The Greenbrier Companies, Inc. (GBX) Q2 2012 Earnings Report, Transcript and Summary

Hello, and welcome to the Greenbrier Companies Second Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] At the request of the Greenbrier Companies, this conference call is being recorded for instant replay purposes. At this time, I would like to turn the conference call over to Mr. Mark Rittenbaum, Executive Vice President and Chief Financial Officer. Mr. Rittenbaum, you may begin.

Thank you. And good morning, everyone, and welcome to our fiscal second quarter conference call. On the call today, I'm joined by our CEO, Bill Furman; and our Treasurer, Lorie Leeson. We will discuss our results and make a few remarks about the fiscal quarter, and then we'll provide some qualitative outlook for the second half of the year. And after that, we'll open it up for your questions. But first, as always, I remind you that matters discussed in this conference call include forward-looking statements within the Private Securities Litigation Reform Act of 1995. Throughout the discussion today, we'll describe some of the important factors that could cause our actual results in 2012 and beyond to differ materially from any expressed forward-looking statement made by or on behalf of the company. Now turning to our results for the second quarter ended February 29, Our net earnings for the quarter were $17.7 million or $0.57 per diluted share on revenue of $458.2 million and EBITDA of $40.1 million. Our continued focus on operational efficiency, combined with favorable industry fundamentals, has made the second quarter record revenue quarter for the company and driven profitability to new levels. Now let me address some highlights for the quarter. To supplement the year-over-year comparisons in the earnings release and in the financial tables, I'll include additional color on a sequential basis, too. Our Manufacturing segment posted second quarter revenues of $320.2 million, the strongest quarterly revenues for this segment in the company's history. The sequential increase from Q1 revenues of $262.7 million was primarily a result of increased demand for car types in which we focused and the ramping up of production in response to this demand. In Q2, we delivered approximately 3,700 new railcars, up from the 3,300 deliveries in Q1 but continued to see strong demand for our hopper cars and tank cars tied to the U.S. energy sector, as well as new orders for additional car types not previously in backlog. These orders diversify our product mix and provide further evidence of a more broad-based recovery. We have steadily ramped up production rates at our 8 operational lines, and we're firing on more cylinders. We still expect to deliver over 15,000 railcars this fiscal year. And currently, we anticipate the Q3 deliveries will be higher than Q4 due to line changeovers that are going to occur in line for -- as well as the difference in product mix, where we'll be building an auto-carrying car or AutoMax auto-carrying car in Q4, which is a higher labor hour, and therefore, a higher unit value car but with -- higher labor hours means less total units per labor hour. So -- but as I mentioned earlier, we continue to ramp up production rates overall, and that would continue into our next fiscal 2013. Manufacturing gross margin for the second quarter was 9.2% of revenue, down from the 10.1% in Q1. This margin is consistent with the guidance that we gave at the end of Q1 in that it was a result of product mix and also Manufacturing issue related specifically to one product line at our GIMSA facility for a product line that we had not built in the past for a specific service, and we expect to have that issue behind us in our Q3. Notwithstanding that, our operational efficiency allowed us to recover quickly, as evidenced by the increase in new railcar deliveries overall for the quarter. And in the second half of the year, we look forward to some modest margin expansion in this segment. Now turning to our Wheel Services, Refurbishment & Parts segment. Revenues were up sequentially by a couple of million dollars. The increase was driven by increased demand among all 3 components of this segment and partially offset by reduced scrap volumes. Gross margin for this segment was 11.1% of revenues, up sequentially from 10.1% in Q1, primarily due to production efficiency improvements and product mix. We're cautiously optimistic that we will continue to see modest revenue and margin enhancement in the second half of this year, but we will remain guarded in these comments given some of the loading patterns and specific car types that may turn out to have some effect on our Wheel segment. Turning now to Leasing & Services. Our fleet utilization was 97.3%, up slightly from 97.1% last quarter. Segment revenue increased $18.1 million in Q2 compared to $17.8 million in the previous quarter due to higher rents earned. Our gross margin for the quarter grew to 48.6% compared to 45.7% last quarter as the result of higher lease indication activities where we keep the rent with low associated cost of ownership until the cars are sold. The lease and lease rate environment continues to improve for most car types. Gains on sale of equipment during the quarter were $2.7 million as we opportunistically rebalanced our lease portfolio to take advantage of market conditions, but it's hard to provide for guidance in this area due to the opportunistic nature of sales out of our lease portfolio. We currently anticipate lower activity in the second half of the year than in the first half of the year in trading gains. Selling and administrative costs were $25 million for the quarter, up from $23.2 million in the prior quarter, primarily the result of headcount increases associated with higher levels of activity, increases in incentive compensation. While we expect to continue to see the economies of scale going forward with G&A as a percentage of revenue being declining going forward in absolute dollar terms, we do see that this could continue to grow some associated with the higher levels of activity, and that could run between $26.5 million and $27.5 million a quarter for the balance of the year. Interest and foreign exchange for the quarter was up $1.1 million from the prior quarter, and this was solely due to foreign exchange gains and losses. In the prior quarter, we had a gain of $0.9 million, whereas in the current quarter, we had a loss of $0.2 million. So that created a $1.1 million swing in and of itself in this line item. Our tax rate for the quarter was 23.7%, where we expect it to run about 33% for the balance of the year. The actual rate will be dependent on our geographic mix of earnings, but the lower rate for the quarter was due to the release of certain valuation allowances in foreign jurisdictions. Turning to the line item net earnings loss attributable to noncontrolling interest. This relates to our partner's 50% ownership in our GIMSA joint venture in Mexico. For this quarter we showed a loss of approximately $4 million on the line item. And since it's our share of the partner's losses in this case, that goes to grow what's remaining for Greenbrier, then it's an add-back to get the Greenbrier's number. We do not actually have an operating loss from the vicinity [ph] though rather many of the cars which were produced but not sold during the quarter. And they're hung up on the balance sheet, and the related margin is hung up on the balance sheet until after these cars are ultimately sold. We expect that this line item will show growing income rather than loss in future quarters and that at the point when it shows income, it will be a deduct to get the Greenbrier's earnings rather than an add-back. Looking forward to the rest of fiscal '12, based on business trends and production rates, we still expect the deliver in excess of 15,000 cars and that revenues and adjusted EBITDA in the second half of the fiscal year will be higher than the first half of the year primarily due to higher deliveries. As a reminder, the orderly flow, and Bill will comment on this, we're pleased with the order rates we achieved, as a reminder that, that tends to be nonlinear in nature and lumpy in nature. We continue to expect CapEx in fiscal '12 to add equipment sales to run about $70 million to $80 million and depreciation and amortization to run about $40 million. Finally, as a reminder, the calculation of diluted EPS can be complicated due to the nature of the convertible bonds and the outstanding warrants. Lorie went through this on our last call. And if you have any questions after, she will be happy to go through it. As a reminder for now, we include the underlying shares associated with the convertible bonds in the diluted share count. Even though at the conversion stock price of $38.05 a share, those bonds are currently out of the money. With that, I'll turn it over to the Bill, and then we'll open it up to questions. Easy for me to say.

