The Greenbrier Companies, Inc. (GBX) Q2 2013 Earnings Report, Transcript and Summary

Hello, and welcome to The Greenbrier Companies Second Quarter of Fiscal Year 2013 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 over to Ms. Lorie Leeson, Vice President and Treasurer. Ms. Leeson, you may begin.

Thank you, Amy. Good morning, everyone, and welcome to Greenbrier's Fiscal 2013 Second Quarter Conference Call. I'm Lorie Leeson, Senior Vice President and Treasurer of Greenbrier, and I'm joined by our CEO, Bill Furman, and CFO, Mark Rittenbaum. Mark will discuss our results for the fiscal quarter, as well as provide comments on our outlook, and Bill will provide comment on our strategy. After that, we'll open the call up for questions. Please note that we've included our press release and a slide deck on the IR section of our website, which includes information about our strategy and supplemental financial information. Consistent with the last several earnings calls, today we'll be discussing quarterly results in relation to their sequential trend, comparisons to prior periods and related discussions can be found in our SEC filings. Now, before I turn it over to Mark, I want to remind you that today's conference call includes forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and includes statements as to estimates, expectations, intentions and predictions of future financial performance. Please look at our Form 10-K and other SEC filings for a description of certain of the business issues and risks. A change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Now, I'll turn it over to Mark.

Thank you, Lorie, I'd like to take a few minutes to summarize our second quarter financial performance and future outlook at a high level, then I'll turn it over to Bill. And after Bill's remarks, I'll make some concluding comments, and then we'll open it up for questions. Our second quarter revenue was $423.2 million and our EBITDA was $36.2 million, yielding net earnings for the quarter of $13.8 million or $0.45 per diluted share. Our tax rate for the quarter was $0.28 -- or 28%. We expect our rate for the year to run around 32%. And lower tax rate for the quarter, that is the difference between our 28% tax rate and the 32% rate going forward, yielded a benefit of about $0.03 a share. Our net debt was reduced by $55 million during the quarter, as we had strong cash flow. We delivered 2,700 cars in Q2 and 5,600 year-to-date. As we have stated before, our business ramps up in the second half and we do expect deliveries to be more heavily weighted towards the second half and deliveries for the full year to be about 13,000 units. To say the least, our order activity has been robust. It's also been diversified and not dependent on any one car type. Since the beginning of the year, we've received orders for 9,600 cars in North America and Europe valued over $1 billion, and 4,000 of those being tank cars, 2,200 automotive and the balance being a diversified range of cars. Our orders during the quarter were 4,500 units and our deliveries were 2,700 units. So our book-to-bill was at a ratio of 1.67:1. In addition, we received orders subsequent to quarter end for another 3,700 cars. This brought our backlog as of the quarter end to 11,700 cars, with an estimated value of $1.3 billion or about $111,000 per railcar. So during the quarter, our backlog grew by 2,000 units or $190 million. As Bill and I have said many times, our goals have been to enhance our operating margins and our overall margin profile. We continue to receive orders for car types that have a richer mix of value and expected margin. Turning now briefly to our various segments. We're very pleased with the performance in Manufacturing. We gained additional traction from a richer product mix and operating efficiencies. Our margin in Manufacturing grew to 10.7% from $294 million of revenue, up sequentially from Q1 margin of 9.4%. In our Leasing segment, our fleet utilization grew to 97.5%, up from 95.2%. Revenue and margins were down somewhat due to lower interim rents and lower earnings from certain railcars. You'll also recall in the prior quarter, we had a reversal of a certain maintenance accruals, or rather reduction in certain maintenance accruals that had our margins be at a higher level last quarter. We expect our leasing margins to improve going forward, though perhaps not back to the levels that we saw in Q1. The secondary market continues to be very robust, as reflected on our gains on sale from the lease fleet for the quarter. Our Wheels Refurbishment & Parts segment did not meet our expectations for the quarter, as margins declined on 7.9% of revenues, due in part to lower scrap pricing and wheel volumes, but also due to some operating inefficiencies. Looking forward here, given our guidance for the year is unchanged, while our visibility next year -- into next year increases, we believe that our 2013 revenue, EBITDA and EPS will be similar to 2012. Obviously, meaning that the second half of the year, we expect to be stronger than first half. Our guidance for SG&A, minority interest, CapEx and depreciation remains substantially unchanged from our last earnings. SG&A will be more heavily weighted towards the second half. Our noncontrolling interest will be up in the second half. We expect our net CapEx to be about $96 million and depreciation to be about $45 million. And again, our tax rate for the second half of the year to be around 32%. As noted in our press release, in response to feedback from investors and in order to paint a better picture going forward of the business, we'll begin providing operating margins and income by segment starting in the first quarter of 2014. We believe these -- this information will provide a -- important incremental information for the company. I'll now turn it over to Bill. And then again, I'll make some remarks, and then we'll open it up for questions.

