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Edited Transcript of ARII earnings conference call or presentation 24-Feb-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 American Railcar Industries Inc Earnings Call

ST. CHARLES Feb 24, 2017 (Thomson StreetEvents) -- Edited Transcript of American Railcar Industries Inc earnings conference call or presentation Friday, February 24, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luke Williams

American Railcar Industries, Inc. - SVP, CFO, Treasurer

* Jeff Hollister

American Railcar Industries, Inc. - President, CEO

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Conference Call Participants

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* Mike Baudendistel

Stifel Nicolaus & Company - Analyst

* Justin Long

Stephens, Inc. - Analyst

* Mark Elkott

Cowen and Company - Analyst

* Matt Brooklier

Longbow Research - Analyst

* Tyson Bauer

Kansas City Capital Associates - 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 American Railcar Industries Inc. Q4 2016 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Luke Williams, Chief Financial Officer. You may begin.

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [2]

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Thank you, Sandra. Good morning. I would like to welcome you to the American Railcar Industries fourth quarter 2016 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. Joining me this morning is Jeff Hollister our President and Chief Executive Officer.

Our call today will include comments about the railcar industry, operations and financial results. Following these remarks we will have a Q&A session. This conference call will include forward-looking statements, including statements as to estimates, expectations, intentions, and predictions of future financial performance, based or 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 statements made during the call.

EBITDA and adjusted EBITDA are 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 is available through the Investors Relations page of our website, as well as the supplemental information presentation.

Now it's my pleasure to introduce Jeff Hollister.

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [3]

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Thank you, Luke. Good morning to everyone.

I would like to start by congratulating Luke, who was recently appointment as our Senior Vice President, Chief Financial Officer and Treasurer after serving in those same roles on an interim basis since January 1, 2016. Luke has been with the Company over ten years, since joining ARI shortly after the IPO in 2006 and has served many rolls very successfully in the finance and accounting groups.

I have greatly appreciated Luke's efforts and so has our Board. We are confident that he will continue to support ARI as we look for ways to strengthen our integrated business model and drive future growth. As we continue to support the industry with complete railcar solutions over the full lifecycle of the railcar we have remained focused on enhancing our manufacturing flexibility, expanding our repair network and growing our lease fleet to 11,268 railcars.

The steady stream of revenues generated from our lease fleet and railcar services business served to partially offset softness in the market for new railcars. The FTR rail equipment outlook for North American Railcar Market is currently forecasting deliveries of just below 40,000 cars in 2017. The industry backlog at December 31, 2016, was 66,681 railcars, and approximately 84% of the backlog is for hopper and tank railcars, our primary products.

The industry reported that 4,866 railcars were ordered on a gross basis and 14,914 railcars were delivered during the fourth quarter of 2016, producing a book-to-build ratio of 0.3 to 1. The industry currently faces headwinds as both the tank and hopper railcar markets have softened, as demand is shifted to lower volumes of more specialized railcars.

The tank railcar market has been impacted more heavily than most other markets as a result of the over saturation of that market in recent years. We have historically relied on and, now more than ever, will continue to rely on our flexible workforce and knowledgeable management team to weather these current market conditions as our employees continue to provide us with the ability to effectively adjust our production rate in an effort to align them with the current industry trends while staying competitive. As of December 31st, 2016, we had a backlog of 6,213 railcars.

As of December 31, 2016 we had a backlog of 3,813 railcars, 1,637 of them which will go to our lease fleet. Even though we've had low order levels in the fourth quarter 2016, we have secured several orders the first two months of 2017 for more specialized covered hopper and tank car (inaudible). We continue to work with our strategic customers on fostering long-term relationships as we offer options for manufacturing, repair, and railcar leasing.

We finished 2016 with consolidated operating margin of 20%, which was largely supported by the growth of our railcar leasing segment and favorable efficiencies at our new car assembly plant. Parley offset by the increased manufacturing costs related to lower railcar volume and lost contingency at December 31, 2016 of $12.3 million related to the FRA's revised directive issued on November 18th.