Thanks, Mark, and good morning. Cat got your tongue this morning, I guess. During the quarter, Greenbrier produced strong operating and financial performance, continuing to build product backlog and to execute on our strategy, as we have done over the past year. I'm especially pleased about the orders received during the quarter and the strong start in the first month of the current fiscal Q3 quarter. As indicated in our press release, we received orders for 3,600 units during the Q. And subsequent to quarter end during March, we received another 2,300 units with the valuation of $270 million. The order pace and interest pace, the deals that we are tracking continue to remain strong and more broadly based than only energy. Our strategy has been to expand our lower-cost production facilities, increasing capacity in high-demand freight cars on the Manufacturing side while broadening our product offerings to provide coverage over most shipping needs throughout the North American and European freight rail networks. At our rail services unit, we are focused on improved margins and operating efficiencies. In our leasing company, we're increasing our lease rates on our owned and managed portfolio, as well as targeting and realizing higher throughput through our lease syndication model. Both the low-cost manufacturing footprint and the higher volumes and more complex lease syndication model have contributed greatly to Greenbrier's profitability over the past 2 quarters. Beyond these business unit strategies, we realized significant benefits through cost control and other majors and global sourcing, and we've expanded human resources available to help us sustain higher volumes and performance, as well as build for the future. In absolute dollars, our backlog remains stable this quarter at about $1.1 billion in our Manufacturing segment, not counting the order flow referenced at the end -- or subsequent to the Q. And as mentioned earlier, that flow continues to remain strong. We are seeing more order diversity in the quarter over the past 6 months among a broader range of car types. While Mark mentioned energy and energy-related products continue to make up much of industry backlog and demand, we also have backlog building in other car types, including food-grade covered hoppers, grain cars, boxcars, gondola cars, double-stack intermodal cars and our automotive -- and in the automotive market, our AutoMax car. With the exception of coal, industry loadings continue to be very strong. And looking at the overall statistics, coal has dragged down the actual performance of the broader-based commodity mix. So we believe the fundamentals in the rail sector on all of those products and -- needs remains strong. We continue to be optimistic on energy, and we are expanding our capacity in tank cars and copying what we did last year in a wide range of covered hopper cars. In so doing, we are enhancing our capacity to address the energy market, which has experienced growth of almost 30% year-over-year. And it's truly a bright spot in the North American economy, which will have broad knock-on effects or economic development in an energy-sufficient environment over the next decade or 2. Our railcar capacity for some products lines are booked through 2013. We see signs of renewed activity in the marine business, which could be an upside to our 2012 and first half of 2013 plans. We continue to pass through the risk of longer-term exposure on materials, having advantage on materials availability through our strong supply relationships and global sourcing network, also something that has been part of our strategy changes over the past year. European demand remains strong. We expect good performance from this unit in 2012 and 2013 despite this general concerns about the European debt situation. Over the past year, we've ramped up production in our Manufacturing segment almost fourfold from this time last year. And we look forward to record production volumes in North America. The ramp-up has not been without some issues both in labor and in delays in certain specific production lines. However, the issues we've experienced and commented on the past quarters have been largely addressed. We expect our balance sheet margins to improve Manufacturing, moving through the balance of this fiscal year, and we expect excess inventories will continue to work down. As new workers become more experienced, we should become more efficient. And because of those factors in the past -- the trailing 6 months, we have been behind our working capital goals, and we're determined to respect capital and to make efficient use of our working capital. In summary, we remain focused on fundamental changes in our business strategies, which should help us take advantage of what seems to us to remain an early-stage recovery in the freight transportation sector. Industry forecast continue to predict strong demand for freight car products and services over the next several years, and the economic advantages of rail transportation over other modes make the outlook much more promising than I have seen at this time in the cycle throughout my long career in this industry. Coupled with strong railroad balance sheets and prosperity in the railroad side, their desire and willingness to reinvest for the future, the need for new equipment and services for both replacement and growth in fundamental -- continues strong, and we think that the fundamental changes in energy-related economic activity will revitalize the American industrial sector. Of course, the world is very complicated. The structural trends and the political situation, not only in North America but throughout the world, remain things to ponder seriously. And good economic revival can always be trumped by those forces on a global scale. Overall, however, we remain very optimistic. We're happy to have a third consecutive quarter of strong financial performance behind us with the promise of more to come. Mark, back to you.