Thank you, Mark. Well, in our second quarter, we had a busy quarter. We spent considerable time with shareholders, as well as reflecting and reviewing our 5-year plan and our strategic model. We've also focused on short-term stock pricing, and I'm pleased that our order book has improved and that we've entered very successfully 2 high-growth areas, tanks and automotive. We expect our strategy to improve Greenbrier's return on invested capital and enhance shareholder value. We promised that we would lay out more transparency, focusing on capital efficiency and focusing on margins. And today, we'll outline those actions, along with timeline-specific goals and the path to get there. Our integrated business model is solid, and we believe we'll deliver a superior value proposition over time. However, we are all concerned about shareholder value also in the short run, and that requires execution and focus on areas of the business that require a careful review and action. Our model contains life cycle revenues and allows us to obtain life cycle revenues from a mix of manufacturing profits, leasing throughput, from origination and syndication, leasing profits from our own portfolio of railcars, asset management, related downstream revenues and profit from after-delivery service over the life of the railcar in Wheel Services, Refurbishment & Parts. So we believe this model differentiates us from our peers, but we can extract more value out of the model itself, as well as in each of our operating units by improving our operational efficiencies. Over the past 18 months, and particularly in the last year, we've been ramping up our manufacturing activities considerably. It is no small thing to take advantage of the improving outlook for tank cars and for automotive. But both in throughput and product diversification and by driving more business through our leasing model, these -- this growth has brought some growing pains, in some cases, loss of productivity during expansions, startup inefficiencies, learning curves with an impact on working capital. In 2013, we decided to consolidate our position and drive capital efficiency and efficiency in execution. That has been reflected in our comments to the Street. Thus far, we're very pleased that the first half, we're ahead of our expectations and we are looking forward to a solid second half of the year as we focus on these items. But it's not enough for us to know these things. We also have to communicate them with our shareholders. We've heard that loud and clear. So now specifically, we'll address our plans to improve gross margins and increase the capital efficiency. We've set goals for where we intend to be by the end of our fiscal fourth quarter of 2014. Execution in these goals assumes economic conditions continue to be in line with consensus forecasts for our industry and for the economy in general. First, let's take margin improvement. Our fiscal first-half year-to-date aggregate gross margin is 11.5%. By the fourth quarter of 2014, we have set a target to increase gross margins by a minimum of 200 basis points, approximately $40 million to 13.5% of revenue. We intend to achieve this target through a variety of very specific initiatives. On the cost side, by the fourth quarter of 2014, we should be fully up the long learning curve of growing production rates, introduction of new products and the opening up of additional product lines at our 2 facilities in Mexico. In addition, we have launched a number of exciting cost initiatives to support our nimble manufacturing operations. These include, with the addition of Martin Graham, more emphasis on our raw material costs, reduction through vertical -- of costs through vertical integration, our procurement process streamlining, global sourcing and also, continued manufacturing cost reduction through lean manufacturing, value engineering, transfer of best practices among our facilities and improved labor productivity, jigs and fixturing through selective capital expenditures. We will also execute on increasing the efficiencies in our rail services facilities, and in particular, our North Platte wheel operations. On the revenue side, our backlog contains a much richer mix of higher-margin business. And of course, we expect to be increasing our participation in the higher-margin tank car market to an annual production rate and capability of $3,800 -- or 3,800 cars per year by the closing months of calendar 2013. We also expect to benefit by a return to more normalized levels in our marine business. And of course, stronger intermodal market, forest products market and, over time, plastic pellet markets, and we've received our first order for plastic pellet cars. Stripping out our noncore and underperforming assets, will, in and of itself, provide uplift to margins and reduce capital efficiency employed by -- in capital -- and we'll increase capital efficiency and reduce capital employed in the company. This ties into our second major goal, capital efficiency improvements. By no later than the end of our fiscal 2014, and hopefully, sooner, we intend to liberate at least $100 million of capital invested in the business by reducing working capital, selling noncore or underperforming parts of our business and refining our leasing model to make it more transparent to take more assets and related debt that is not required off the balance sheet, while making tax shelter from Leasing more efficient than it is today. We hope to meet this target earlier, but believe it is a very achievable target by the end of the 2014 fiscal year. Moreover, we will review asset performance at each location on a more frequent and continuing basis with the goal of identifying and reducing noncore or underperforming capital assets. We will redeploy capital -- liberated capital for new investment opportunities in order to enhance the performance of Greenbrier's integrated business model, pay down debt or buy back shares. Very simply, we're going to look at ROIC by location and whether each location fits and is essential and core to our strategic model and is contributing a significant value to that model. These efforts are designed to increase Greenbrier's return on invested capital and enhance value to shareholders, as well as to improve our margins. We're going through the pieces of our businesses which are not core, particularly in the Rail Services business, which frankly, has been producing disappointing results and especially so during the first 6 months of this year. We're performing a detailed review of our now 38-wheel service refurbishments and parts location to selectively sort out, fix, sell or close marginal facilities, which are not meeting adequate rates of return, or otherwise are deemed nonessential to our overall strategy. The first step was the sale of our wheel bearings business announced in March 2013, which we expect to liberate approximately $10 million of capital and to redeploy that capital in higher returns. We're in the midst of a review of all of our locations to identify those not performing to our standards and our goal is to optimize and consolidate our shop network. In specific terms, we expect to sell, close or materially change the operating profile of up to 8 additional shops in the balance of calendar 2013 in that network. These moves, again, should not only free up capital for investment in higher returns, but eliminating marginal units by itself, will or improving the performance of those units, will, by itself, increase average margin in GRS. Secondly, we've been saying or lastly, we've been saying for some time that we're focused on working capital improvements as well as capital efficiency. We're determined to take capital out of the business, improve our inventory turns across both our manufacturing and Rail Services networks. I guess as an after note, we are devoting special attention to our Leasing business. Deal origination has been and always will be core to what we do in our integrated model. However, we recognize that our owned lease portfolio and operating lessor business causes some confusion for many investors and makes it more difficult to evaluate total company performance. So we are looking for simplicity and we're looking at the optimal ownership and balance each structure for our owned portfolio. Not only may we liberate value in so doing, but we can enhance the leasing model that is essential to our integrated business itself. We expect to fund more of this business in a tax efficient, off-balance sheet manner and move a portion of existing assets off the balance sheet for -- to these goals. We are also going to prune the fleet for underperforming assets and assets that are no longer tax efficient. We've heard a lot from investors about our G&A expense. There may be some misperceptions here. The Leasing and related management services business by its nature brings more administrative costs. We believe our G&A expense, as a percentage of revenues, is in line with our peers, such as Trinity or GATX for example, and in the question-and-answer session, Mark can speak to that. We recognize that our present Manufacturing margins lag some of our peers, but expect that to change as a result of these initiatives and as a result of mix -- more favorable mix, particularly in tanks and automotive pricing and efficiency. With all of the changes outlined today, we are not setting a G&A reduction target at this time. But we believe there will be significant operating leverage as our business grows that will bring G&A, as a percentage of revenue, down and slow the growth of G&A. But moreover, we also plan to take direct action to reduce G&A costs. Again, we do not have today targets we wish to announce with the other things we've talked about, but you'll be hearing more about this later in the year. Lastly, we've been hearing investors ask if we can provide more transparency, more financial information with which to evaluate our business. Last year, we made significant changes as a result of conversations with investors in our governance, which improved our ISS rating. We will continue to provide much more information and transparency to the market, as we have been doing recently, sighting the data that was attached to our press release on orders. Being able to segregate this out, giving you more information to evaluate the company, should provide better transparency and a better understanding and allow those analysts who were following us, and investors, to better model our business. In conclusion, we believe these actions will comprise the first step of a multi-phase campaign to improve margins and capital efficiency. We're focused on Greenbrier's return on invested capital, and we are very focused on shareholder value, not only in the long run, but also in the short run. It's too early to assess the effect of these actions on short-term shareholder value because we have to execute them, and we understand that. One can look, though, at the incremental value, an additional $40 million of EBITDA and the value of taking $100 million of capital efficiently out of our business for redeployment in higher return investments, paying down debt or return to shareholders, improving total shareholder value. Mark, I'll turn it back to you. Thank you.

