Greenbrier Companies Inc (GBX) 2004 Q1 法說會逐字稿

Hello and welcome to the Greenbrier companies first quarter 2004 earnings release conference.

Following today's presentation, we will conduct a question and answer session.

Until that time all lines will be in a listen-only mode.

At the request of The Greenbrier Companies, this conference is being recorded for instant replay purposes.

At this time I would like to turn the conference over to Mr. Mark Rittenbaum, Senior Vice President and Treasurer.

Mr. Rittenbaum, you may begin.

Thank you and good morning.

Welcome to our first quarter earnings conference call.

After we review our earnings release and make a few remarks about the quarter that just ended and the outlook for 2004 and beyond, we will open it up for your questions.

As always, matters discussed in this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

For our discussion today, we will describe the important factors that could cause Greenbrier's actual results in 2004 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

Today we announced profitable results for our first quarter ended November 30, 2003.

The company reported net earnings of 28 cents per diluted share out of 4.2 million or 28 cents per diluted share of - on revenues of 112 million.

This compares to a loss of 0.7 million or 5 cents per diluted share on revenues of 97 million in the first quarter of our fiscal 2003.

For the quarter that just ended, both North American continuing operations and discontinued European operations were profitable.

The company anticipates continued profitability for the balance of fiscal 2004 as the result of higher production rates, improved margins and operating efficiencies.

Earnings from our continuing operation were 3.1 million for the first quarter, up significantly from the 1.8 million in the fourth quarter of 2003 and 0.1 million in the first quarter of 2003.

This improved performance was driven by higher new railcar deliveries, improved margins and lowered interest expense.

Earnings from discontinued European operations were 1.1 million in the first quarter that ended -- that just ended compared to earnings of 1.4 million in the fourth quarter of last year and a loss of 0.8 million in the first quarter of our last fiscal year.

The improved performance -- continued improved performance was principally due to higher manufacturing margins associated with improved manufacturing efficiencies and favorable exchange rates, foreign currency exchange rates as well as lowered G&A expense associated with cost control measures.

Certain direct G&A expenses attributed over European operations were reclassified in the prior year's first quarter from continuing to discontinued operations.

The company's combined European and North American new railcar manufacturing backlog at November 30, 2003 was 11,500 units valued at 620 million, this is double the 5700 units valued at $310 million at November 30th of 2002.

Our North American backlog in the quarter at the end of the quarter was 9900 units valued at $480 million.

European backlog was 1600 units valued at $140 million.

Turning to manufacturing, revenues from continuing North American operations were $94 million.

In North America, during the quarter we delivered 1700 cars.

This compares to 1800 cars in the fourth quarter of last year and 1200 cars in the first quarter of last year.

The current quarter deliveries include about 150 cars from our unconsolidated Mexican joint venture.

Whereas the fourth quarter of last year included 300 units and the first quarter of last year had no units delivered.

These deliveries are not included in revenues since the joint venture is not consolidated.

We continued to anticipate the deliveries would exceed 8,000 units for the entire fiscal year.

Our manufacturing margin for the quarter was 9.6%.

This is up significantly from 6.2% in the first quarter of our last fiscal year.

The margin was favorably impacted by higher production rates and operating efficiencies.

For 2004 as a whole, we expect margins to be closer to 8% to 9%.

These double-digit margins are still difficult to sustain in this marketplace.

Our leasing and services, Marine manufacturing, industrial forge, and rail services businesses continued to provide a stable revenue base and positive contribution to earnings and cash flow.

Leasing and services' revenues for Q4 are -- leasing and services revenue for the quarter that just ended were 18 million dollars similar to the prior quarter.

Leasing margins remain around 39% and we anticipate similar margins for the balance of the year.

There was a 100,000 of pre-tax income from the sale of leased assets both in the quarter that just ended and in the fourth quarter of last year and there was virtually none in the first quarter of last year.

Our lease fleet utilization, that is, the percentage of the fleet that is on lease, increased 3% during the quarter to 95%.

Our fleet now consists of 12,000 owned units and 113,000 managed units.

