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Edited Transcript of ARII earnings conference call or presentation 23-Feb-18 3:00pm GMT

Q4 2017 American Railcar Industries Inc Earnings Call

ST. CHARLES Mar 22, 2018 (Thomson StreetEvents) -- Edited Transcript of American Railcar Industries Inc earnings conference call or presentation Friday, February 23, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. O'Bryan

American Railcar Industries, Inc. - President & CEO

* Luke M. Williams

American Railcar Industries, Inc. - Senior VP , CFO & Treasurer

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Conference Call Participants

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* Justin Trennon Long

Stephens Inc., Research Division - MD

* Matthew Youssef Elkott

Cowen and Company, LLC, Research Division - VP

* Willard Phaup Milby

Seaport Global Securities LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Quarter 4 2017 American Railcar Industries Inc., Earnings Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Luke Williams, Senior Vice President, CFO and Treasurer. Sir, you may begin.

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [2]

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Thank you, Victor. Good morning. I would like to welcome you to the American Railcar Industries Fourth Quarter 2017 Conference Call. I am Luke Williams, our Chief Financial Officer, and I would like to thank you for joining us this morning. For those who are interested, a replay of this call will also be available on our website, americanrailcar.com, shortly after this call ends.

Our call today will include comments about the railcar industry, our operations and financial results. Following these remarks, we will have a question-and-answer session. This conference call will include forward-looking statements, including statements as to estimates, expectations, intentions and predictions of future financial performance based on currently available information. Participants are directed to our SEC filings and press releases for a description of certain business issues and risks, a change in any one of which could cause our actual results or outcomes to differ materially from those expressed in the forward-looking statements.

Also, please note that the company does not undertake any obligation to update any forward-looking statement made during the call. EBITDA and adjusted EBITDA are the non-GAAP financial measures we will discuss today that are reconciled to net earnings in our press release that was issued this morning. The press release as well as the supplemental presentation are both available through the Investor Relations page of our website.

Before we discuss our fourth quarter results, I would like to introduce our new President and Chief Executive Officer, John O'Bryan, who is joining me this morning. John joined ARI in June 2017 as our Chief Commercial Officer, and he started his new role as CEO in January 2018. John has worked closely with the ARI team for over 3 years through his roles at ARI and ARL. John has 29 years of industry experience.

Prior to joining ARI, John's roles throughout the rail industry included President and CEO of ARL, a leading railcar lessor with a fleet of over 35,000 railcars; President of Mitsui Rail Capital, another railcar lessor; and Chief Operating Officer and Chief Financial Officer of Rescar, a company providing repair and logistics services with over 90 locations. John succeeds Jeff Hollister, who had been with ARI since 2005. On behalf of the company, I would like to thank Jeff for all his contributions during his time at ARI.

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [3]

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Thank you, Luke, and good morning, everyone. ARI is an exciting business with a rich history of great people striving to develop innovative solutions and deliver excellent service to our customers. I am honored to serve as ARI's President and CEO.

During 2017, the team delivered 4,292 railcars, including 1,874 to our lease customers. And our lease fleet grew to over 13,000 railcars. While our shipments were down 11% compared to 2016, the entire railcar industry was down 28%. Industry demand for new tank cars was soft, but inquiries picked up late in the fourth quarter of 2017. On a positive note, we did secure some tank car retrofit projects from customers, and we utilized our skilled workforce and capacity at our tank car facility.

During the past year, the ARI team has worked diligently to develop our lease fleet management services, including enhancing our commercial team. I appreciate the team's efforts to understand customers' needs and develop the right solutions. In addition, the operating team is striving to improve safety, quality and service.

During the past 45 days, I've met with over 1,500 team members and appreciate their hard work, feedback and support. The team has shared their passion for serving our customers and their commitment to excellence. We want to be the best railcar solutions provider in North America by aligning people, process and tools to deliver world-class results in safety, quality, service and profitability.

As we begin 2018, I am grateful for the team's contributions and past achievements. While the market continues to be challenging, I am confident that the ARI team is ready to face these challenges and is excited to pursue our vision and business strategy.

I now turn it back to Luke for a discussion of the fourth quarter and full year financial results.

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [4]

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Thank you, John. Fourth quarter 2017 consolidated revenues were $132 million, down 21% versus $168 million for the same period in 2016. This decrease was primarily due to decreased revenues in the manufacturing and railcar services segments, partially offset by increased revenues in the railcar leasing segment.