Thank you, Bill. I -- just as a reminder, as Bill noted, our baseline targets set today for margin and capital efficiency enhancement have been set based on our view of the current industry and economic trends. Assuming positive trends do continue, there are multiple variables that could either allow us to exceed our baseline targets or accelerate the timing of when we meet our goals. That is, our targets are minimum baseline and there could be upside. Some of the bigger variables are, of course, related to our Manufacturing segment, the biggest piece of the model. First, how quickly we can get up the learning curve and efficiency curve, particularly in tank and automotive products. Secondly, the mix of business for what isn't currently from backlog for 2014. Thirdly, the execution and traction on the various initiatives that Bill just laid out. Another major piece is just how quickly we were able to get our Wheel Services Repair & Parts -- or Refurbishment & Parts segment back to performing where it needs to be either by fixing, selling or closing down operations. What I'd referred to as some of the wildcards would be the marine and European pieces of our Manufacturing segment. Today, we're not prepared nor will we quantify the upper end of the range we might achieve or how much fast we might get there. But suffice to say, again, we have set these as our minimum targets. Also please remember, as Bill has noted, this is a journey. This is the first of a multi-phase campaign to improve margins and capital efficiency. This is not as good as it gets, and we, again, believe that this will enhance Greenbrier's ROIC and shareholder value. We intend to periodically update investors on the progress we've made on our initiatives. We'd also refer you to information we've posted on our website outlining what Bill said in his prepared remarks, not only -- and I said in my remarks, not only regarding commentary for the quarter, but the goals that we have outlined today and the actions we will take to achieve those goals. With that, we'll now open it up to questions, please, operator?

[Operator Instructions] Our first question is from Allison Poliniak with Wells Fargo.

Going back to, I guess, the selling of underperforming asset. I think you just mentioned 8 shops. Is there any way to quantify what percentage of revenue we're talking about here? I imagine it's fairly small, no?

No, we wouldn't want to quantify and we're not talking about selling them. We have some shops that are capable of doing better. So we're going to be aggressive about making operating and management changes where necessary and have better dialogues with our customers as required to ensure that ROIC targets and core value is being addressed. So out of that 8, if we were to close all of them or sell all of them, it could release a different level of value than if we are able to get them to performing in a very short -- with a very short time line. And I'll just give you a brief example. We've constructed a very sizable facility in North Platte, in Nebraska, to serve the Union Pacific wheel shop. We redeployed capital out of the proceeds of insurance from a fire there, we have about $20 million tied up in that. And we have yet to hit our stride in terms of the operating efficiencies. So we believe that those are achievable, and we can return capital on that. But if we can't, then we are going to have to have a dialogue with our customers and look very closely at the capital we have in that facility. So this is a journey. As Mark says, there are significant -- some of the shops in here have significant capital in them, and we're focused on where the capital is in the ROIC in each of those. Some of them are responding to the work that the GRS management team has put into it, and others need to respond or we intend to close them or sell them.

Great. And then I just -- on the gross margin side for that business, I mean, I know we've reached high teens in the prior cycle, but I believe a lot of that was to do with scrap prices. I mean, what theoretically -- I know we're high-single digit here. I mean, low double-digit, mid-teens, I mean, what do you think is achievable in that segment?

Obviously, some of these things have been -- there's been trend lines in the industry, the big drivers have been in our Wheel Service business volumes because of the effect that coal has on wheel velocity or car velocity and the replacement of wheels. That's affected, particularly the UP wheel volumes. And that's really not something that our management team can easily control. However, we will have dialogues with our large customers to talk about that in context of the investments we've made on their behalf. Another big factor, as you point out, is scrap. That's changed. And again, there's very little that we can do about that. We are getting some reclaim on recycling cars for others -- other companies, but scrap has been not controllable. I would say that, at least when you look at the miss -- well, if you look at the margins in GRS as they've declined though, upwards of a couple of million dollars or within the range of -- in the last 6 months are in the range of something we should be able to manage or address. And as far as capital is concerned, if we're not getting targeted ROICs and we need to shed those operations or -- and just have to shed them or fix them.

