Greenbrier Q1 Earnings Call Transcript

123jump.com Staff
22 Jan, 2009
New York City

The rail road cars maker reported net loss in the first quarter of $3.3 million or $0.20 per diluted share on revenues of $256 million. The company reduced dividend from 8 cents a share to 4 cents a share.

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.

The scenario I just described is not uncommon to our industry and I’d like to remind everybody and particularly our long-term investors of that fact. We have seen it many times during cyclical downturns. As the economy recovers there comes a shortage of serviceable rail cars and velocity changes and all of our business units will benefit quickly and dramatically. However, in the short-term while we are mindful of the opportunities and requirements to limit CapEx there are opportunities to buy rail cars cheaply in the market, repair them through our system and our network and lease them out and when the market recovers the market value of any assets we put into such programs will increase dramatically.

One last comment I would like to make regarding the market environment has to do with the potential for an economic stimulus package or packages in the form of increased government support and spending on infrastructure tax credits or other programs such as this. If passed, this legislation could also stimulate demand for rail car types needed to support such programs which in turn could benefit all segments of our business and other businesses in the railroad supply industry. We will be closely monitoring the status of federal legislation and the first important piece is a stimulus tax bill which we understand to be presently on a very fast track in Congress. Our management and board continually conduct scenario analysis of our industry and the economic environment and its impact on our business. At present we believe we have a strategy in place to operate through these difficult times, a strategy that positions Greenbrier to succeed under various operating scenarios. Throughout the balance of 2009 we have several important objectives. Let me turn to those.

Most importantly we will manage the company for cash and liquidity as we have done in earlier downturns. We will continue to take measures to improve liquidity, increase efficiency, reduce our operating costs, improve our balance sheet and conserve cash, all appropriate to the current environment. Last year in the first quarter of this year we slowed down production rates and eliminated $10 million of annual costs. We will aggressively continue this theme this year on multiple fronts.

Specifically and number one we will reduce our 2009 capital expenditures appropriately at least by $25 million from 2008 amounts and we have the ability to go deeper as conditions may warrant. Secondly, we plan to improve our working capital utilization by $50 million. Part of this is natural as inventories run down and receivables run down with lower levels of operations. However, we have put into effect over the past five months a very aggressive review and reorganization of our business methods to improve the efficiency of our working capital. Third, we will continue to adjust production rates and consolidate production. If the outlook does not improve we will likely shut down or temporarily close one of our new rail car facilities until the market conditions do improve. Fourth, we will continue to adjust our cost structure to the current environment. We will take out at least an additional $5 million of overhead and G&A costs as a first step. Turning to the overall outlook while this economic picture is rather gloomy and while visibility is somewhat limited, we anticipate the balance of the fiscal year to be better for us in the first quarter and that we will be profitable, both a result of the internal measures I previously discussed and external factors.

Let me discuss those external factors in greater detail. Raw material costs have dropped significantly which should help our new rail car manufacturing operations. We have also started to deliver the first rail cars under our GE contract. These cars have been accepted and the contribution from our marine operations aided by a very strong backlog in that operation at Gunderson is expected to grow throughout the year. Scrap prices have started to rebound off of first quarter lows, which will help our refurbishment and parts business and reverse the throughput adjustments that clearing the pipeline with older costs, has brought to that unit in the first quarter. Volume in our repair and refurbishment business, particularly in wheels, remains strong. We have been awarded a significant new wheel contract in the Southeastern part of the United States and we believe that higher material costs and surcharges will largely be flushed through the system by the end of our current quarter or by the end of the quarter we are in.

So these factors along with an expected more favorable product mix should help improve margins. I will remind you that the first quarter has traditionally been our weakest quarter due to product mix and that the year is back end weighted. Looking longer term, we continue to believe rail and marine transportation will compare favorably to other modes of transportation driven by a number of factors. We expect these to include increasing highway congestion, prospects longer term although not immediately are a weakening U.S. dollar which will favor railroading and commodities and exports in the United States, an aging rail car fleet, the lower cost infrastructure build and a higher emphasis on environmental factors under the new administration and Congress.

So in sum, we remain confident about our business model, our strategy and our ability to navigate through this downturn. We have specific plans in place which I have enumerated which adjust to the current operating environment and as Mark will discuss in more detail adequate liquidity to operate in this environment. As a result of these plans and the external factors I previously discussed we expect near-term results to improve. Our competitive position is strong and our business model cannot be easily duplicated. Longer-term, we do remain optimistic about the marine and rail industries and our competitive position.

I will now turn the call back to Mark.