Consolidated manufacturing revenues were $80 million for the fourth quarter of 2017 compared to $115 million for the same period in 2016. This decrease was primarily driven by the impact of fewer railcar shipments for direct sale for both hopper and tank railcars with a higher mix of hopper railcars sold, a higher percentage of railcar shipments going to the company's lease fleet and more competitive pricing for orders delivered during the fourth quarter of 2017 compared to the same period in 2016. We shipped 720 railcars for direct sale and 389 railcars for lease during the fourth quarter of 2017. This was compared to 1,005 railcars for direct sale and 307 railcars for lease during the fourth quarter of 2016.

Consolidated manufacturing revenues exclude estimated revenues related to railcars built for our lease fleet of $37 million for the fourth quarter of 2017 compared to $31 million for the same period in 2016. Railcars built for our lease fleet represented 35% of our total railcar shipments during the fourth quarter of 2017 compared to 23% for the same period in 2016.

Our consolidated railcar leasing revenues for the fourth quarter of 2017 were $34 million, up 2% from the same period in 2016. Our lease fleet has grown to 13,138 railcars at December 31, 2017, from 11,268 railcars at December 31, 2016. Although we continue to strategically grow our lease fleet, we are experiencing a decline in weighted average lease rates for both new railcars and railcars up for lease renewal compared to the same period in 2016, given the competitive market environment. As of December 31, 2017, our lease fleet utilization was approximately 98%. With approximately 10% of our railcar lease fleet up for renewal in 2018, we are actively working with customers with upcoming expiring leases to renew the lease or find a reassignment opportunity for the railcars with another customer.

Our consolidated railcar services revenues for the fourth quarter of 2017 were $18 million, a decrease of 6% compared to the same period of 2016. This decrease was primarily due to performing more intercompany work related to inspections, testing and, if necessary, repairs required under the FRA's Revised Directive, for which the revenue is eliminated in consolidation, partially offset by increased demand for ARI's mobile repair offerings and additional repair volume due to added capacity for railcar services at the company's Marmaduke tank car manufacturing facility.

Consolidated earnings from operations for the fourth quarter of 2017 were $17 million, a decrease of 54% compared to $37 million for the same period of 2016. Our consolidated operating margins were 12.9% for the fourth quarter of 2017 compared to 22.3% for the same period of 2016. These decreases were primarily driven by lower earnings from operations in the company's manufacturing segment.

Consolidated loss from operations for our manufacturing segment was $1 million for the fourth quarter of 2017, compared to consolidated earnings from operations of $19 million for the same period of 2016.

Operating margin from our manufacturing segment decreased to approximately negative 1% for the fourth quarter of 2017 compared to 15% for the same period in 2016. These decreases were driven by more competitive pricing on both hopper and tank railcars, an increase in our warranty costs of approximately $5 million in the fourth quarter of 2017 compared to the same period of 2016, and higher costs associated with lower production rates at the company's railcar manufacturing facilities. As the company adjusts its production schedules and output of new railcars, it continues to monitor overhead spending and employee levels. These earnings from operations excluded $2 million in estimated profits on railcars for lease for both the fourth quarter of 2017 and 2016. The estimated profits on railcars built for our lease fleet are eliminated in consolidation.

Railcar leasing segment earnings from operations on a consolidated basis were $21 million for the fourth quarter of 2017 compared to $22 million for the same period in 2016. This decrease was primarily driven by increased costs due to maintenance and services related to lease reassignments, lower rates on certain lease renewals and increased rent abatement related to railcars being sent to repair shops in conjunction with inspections required by the FRA's Revised Directive, all partially offset by an increase of railcars in the lease fleet in 2017.

Consolidated railcar services earnings from operations were $2 million for each of the fourth quarter of 2017 and 2016. Operating margins increased to 12% for the fourth quarter of 2017 compared to 11% for the same period in 2016. This increase was due primarily to an increase in demand for our mobile repair services.

Consolidated selling, general and administrative expenses of $10 million in the fourth quarter of 2017 were down 7% compared to the same period of 2016, primarily due to decreases in incentive and in stock-based compensation expense, both partially offset by increased bad debt expense and increased compensation costs relating to additional personnel hired in connection with increasing our sales and marketing team and other supporting groups in connection with transitioning our lease fleet management in-house.