After expressing our concerns with the original directive issued on September 30th, the FRA issued this revised directive, which served to both change and supersede the original directive. While significant uncertainty in the industry still exists in connection with the revised directive and its implementation, we continue working with the FRA, our customers, and industry groups to comply with the revised directive as it is currently stated.

I will now turn it back to Luke for a discussion of the fourth quarter and the full year 2016 financial results.

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [4]

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Thanks, Jeff.

Fourth quarter consolidated revenues were $168 million, down 36% versus $261 million from the same period in 2015. This decrease was due to decreased revenues in the manufacturing segment, partially offset by increased revenues in the railcar leasing and railcar services segment.

Consolidated manufacturing revenues were $115 million for the fourth quarter of 2016, compared to $210 million for the same period in 2015. This decrease was driven by fewer railcar shipments for direct sales. We shipped 1,005 railcars for direct sales and 307 railcars for lease during the fourth quarter of 2016.

This was compared to 1,185 railcars for direct sales and 45 railcars for lease during the fourth quarter of 2015. Railcar shipments for lease represented 23% of our total railcar shipments in the fourth quarter of 2016, compared to 2% during the same period of 2015. During the fourth quarter of 2016 we shipped a higher mix of hopper railcars and experienced a shift in production to a larger mix of specially railcars.

So although we are experiencing more competitive pricing due to the softened railcar markets for both tanks and hoppers, average selling prices increased during the fourth quarter of 2016 due to this mix of more specialty type railcars. We cannot assure you that average selling prices will continue to increase or remain the same in future quarters.

Consolidated manufacturing revenues exclude estimated revenues related to railcars built for our lease fleet of $31 million for the fourth quarter of 2016, compared to $5 million for the same period of 2015, reflecting a higher mix of railcars shipped for lease. As a reminder, due to flexibility within our business model, it is at the customer's discretion whether to directly purchase or lease railcars from us.

Also, please note, because revenues and earnings related to lease railcars are recognized over the life of the lease, our future quarterly results will vary depending on the mix of lease versus direct sale railcars that we ship during a given period. Our railcar leasing revenues for the fourth quarter of 2016 were $33.5 million compare to $32.7 million in the same period of 2015.

Our lease fleet has grown to 11,268 railcars at the end of 2016, compared to 10,362 railcars at the end of 2015. Although we continue to strategically grow our lease fleet, we are experiencing a slight decline in weighted average lease rates compared to the same period in 2015, given the current industry trend. Our lease fleet continues to be utilized at over 99%.

Our railcar services revenues for the fourth quarter of 2016 were $19 million compared to $18 million in the same period of 2015. Revenue increased, due to an increase in customer demand and volume associated with additional capacity, resulting from expansion projects in our repair network, that became operational and continued to ramp up in 2016. Consolidated earnings from operations for the fourth quarter of 2016 were $37 million, down 39%, compared to $62 million for the same period in 2015.

Our consolidated operating margins were 22% for the fourth quarter of 2016, compared to 24% for the fourth quarter of 2015. These decreases were primarily driven by lower earnings from operations in our manufacturing segment. Earnings from operations from our manufacturing segment were $19 million and 17% of sales for the fourth quarter of 2016, compared to $42 million and 20% of sales for the same period in 2015.

These decreases were due to fewer overall railcar shipments for direct sales, as previously mentioned, more competitive pricing on both hopper and tank railcars, and higher costs associated with the lower production rate at our tank railcar facility. Segment earnings from operations excluded $2 million in estimated profits on railcars built for our lease fleet for the fourth quarter of 2016, and $3 million for the same period in 2015. The estimated profits on railcars built for our lease fleet are eliminated in consolidation.