G&A expense for the quarter was 8.2 million dollars, this is down 0.9 million for the fourth quarter of the last fiscal year, and it's similar to our second quarter of the last fiscal year.

You will recall our Q4 of 2003 included professional fees associated with litigation and strategic initiatives.

Also there was some one time employer related costs during the quarter.

We expect the G&A expense will run between 8 and 8.5 million for the quarter for the balance of the fiscal year.

Interest expense for the quarter was 2.1 million dollars, down 1.1 million from Q4 of 2003.

The reduction is due to lower outstanding borrowings and reduced interest rates on certain of those borrowings.

As well, the current quarter included a foreign currency exchange gain of 500,000 whereas the prior quarter included a foreign currency loss of 300,000.

Interest expense should run about 2.2 to 2.3 million per quarter for the balance of 2004, excluding any currency gain or loss that might occur in a quarter.

The tax rate was 42% for the quarter and should run at a similar rate throughout 2004.

Depreciation expense was 5.2 million for the quarter and should run about 20 million dollars in 2004.

In '04 we intend to more aggressively deploy capital and leasing assets and anticipate a net CAPEX that is gross CAPEX minus sales from the lease fleet of about 30 million dollars.

Discontinued European operations continue to show marked improvement as a result of the costs containment and other measures taken in 2002 as well as market improvement, lower interest rates and favorable foreign currency exchange rates that makes exports from Poland into the central European and western European marketplace attractive.

We have made substantial progress on the recapitalization of these operations and have entered into an update letter of intent with a private equity group.

We remain committed to completing this transaction by the end of the second quarter, subject to the necessary regulatory approval.

After the recapitalization, Greenbrier will maintain a minority position in Europe and assume the passive role.

Based on the current letter of intent, management believes the completion of the recapitalization will not have a material effect on the consolidated results of operations.

Turning to the balance sheet - Greenbrier remains very liquid with cash balances of 51 million in unused lines of credit of 110 million.

During the quarter, senior and subordinated debt was reduced by 7 million, in addition to the lease fleet of manufacturing CAPEX for 10 million.

We anticipate pay downs of term and subordinated debt and participation expense of over 45 million during fiscal 2004.

Our inventory levels of over 100 million warrant some discussion.

About 50 million of this inventory in both the current quarter and the prior quarter is for raw materials and work in process to produce finished goods for sale.

Also both the current and the prior quarter include 33 million of inventory related to rail cars which are hung up on our balance sheet in inventory -- hung up on our balance sheet as inventory and deferred revenue.

The customer has accepted and paid for these cars.

However, there is a contractual contingency due to their ability to enter into a sale lease factor at a future date.

This contingency results in the (inaudible) until that contingency is removed.

In addition, the current quarter in place 19 million of rail cars held for sale, which is an increase of 13 million over the prior quarter.

And really this is the increase in the inventory balances from the prior quarter.

Greenbrier, in the normal course of our business, builds rail cars and places these cars under lease to third party customers and within warehouse these transactions per syndication to third party leasing companies.

There can be a delay between the time the car is produced and the syndication takes place until the syndication to leasing company takes place, these rail cars are shown as inventory and again hung up on the balance sheet.

Finally, you will note a new line item on the balance sheet labeled subsidiaries shares subject to mandatory redemption.

This line item replaces the line item which minority interest which previously appeared on the balance sheet and this exchange is taken place in conformity was statement of financial accounting standards number 150.

Other than the change in the description of this preferred stock interest in one of our subsidiaries, this SFAS has no effect on Greenbrier's financial statement.

With that I will turn it over to Bill and then we will open it up to your questions.

Thank you, Mark.

I think its worthwhile to just follow up for a moment on the CAPEX.

The 30 million dollar number that Mark talks about needs to be put in perspective in connection with what we consider to be our manufacturing and true CAPEX, which will be under 10 million dollars.

At the end of the last quarter, I said that during the year we would begin to deploy cash to enhance earnings in our lease fleet and we are in the process of making a clear investments in that lease fleet at the -- and that is reflected in this quarter.