Certain expenses related to the management of the company's lease fleet, including the management fee paid to ARL, were recorded within cost of sales prior to the sale of ARL to an unaffiliated third party, which was consummated on June 1, 2017. Subsequent to the ARL sale, as personnel and other related expenses have been brought in-house, the company's selling, general and administrative expenses supporting our business have increased, but our fleet management expenses in total have decreased due to cost savings related to the railcar management fees.

On December 22, 2017, the 2017 Tax Cuts and Jobs Act was signed into law. The 2017 Tax Act reduces the federal corporate tax rate from a maximum of 35% to a flat 21% rate, modifies policies, credits and deductions and had international tax consequences. The rate reduction is effective January 1, 2018. As a result, we were required to revalue our deferred tax assets and liabilities to account for the future impact of lower corporate tax rates and other provisions of the 2017 Tax Act.

During the fourth quarter of 2017, we recorded a onetime tax benefit of $107 million or $5.62 per share related to the 2017 Tax Act. The fourth quarter 2017 income tax benefit related to the 2017 Tax Act may require further adjustments in 2018 due to additional guidance from the U.S. Department of Treasury, changes in our assumptions, completion of our 2017 tax returns and any further interpretation or information that may become available.

Net earnings for the fourth quarter of 2017 were $112 million or $5.86 per share compared to $22 million or $1.16 per share for the same period in 2016. This increase was driven primarily by the impact of the aforementioned Tax Act, partially offset by decreased consolidated earnings from operations.

EBITDA, adjusted to exclude share-based compensation expense and other income related to short-term investment activity, was $34 million for the fourth quarter of 2017, representing a decrease of 35% compared to $52 million for the same period in 2016. The decrease resulted primarily from decreased earnings from operations as previously discussed.

Turning to our full year results. Total consolidated revenues for 2017 were $477 million, 25% lower than $639 million for 2016. This decrease was driven by a number of factors, including a lower volume of hopper and tank car shipments, lower competitive pricing on both hopper and tank railcars and a higher percentage of our shipments going to our lease fleet during 2017 compared to 2016, which results in revenue recognized over the life of the lease rather than recognizing all of the revenues in the current period.

These decreases were partially offset by slight increases in our railcar leasing and railcar services segments. As John mentioned, our total railcar shipments for 2017 were down 11% compared to 2016. We shipped 2,418 railcars for direct sale and 1,874 railcars for lease during 2017 compared to 3,922 railcars for direct sale and 914 railcars for lease during 2016.

Net earnings for 2017 were $142 million or $7.45 per share, compared to $73 million or $3.74 per share for the same period of 2016. This increase was driven primarily by the impact of the 2017 Tax Act, as previously discussed, resulting in a tax benefit of $107 million or $5.62 per share and an increase in other income, primarily driven by gains realized on the sale of short-term investments, both partially offset by decreased earnings from operations as discussed earlier and lower earnings from ARI's joint ventures due to a decline in industry demand and the idling of the Ohio Castings joint venture in early 2017.

Adjusted EBITDA was $142 million for 2017 compared to $188 million for the same period of 2016, with the decrease driven by lower earnings from operations as previously discussed.

Our earnings contributed to positive cash flow from operations of $132 million during 2017, and we ended the year with net working capital of $169 million, including $100 million of cash and cash equivalents.

As of December 31, 2017, we had $546 million of debt outstanding under our January 2015 lease fleet financing facility. Our strong balance sheet, combined with the $200 million available to borrow under our revolving credit facility and additional unencumbered railcars, provides us with the ability to continue to find opportunities to strategically grow.

We continue to return value to our shareholders. On February 21, 2018, our Board of Directors declared a 22nd consecutive quarterly cash dividend. This dividend of $0.40 per share to ARI's stockholders has a record date of March 16, 2018, and will be paid on March 23, 2018.

During 2017, we did not repurchase any shares of common stock. Board authorization of approximately $164 million remains available for further share repurchases.

At this time, I'd like to turn it back to John for some additional comments.

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [5]

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Thanks, Luke. Due to the oversupply in the marketplace, demand for both tank and hopper railcars has been lower during 2017. In the fourth quarter, industry-wide orders were 8,501 railcars, down slightly from the prior quarter. The fourth quarter deliveries were 13,404 railcars, and the book-to-bill ratio was approximately 0.63:1.

Our primary products, hopper and tank cars, comprised 81% of the industry backlog as of December 31, 2017. The FTR rail equipment outlook for North America is forecasting industry-wide deliveries of approximately 44,000 cars in 2018. Given the challenges in the marketplace, the pricing environment continues to be very competitive and the customers have been cautious about placing new orders. At this point in the market cycle, we are focused on a disciplined approach to aligning our production with the industry demand.