Thank you, Bill. And operator, we'll go ahead and open it up now for questions. If you can provide instructions on doing so.

[Operator Instructions] Our first question comes from Bascome Majors from Susquehanna.

Looking at the math between the orders deliveries and backlog, maybe you eluded to this on the prepared comments, it's that you're building and taking cars in the inventory while they're awaiting syndication. Is there any other variable in here? Or is that really the missing number between those other 3?

That is the missing number. There can be cases where cars that -- I think that's the missing number for the quarter. And in total, one missing piece from time to time can be that we can choose to take cars into our lease fleet that we might otherwise earlier have chosen the sale or vice versa. But in this quarter, I think you've hit the missing piece.

Okay. And is that -- that's been heading in the same direction for the last couple of quarters. How much of that is a function of leasing demand? And how much of that is a function of the [indiscernible]?

It's a deliberate choice, which relates to our strategy to market through a combination of direct sales and leasing. So we'll stage production, part of which, which will be blocked for our own fleet, to take into our fleet, and then also for product to go into the syndication market. At the same time, we're working very closely with a few selected customers on a strategic basis. So that's basically the underlying business drivers for the movement in that category.

So is any of this tied to the production issues you mentioned at GIMSA? Or is it really a function of just the nature of the model as you ramp up production?

No. Our direct inventory may be a little higher than we would -- well, is a little higher than we would like because of some production delays at GIMSA and some labor issues that were -- that caused some inventory to pile up at our other facility in Mexico at Concarril at Sahagun. But it has nothing do with the Leasing side that -- at least that [indiscernible]. So the line item leased railcars for syndication on the balance sheet is specifically the line item that relates to the syndication activity, and not all of that is finished production.

And Bascome, we can talk about this further off-line if you'd like.

Sure. And just one other one. You alluded to marines, to looking on the up and up for later this year and possibly 2013. Can you give us a little more color on that and where demand and increase stand or any incremental orders that you may have received?

We received a small order, and we have a number. I think what I'm talking to there is the increased number of inquiries and just some of the dynamics in that market that relate to energy. So it's a little stronger as far as the order or the inquiry rate -- actually, it's considerably stronger than the last conference call we had, although we haven't booked any huge deals. But I do think that the trend is very promising for that business probably in the second -- last quarter of this year, perhaps, and in 2013.

Our next question comes from Allison Poliniak from Wells Fargo.