Mark Rittenbaum

Thank you, Bill. As both Bill and I have mentioned we believe that we have adequate liquidity to manage through this difficult environment and our focus is on cash flow and maintaining liquidity. I want to go into that in a little more detail and then after that I will go into our performance a little bit more but not do a deep dive in that as a lot of that information is contained in our earnings release. First, our financial focus managing for cash. As Bill mentioned we have a number of measures in place to reduce our borrowings and improve cash flow. As we are in this uncertain environment we do have limited visibility. Therefore we have been and continue to stress test our forecast under different scenarios for various financial and financial covenants impacts to ensure we take appropriate measures to run the business and maintain liquidity.

Currently we have very little in the way of near-term debt maturities. This year we have less than $32 million maturing relating to our European operations which we believe we can adequately manage through. Our $290 million revolving line of credit for North American operations matures in November 2011 and the earliest potential significant maturity of any of our notes payable occurs in May of 2013 and this relates to our convertible bonds outstanding of $100 million. We are in compliance with all of our financial covenants. Furthermore we have an excellent relationship with our lead bank, Bank of America, and long-standing relationships and excellent relationships with many in our bank group. Now let me add some color on the quarter. First, while refurbishment and parts helped to lessen the impact of weak manufacturing during the quarter it too was affected by the difficult environment. As such we are taking overhead costs out to reflect lower refurbishment volumes principally and a less favorable mix of repair and refurbishment work.

Secondly, as Bill mentioned, our wheel services business was impacted by a precipitous drop in scrap steel prices and as Bill mentioned we are seeing a pick up there which along with cost reduction initiatives should aid results in the future. Turning to leasing and services our fleet utilization was 93.3% during the quarter compared to 95.2% at the end of our fourth quarter. The current quarter includes $0.3 million gains on equipment sales while the prior year’s first quarter included $0.8 million of gains. We do expect increased trading activity in the last three quarters of the year so our gains on sale for the year as a whole will run higher than the current quarter’s run rate of $0.3 million. Now turning to manufacturing, as a reminder, during the quarter we were still building rail cars for contracts in backlog which contain fixed prices and for which higher price materials were already purchased. Therefore a lot of our production was in that scenario. We had an unfavorable product mix and as Bill mentioned based on our current expectations for any of those contracts that are still in our backlog we increased our reserves by $500,000 for such contingencies where our costs exceed our sale price.

We did not accept any new fixed price orders during the quarter. We do have profitable work in our backlog. As Bill discussed the market is very competitive right now and any orders that are being bid are being aggressively priced with little or no margin and a focus on cash in these bids and making contributions to fixed overhead is principally what we are seeing out there which is also normal in this environment. On a more positive note we are now delivering our first paint cars under our GE contract and the first paint cars that Greenbrier has built for the North American marketplace and we are very pleased by this obviously and now commencing with those deliveries along with lower input costs, continuing momentum in marine and stability in Europe, this should all aid our manufacturing performance.

We expect our marine revenues to approach about $75 million this year, nearly a $20 million growth from the prior year and we have a strong backlog. Our cost reduction initiatives will stay in place. Our G&A expense after you take out less recurring items is on a $17.5 million run rate and that includes the $10 million of cost reductions realized in 2008 and we have plans to drive this down further with the initial step of reducing G&A and overhead by $5 million and further end contingencies for more reductions if warranted. In our working capital management plans we do have specific metric targets, all with the goal of improving working capital utilization by at least $50 million and we reduced our CapEx by $25 million from last year, still with our CapEx at about $40 million. $20 million of that is leasing CapEx. That CapEx is discretionary and can be throttled back if conditions warrant.

We will now open it up for questions. Operator if we can turn it back to you to do that please.

Question-and-Answer Session

Operator

Yes certainly thank you sir. (Operator Instructions) We’ll now begin the question-and-answer session. If you’d like to ask a question, please press “*1” on your touchtone phone, to withdraw your request press “*2”. Once again, to ask a question please press “*1”. One moment please, for the first question and our first question comes from the Mr. Frank Magdlen with The Robins Group. Your line is open.

Frank Magdlen - The Robins Group

Good morning, Bill.
William Furman

Hey Frank, how are you?

Frank Magdlen - The Robins Group

Good. Could you give us a little more guidance or help in trying to understand the significance of steel scrap pricing or proceeds that you get in your refurbishment and parts business? There is a possibility I’m trying to smooth out the gross margin contraction that occurred in the quarter.

William Furman

There was quite a contraction in particularly scrap steel pricing and we receive a yield from scrap steel pricing where our business model works particularly in the wheel business and repair and refurbishment. We sell just in that unit approximately 10,000 tons of scrap steel each month. On a gross revenue basis you can calculate what a $10 change can do in the average price of scrap and so looking at simple terms a $10 reduction or increase in scrap can mean $1 million in the time frame that we are talking about per month. However, it is not quite that simple and it has to do with the surcharges that are built into inventory and the cost inventory. Particularly in the first quarter there is a lot of moving parts and we expect as scrap prices stabilize and increase, which they have been doing and you have to distinguish between the domestic and international market in that regard when you are looking at scrap and you have to distinguish by region. Nonetheless there is a pronounced drift upward in scrap steel. This will have salutary effects on that unit so we think we took the principle hit in that unit in the first quarter.