As of December 31, 2017, we had a backlog of 1,940 railcars and 389 cars are targeted for our lease fleet. In the fourth quarter, we saw an increase in inquiries and secured orders for 366 railcars. During early 2018, we have secured additional orders for approximately 2,000 railcars. The orders are primarily for direct sale and are a mix of both tank and hopper cars. These orders are for delivery needs in 2018 and 2019 and are not reflected in ARI's order totals or backlog as of December 31, 2017.

While these orders and inquiry levels are encouraging, we expect 2018 industry shipments to be similar to 2017 and consistent with industry forecast. We continue to actively meet with customers to support their railcar needs for 2018 and beyond. While the North American railcar market continues to operate at lower levels, we remain confident that we are well positioned. Our diversified and growing lease fleet continues to provide cash flow, and fleet utilization remains strong.

Our railcar services segment provides services to our customers and our lease fleet. The ARI team is focused on delivering high-quality products and services, keeping our costs low and maximizing the productivity and flexibility of ARI's production facilities. Recently, we began to provide tank car retrofit services at the Marmaduke facility, and we are actively pursuing other opportunities with our customers.

As in the past, during downturns in the railcar market, we remain disciplined in our capital expenditures by supporting necessary maintenance, evaluating cost reduction opportunities and projects to further enhance the quality of our products and service offerings. As we move forward into 2018, we anticipate lower levels of investment in our lease fleet compared to 2017, but we will continue to invest in our lease fleet as we find opportunities that represent a good fit for our portfolio.

Most importantly, we strive to understand customers' needs and provide the right solution whether that solution be through direct sale to the customer, lease to the customer or sale to a third-party lessor. This ends our prepared remarks. And now we'll turn it -- the call back over to the operator, and we'll be happy to take any questions.

Operator, would you please explain our participants can register their questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Matt Elkott from Cowen and Company.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [2]

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John, congratulations on the new role. If I look at the orders you guys got in the first quarter and in the fourth quarter, it looks like you're on pace to have about 2,500 orders in the fourth and first quarter combined. So that's an average of 1,250 per quarter for the last 2 quarters. That's a big step-up from where orders have been prior to that during the downturn. I was just trying to get a sense of, is this uptick in orders a function of true underlying demand, incremental demand in the industry? Or did the passage of the tax bill and bonus depreciation make it more attractive for some industrial shippers that would otherwise lease to actually buy new equipment?

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [3]

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Good morning, Matt. Thanks for your question. This is John. From my perspective, I think it's really a combination of both. We are seeing better industry demand and economic activity throughout North America across multiple segments, and I do think some of the decisions that were made in the late December time frame and early January really did relate to the tax bill. So I think you're seeing a combination of both factors. What's encouraging is we're starting to see, I think, a steady, but slow improvement in the economic activity around some of the core market segments that we serve. So we continue to really focus on how we support their needs.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [4]

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Got it. That's helpful. And on the lease fleet, John, you have a strong background in the leasing market. You did mention that in 2018, the investment in the lease fleet would kind of subside from prior levels. Is that -- can you just help us understand what's behind that strategy? Or should we expect any changes in the strategy now as you take on leadership?

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [5]

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Matt, from our lease fleet investment strategy, our strategy remains to grow our lease fleet. So I wouldn't say the strategy has really changed. What we've seen in recent times, and I think you've heard on a few of our customers' calls as well is the pressure on lease rates. There really are a lot of the new car lease rates to us. Look, 30% are now below long-term averages, and we're simply very disciplined investors in the marketplace. And as we find the right opportunities, we'll certainly invest to grow our lease fleet, but we take a very long-term view and a very disciplined view, and we're not out trying to kind of add excess capacity to the market. We want to invest money that makes good return for ourselves and is a good fit for our customers.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [6]

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Makes sense that the 98% utilization rate in this current environment is definitely impressive. For 2018, can you give us some color on how -- what percentage of the -- of your lease fleet comes up for renewal relative to what you had in '17 and '16?

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [7]

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Yes. Matt, this is Luke. We've got roughly 10% or 11% up for renewal in 2018. So that's definitely down from where we were in 2017. We do have a little bit bigger exposure and back up to more kind of the 19%, 20% level in 2019, but we've got a lower number this year as we look at 2018.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [8]

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And Luke, of that percentage that's renewing this year compared to last year, what percentage of the renewals this year are -- can be traced to the CBR era?