Bill, last quarter we talked a little bit about international and intermodal. You were talking about there was some increased interest. Can you just update us on that just given some of the economic concerns out there?

You're talking about, say, the consumer demand in the international boxes coming into North America?

Exactly, exactly.

Yes. I continue to be pretty optimistic that in 2013, we'll see a need for a 40-foot equipment. I believe that the economy is stronger than pundits would like to make it sometimes. We talked about the bad news. But there is some signs that the consumers are stirring. And just generally, the balances of movements and the working off of inventory and storage and so on seems to me to be reflective of demand that would be, for equipment, at least, coming in 2013. I share that view, actually, with several of my colleagues and some of the Western railroads.

Great. And then, Mark, you had alluded to the gross margin in rail manufacturing and obviously some issues in Q2. Could we be looking at Q3 more in line with what Q1 was, sort of what we've had in gross margins on that side?

I think directionally, that's correct. We're talking about kind of a 1 percentage point delta whether or not we get all the way back up to there. But I think that's probably more on the outer edge of what we see now. But since we're ramping up here, we just want to be cautious and not being too optimistic until we get to levels that exceed what were Q1.

Our next question comes from Tom Albrecht from BB&T.

A couple of things here. I want to make sure I heard. You said the GIMSA loss was $4 million in the quarter?

$400,000.

Okay. I was going to say that number you had on the sheet looked like it should have been something else, so okay. And Bill, I know you commented favorably about the demand for energy cars, but what about the frac-ing cars? Have you not seen a little bit of lessening in quotation activity given the price of natural gas?

Well, what's happening is that some gas exploration and production is being slowed, and that may have some dampening effect on the frac-ing demand short term. I think what's probably happening to the degree that, that's true is the -- an awful lot of cars have been ordered, an awful lot of production is in play, so I think there's just a pause as people calibrate their demands. In talking to those -- and we just completed a very extensive industry study, an energy study, and it indicates strong demand for both tank cars, more or less on a 2- to 3-year basis, where there will be a period of time where at least there will continue to be a fairly strong demand for oil, and that will taper off as pipelines kick in. But in the frac business, the only real threat to that is the environmental side. So we remain bullish on it. But you're right, there has been a slowing down of the frantic pace. Frankly, I'm happy to see that because I think the pure logistics of absorbing a fleet as large as this one is becoming a need to be given a lot of flattening and just a digestion issue. But I think in terms of underlying demand in the demand shift for this car, it really isn't anything that's going to interfere with this given some of the pipeline -- given some of the dynamics in this industry. It's, of course, a speculation in some ways because we have never been through this before, and it is truly an amazing phenomenon. And I think, well, we'll just have to wait and see. But I continue to be pretty optimistic about it.

Okay. And then on the production side, I wanted to make sure I'm thinking about this right. So do you now have 2 tank lines? And now you're at 8 lines in total. I think last quarter was 7. Will you -- do you have definitive plans to go to the ninth and 10th line?

We have only one tank line, and we're simply increasing the capacity throughput through that line. And that line is at GIMSA. We have expanded GIMSA so we have a third line there, and we are in the middle of expansion plans at our Sahagun facility that will add 3 new lines in 2013. But we will lose one line at Bombardier -- at the Bombardier facility, which is a loaned line. So we'll end up net 2 additional lines.

And then just one additional comment, Tom. As Mark indicated, we're going to be changing over and starting up our auto-carrying car in the fourth quarter of this fiscal year because that is such a labor-intensive and large car. It's going to actually take up 2 of our production lines. So just in case that creates any confusion on the number of lines we have earning in the future, it does depend on product mix.

Will those be 2 existing lines they take up or they'll take 2 lines in their entirety and they represent new capacity?

Existing lines.

Okay. So we're basically adding a net 2 lines. One of the current lines we're using has been loaned, and we'll give that one back. And so we're adding, in the short term while we're running AutoMax, one net new line at Concarril that we can use. We have adequate capacity though to meet the targets or exceed the targets that Mark is talking about for this year and then increase those rates next year, I believe.

[Operator Instructions] Our next question comes from Peter Nesvold from Jefferies & Company.

It's actually Elliott Waller in for Peter. A quick question -- a couple of questions for you. You had mentioned GIMSA to show profit in future quarters. Should we expect that to start in the fiscal third quarter?

Yes.

Okay. Great. And then as we think about just general directional trends in pricing this quarter versus last, how would you, I guess, talk about that or give some color on that, if you would?

I'll let Mark talk to the Leasing side in a moment. On the Manufacturing side, we see pricing remaining -- well, it remains competitive across some of the commodity car types. But generally, there's been less sensitivity to pricing on the frac sand. And on -- I think we're getting decent margins, improving margins on our tank lines.