We're also making investments in our supply chain.

We are managing our capital expenditures very tightly.

We expect our manufacturing EBITDA to continue to increase, and we will be ending the year at much higher levels of cash flow with continued very close monitoring of the cash flow for CAPEX expenditure.

We routinely accumulate transactions in our lease fleet and sell these and, during the year, we intend to deploy cash into highly liquid investments in leased cars.

This will appear both in our inventories marked just describe and permit CAPEX, but we will be able to sell those out.

And in the meantime, we will be earning an attractive rate of return relative to investment in money market securities.

This will enhance earnings during the year.

As our news release caps during the quarter we increased our backlog-improved lease for utilization.

We are in an improving market for railcar leasing and sale and we also took final steps toward re-capitalizing our discontinued operation in Europe.

Our investment in Ohio Castings, an investment made with ASF and ARI, I'm sorry, American car and foundry, completed important financing during the quarter with the state of Ohio for the startup of its alliance operations, which is beginning operations this month.

The two facilities in this venture, Cicero and alliance, will provide needed free car truck castings for the industry when the industry has exceeded supply.

This is a good thing not only for the three partners in the venture but the industry and other car builders as well.

On a strategic front, we work with outside advisors over the past nine months and these costs are reflected in our D&A costs.

We're monitoring the entire company for cash flow and reduced expenditures and we're spending a great deal of time on enhanced manufacturing efficiencies and strategic initiatives relative to our manufacturing operations.

We have moved to a cash valuation management of each of our major business units and are closely working to enhance manufacturing EBITDA and to monitor and control capital expenditures.

Turning to the markets for a moment, Green brier has maintained its market share at very high levels during the year.

Our industry mark share remains around 30% and our rated capacity is half that amount.

Nonetheless we have adequate space for revenue growth during 2004 and 2005 and we will use several methods to enhance our manufacturing capacity to keep up with rising demand for freight cars in the United States.

We're also monitoring closely supply chain management issues including steel pricing, scrap surcharges and the truck castings issue, which is something we have been attune to for the last year.

We think we're doing well in hedging both the supply costs in the steel area, which is an important area, and also managing well our currency exposures.

It's important to recognize that Greenbrier is unique in North American railcar builders in having a footprint, a manufacturing footprint in each of the three NAFTA countries, Mexico, Canada and the United States, currencies have become increasingly important over the last number of years.

We continue to balance our production plans to reflect the realities in the NAFTA marketplace.

Overall, our U.S. and Canadian railroads during 2003 carried a total of 12 million containers and trailers up about 7% over the previous year.

This is very good news for double stacked cars.

The market with Greenbrier is over 60% market share.

The growing economic recovery, higher interest rates and a weak U.S. dollar have helped other commodity traffic as well.

And we expect to see continued growth in our basic markets into the next few years.

We have excellent financial visibility through the balance of this fiscal year and into 2005.

Earlier I talked about twin forces of the recession and industry adjustment.

These are passed us now.

And we are looking forward to participating in this continued revival of not only the railroad industry but also the general economy.

With that I will turn it back to Mark.

With that operator, we will open it up for questions.

Thank you, [OPERATOR INSTRUCTIONS].

The first question comes from Bob Fetch (ph) from Lloyd Abbott.

Good morning, gentlemen.

Good morning.

If you could elaborate little bit more on the demand out look particularly in North America your backlog is up about 900 units.

Along with that demand, if you can talk about the pricing a little more, the imputed average price per car with the stated dollar backlog, it shows about a 9% increase from slightly fewer than 49,000, above $53,000 car.

Is that apples to apples or are there mixed issues in there?

On the demand side, if you can break out the types of cars where you see some of the best demand and where you have yet to experience it?

Perhaps I can address the -- some of the unit sale prices that you referred to and Bill can address the market out look.

If you're taking manufacturing revenues and dividing those by deliveries for the quarter, that would be mixing apples and oranges for a number of reasons.

The manufacturing revenues includes new rail cars as well as repair and refurbishment, Marine, and industrial forged revenues.