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [9]

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We don't have any in the CBR space in 2018. We did have a handful in 2017. Some we were successful at reassigning and some we're still looking at opportunities.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [10]

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So the revenue headwind should not be as drastic, I guess, this year for -- from...

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [11]

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The other factor to consider is, obviously, 2017 was heavy for lease cars. So we've got the full year impact of the 2017 lease cars that were added to the fleet.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [12]

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Okay. And just one final question on the margin front for 2018. We've been in this downturn for at least 2 years now. You guys have been rightsizing the manufacturing infrastructure as much as you can. I think a lot of the mix -- the negative delivery mix shift, a lot of it has occurred in '16 and '17. I was just wondering how much of that is still going to happen in 2018. And given the current pricing environment most likely has bottomed and maybe there is more upside than downside from these levels, where do you see margins in this year relative to what we saw in '17?

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [13]

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So I think as I mentioned last quarter, our manufacturing gross profit levels were right around 6% or 7% in the second and third quarter of '17. And while the fourth quarter was lower than what we would have liked, a lot of that was driven by the warranty charge we booked this quarter. So I think that kind of mid-single digits maybe around the 6% or 7% we ran, we would expect similar levels to that in 2018.

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Operator [14]

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And our next question comes from the line of Justin Long from Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [15]

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John, also congratulations on the new role. And maybe I'll start with some bigger picture questions for you given this transition. As you step into this CEO role, what do you view as the most substantial opportunities for the company going forward? And just in terms of the strategy, do you foresee any major changes to what ARI has kind of pursued in the past?

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [16]

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Yes. I think first and foremost is we want to have a very clear strategy that we can align our people, process and tools around. I think we have opportunities to better deliver effective service and quality to our customers across our integrated business platform. So I think there's a real opportunity for us to continue to develop our services business. I'm very excited about the work that we've done on the sales and marketing and the commercial team and the customer service group we've put in place.

So I think you'll see us really focus on how do we deliver quality and service excellence to our customers. I think there's opportunities within our manufacturing business to continue to innovate. We're certainly working with a few key customers on how we can innovate within our current product lines and maybe even consider some other opportunities in the marketplace. So I think you'll see us stay true to our core focus, but really try to focus on a higher level of execution and service excellence.

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Justin Trennon Long, Stephens Inc., Research Division - MD [17]

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That sounds good. And maybe, secondly, to ask about 2018 and your expectations. You mentioned that you expect industry deliveries to be flat in 2018. Do you still expect your deliveries to be flat as well? And do you have any initial thoughts on the split between external and internal deliveries this year?

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [18]

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Yes. I think we'll see our deliveries to be similar to 2017. Maybe in the first quarter, they might be down slightly, but then after that we'll see a pickup. I think you'll see us given the strategy we have around the leasing business that we do want to grow it, but we're going to be smart investors in that market cycle. And we're starting to see stabilization in prices, but I would say that prices are still highly competitive in the marketplace. So I think you'll see us with a slightly higher weighting toward direct sale in 2018.

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Justin Trennon Long, Stephens Inc., Research Division - MD [19]

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Okay. That's helpful. And then lastly, just a couple number questions. So on the 2,000 orders that were received in 2018, is there a dollar amount that you would be able to share on those orders? And then secondly, Luke, I was curious if you could provide guidance on where you expect the tax rate to shake out for 2018?

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [20]

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Sure. Justin, thanks for the question. As far as the order levels, let me get back to you on that one as far as the value of that. I've got a schedule here we can dig up. But we booked those orders, those approximately 2,000 cars. It's $171 million of revenue, so just to level set that number. And as far as tax rate going forward, we're expecting to come in around 25% for 2018. I mean, as we digest the new tax bill, we'll obviously continue to evaluate that and update you as we progress throughout the year, but that's our current estimate as of right now. The fourth quarter we did have a hit for taxes. We updated our full year rate up to 47% prior to tax reform. So that was driven by a reestimating of our state tax rate, given kind of where our sales by state fell out for the year. So that hit us a little bit harder in the fourth quarter, obviously, pretax reform than what we expected.

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Justin Trennon Long, Stephens Inc., Research Division - MD [21]

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That's helpful. I was going to actually ask about that too, but that helps clear things up.

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Operator [22]

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And our next question comes from the line of Willard Milby from Seaport Global.