And then on the Leasing side of the business, generally pricing is firmer and stronger. There is a note that there are some car types that loadings had been down on rather than up. And then those car types -- then the lease rate environment would have been, if anything, a bit softer and in coal.

And that would be true with coal cars, right?

Right. And...

Generally in other cars, we're seeing some strengthening for demand. It kind of tracks the national trend of concealed car loadings growth by the kind of the downdraft in coal.

Right. Great. It makes sense. Okay. And then finally, you had mentioned refurbishment in parts. Looking forward, obviously, given the overall soft volumes again driven down by coal, how should we think about that trajectory going forward? I mean, will that kind of grow with changes in volume, overall volumes? Or how should we think about that?

I'm sorry. I'm not sure I understand the question. Could you repeat it?

Just trying to get a sense for how you -- how we should be thinking about the refurbishment parts revenue going forward. I know you expect -- expressed a little caution regarding the overall coal volumes, which are overall volumes which have been impacted by coal.

Yes. We don't have a lot of refurbishment parts revenue dedicated to the coal market. We have a small amount. So the wheel side would be where it would affect the -- on the wheel side, it would affect potential demand for wheels. We haven't really seen that. We've seen fairly strong demand for wheels. But we're still watching that coal market very closely. On the more general side of refurbishment, we think -- we're pretty optimistic -- I'm pretty optimistic about continued improvement in that segment as this recovery continues.

Our next question comes from Ken Hoexter from Merrill Lynch.

Mark, can you kind of go into that a little bit, the -- I just want to make sure I heard you right. You said Q4 will have fewer cars delivered than Q3 despite the more -- the additional lines. Just wanted to verify if that was your statement earlier.

Correct.

And that's because of the auto -- more manual production?

It would be that. We're also going to have another line changeover in Q4, and partly due to anticipated timing of some of our lease syndication activity. So those 3 items overall are why we would see Q4 being lower than Q3. That does not mean that we're ramping down production rates though. It's those specific items.

Okay. You said Q4 less than Q3 and then one line is changing over. What was the last thing on the leasing?

The timing of our lease syndication activities, and that is -- that can be a little tricky. But you see the railcars, somebody asked earlier, railcars we can build in one period and ship to a customer, that we can build in one period but then include as a sale on a different period. That's when we place the car under lease with the customer, and then we hold it on our balance sheet and earn the rent in those cars and then sell it in the future quarter. And right now, we have about $80 million of that on our balance sheet under railcars, leased railcars for syndication. And depending on when the timing that those flush through the system, we could see more of those flush through the system in Q3 than in Q4.

Just to clarify though, those aren't the ones that you count in production though, is it? Is that cars...

Well, we call it a delivery. So when we -- in our releases, we -- delivery is when we have revenue recognition. So we produced the car in one period, and that's hung up on our balance sheet as lease railcars for syndication. When it's actually sold to a third party, that's when we count it as a delivery and recognize the revenue and margin.

So just switching a little bit, if I take that $320 million that you had in Manufacturing revenues divided by that 3,700 cars, you get mid-80s in terms of $1,000 revenue per car, and then the new -- subsequent to quarter end and even last quarter subsequent to quarter end or over $115,000. I know you've talked a lot about mix shift, but can you talk about profitability shift of the different types of cars? Does that vary much as you get into these various -- you talked about an expanding base type of cars. Should we see a profitably shift as well?

All right. Well, the first part of this is -- you're correct, that overall, the dollar change is just due to mix of equipment. But overall, we've made the comment that the pricing environment has improved. This is going to be partly dependent on length of production runs. But we would not see margins contracting. We would not anticipate seeing margins contracting going forward. That's another way to look at it, is that you'll see, hopefully, opportunities for expansion.

Okay. Is the shift of who's buying the car shifting at all? Is it shifting -- when you get more energy, are you shifting more from the railcar, the rail companies, to the shippers at all? Does that matter in your mix change as well?

That, again, is dependent on car types. Some car types are more prone to be either shipper or leasing company owned, and other car types less or so. And then some also depend -- with our lease syndication model that we have been looking to grow that aspect of the business. So there's not one flat answer that we can give you. We can tell you that our backlog does have a good mix of shippers, railroads and leasing companies that are purchasing equipment.

Okay. One last one if I can, just a numerical one. The working capital seems to have gotten awfully high the last 2 quarters. Is there something that keeps that high or allows you to bring that down to pay down debt? I just want understand kind of how you look at the balance sheet going forward.