Partially offsetting this decrease was a reduction of the loss contingency established as of September 30, 2016 from $17 million to $12.3 million as of December 31, 2016, for a total reduction of expense of $4.7 million, resulting in an increase to earnings-per-share of $0.17 during the fourth quarter. This reduction in the loss contingency primarily reflects the changes made by the FRA from the original directive to the revised directive that reduced the number of railcars that are currently required to be inspected and repaired if necessary.

Earnings from operations from the railcar leasing segment were $22 million for the fourth quarter of 2016, compared to $23 million in the same period of 2015. This decrease was due to a slight decline in weighted average lease rates, compared to 2015, partially offset by an increase in the number of railcars on lease.

While our young lease fleet continues to yield relatively low mainstream expenses, we are not impervious to the declining lease rate experience by much of the industry as a result of the softness in the overall market. On the up side, the expiration dates of the operating for railcars in our lease fleet are spread over the next several years, which helps mitigate the risks of renewing leases at lower rates or any inability we may experience in renewing leases or releasing these railcars.

As of December 31, 2016, approximately 16% of our lease fleet is up for renewal through the end of 2017. We have begun working with customers, and have already renewed over 200 railcars on lease thus far in 2017. Earnings from operations for our railcar services segment decreased $1 million compared to the fourth quarter of 2015.

This decrease was primarily due to an unfavorable change in the mix of work at our repair facilities and inefficiencies as we ramp up our expansion, partially offset by an increase in demand and volume as discussed above. Selling, general, and administrative expenses were $11 million for the fourth quarter of 2016, compared to $10 million in the same period of 2015. Primarily due to increased incentive compensation expense, partially offset by lower costs for consulting and bad debt expenses.

Interest expense was flat and $6 million for both the fourth quarter of 2016 and the same period of 2015, with consistent average debt balances during both periods. Net earnings for the fourth quarter of 2016 were $22 million, or $1.16 per share, compared to $36 million, or $1.82 per share for the fourth quarter of 2015. This decrease was driven by the lower earnings from operations referenced earlier, partially offset by a reduction in the effective tax rate during the fourth quarter of 2016, resulting in an increase to earnings-per-share of $0.11.

Adjusted EBITDA, which excludes share based compensation and other income related to short-term investment activity, was $52 million for the fourth quarter of 2016. This was 31.6% lower than the $76 million for the fourth quarter of 2015. This decrease resulted primarily from decreased earnings from operations as previously discussed.

Turning to the results for the full year, total consolidated revenues for 2016 were $639 million, 28% lower than the $889 million for 2015. Revenues decreased as a result of fewer railcar shipments for direct sales, partially offset by an increase in revenues from our lease fleet and an increase in railcar services revenue. The railcar services segment posted record revenues of $77 million, growing 6% over the prior year.

Total railcar shipments for 2016 were down 46%, compared to the record level of shipments in 2015. We shipped 3,922 railcars for direct sales and 914 railcars for lease during 2016, compared to 6,270 railcars for direct sales, and 2,633 railcars for lease during 2015. Net earnings for 2016 were $73 million or $3.74 per share, compared to $133 million, or $6.39 per share for 2015.

This decrease was due to lower earnings form operation, driven by a higher mix of hopper railcar shipments, along with more competitive pricing and higher costs associated with the lower demand for tank railcars. Adjusted EBITDA was $188 million for 2016, compared to $279 million for 2015, with a decrease driven by lower earnings from operations as previously mentioned and a reduction in earnings from our joint ventures. The decrease in earnings from our joint ventures reflects a ramp down of production, in line with industry demand.

Our earnings contributed to positive cash flow from operations of $181 million during 2016, and we ended the year with networking capital of $237 million, including $179 million of cash and cash equivalent. As of December 31, 2016, we had $576 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 facility, provides us with the ability to continue to find opportunities to strategically grow as we make future investments to further enhance our business model.

We also have additional unencumbered railcars available to further leverage our lease fleet as we continue to expand that segment of our business. We continue to return value to our shareholders through the payment of quarterly cash dividends and through our stock repurchase program. On February 22nd our Board of Directors declared our 18th consecutive quarterly cash dividend.

