancellations of contracts. I might say that this situation is the product of many, many stored cars and excess equipment in the system during the current part of this business cycle and we don’t expect this to continue, this kind of environment to continue indefinitely.

Turning to our competitive position our management team and Board of Directors have been through many such downturns and have a proven track record managing through business cycles. While we believe the current recession will likely have a larger or longer than average duration, we remain confident in our ability to manage through this one as well. Later I will provide more details on how we specifically plan to do this. However, the strategy which we pursued over the past few years to diversify revenue and earnings has and will stabilize earnings and cash flow and has improved our competitive positioning. We remain optimistic about the longer-term fundamentals of the railroad industry and about our competitive position in it and our business model. Turning to the market environment and before I go into more detail about Greenbrier and the steps we are taking to combat the downturn I’d like to frame the current operating environment. To begin with, rail loadings are a leading indicator of the health of the economy. North American rail car loadings are currently weak and have been for a while now. But particularly they have been affected by the massive commodity swings and weakness in commodities in recent months. Loadings of commodities in North America were down 9% in the fourth quarter of 2008 as compared to Q4 of 2007. Car loadings for forest products and automotive, car types in which we have a strong market presence have been even harder hit.

While we are also strong in double stacks in our model out loadings we are down 7% in Q4 2009 versus Q4 2008. As a result of decreased loadings, tens of thousands of rail cars are currently being stored by customers and moved to the sidelines. Not all car types are affected equally but this phenomenon is natural in a downturn and we have seen it before. Furthermore, customers are deferring capital spending and are in many cases opting instead to store damaged cars rather than to repair them. Nonetheless we feel that our GRS repair and refurbishment unit will be a strong performer during this part of the business cycle and we are happy we have expanded that segment to now account for the bulk of our profitable revenue along with marine and other parts businesses for Greenbrier. Demand for new rail cars in North America is being hit hardest and industry forecasts are for 30,000 to 35,000 rail cars to be built in each of 2009 and 2010, rebounding in 2011 to a more normalized level. All of this compared to about 60,000 units expected in the final numbers for 2008. However, I personally believe these forecasts for new orders and deliveries for 2009 in particular may prove to be on the high side.