Yes. You sound like the chair of our audit committee. We're looking at the working capital. We are disappointed that the working capital is not on where we have targeted and not according to our plan. But it's a product of heavy ramping up. Again, if you ramp up manufacturing 4x where you were a year ago, it is -- that fact alone will cause heavy buildings of inventories and other items on the balance sheet. We've had a couple of glitches in deliveries in the production schedules, which have caused inventory to pile up because we have to order to the planned schedules. And as the -- as we are now an on-time, we're not going to -- we have recovered on each of these, it should be working down. So we're very, very focused on it, but I think it's just, a, the momentum, building these new lines, opening new lines; and b, the delivery, some of the delivery issues that caused inventory to pile up; and then c, with interest rates as low as they are and with volatility in the marketplace for raw materials, especially steel, scrap surcharges, steel surcharges, it's -- and with the desire to have our materials cost covered, we sometimes acquire inventory to lock in favorable pricing. But we are going -- we do expect to see better numbers by year end. And that's the same promise I've given to the chair of our audit committee. We'll let him know, the chair, that you're and you're curious.

Our next question comes from Sal Vitale from Sterne Agee.

So you discussed the reasons behind the tick-down in Manufacturing gross margin sequentially. Just to make sure I completely understand that, you're saying there was no raw material pressure that contributed to that 90 basis point sequential decline, correct?

Correct.

And so it's basically just labor. While you mentioned delay issues, and was there a labor component to that as well?

The biggest component was a challenge we had with a specific car type down at our GIMSA facility. But it was for a service that we had not built before, and it turned out to be more challenging than we had anticipated. And we're working through that. But that's the #1 issue. We also, to a smaller extent, around the quarter end, had a labor issue and a labor renegotiation at our Concarril facility that we successfully extended that would've had modest impact. But the big thing was the first one.

Okay. And that labor issue has been resolved. And will that -- so will the labor component of the -- slight of the decline sequentially, will that be reversed in, I guess, in 3Q and 4Q?

Can you repeat the question?

Right. So the portion of the margin, of the sequential margin decline, that was ascribed to labor, well, should we expect to see that reverse in Q3 and Q4?

Yes.

We do expect -- Sal, this is Lorie. We expect Manufacturing margins to get back to what we saw in the first quarter of this fiscal year. So yes, for a variety of reasons, we would expect the margins in the Manufacturing segment to be improving in this next quarter.

Okay. That's helpful. And then just the second question I have is -- pertains to the new orders that you've received. And you said that there are some car types that have -- were previously not included in the backlog, including food-grade covered hoppers, grain cars, double-stack intermodal and AutoMax. Did I miss any there? Were there any others?

Let me correct your statement just slightly. We have had some of the...

Of course, double stack. I didn't...

And of course, double stack. And we've had food-grade covered hoppers. I think my point is that we're seeing more activity in each of those areas, and the AutoMax is a relatively new phenomena. And the automotive market is really hot right now, and the need for [indiscernible] is good. So we're seeing just a broadly based trend there. And then finally, we've taken several orders for gondola cars for steel and other general purposes use.

Okay. And then just in general, and there's new types of cars, should we expect the margin profile, the profitably profile, to be any different for those types?

On average -- Lorie, would like to address that? Probably...

Again, that's where it's -- potentially, we do have such a broad product mix and are building so many different car types in only one period. It's hard to give that kind of specific guidance. That's where we can to look to the overall Manufacturing segment and give guidance there, that we do expect it to improve from -- in the second quarter ending February 29 and get back to what we were seeing in the first quarter. And then again, as we tend to have longer production runs, we expect to continue to see margin expansion albeit at a slow pace.

Could I just go back -- let me interrupt for 1 second, and you can still keep the floor. I just want to go back and correct a possible misunderstanding that we might have been responsible for earlier. There was a question that concerned me about GIMSA losing money. Mark went through an accounting adjustment that has to do with our minority shareholder down there -- or our shareholder down there, the other shareholder. We did not lose money at GIMSA, but we don't disclose the net contribution of these individual plants. So we are very profitable at GIMSA. We think that our strategies are working very well. We weren't as profitable as we would have been had we not had a couple of production glitches having to do with one specific car type and some of the start-up of a third line down there for covered hoppers.

And then just to complete that thought because I know some people are looking at our income statement, and there is a line item on the income statement that says net earnings loss attributable to noncontrolling interest, and that number does show a loss of $400,000. And the reason for that is, again, on a standalone basis, GIMSA made money. Certain railcars that were produced during the period are hung up on the balance sheet and railcars for lease syndication. And while they're hung up on the balance sheet, the margin associated with those cars is also hung up on the balance sheet until we sell those cars. And so when you strip out that margin on a fairly sizable number of cars, that's what gets you to the -- to what is showing as a net loss. Even though on a standalone basis, GIMSA made money.