And while new rail cars clearly are the lion's share of that, there are all of those items in there.

Secondly, the deliveries that I referred to from our Mexican joint venture are not included in revenue because those are not -- because that's -- a joint venture is not consolidated.

And approximately 150 cars from the joint -- that we include in our 1700 car delivery is -- are in those numbers for the current quarter.

And in the first quarter of last year, there were no deliveries.

So I cannot take the simple math and apply that and get an average car value.

Excuse me, though, can you do that though with your backlog content that you have reported of $480 million, can you divide that by the 9900 cars and take the prior period and does that result -- are they applicable?

Yes.

That would be applicable.

And that's really what I was -- that's what I was asking initially.

And at about 9% value difference per unit or car in the backlog from period to period, is that largely offset with some of the costs pressures or does that you just suggest a better pricing environment with the demand out look improving as you look out?

There's a little bit of product mix going on in that that would denote some of the change as well.

So we sponsor right now three car types, in model cars, boxcars, and center beam cars.

And each of those has a different sale price.

And with the boxcar being the most expensive, of those car types.

So there's a little bit of a difference in car price and there's also some pass through of cost increases.

But we have seen some margin improvement from the prior quarter of the prior year due to operating efficiencies.

So less of this is due to increases and just pure increase pass-threw of -- about our ability to pass through price increases.

Can you bring out of 9900 cars in the backlog, how much are in those three car types, and where do you see the greatest demand of the three?

We do not break that out by car type.

The intermodal cars are the majority of those cars but we do not break it out by car type.

And lastly, just on the production side, you talked about ensuring that you can increase your capacity to grow with the industry.

What would you, what would you be targeting as far as a production run rate in terms of a capability out 12 and 24 months from now?

We expect this year to produce about 8,000 cars, and we have the rated capacity in North America to produce significantly in excess of that.

Probably in the neighborhood of 11 to 12,000 cars fending on the mix with our existing facilities.

Today we have, in our venture in Mexico with bombardier, one of two lines deployed and one line open, which is a very valuable line to us.

We are considering the balancing of our production in Canada into Mexico.

And that would leave line space open in Canada.

So, we have a, some existing capacity in our current mix which is not surprising since only a year ago the industry was really way over capacity.

However, having said that, the fundamental fact is that, in the car types we're operating in two segments, intermodal, which is enjoying very strong growth and supply and demand are relatively balanced and as long as the growth continues, which we expect, into the foreseeable future, despite currencies, we're going to see very, very strong base demand for a core product double stacked cars and we will continue to have improving margins and good production efficiencies, not through pricing but just through production efficiencies in long runs in that product.

The other segment, forest products is driven by a couple of things, the economy and the US dollar.

And we're getting some, a boost in that market and that market remains fairly strong.

I will just give you an example on the double stack side, whereas intermodal growth was year-over-year, the double stack approached doubles of 10% and that's a sizable base of supply requirements, if container demand continues anything near that pace, we expect very strong demand over the next couple of years.

The major constraint on margins today is the effort by the steel industry to pass on costs, and they're making efforts to do that, even in backlog.

We're strenuously resisting any such move where we have placed firm orders, to pass those costs along.

And, so far we have managed to stay out of the cost squeeze.

Currencies are another issue and we managed to hedge supply and currencies quite well.

We think we're in good shape on the supply side.

We haven't had any serious production interruptions on the supply side but this is something we will continue to monitor.

We expect to see, as the year goes on and into 2005, to be able to restore some margins as the industry reacts.

Part of this will depend on the reaction of our competitors.

Some of our competitors continue to price in a rather separate way, and it's not doing the industry any good.

But I think, and some of them have higher costs than we do.

Do some or all of your contracts have steel surcharges?

We're only concerned principally with scraps surcharges.

Or we have allowed for them in our bids.

In most cases, we're having, to give you an example, in the last two quarters internally, we have exceeded our forecast by significant amounts, and some of that internally, our internal forecast.

And we have been able to exceed our targets on the materials costs.

We have had one factory that has had some issues with labor hours.