Allison, just quick -- closing up on that. If we might look at further out, the upper teen margins that you referred to, as we have said in the past, those are not likely to repeat themselves just for the reasons that you mentioned. There was a significant uplift from scrap there. Yet, certainly get back -- getting back into double-digit margins and -- is a territory that is achievable in the longer -- after -- upon execution and further out here. So we believe, in the low double-digits, we should be able to get there.

Our next question is with Justin Long with Stephens.

Any way of segmenting the $100 million goal on capital efficiencies in terms of what you expect to come from reducing some of these noncore assets versus the other levers you might have?

We expect to have material contributions to that goal from each of the 3 segments. But it's something of a moving target. And particularly, just with reference to the discussion we just -- we had with GRS, it really depends on how much we can mine and how quickly we can mine from each of those sources. Mark, would you care to elaborate on this?

No, I think that's it, Bill. Again, just the 3 pieces being working capital reductions, either closing or selling noncore or underperforming assets. And the third would be in our leasing operations, taking assets off the balance sheet and related debt off of the balance sheet and doing -- and performing our Leasing business in a more tax-efficient manner.

We are focused very much on inventory turnovers, as we have ramped and continued to grow up the curve when we're opening 3 automotive lines in Mexico, for example, and pushing hard in that market. It comes with an investment in working capital. So just reaching a plateau of that activity will have a natural effect. So a significant amount of work is going into inventory, management and working capital management. We also have now, for 2 years, a robust pay-for-performance platform in the company. That's working much better. I think it's motivating people to focus on capital and respect for capital, not only capital, but the margins and the EBITDA returns that come from capital as we've employed it. And we've done a fair amount of training with our senior managers and middle managers on what the cost of capital is to our shareholder value and what the value of EBITDA is on the trade-off there. So we're working very, very keenly in each of the 3 segments with that goal in mind.

Got it. That makes sense. And is there any update on the lease fleet? I know you've talked about that being significantly underlevered in the past and some opportunities in terms of financing there. Any update you could provide on that process?

Well, I can say that I have -- I really gained a lot from talking to some significant shareholders in our stock -- the people who've been in the company for quite a while, some 1 year or 2, some new investors. And everyone has opinions about the Leasing business. The Leasing business is a vital part of Greenbrier, but it is -- it takes away from the virtue of simplicity. So there is value locked up in that platform. And what we need to do is extract that value without damaging the benefits in EBITDA and shareholder value that comes from the platform. And that should be easily obtainable. And I think our goals in that regard are very modest. Some of our shareholders who are very familiar with the leasing business have made some excellent suggestions, and we are listening to them, these suggestions. So again, it's a work in process. And we're setting goals, which we think are attainable.

Got you. And you made it clear back in December that you believe your stock is grossly undervalued at $22 per share. You're freeing up a sizable amount of capital according to this plan that you just outlined. What's preventing you from buying back stock today, given the stock's currently trading below that level? And it seems as though we're in the early innings of the cycle for a lot of these car types that you're building.

Well, we made reference to liberating capital and the 3 possible uses for it, including returning capital to shareholders. But I will take the first part of this question. One of the reasons our value has been -- our company has been undervalued, is that we have the benefit internally of looking at our 5-year plan. We have the benefit of looking and not -- we have not been communicating as much to the Street where we are going. We have been inwardly focused more than we should be. So we're now basically going to have more transparency. Our plan supports a higher shareholder value and -- not only in the long run, but in the short run. So as far as returning, that's -- returning cash to shareholders, that's obviously a tool we can use. And Mark, what would you like to say about that?

I just -- say at this point, a couple of things. One, that we haven't made the determination. Again, there's 3 tools that we can use. We can either redeploy this capital into the business, pay down debt or return it to shareholders. At this point, we -- those are moving levers too of looking at additional opportunities for redeployment into the business, and we still need to execute on these areas that will give us the cash to return. So we're not ready to -- until we've deemed that we've made the decision that we're going to buy back stock, and we haven't announced a stock buyback plan because we haven't determined which of those 3 is where we will redeploy that capital yet.

Okay, fair enough. That makes sense. I have one more and then I'll pass it on. Any clarity you can provide in terms of the timing of your deliveries in the backlog today and essentially, how much visibility you have in terms of the 2013 guidance that you've laid out for 13,000 deliveries?

Right. So the orders and the backlog we announced, it does depend on a car type as to whether delivery is in the current year, fiscal '14, or even stretching into our fiscal 2015. And we have been on record before and be on record again with these current orders that our tank our backlog takes us well into our fiscal 2015. So we gave guidance for 13,000 units for this quarter. We do have some open -- we still do have some open slots to meet that 13,000 unit goal. And we, again, as we look down the pipeline, we believe that we will be able to fill those. So there's still some execution on that front, but a lot -- a substantially large portion of that 13,000 are in the backlog or have already been delivered.

Our next question is from J. B. Groh with D.A. Davidson. J. B. Groh - D.A. Davidson & Co., Research Division: I had a question on kind of the revenue outlook and the production outlook. Given what you've done in the first half, it kind of looks like the average revenue per unit has to come down in the second half. Is that mix, pricing? What -- are the car types differ in the second half? How do we square that up?

J. B., can you repeat that? I'm not sure I followed your question. J. B. Groh - D.A. Davidson & Co., Research Division: Well, in the first half, you delivered 2,900 units in Q1, 2,700 in Q2, correct?