The other business we have been awarded should generate between $10 to $12 million gross revenue. Of course not all of that will come to the bottom line. Those are some of the moving parts related to scrap. Basically the outlook in steel is more positive than it was a few months ago and scrap is still a fairly weak commodity market.

Frank Magdlen - The Robins Group

All right, if I can clarify, every $100 was it just a slip of the tongue? Every $100 if we are shipping 10,000 tons a month then approximately every $100 equates to $1 million?

William Furman

I’m sorry. I did have a slip of the tongue. It is a significant item but the kinds of movements and it has affected us each month probably in this particular downturn by at least $3 or $5 million.

Frank Magdlen - The Robins Group

For the quarter?

William Furman

For the quarter, yeah.

Frank Magdlen - The Robins Group

$3 to $5 million in the quarter, then what when we go back to prior guidance of something in the neighborhood of 14% to 16% margins on that business? In ordinary times, and I don’t know what ordinary times are, but if you didn’t have the big volatility in scrap?

William Furman

Frank let me clarify that number because you have got a pricing effect and you’ve got a cost effect. Probably the total effect of clearing the pipeline and the price decreases in this quarter was most likely $11 to $12 million, which pricing would be a component of that but costs as we clear higher inventory surcharges through the sales units would contribute to that as well. So we took a significant hit in the first quarter from just the commodity pricing down. As that swings back up we will have a similar benefit in coming quarters.

Mark Rittenbaum

To the second part of your question Frank, on the margin outlook, yes earlier in the year or at the end of last quarter we gave guidance in the mid-teen’s. We are a little bit more cautious on that in part on the refurbishment side of the business. As we mentioned before we are seeing deferments in capital spending and so the product mix on the repair and refurbishment side is a little weaker and scrap steel did drop down precipitously. It is coming back up but we are being more cautious probably on our view of the average price. We probably take it more down to the lower teens rather than the mid teens.

Frank Magdlen - The Robins Group

Okay two other questions. How many cars are left that are fixed price for production this year?

Mark Rittenbaum

Less than I believe it is about 1,000 that are left in the pipeline that we have reserved for all of those and we believe that we are adequately reserved for all of those at this time.

Frank Magdlen - The Robins Group


All right. I’ll jump back in queue. Thank you.

Operator

Thank you. Miss. Wendy Caplan with Wachovia, your line is open.

Wendy Caplan - Wachovia Capital Markets

Thank you. Good morning.

William Furman

Good morning, Wendy.

Wendy Caplan - Wachovia Capital Markets

The internal actions that you have been talking about, do you think that they will allow you to stem losses in manufacturing this year or are we really counting on the lever of refurbishment and parts to improve the prospect and to become profitable for the full year as you described?

William Furman

I’ll let Mark address that and I might add some comments because manufacturing particularly with the momentum in our GIMSA facility will have a different profile than is apparent from these quarterly results, Mark.

Mark Rittenbaum

I think the answer is more the latter, Wendy. For the year as a whole and for the quarters going forward which include G&A expense and operating costs below the gross margin line that it would likely not be profitable. We do see improvement in our margin which is now a negative margin to something closer to break even or modestly low single digits. So it would be the other parts of our business that would principally be the contributors. And of course just taking the margin from the negative to break even or low single digits in manufacturing.

Wendy Caplan - Wachovia Capital Markets

And the tank cars you are talking about, just so that I am clear of the 2,900 cars you expect to ship out of the backlog this year how many of those are the tank cars and given that the production start up and what does that say about profitability in that piece?

Mark Rittenbaum

On the tank car piece it is less than 500. I don’t have the exact number here Wendy, but it is right around 500 that would be in there. I don’t want to go into profitability by particular car type obviously for partly competitive reasons. Certainly we have learning curve efficiencies and inefficiencies in the start up but we are also gaining traction in that area.

Wendy Caplan - Wachovia Capital Markets

And then finally I’ll jump off and let someone else have a chance, just so we understand, as we are looking at the P&L where is that hedging charge you referenced on the P&L in the quarter?

Mark Rittenbaum

It is in interest and foreign exchange.

Wendy Caplan - Wachovia Capital Markets

So it is lumped into the interest expense line?

Mark Rittenbaum

Yes.

Wendy Caplan - Wachovia Capital Markets

Okay all right. Thank you very much.

Mark Rittenbaum

You’re welcome.

Operator

Thank you. Mr. Todd Maiden of BB&T Capital Markets, your line is open.