Otherwise, we would have had some really attractive overages on our targets on steel costs.

So, so far we think we have done a very good job of anticipating this problem.

We did it with the castings business.

We were way ahead of it in castings.

Maybe not as quick to try to hedge our steel costs, but it's hard to do that.

And we're in reasonably good shape for supply chain management during the year.

Thank you.

Mike Doersch from MKG Financial.

Your line is open.

Congratulations on a great quarter.

My question is -- a number of them have been asked already, but let me just follow up on the one about capacity.

You're saying, you have potential capacity of 11,000 to 12,000 units.

I'm wondering how quickly that could be brought online.

Is there any kind of lag there?

Is it something, if demand is increasing rapidly, that you can bring that on relatively quickly?

Well, I think it's important to realize that there is significant excess capacity remaining in the car building business.

It is constrained right now by supply chain management issues, both truck castings and to some degree steel and other components.

The supply industries suffered dramatically during the recent downturn of some of the company's -- many of the companies are not public.

Many of them were driven to the wall.

The total capacity support card building declined.

Quality declined.

Safety issues arose.

And these are all things that are driving a kind of total constraint on the total system.

So we are able to, with our existing network, and with the demand we see in our products, move forward next year with the existing facilities and with some out sourcing, selective out sourcing that we have done, both in Europe and here.

I don't see that as a particular constraint.

We are, during the second half of the year, likely to be fully deployed in all of our manufacturing facilities, and since all of our lines will be running.

And that's what our plan.

What kind of effects have you seen as far as the weakening dollar overseas?

Are you seeing any kind of increased competitiveness with your bidding on jobs over there?

Most of our international business is contained within the countries where the regions, where the products are sold.

I used to say we manufacture in Europe for the market in Europe.

We do have supply chain advantages where we bring materials in from and think that, fabricated materials in from all over the world.

But from our European operations and from Asia.

But the principle driver on currencies has been a boost to the Polish manufacturing facility through the relative valuation of Israel compare to the Europe.

That's really kind of boost to their margins and favors that Polish facility dramatically in the European market.

Here, more competition is coming in the United States and exports out are fairly modest components of the total market due to transportation costs.

That's changing as we all are doing more out sourcing our resources in supply chain management.

How would you characterize the European market at this point?

It seems that your backlog and suppose seems to be a little flat there, is that, would it be fair to say that your European operations are - were at least the demand in Europe is lagging in United States and North America?

Yes.

The market there is smaller than here.

It is -- it's undergoing some fundamental changes.

We have opted over a year ago to diminish our footprint in Europe and to reduce our position to a minority interest to discontinue that operation.

And I think that reflects our view of that market in terms of its size.

We're re concentrating our activities to supply chain management and to -- particularly to sub components in the supply side in North America and in Asia.

Right the gain on your discontinued operations, was that -- that was the Polish facility?

Yes.

That's the Germany and Poland.

And some of that were just better margins.

You know, the market is strong over there.

It's certainly -- we're doing very well over there for a discontinued operation.

And but the decision has been made to pull out of Europe and we will end up with a minority interest in that, probably -- if we're able to close this transaction in this current quarter.

So, this gain that we had this quarter, is that the last of it or is there some more to come as far as charges or gains?

It depends on the timing of the completion of the re capitalization.

If it's, we would, after the re capitalization, the effect of the re capitalization itself is we expect it to have an immaterial effect and not a material effect on the financial statements.

If the re-capitalization occurs after the quarter end, we will have one more quarter of reported, of reported earnings from there and we will have earnings from there up until the date of re-capitalization.

And as we mentioned earlier, we intend to complete this before the, we intend to complete it by the end of the next quarter subject to regulatory approvals.

We followed a very conservative policy in accounting for our European operation.

And having written down those assets two years ago in our focus on cash, it is possible and we're going to continue to be a very, very cautious accounting on the European operations.

So, it is possible, as we begin to recover cash back in the deal we're making over there that that income will come in to and continue to be a source of earnings.

However, it's not something that we're forecasting.

OK, well I have asked enough questions.