Our next question comes from Brad Delco from Stephens.

I wanted to make sure, I think you addressed this, I want to make sure I understand the math on the backlog from a unit perspective. So it's 13,300 after the first quarter. You delivered 3,700 units. You had orders for 3,600. To me, the math would suggest backlog was down 100 units, but it's down 800. What was the explanation for the delta there?

Mix, I think. You're going to...

It's going to be railcars that were built in a prior period that got delivered to a customer, reducing backlog. It is a little bit different this quarter than what we've seen the activity in prior quarters. But again, it's just due to the timing of when the backlog gets released or cars that get delivered to a customer.

Okay. So I shouldn't read that as there are 700 units that were canceled or anything like that, right?

That's correct. There were not any cancellations.

Okay. And then one of the -- I think, Bill, you might have suggested that, or Mark, the fourth quarter, you may have more units sold out of syndication. Typically, don't those carry a lot higher margin associated with them because there are some leasing contract associated with it?

And just to clarify, right now, although it's -- the timing of these can be difficult, we may see that there's more of those syndicated in the third quarter than the fourth quarter, and that was part of the reason, the explanation as to why the deliveries may be higher in Q3 than in Q4. In general, we are able to receive attractive margins on those types of railcar activities in part just for the reason that you mentioned. But the associated lease attached the railcar and selling, that does create value.

And then maybe one more for Mark. I think the prior call, you said SG&A, somewhere between $23 million and $24.5 million. Looks like you took that up today by a couple of million. What's the explanation for the delta there?

Part of it is -- I think there's really 3 parts: increases in incentive compensation from operating at higher levels of performance. We have also been ramping up headcount as we've been operating at higher levels. And I think overall, maybe as compared to earlier in the year, we've come to the conclusion that operating at these higher levels, that we've been beefing up, perhaps, at a little bit more rapid rate in our line operations with support. So those would be the 2 biggest areas. So either compensation from headcount increases or incentive compensation would be the 2 biggest areas. And that's all due to operating at higher levels of activity.

Our next question comes from J. B. Groh from D.A. Davidson.

Most of my questions have been answered, but I was just curious sort of on this pattern of order flow. It looks like at the beginning of the February quarter, you started off really strong, and then order slowed down a little bit. And then it looks like the first part of the May quarter started off really strong. And can you -- is that typical? Or is it just something that's going on that...

It's -- as Mark has said, it's a nonlinear or not homogeneous order flow in the industry. When I look at backlog and order rates, every quarter is not going to have a building backlog even in a time of cycle when economic activity is building. And that's just due to the way lines are set up and the way orders are placed, and to some degree, which orders we are targeting and what customers we're going after. So I think that obviously, we started out with a bang on the frac sand earlier last year, and we have had a good lift on the tank car side. And we continue to see covered hopper car demand across the board looking good, including some frac sand customers. So we haven't really -- it's just -- we've got a lot broader product mix than we've had before. We're building all car types now except coal cars. So I think that we will tend to become more homogeneous. It used to be that we were very heavily weighted on intermodal, and we were watching those in our intermodal orders very, very keenly. But now I think we're looking at a cross-section of the total rail products, and we -- I wouldn't read too much into a fiscal pattern of one quarter or another. But right now, we have -- seemingly are getting a lot of interest out there.

And then I'm sure you've seen that cars in storage statistic, and I know in the past you've said that's a relatively new number and maybe not super reliable. But can you comment there on what the kind of things are going on? It looks like it nudged up this month a little bit probably...

Well, I think it's coal, coal and coal. Actually, there's an awful lot of interesting stuff going on underneath the surface of that statistic. We were in the course not long ago. And there's a lot of, believe it or not, a lot of forced products movements that are kind of coming back. And a lot of cars of different kinds are coming out of storage. So it's one -- a railcar is not a railcar is not a railcar. It's 20 different types at least that make up that data. A lot of those are forced products cars. A lot of them are obsolete cars, too. One thing I might comment on that's related to it is velocity. And railroads have made very big strides in improving velocity, and some of that happens when you look at the year-over-year peak-to-trough pattern of what they're trying to put on their railroads. It's a very complicated equation to run these trains rapidly as traffic rebuilds. But loadings as high as they are still not as high as they would like them to be. And in general, when demand comes up, velocity tends to be drug down. So velocity is a very important item in the railcar equation, and it can actually add to the cyclical nature of the business if what I see probably in the near term is in the next year, as railroads struggle with their operating issues to juggle traffic. Although they've doubled line a lot of the things and really a lot of their track are achieving really good productivity, it's going to be very difficult to break out of the pattern of a drag on velocity as traffic builds. So I think the velocity issue is always one that one has to look at when you look at railcars in storage. You need more railcars. If velocity falls, you need more railcars to move the same amount of freight.