This $0.40 per share dividend to ARI shareholders of record, as of March 17, 2017, will be paid on March 24, 2017. During 2016, we repurchased approximately 761,000 shares of common stock at a cost of $29 million. Board authorization for approximately $164 million remains available for further share repurchases.

At this time, I would like to turn it back to Jeff for a few comments about our potential growth opportunities and joint ventures.

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [5]

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Thanks, Luke.

It's no secret that the next several quarters will be challenging for the North American railcar industry. However, we believe our commitment to manufacturing a wide range of quality hopper and tank railcars, that serve a variety of commodities and customers right here in the United States, sets us apart if from our customers.

Even at lower production levels, we have the capability to efficiently produce high quality hopper and tank railcars and we continue to work with customers on opportunities to fill our production schedule for the second half of 2017 and into 2018. While we offer our customers several different railcar types from our broad spectrum of hopper and tank railcar families we also have the design capability, manufacturing flexibility and expertise to produce many other railcar types tom meet our customer's needs.

Also helping us to remain competitive is the vertical integration of our business as we continue to benefit from our joint ventures and component manufacturing facilities. Throughout the railcar cycle, just like ARI, our joint ventures continually evaluate their production levels. In doing so the partners decided to idle our Ohio casting joint venture production in January of 2017.

We expect that this joint venture will remain idle through at least the end of 2017, subject to reevaluation based on changes in future demand expectations. But, by working with our partners and other key vendors, including our other joint venture, Axis, we have confidence that we can procure an adequate supply of key railcar components at competitive prices for this year.

With the completion of our major expansion projects in 2016 our current capital expenditure projects for this year are more focused on supporting necessary maintenance needs, process our cost reduction initiatives, and continuing to strategically grow our lease fleet, which, as we mention each quarter, remains a priority for us.

With the help of ARL and affiliated company, we have been able to grow our lease fleet to over 11,000 railcars. We are grateful to both the employees and management team for their continued support in helping us build and sustain our railcar leasing business.

Now, with the recently announced sale of ARL, which is anticipated to close during the second quarter of 2017, we have the opportunity to further enhance our capabilities by transitioning the management of our railcar leasing business in house to ARI. We believe our integrated business model lends itself to a solid foundation of knowledge that we intend to leverage as we transition to internally manage our railcar leasing business.

Together with ARL we are preparing for this new opportunity as we add to our existing sales and lease operations staff, aiding in our strategy to target key customers and key railcar types to meet the needs of our customers. We feel our ability to manufacture our own railcars and control the supply chain of these new cars gives us the flexibility and competitive advantage to manage and grow our leasing business.

We expect to continue to get lease opportunities for certain commodities in both hopper and tank railcars going forward. By further strengthening our organization through this endeavor and utilizing synergies from our manufacturing and railcar services operations we believe we will better equipped to continue to be competitive in the North American railcar leasing market.

In a continued effort to support our railcar leasing business and the needs of our customers we remain optimistic in the growth of our railcar services business, by offering repair services over the railcar life cycle we gain valuable insight into our customers needs. In recent years we have expanded this business to add flexibility and compactly through expansion projects at our traditional repair facilities and our mobile operations.

With the additional repair capacity we have added at our tank railcar manufacturing facility and our ability to leverage ACF Milton's repair operation, we also have the added flexibility to perform traditional repair and retrofit services in a production line set up at those facilities. Our existing repair network stands ready to respond to additional demand opportunities that may arise. Further more, the capacity at these facilities will also aid us, and our customers, in complying with the revised directive as we have already began to inspect some of these cars in 2017.

Now we'll turn the call back over to the operator, and we'll be happy to take your questions. Sandra, would you please explain how our participants can register their questions?

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Questions and Answers

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Operator [1]

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Certainly, (Operator Instructions). And our first question comes from line of Mike Baudendistel with Stifel. Your line is now open.