I will get back in the line and let somebody else ask a question.

Thanks a lot.

Thank you.

Mike Houser from the Robbins group, your line is open.

Hi, guys.

Hi, Mike.

This is a much more exciting call than it was two years ago at this time.

Yes, it was.

Just a couple of questions.

I notice that the backlog, the total backlog as a matter of units is down slightly from a couple of quarters ago but yet the dollar value on the backlog is almost the same.

And I'm wondering if that is an indirect indication that you're starting to see some pricing

It's probably a mixed issue but we are seeing, as we're seeing with steel pricing and with other pricing, there's more sensitivity on the part of all manufacturers who have had very lean times to try to get back to normalized margins and this is something that customers all overt world always resist, but it is important that our industry have profitable operations and positive cash flow.

So, we're determined to remain focused on that, even if we have to sacrifice backlog or revenues.

And very keenly focused on EBITDA and cash flow.

We believe that we will see margin improvement but we do have these unknowns in constraints of continued overhang in the capacity of the industry and supply.

So, it's a little imponderable.

So, we're hopeful of having margins but the forecast is in the pricing that we've been able to get.

Our leasing company also gives us an ability to stage transactions to enhance revenue, and in this kind of a marketplace, this particular time, in many cases it's preferable to lease cars into a market like this to compete head-to-head to sell them.

And it's also going where the railroads seem to want to go.

They would prefer that other parties put the capital into the freight cars, and that has been a trend we have watched over the last five, six years, 10 years actually.

The railroad's share of their own freight car fleet just continues to include, that ownership has been transferred to many, many institutional owners.

Well so you are -- suggesting that we might be -- should maybe focus on leasing and services revenue as possibly increasing over the next several quarters?

Well, the way we use our leasing fleet is that we enhance our manufacturing margin with it because of the staged -- the staged sales from our leasing fleet.

So as we -- as we operate in the marketplace and invest in leased equipment, put that equipment out on lease, capture a revenue stream, consolidate that, and then turn around and sell it, we can find opportunities for higher margins in the sale and operating that way and going out and bidding directly head-to-head on the transaction to sell to a railroad, and the principal buyers are not the railroads.

The principle buyers in many cases are financial companies.

Back to the backlog for a second.

It looked like listed in the last couple of quarters, as a total number of units that the number is flat or down a little bit.

But you also mentioned that it was part of your goals over the next, or the balance of the year to be more fully utilized with your three facilities in North America.

So from that, I'm also assuming that we should be seeing some top line growth?

Yes as well as, again, for the quarter, we delivered 1800 cars and we're forecasting for the year 8,000 cars so we will have to be operating at a higher production and delivery rates for the balance of the -- for the balance of the year.

And, indeed, that would indicate that, with those increased deliveries, even when you back out what is coming out of Mexico that there might be top line growth.

You know, you mentioned that there's still irregular pricing behavior from the competition.

Do you have a sense whether some of that competition might end up going away permanently or that will be a constant source of erosion of pricing power?

It's not so much individual competitors as it is, it is the factories that are owned by the competitors.

In fact, competitors sometimes come and go but the factories, if they're good factories, remain.

So if the factory is mishandled during at downturn, some have been they may be threatened.

But there's a lot of capacity out there.

Many of these have been closed so there's been a permanent adjustment in the total capacity of the car building as well as the total capacity of the spine chain.

And both of those will be constraints on natural constraints on the market and therefore will, in their own perverse way, enhance margin.

The behavioral aspects of this, we watch the castings business where the pricing went below there cash cost and then began doing that on a very significant scale and it's difficult to understand that kind of behavior, but it occurred in.

And I think that now, as the, as we go into 2004 and 2005, we see almost a sub-correcting mechanism where the capacity constraints of the supply chain and the closed plants will make it more difficult for the market to respond to demand, even if it is excessive.

And that will mean that pricing will be able to go up.

That's the perverse thing you're talking about as far as margin is concerned?

It's perverse, but a good thing for the industry.

It's not a bad thing to have to have some rationality brought to the entire commercial picture.