Right. J. B. Groh - D.A. Davidson & Co., Research Division: So you have to -- the 3,700 units in the second half of the year, in Q3 and Q4. And your revenues is going to be flat. So you -- bake that all into your model, the average revenue per unit delivered has to go down from where it was in Q1 and Q2. Is the car type -- scheduled car type delivery in the second half of the year different than it is in the first half of the year? I mean, is it more auto max and tank, and then more intermodal in the back half? Or how do we -- what's going on there?

A good question. It's a bit of a moving target, as well as there was some marine revenue in the first part of the year. So I -- of course, we expect to deliver more tank cars in the second half of the year than the first half, as we ramp up production, and that is a higher unit value car. But the -- as you referenced, the intermodal cars on a per unit basis order are a much lower value. So it really is a reflection of the mix and perhaps, our guidance there just being -- until that mix is more fully baked just using last year's or using a baseline tied to last year. J. B. Groh - D.A. Davidson & Co., Research Division: Good. Okay. And so in Q2, what was the marine contribution?

It was less than $10 million. J. B. Groh - D.A. Davidson & Co., Research Division: Under $10 million, okay. And then so you have -- it looks like you have roughly one barge in backlog that will be delivered in the second half?

We actually have 2 barges of backlog that will be delivered in the second half of the year. J. B. Groh - D.A. Davidson & Co., Research Division: Okay. So they're small, okay. Okay. Okay. I think that's all I've got.

Our next question is from Mike Baudendistel with Stifel, Nicolaus. Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division: I wanted to ask the impact on mix and what the impact that has on your margin guidance of the 200 basis points. It seems like the auto cars and the tank cars, as well as possibly the barges, is that part of the 200-basis-point guidance and how much is it?

It is, again, because we're looking out 18 months, you can just take our backlog in the orders subsequent to quarter end and that would be part of the moving pieces, that not all of the -- not all of the backlog, or we don't have firm backlog or orders to support all the slots that would be baked into there. So we have to make certain assumptions about the mix of business at least in setting a minimum baseline. But that's not fully baked. Certainly, we're assuming, and we have the backlog to support a very robust tank car market, and we -- and as Bill has referred to before, very robust automotive market. But the exact mix of business is really just yet to be seen.

Pricing on those 2 products in our backlog is very good. And the value of those in our backlog is also -- the individual car value is high. And it is exactly what Mark just said, that it's the slots with lower value numbers that we -- you still have to fill in that are confusing some of the questioners here. And that's really the answer to it. Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division: Okay. That makes sense. And then the $60 million of the letters of intent for the barges, when is that likely to come online as far as activity?

You're talking about the coal barges? Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division: Yes.

We're spending a fair amount of time on that. That is boiling me down to a couple of permits that are required by the core of engineers and the Oregon DEQ. As everybody knows, coal is a very emotional subject. And we believe that, that project still has legs on it. There have -- activists have managed to slow it down because they have other areas in Oregon and in Washington, in Timber, and companies on the River. However, I think that there is really not a good foundation for those permits to be denied. So we believe that this project is sound. We, however, to show conservatism, have not put it in our backlog. But we are planning on it, and we believe we have other barge orders we can put in the space before the approvals come. Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division: Good. And you mentioned that in your slides, you can do some vertical integration efforts in the manufacturing side that maybe improve the efficiencies. Is that producing certain components that currently are being outsourced? Or what is that?

It's producing -- it's a part of global sourcing and it's also producing some components that are being outsourced, yes. Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then just one last one for me. You talked about in your press release that maybe there's some activities that you can do in Mexico that you're currently doing in the U.S. So what would those be?

I think you may be referring that our continued to shifting production and expanding production in our Mexican facilities, which has been an ongoing process over the last several years. And again, we continue to grow our production and our capacity down in Mexico as related to new railcar manufacturing.

In many ways, Mexico is becoming the new China. And as we watch the cost differential of outsourcing major components to China, there's in-sourcing that can be done in Mexico. For example, we have an Amsted facility adjacent to our Concarril facility. We also have the ability to fabricate components that have otherwise been transported from China. So it's -- a lot of activity going on in Mexico, especially the movement of automotive plants down there, which favors our new car design. So...

Our next question is from Art Hatfield with Raymond James. Derek S. Rabe - Morgan Keegan & Company, Inc., Research Division: This is Derek Rabe on for Art. Hey, I wanted to look a little bit further at SG&A. It came in lower than we had expected in the quarter. Was there anything unusual in the quarter? And then also, you had mentioned that SG&A was likely to be weighted toward the back half of this year. So should we assume kind of a step back to the first quarter run rate?

Yes, I think that would be a fair comment for the second half of the year. Derek S. Rabe - Morgan Keegan & Company, Inc., Research Division: Okay. And anything in the quarter that was unusual?

No, the things that would weight it a little bit more to the second half would be, again, one of the things that perhaps is confusing to, or would be understandably confusing to investors, is we have a revenue-based fee that we pay our joint venture partner in Mexico that is included in G&A expense. So we'd be operating at higher levels the production in the second half and also, a compensation-related expense, both as we brought on employees and incentive compensation that would be more tied to earnings, would be more second-half weighted. But nothing particularly unusual on the cost side this quarter. Derek S. Rabe - Morgan Keegan & Company, Inc., Research Division: Okay, great. Great color. Are you ahead of schedule on the plastic pellet car? I know you got your initial order in hand currently. And then also, remind me, maybe remind us about your strategy with that car going forward, how your marketing that car versus other cars, plastic pellet cars currently in the market?