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Mike Baudendistel, Stifel Nicolaus & Company - Analyst [2]

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Thank you. First, I just wanted to ask you, in that comment on the idling of the Ohio casing joint venture, maybe you can talk about, is there any financial impact there in terms of just higher input costs or how you're thinking about that for 2017?

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [3]

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Yes. Good morning, Mike, this is Luke. We do expect a little bit of a financial impact, just based on the cost to ramp down the facility, so that will hit us here in the next few months, as they have recently idled here in the first quarter, but the marginal cost to keep a staff on-site won't be that big of an impact as we move forward during the idling perfected.

And I'll remind you that the joint venture was idled back in 2009 through 2011 during the last downturn. So you can look at that during the benchmark where we were during that Idling.

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Mike Baudendistel, Stifel Nicolaus & Company - Analyst [4]

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Okay. And I also wanted to ask you, the 3800 units in your backlog, are those all for 2017 delivery?

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [5]

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No, we do have some of those for delivery in 2018 and beyond. So there is a portion that stretches out passed 2017.

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Mike Baudendistel, Stifel Nicolaus & Company - Analyst [6]

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Can you tell us how many stretch out passed 2017?

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [7]

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Yes, there's disclosure in our 10-K that will be released later today, I think it's around 2500 that we expect to be shipped in 2017.

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Mike Baudendistel, Stifel Nicolaus & Company - Analyst [8]

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Okay. and also, you guys mentioned adjusting your production rates, I think you mentioned that briefly, and give a little bit more detail on that. Are you cutting shifts or cutting production rates? How much capacity you expect to take out?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [9]

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Yes, so we try to systematically ramp up and ramp down as the market goes up and down. As we've said quite a bit, we didn't really ramp up and expand capacity back during the energy booms, knowing that production was going to come back down at some point. The industry expectations are the total industry is going to be ramping down to 40% this year.

I know some competitors have said up to 50% reduction. So we see systematically ramping down throughout 2017, probably in the 25% range for the year. Is kind of what we're targeting it at.

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Mike Baudendistel, Stifel Nicolaus & Company - Analyst [10]

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Okay. Yes, that's helpful. And then I just want to ask, on the services business, margins were a little bit lower than what we're accustomed to in that segment.

And you're going through some changes in mix, and what exactly your building capacity, et cetera. And how do you think about the normalized margins and services or what margin you're targeting in services?

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [11]

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So we still expect that margin to be maintained in the 20% range. The low 20% range. So we're just going through a blip here in the fourth quarter. Certain customers have pulled back on their maintenance spending and haven't shopped as many cars and so we're just taking a mix of work that's causing us to be a little bit inefficient as we ramp up some of these expansions and train some of these new employees that we've hired over the last several months.

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [12]

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And we still think there's still quite a bit of tank qualification work and other hopper and tank project work that should come through this year and next year.

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Mike Baudendistel, Stifel Nicolaus & Company - Analyst [13]

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Got it. That's helpful. And just one last one for me, just to keep track of the industry data, were there any cancellations in the quarter?

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [14]

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There were. For the industry?

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Mike Baudendistel, Stifel Nicolaus & Company - Analyst [15]

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Just for you specifically, I was thinking.

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [16]

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No, none for us.

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Mike Baudendistel, Stifel Nicolaus & Company - Analyst [17]

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Okay. Thank you.

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [18]

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Thanks, Mike.

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Operator [19]

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And our next question comes from the line of Justin Long with Stephens. Your line is now open.

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Justin Long, Stephens, Inc. - Analyst [20]

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Thanks and good morning, guys. So the first question I had was on orders, you mentioned that you -- in the first couple of months this year, you've received some orders. Is there any way to quantify the number of year to date orders that you've received?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [21]

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We'll get the detail. But it's several hundred cars, both tanks and hoppers.