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Willard Phaup Milby, Seaport Global Securities LLC, Research Division - Associate Analyst [23]

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I was hoping you all could go a little bit deeper into the warranty expense incurred this quarter and kind of what that related to. And if you see any kind of future expenses, maybe in 2018 or beyond, either related to this or in other areas where you might see a warranty expense creep up?

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [24]

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Thanks, Will. This is Luke. Yes. I think at this point, I mean, we obviously had the charge related to the FRA Directive a year ago and had this warranty expense here in the fourth quarter. It was related to another tank car identified warranty that we had some exposure on. And as we had inspected some cars, we determined that we had a defect rate that was big enough we wanted to -- or needed to book this warranty reserve.

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Willard Phaup Milby, Seaport Global Securities LLC, Research Division - Associate Analyst [25]

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All right. And I guess, continuing on the FRA line of questioning, the railcar services kind of incurring some of those FRA costs here in Q4. Are there additional costs here in 2018 that would kind of keep that revenue down?

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [26]

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So I'll answer that twofold. One, we did have, as part of the directive, a requirement to inspect all the 15% highest mileage cars in 2017, and we completed all our inspections as required. But going forward, I think, as you look at the railcar services segment, it's been a little bit depressed just given the general state of the tank car market, with a lot of tank cars in storage. So some of the good project work we've seen historically for tank cars being repaired and going through qualifications, that work's been a little bit depressed here over the last, say, 4 or 5 quarters. So that'll hurt us a little bit here as we move forward. But as tank cars need to get qualified, we'll hopefully get some more work in the shop.

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [27]

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Yes. A little more color on the repair services business might be helpful. I have worked in that business for 6 years in a former company. We had a very large footprint in North America. And I think in the near term, you're continuing to see some pressure on the demand curve for repair services because, as Luke said, the oversupply. I think we're in the early stages as some of that oversupply gets worked off, in particular, as we start to see the pickup in retrofit activity that hopefully we'll see a steady improvement in the repair business as the year goes on. I think our major focus is what we can control and day to day that's to try to deliver an excellent service to our customers and keep our costs under control. So we're going to continue, even in an environment where maybe the scope of the work is a little bit less per car, to try to enhance how we deliver service and get more efficient to improve our profitability and really prepare for the -- creates a little bit of pent up demand that eventually there is a recovery because the cars have to be tank -- requalified.

And what's happening is if cars aren't going back into service, customers that are getting cars back on a lease return, for example, are just doing kind of the minimal work putting the car back in service, I mean, put it in storage. But when they take it back out of service, obviously, they have to do all the work related to the reassignment of the car to the new lessee, but they also have to deal with any regulatory issues that they may have deferred. So it's really more of a deferment of demand, and we just want to do our best this year to deliver great service, but then really be prepared as the market continues to improve.

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Willard Phaup Milby, Seaport Global Securities LLC, Research Division - Associate Analyst [28]

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Okay. So is, I guess, a mid-teens gross margin, like we saw in Q4, a good place to think about that business?

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP , CFO & Treasurer [29]

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Yes.

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Willard Phaup Milby, Seaport Global Securities LLC, Research Division - Associate Analyst [30]

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Okay. And just one more kind of high-level market kind of questioning. Do you see the, I guess, overall prices of railcars kind of stabilizing here in 2018? Or is there kind of continued pressure as you all go out and try to fill slots in the market here?

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [31]

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I think the pricing's stabilizing. I still think it's a highly competitive environment and obviously, much lower than historical averages. I think the positive signs out there and have been discussed on some of our competitors' calls, is you do see a fair amount of the capacity has been spoken for, for the year, which I think as we work towards the additional demands that customers have, I think at least you're starting to see some pricing firm up. And we're certainly trying to be a disciplined player in that environment. We want to provide a good service to our customers, but frankly, we've also got to do it in a way that produces high quality, and we have a good and strong business model for the long term.

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Operator [32]

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(Operator Instructions) And I'm actually showing no further questions at this time. I would now like to turn the call back to Mr. John O'Bryan, President and CEO, for any closing remarks.

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [33]

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Victor, thank you very much. That concludes our conference call this morning. I would like to thank all of our employees, customers, suppliers and shareholders for a great 2017. We look forward to continued success in 2018 and working closely with you. Thank you, everyone, who participated today, and we look forward to talking to you at the next quarterly call. Thank you.

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Operator [34]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a good day.