We are on schedule with the car. We've installed lining facilities in our Concarril location. We have lining capabilities in both our -- both of our Mexican plants. And we're training an elite group of folks to work on the plastic pellet car and interior preparation before it goes into lining and into paint. It's a car that needs to be marketed to a base of customers that are constructing large plastics and other downstream derivative energy-boom products. So there's going to be a good market for that in 2014 and '15, and we are, as we have with tanks and automotive, entering that market and we will be competing with existing parties in that market. So we have to market the car aggressively. We'll deploy -- we'll use leasing and our other range of value enhancements to assist us in that. But it's a -- essentially, it's an end customer shipper product.

Our next question is from Peter Nesvold with Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I was hoping you could help put the margin target in a little different context. So it does look like the cycle is still pretty strong. The production mix in manufacturing is moving towards higher-margin tanks. You've got the barge business, which looks like it's on a great growth trajectory. So if I were to add all those things up, I guess, one thing that it's unclear to me, why wouldn't you be at a 13%-plus gross margin by the end of fiscal '14 even without any restructuring initiatives?

You're saying why wouldn't we be all at, at least a 13.5%... H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Well, at least 13%. I mean, if I just think about the mix is improving on -- towards more tanks, which are higher margin. And the barge business is a great business because you make them in Gunderson and you get to leverage the overhead really significantly. So, I guess, what I'm just trying to understand better is, it almost seemed like I could get to 13% gross margins without any kind of restructuring efforts. And so I was trying to...

We might be able to, but we talked about the coal project. Not only do we have about $60 million of potential backlog there subject to the permits, which we're working very aggressively on. If you wanted to call up the last couple of days, the Oregonians Editorials, for example, we're working closely with the staff, the governors of both states. And we're very close to that. And in the event that Morro project goes ahead, they're going to need an equal value of barges. So that deal is important. And it's really execution and getting the run rate in that to meet its potential. There's a lot more activity out in that marine business with existing customers. And there's even a chance that we could be forced to choose between the coal project and other opportunities, which are considerable. So it's just getting that to happen and having the transparency of orders booked as opposed to 2 or 3 barges in our current backlog that we can say are firm backlog. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Okay. And as my follow-up question then, is there a dollar figure that you could put on the value of the restructuring actions that are -- or management actions as opposed to -- because, I guess, what I'm just trying to just think through is how can I model the baseline business and then potentially layer on some of the restructuring actions?

That's a great question. You're going to whether we're being too cautious on our targets. I think we may be... H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Well, I'm not trying to backdoor that question. But I guess I'm just trying to understand essentially how much is inside your control on this number versus how much is really just subject to where the cycle goes, some of these other things that are happening in the background as you just described in terms of the baseline business?

So how much is the rising tide of the mix, automotive and tanks, recent pricing and it's really, the answer to the question is mix. And a couple of moving pieces of open slots, I suppose. Mark, do you want to try to...

Yes. I mean, we -- although we've gone through this in a very detailed manner, in setting up our minimum targets we really haven't thought of it that way. Peter, you're certainly correct to say that some of this would be due to a rising tide of what we've assumed and what we have in backlog with the tank cars and what we believe the automotive market to be both, which would be uplifts. But as Bill referred to, there are other moving pieces here, including the mix of the backlog. So we haven't broken it out that way. We've more thought of it as what are some things that could cause these minimum baselines to be exceeded in -- either in terms of how quickly we get there, which is one other piece that's tied into your question, or just how much upside there is to it, but we haven't broken out our guidance as this minimum baseline or our target. Our goal is a minimum baseline between the 2.

So maybe to put in perspective, upwards of 50% now of our -- of order backlog is in tanks. But again, some of that is in 2014 and in 2015. So a very robust market, as everyone has commented. And our pricing and our margins are in the high teens on all of the new transactions we're doing at existing cost structure. However, on the purchasing and on the reengineering, value engineering, vertical integration, which many of our competitors have, we are still coming up the curve because we are relatively new entrant at any volume in that market. So in 2 years, we expect to be fully competitive in our cost structure with our peers. That will require vertical integration and a couple of thousand dollars per car here. $1,500 per car there. It's very significant and it adds up. I really think you're coming to a point as with momentum and with the emphasis on these kinds of efficiency, do we have the potential to do more? But I think the answer is we do have the potential to do more, but we are also facing reality of running a business that where we still have some open slots in 2013, and we want to be realistic about the targets we set.

Peter, I'll just take one more crack at this because what -- if I heard you correctly, are you saying that with just might the rising tide of mix get us to 13% by the fourth quarter as compared to the 13.5% minimum target. And I think it's very suffice to say that our cost initiatives are meaningful. They're worth a heck of a lot more than 0.5% improvement in margin over a baseline. It's -- part of this is execution. Part of it is how we quickly get there in the overall journey. But these are meaningful cost initiatives.

Our next question is from Ken Hoexter with Bank of America Merrill Lynch.

Just wanted to follow up, I guess, a little bit on Peter's question there. When you think about all of the things that, Bill, you mentioned in terms of the overall and raw material cost focus, process streamlining, manufacturing via lean, these are massive programs when you think about what you want to launch on the cost side, especially if you're going to get into lean and what that means for your production and structure. Are you hiring new management? Are you bringing consultants? How do we get comfort that this really gains hold and doesn't just become kind of tag words for the conference call, but that there's like deeper moves to kind of implement all of these programs?