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Justin Long, Stephens, Inc. - Analyst [22]

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Okay, that's helpful. And then, I wanted to also ask about railcar pricing and how it trended in the fourth quarter, and so far in 2017, I think you mentioned a few times that it's a competitive environment. But I'm just curious if you've seen any stabilization in pricing on a sequential basis, or if it's continued to weaken over the last several months?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [23]

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So I would say overall, it's still weakening, but we kind of break it into two buckets. So you have the more commodity standard car types that the whole market can build. Those continue to get squeezed down, but what we pride ourselves on, and we've been focusing on, and working with our engineering and production groups to have the flexibility to do, is to do more of the specialty type railcars, both hoppers and tanks, and so we mix in those with some of the standard car types.

So the overall margins continue to go down somewhat. But as we get some of those specialty cars, we're able to hold margin on those over the others.

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Justin Long, Stephens, Inc. - Analyst [24]

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And maybe building on that last point, I wanted to ask about your ballpark expectation for manufacturing margins as we get to 2017. Do you think what we saw in the fourth quarter is sustainable this year, just given what you described with more specialty cars in the backlog? Or should we anticipate some additional pressure?

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [25]

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Justin, this is Luke, I think as we have talked about the market getting more competitive, we have taken some orders with lower margins than we've seen here the last couple of quarters. So we do anticipate some softening on our manufacturing margin going forward, but I expect volumes to come down just slightly, as Jeff had eluded to earlier.

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Justin Long, Stephens, Inc. - Analyst [26]

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And just from a high-level, I mean, do you think, even with those competitive pressures that you've seen manufacturing margins can stay in the double digits, or could we be below that level at some point this year?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [27]

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I mean, low double digits is our target for the first half of the year. We have gotten pretty comfortable with our production rates the first two-thirds of the year. We still have got some work to do the last third of the year, so depending on what orders we get over the next three or four months. Obviously volume plays a role on overhead spending and absorption that last third of the year. So probably more to come next quarter on kind of a full year look.

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Justin Long, Stephens, Inc. - Analyst [28]

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Okay. Great. That's really helpful, I'll leave it at that and appreciate the time.

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [29]

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Thanks, Justin.

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [30]

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Thanks, Justin.

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Operator [31]

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And our next question comes from the line of Matt Elkott with Cowen and Company. Your line is now open.

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Mark Elkott, Cowen and Company - Analyst [32]

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Good morning. Thank you, guys. I just wanted to follow-up on the order profile in the first quarter. You said that the margin profile may be a bit more tempered in the first quarter. Does that also apply to the ASB? Does that mean that you've got less -- fewer of those specialty cars that you mentioned earlier that helped your ASB stay stable or increase?

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [33]

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So, I think what Jeff was referring to, we hope to keep the first half, the two-thirds of the year in the low double digits, depending on volume. So some of the orders we have taken have been a little bit lower margin for delivery later in the year. So just a mix, we're still getting some of the car types that Jeff mentioned.

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Mark Elkott, Cowen and Company - Analyst [34]

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Got it. And in the notable uptick in orders that you've seen in the first quarter so far from the fourth quarter, do you get the sense that this is partly a culmination of the recent uptick in inquiries we have seen since mid November or so?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [35]

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Yes, I think we're riding a little bit of the wave since the election, with the economy doing what it's doing. So the jury is still out how sustainable it is, but I think definitely in the last couple of months, we have seen a little bit more opportunities out there, and we're trying to take advantage of them. I will say though, I mean, a lot of our customers are bigger companies that realized that the market has softened and it's turning more to a buyer's market.

So, I think there is some bubbles of demand that order will be placed this year, but obviously the quantities are going to be a lot smaller and so we're all going to be fighting for those. The specialty cars, you know, we pride ourselves, we've built a lot of plastic pellet cars, we continue to get a lot of inquiries for plastic pellet cars. Specially tank cars, we're chasing several of those, but, again, some of these will be at smaller volumes.