Our next question comes from Art Hatfield from Raymond James.

I'll try to be quick. You've had a lot of questions thrown at you today. Just first, Mark, did you all book any meaningful, or any at all, revenue related to marine in the quarter?

No. There was very small amounts.

Okay. And then secondly and finally, just going back to this capacity, you talked about this year. You gave us guidance of 15,000 cars delivered in 2012. As we kind of think out going forward, your ability to grow the business in out years, assuming demand is there and as you make some of these changes to your production lines, kind of what -- and I know this is dependent on mix, but theoretically, can we think about the potential for what you could do in a given year with regards to deliveries? Is it something where you can grow maybe 1,000 more next year? Or could you conceivably get up to the 20,000 number if demand is there?

Well, to be honest with you, I've lost track of where we might be. Things have been really hectic. We are building a lot of capacity in Mexico. As we get better labor hours in Mexico, as we trained workforce that we're bringing on, we have close to -- not quite at it yet but we have close to 5,000 workers in Mexico now. And these are low-cost facilities. But as we ramp up, not only in inventory, but it in margins and efficiencies and safety and all these things we manage, we expect improvements across the board. And as we add these lines, we expect higher throughput. So I think 20,000 cars in a good year, when everything is clicking in Europe and in North America, is a good theoretic capacity for Greenbrier. But again, I got to remind you that a railcar is not a railcar flooding [ph]. We look at dollars per day in margin, not margin percentage and not the number of railcars. We look at our backlog in terms of dollar-denominated backlog. So it's a lot of getting an AutoMax car for something a little less than $200,000, $180,000 or so. And that backlog is a good thing to have because it counts as a car.

Our next question comes from Steven Barger from KeyBanc Capital Markets.

You just said what the price of the auto rack was plus or minus. And the orders post-quarter were significantly higher than what you've seen. I think it was $86,500 revenue per car in 2Q. Were there tank cars in there as well that helped get that average car price up? Or was that really just the influence of the auto racks against whatever else you took that drove that average price that high?

It was tanks, and to a lesser degree, AutoMax tanks and AutoMax and then some other higher-priced cars, I think, box cars. Yes, boxes are quite expensive these days as well.

Great. From a mix standpoint, is the back half going to look more like 2Q in terms of dollars per car as we think about modeling? Or how long does it take to start working through some of these higher-priced cars that you're booking? And when does that hit the P&L?

I think we're pausing before answering that. We know in Q4, with our auto carrying car and as we ramp up our tank car production rates, those 2 car types do have a higher unit value. What I think we want to be -- take the pause on is that also, we're increasing production rates in other car types, too. And so when you blend all of it, you actually end up with a higher dollar value per unit -- or significantly higher dollar value per unit in Q3 and Q4. I think that will be the case in Q4, but I don't want to over overemphasize that. I understand. Okay. My last question, I saw a presentation from a Class I railroad that's adding several new good-sized intermodal facilities over the next year or so. Do you expect that'll drive new intermodal car orders? And typically how long does it take to see orders come in when a Class I builds a new facility?

I think the building of the facility doesn't cause new orders. The building of the facility is a very strong statement however their fate in the intermodal phenomenon that's going on. And again, just for the building blocks of that, you have a domestic containerization and a transload business in North America that's been driving most of the past 2 years of intermodal demand. You have a very important remaining international business segment that has not been as robust but which we expect on a car demand side to kick in again. And if you have both of those working at the same time, then you have what would be an ideal market. We don't have, as far as a car builder is concerned, ideal double stack market to be at. But I think at 2013, we could see both of those segments looking pretty good. I think the major thing you have to look at when you're looking at the railroads and intermodal is the Eastern railroads have a strategy that's going to, I think, be very successful. And the Western railroads have their business which is also going to be very successful, and we'll tend to have a bit more international business in it. But the Eastern railroads are going to really move the dial on the domestic side, and I think that we'll see demand for intermodal cars coming back in 2013 for international. And based on all of this -- and that's just -- that just shows the faith that they got and looking out what they believe is going on in those markets.

We have no further questions at this time.

Okay. Thank you very much for joining our call today. We appreciate your interest. And as always, if you have a follow-up, we look forward to responding to you. Have a good day.

This concludes today's conference call. You may disconnect at this time. Once again, this concludes today's conference call. You may disconnect at this time.