That's an excellent question. I'm glad you asked it. We have significantly reinforced and strengthened our manufacturing management team. We continue to work with our GRS team in the same light. But let's just talk to manufacturing because it's a big driver for our 2013 and 2014 plan. What we're really doing is giving you more transparency into our plan and the specific ways we're going to get there. And specifically, value engineering and the logistics tale to get that better match through processes and systems is a job that Martin Graham has been assigned. He's very familiar with our industry and this process. And he himself has run huge manufacturing companies in our space. So we really are making a thrust in value engineering, jigs and fixtures and the process of -- and process improvement as part of the work he's doing for Alejandro Centurion. We have always had a lean manufacturing emphasis. And lean is a buzzword that people use, and people who really understand lean know it's a continuous process. It is not the central focus of where these efficiencies will come from. It's from learning curve, advantages of longer production runs and experience. Building 1 or 2 tank cars for General Electric a few years ago is much different than building 16 per day, which is where we'll be at the end of this year. Building 3 different kinds of automotive cars where we have only been building 1 and breaking into that market with an exciting new rack design is a totally different thing. Now we need to tune the cost out of the production of that. And that's labor hours. And even in Mexico, where labor is cheaper, taking 100 hours out of a car or 200 hours out of a car is very, very significant. So these are the main thrusts in addition to more aggressive application of lean, especially lean in our GRS, our total Greenbrier Wheel, Repair and Parts business.

So do you sit there and kind of detail what the kind of -- you said you're not going to provide the upper end of all the programs. Do you kind of bucket what you hope to get out of each so we can kind of measure as you progress through, whether it's things like taking hours out of cars or your order discounts and the like?

I -- let me respond to that by completely answering your first question. The number of skilled people that we are applying to this task has increased. We've recruited a couple of new engineers with tank and other experience. We have process improvements at our tank car facility with an additional redeployment of 10 specialist teams from our Gunderson facility, cross-training, welding training. And this is a very robust process, which Martin Graham has helped Alejandro improve the systems that are already in place. So I'll come back to the second question, if you like. But major management resources into this as a consequence of Martin's -- Martin's assistance alone has been invaluable.

Understood, I think you're kind of walking me there. When I think about -- if I can just follow on. On looking at the metrics, though, I guess, if -- I think Mark said before, you're going to start giving out in the first quarter '14 the operating margin. Why not start maybe even sooner so we can see where the bottom is and start watching the improvement on a line basis, particularly for the Wheel segment? I guess that one seems to be the most extreme example of where we might see some quick turnaround there.

Why -- is the question, why might we not provide operating margin earlier than Q1 of '14?

It is. So we can start making -- because if this is the bottom and you're going to see all these programs kick in, the benefit of the tank cars and gain the experience, why not start at the bottom here and watch so we could see where the improvement's coming in?

It's a fair question. And the answer is a bit that it's a pretty detailed process that also requires going back the prior 2 years as well, once we provide operating margin by segment. So first is the allocation of the expense, and then restating it for the prior 2 years as well. So it's a bit of an undertaking and also to be reviewed with our auditors. So we believe that the first quarter of '14 is both a fresh starting point and a point that we can -- the soonest that we can get there.

Let me say one thing as far as emphasis. We're wide open to these kinds of suggestions. We're encouraging a greater dialogue. And we welcome all of these comments and suggestions. One of the bullets is transparency and communications with analysts and investors so you can model us better. And we will continue to be open to these suggestions, not addressing the specific timeline that Mark has just addressed.

I appreciate that, Bill. On the -- lastly, let me just wrap up. I think, Bill, when you were answering a question before, you mentioned the tank car will be at 16 per day at the end of the year. Can you maybe just throw out, on the tank side, where do you expect it to be at the end of -- I guess, that's calendar '13. Where do you expect it to be in 1 year at calendar '14 when you've got all of the lines up and running? Or is that the peak?

That's the peak. And we expect to hit that peak in November or December of the year on a run rate. We're approximately at 10 per day now. And you can do a fairly linear extrapolation on our goals. Whether we will be able to hit the exact ramping goals we have and whether it's actually going to be linear, it's not too totally differentiable. We're -- we've installed the new tank car line and it's up and running. And that was necessary in order to get to the next ramp goal, but we're essentially on our ramping schedule today.

Our next question is from Bascome Majors with Susquehanna.

In February, you talked about SG&A and said you're going to be taking a very hard look at that. And it sounds like from your comments earlier, the message is stay tuned at least for something to be announced later on this front. But can you help us through your thought process a little bit and maybe, I mean, are there specific projects that you've identified that have clear-cut dollars savings amounts and it's a situation that you're working on these and not ready to announce them yet? Or is it a little less clear-cut than that?

We're looking at methodology. And it is -- we are doing what you've suggested. We're wanting to share, transparently, our targets. And frankly, we've not been able to agree yet on the appropriate target or the final process. But we are working very hard on it. We wanted to get out this -- at the end of this quarter, a very busy quarter. If you recall a sequence of January -- December, January and February, we've had a lot activity. So we hear a desire for more transparency and more efficiency in G&A, particularly when you connect it with the margins we're achieving. But some of it is buried in the service business. And so a part of it is just the transparency and simplicity that we have to explain it better. And we're just not ready to set that goal yet. We have been encouraged to set a very robust goal. Whether that's the right thing to do, I -- with an outside focus as other companies sometimes do or not, or we get along further on this rationalization process that we've described in capital efficiency is to see how much G&A is going to be eliminated out of that process that's not efficient, then I think within a quarter or so, we should be able to be more granular on G&A targets.

So it sounds like this is something that you guys will perhaps communicate in a little more detail by the end of this fiscal year?

Yes.

Okay. And just a couple of fairly small follow-ups. You talked about being fairly close to having enough orders to fill your guidance for this year's deliveries of 13,000. And I know now that the rest of the backlog is stretching into fiscal '15 at this point. Can you give us a sense for how much you've got booked already that's going to be delivered in fiscal 2014 at this point?