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Mark Elkott, Cowen and Company - Analyst [36]

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Okay. And do you get the sense that some (inaudible)cars are starting to come out of storage, given the recovery in the commodity?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [37]

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Yes. We definitely have heard that. And obviously you can see in the numbers that were leased from the AAR, and talking to our customers, they have actually started asking about sand cars a little bit more. So I don't think anything dramatic in the next several quarters, but it does give us a little hope for future years that we could get back to higher levels on sand cars.

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Mark Elkott, Cowen and Company - Analyst [38]

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Got it. Great, thank you very much, guys.

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [39]

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Thanks, Matt.

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Operator [40]

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And our next question comes from the line of Matt Brooklier with Longbow Research. Your line is now open.

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Matt Brooklier, Longbow Research - Analyst [41]

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Hi. Thanks, Jeff, Luke, good morning, and Luke, congratulations.

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [42]

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Thanks, Matt.

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Matt Brooklier, Longbow Research - Analyst [43]

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So my first question, trying to get a sense for what lease fleet growth could potentially look like this year.

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [44]

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Yes, so if you look at our backlog we disclosed, I mean, we're a little more than 40% in our backlog and with a percentage of those being shipped in 2017, the lease percentage is going to be a lot higher in 2017. It's not necessarily a bad thing obviously it affects our -- the financial numbers a little bit on the short-term, but it's definitely part of our long-term strategy and a little bit of security of lease revenue and earnings for future years. So I would expect it to be probably closer to a 45%, 50% mix the first half of the year, and then depending on what orders we get to finish out the last third of the year, definitely probably going to stay 40%, or maybe a little north of 40% for the year.

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Matt Brooklier, Longbow Research - Analyst [45]

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Okay. And the cars that you have in your backlog right now that are anticipated to go to the lease fleet, those are cars where you already have a customer, you already have a contract in hand?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [46]

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Yes, that's correct.

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Matt Brooklier, Longbow Research - Analyst [47]

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Okay. And you mentioned the ARL sale and the fact that you're bringing in the management of those cars in-house. Can you talk about the potential savings that could result from that? Maybe the timing and the total magnitude?

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [48]

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Yes, so we currently pay ARL a management fee along with some commissions on an annual basis, roughly between $7 million to $8 million. So as we increase our sales force and buildup a team to support the lease management process internally on the ARI side, we would expect a little bit of savings on that number, but it won't be too drastic.

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [49]

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We have do go through the ramp-up and get everything set. So for 2017 probably not -- very little effect. Obviously we're pushing to get some savings out of it in the synergies but definitely going forward we're hoping to have a benefit there.

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Matt Brooklier, Longbow Research - Analyst [50]

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Okay. And can you just remind us, I think Jeff mentioned it, the specialty cars. You talked to building more plastic pellet cars, what are the end markets on the specialty tank car side of things?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [51]

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It's mostly chemicals, and without getting into specific, specific commodities, which would kind of identify customers, we really don't want to go into that detail. But it's just a variety of different chemical type cars. We've built some stainless steel cars, we built some heavy-duty pressure tank cars that not every manufacturer can build.

And then some -- just some normal general purpose insulated -- cold insulated tank cars that serve a variety of different commodities.

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Matt Brooklier, Longbow Research - Analyst [52]

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Okay. And then last question. Are you able to talk to the backlog and how much exposure you have to energy cars moving forward? I think you cycled through all of your crude tanks at this time. But maybe just give us a little bit of color in terms of cars and backlog that are potentially bound for energy markets? What's kind of left at this point?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [53]

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Yes, I mean I think it would be similar to what we said in past quarters. We try to keep a very diversified lease fleet. We have over 25 different car types or commodities that make up our lease fleet.

And no one commodity makes up more than 20% of our total fleet. So we do have some exposure on the energy crude side. But it's spread over the next five years as lease rates expire.

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Matt Brooklier, Longbow Research - Analyst [54]

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Okay, that's helpful. Appreciate the time.

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [55]

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Thanks, Matt.

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Operator [56]

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(Operator Instructions). Our next question comes from the line of Tyson Bauer from KC Capital. Your line is now open.