Bascome, I -- we haven't broken that out yet. And some of that is that there's some flexibility of some of what is in the backlog. But -- and if -- Lorie, if you have some more color that you want to add on that and -- anything to add, then...

Yes, I think I would just clarify that what you have said before is that we do still have some open space, but there's not a tremendous amount to get us to the guidance that we've given of 13,000 units being delivered this year. And that we're, I'd say, we're within 15-or-so percent of being fully booked.

And then as it relates to '14, which I believe is your question, Bascome, is how much visibility do we have into our 2014 is that -- and I'd say that we haven't broken that out yet. But probably half of our backlog and orders go into 2014 and the balance into '15 or either '13 or '15.

And just one final comment on this. I would keep a close eye on the intermodal loadings, intermodal markets and intentions of intermodal players. The loadings have been robust. Velocity at the railroad system, and even coal train velocities, affects all of this. So we did receive orders this quarter for 600 wells, and we expect during the balance of the year to see other activity on intermodal. But that's an area that would affect our mix and our -- because those are lower per unit value cars. And there are some open spaces in that line currently.

Okay. And just finally, I know it's not an immediate focus, from your comments earlier. But should you decide you want to return cash to shareholders, I mean how much flexibility do you have to do that with your lenders today?

Pretty great flexibility. We're undrawn on our lines of credit in North America, and we're well within our financial covenants.

Yes, we focus on reducing debt. But we are focused on that option, just to correct the record. We mentioned it in the last release. We are focused on that option, and we're going to use all the tools available to us, assuming we're confident with our capital targets.

Our next question is from Jason Sult [ph] with Iroquois Capital.

On the tank car business, you're saying you're going to get to 10 a day or 900 a quarter. What are you guys doing right now?

We're doing 10 a day for the last 4 weeks on a run rate.

So we're at 10 a day now.

And I believe what Bill has mentioned is that we'll be getting to 16 a day by the latter part of this calendar year.

Right. And I've also said that you can look at that as a linear function at -- to the end of the calendar year. To November, December, we expect to be at that 16 per day rate.

Okay. And then is this new capacity you've brought on, is this capacity that takes away from existing capacity that you have? And what is really the capacity for the company to produce the total cars, including the tank cars?

A couple of questions there, let me take the first one. We have not -- we had earlier announced and have added additional capacity on a bolt-on basis at are -- the one facility we're producing tank cars in a joint ownership situation in GIMSA. So that's all behind us. We've spent the money. We've installed the equipment. And we're not taking that away from any other car type. We have additional space there that we've chosen not to deploy for an extra line of covered hoppers. We're also running covered hopper car -- a line there. But in order to meet our tank car goals, in order to take the pressure off of that ramp, we've transferred the covered hoppers -- our covered hopper emphasis over to Concarril.

So is the capacity of the company -- what is the capacity of the company then to produce tank cars as well as other cars? Tank cars is -- did you say it's 16 a day? Is that the capacity?

That is our expected theoretic capacity. At the end of this calendar year would be to get up to 16 units a day. And with that increase in production through the addition of another tank car line, our theoretic capacity is about 20,000 railcars per year. And we use theoretic just because depending on the mix of cars that we're building at any particular time, if we're building a high number of intermodal cars, our capacity would increase because they are -- we're able to get more throughput. But when we're building more tank cars or the automotive cars that take a considerable amount of time, that reduces our capacity. So...

So if you don't mind, we're -- we'd be happy to go into greater detail of this offline since we've run long on our time here, and we can do a deeper dive in this area with you offline, if that would be okay.

Our last question then is from Steve Barger with KeyBanc Capital Markets.

This is actually Tejas filling in for Steve. So I know you guys are running a little over, but I'll just ask one quick one and then follow up with the rest with Lorie. But I guess the question I have here is just kind of looking at the orders that you booked in the quarter, about 4,500, how much of that was kind of just overall industry demand for all cars being up versus company-specific?

Well, the industry stats have not come out yet for the quarter, for the March end quarter for us, and we're a little off from the calendar. But book-to-bill ratio for the quarter of 1.67:1 is pretty robust, and that is not including what we got after the quarter end. So I think when the statistics are out, we will compare very favorably. As well, you'll recall, at the end of the year, that the industry backlog was 80% weighted towards tank cars. And as we've noted before, we've been capacity constrained in the nearer term from getting our shares. So whereas the industry backlog has been 80% weighted towards tank cars, the orders we've announced since the beginning of the year, only about 50% of those tank cars. So certainly in the nontank car market, we believe that we've been punching well above our weight and we've been getting a large share of what's out there, and that is also demonstrative of that there is demand out there other than tank cars.

You were also asking about the customer concentration with spread among -- these are spread among a number of customers.

I guess just to kind of follow-up on that. You mentioned other demand, other nontank car demand is still there. Is that just -- are you just punching above the weight due to other manufacturers kind of switching more into the tank car side versus GBX kind of relatively speaking not really shifting a lot of their capacity? Or is that more on the competitive measures, such as pricing, quality of the product you guys offer?

Well, all of the above. I think we are punching above our weight. Especially in sand cars, we continue -- the demise of certain car types is premature. There's robustness in forest products. That's really coming along. That's a very sweet spot for us. And the intermodal business, we expect to continue to grow. So there is demand there. And I think we are punching above our weight because of our leasing and the various options, the value options we can add to the equation. We think we're doing well. And we seem to be improving our pricing. So I'm -- we're pretty pleased about the quarter's momentum and the momentum going forward into the third quarter.

Thank you, all, for joining the call today. We know we went long. And if we weren't able to get you, as always, we're pleased to take questions offline as well. And we appreciate your interest and participation in today's call. Thank you.

Thank you for participating in today's conference. You may disconnect at this time.