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Tyson Bauer, Kansas City Capital Associates - Analyst [57]

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Good morning, gentlemen.

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [58]

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Good morning, Tyson.

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Tyson Bauer, Kansas City Capital Associates - Analyst [59]

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As we've seen in the prior year, sometimes you'll get a pull forward effect in Q4 for customers who want to get that delivery before December 31st. Did we seen any of that this year?

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [60]

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Yes, I definitely think we saw some of that as you see in our quarterly kind of trend. We were a little bit lower in Q2 and Q3, compared to Q4, and really, that was us just ramping up a little bit to meet customer requirements for delivery in the fourth quarter. So, yes. as we've seen in the past year, we did see a little bit of that effect in the fourth quarter.

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Tyson Bauer, Kansas City Capital Associates - Analyst [61]

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Does that mean we're going to see a little bit of a void in the first quarter as we start this year and then kind of pick up a little bit more in the summer months, so we could see a fairly significant drop in the third party deliveries early in 2017?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [62]

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I wouldn't say it's significant, but you are going to see a reduction. Like we said, we're starting maybe 20% 25% for the year, and more of that will be weighted in the second half of the year if we don't fill in some order book. But the first half will be down compared to Q4.

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Tyson Bauer, Kansas City Capital Associates - Analyst [63]

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Right. Have we taken any steps for employee furloughs at this point? Is that something that will be dependent on how many orders you can get in the next quarter or so?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [64]

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No, we haven't. Like we have said in the past, we try to systematically and strategically ramp up and ramp down, our two biggest assembly plants are within 20 minutes of each other down in Arkansas. And so we move employees back and forth between the two big plants as needed.

Also, keep in mind, the Marmaduke tank car facility, we're utilizing part of that facility to do traditional and repair project work down there. So we're moving employees over to do that type of work. If we were to ramp down further, we could move employees to do repair work as well.

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Tyson Bauer, Kansas City Capital Associates - Analyst [65]

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Are you able to leverage having U.S. based facilities, given the long production schedules, and when these orders are taken, that gives your customers a little more solace of eliminating some of the unknowns and the uncertainties given the administration? Is that something that is -- there's an ear out there listening to that pitch from you guys?

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [66]

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Yes, we think so. It's definitely a hot topic right now. No secret, all of our manufacturing is in the U.S. Most, if not all, a big part of our component parts come from the U.S, so we don't have any major concerns. If anything, we think it's a benefit and a definitely favorable situation for us. Also, what we have also done over the last year or so, work to streamline our order processing, development and production process. So some builders may take 16, 20 weeks from time of order to build a car, and we've gotten that down -- probably cut that down to half that to be able to be more reactive and flexible for our customers because a lot of them are waiting until the last minute to order cars, and then we'll jump through hoops to try to make it happen for them.

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Tyson Bauer, Kansas City Capital Associates - Analyst [67]

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Thank you, gentlemen.

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Luke Williams, American Railcar Industries, Inc. - SVP, CFO, Treasurer [68]

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Thank you, Tyson.

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Operator [69]

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And I'm showing no further questions at this time. So I would like to return the call to Mr. Luke Williams for any further remarks.

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Jeff Hollister, American Railcar Industries, Inc. - President, CEO [70]

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This is Jeff Hollister. Let me say before we conclude this morning, I would like to take a moment to thank our employees for all of their efforts and hard work this past year, to all of our customers for their continued business, and our shareholders for their support. The challenges this rail market and its cyclical nature brings -- it forces us to react and adjust our business model accordingly. It's not easy to ramp up production efforts and then later ramp back down to lower levels due to softness in the market, like we're seeing now.

But our employees and our management group throughout the Company, from our manufacturing plants, to our repair facilities, and finally our support groups at our headquarters office, are fully committed to keeping ARI competitive by remaining flexible, cost effective and responsive to our customer's needs at all times.

That concludes our conference call this morning. We want to thank everyone who are participated and we look forward to talking to you next quarter.

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Operator [71]

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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 great day.