I think everybody in this market, in this industry has to recognize that the supply chain to the railroad industry is crucially important and, I think there's been a great deal of neglect of it.

And it's simply not possible for this Darwinian process to go on with people serving the railroad customers by pricing below their costs.

If the railroads drive their suppliers to do that, they're going to have no suppliers.

And we have compare this close to this on the cast traffic exert in the business on the casting side and this could happen in car billing.

Right now, things are looking like they're really correcting and I think the railroads have awakened to this issue.

We will see a much more stable period in the next year or two.

Are there other areas of concern outside of truck castings?

You mentioned steal a moment ago.

Are there other component parts of the rail cars in the supply chain that are causing you some concern?

Not immediately, no.

There's quite a bit of concentration on the supply chain side with obscure component suppliers getting down to two sources and each market and probably realistically, only one.

It has to be a great concern to the railroads and to of course car builders.

You are, you mentioned that the next quarter you hope to re capitalize the European operation, and then, you know, that will be, I imagine the partners will come in and your ownership will be reduced and that's an inevitable course you're taking.

Will that pretty much occur at the similar time with the re capitalization or should we be looking for an event later in the year?

No, it will be simultaneous.

It is part of the same event.

OK.

And my phone clicked out during your presentation on market share.

Could you comment on that again?

Well our market share continues to be roughly twice our fiscal rated capacity on a, in an arithmetic sense.

We have a 30% market share and the rated capacity is about 15% of the total theoretical capacity.

I'm not so sure that the latter statistic is a good one because it hasn't been updated realistically with some plans that are probably permanently closed.

In the intermodal market we continue to have a very strong market share and double stacked cars.

That, of course, is going to be a good thing for us in the -- in the next year or two.

That was my question.

Can you tell us what the market share was for intermodal?

In the double stack market we historically had at 60%, a little over 60% for the last decade.

And we continue to target in that 50% to 60% range year to year.

Not a year ago, you mentioned that the competition was starting to compete on the double stack side.

Has that continued or is that not an issue?

No, it is an issue.

It's always an issue.

We have very capable competitors.

And we have concentrated buyers in the marketplace and they're interested in competition and competitive alternatives so we certainly can't rest on our past accomplishments.

We continue to offer a very broad product line and innovative service, highly engineered products and our products have some inherent engineering advantages over those that are offered by others.

But we have -- we have competitors in that marketplace and we're quite concerned about maintaining our market share and we work hard at it?

Are you still launching about three barges a year?

Three to four.

And our backlog there is very, very strong.

With visibility through most of 2005, that's a very, very strong market.

I hope to see the next when you drop in.

I have to compliment you on your control of SG&A and reduction of debt and interest expense.

It was it's really, really positive and solid.

One question,

You used to pay a dividend.

And it appears that over the last couple of quarters that the operations are stabilizing and improving and I'm just wondering if you have given any thought to reinstituting the dividend?

It's something that we discuss at our board meetings during the last two years.

We have asked employees to take -- and officers of the company take substantial cuts in their compensation.

And we have asked suppliers to help.

We have asked for many sacrifices from many constituencies and we have yet to restore fully the balance in the company.

We want to maintain a tight walk on cash.

But this is something that -- this is a company that is run for the stockholders and, if we determine that this is a desirable thing, we will certainly reconsider it.

And we are in a financial condition now.

Our cash flows could support it.

Well, I thought so.

Thank you very much for entertaining my numerous questions.

Thank you.

John Rogers from D.A.

Davidson, you may ask your question.

Good morning.

Good morning, John, how are you?

Good, good.

Just a couple of follow up things.

First of all, in the castings business, are both of your plants, I think it's two plants that have investments, are those both up and running now?

Cicero all operations is been running continuously and thank goodness it existed or I think all industry would have really suffered.

And the alliance operation is just coming on stream.

Together, those two will add capacity for -- in the neighborhood of 12 to 15,000 units a year.

And with those plants up and going where your backlog is, that's -- that allows you to get over the 8,000 cars this year, or do you -

Well, that -- I think it's certainly a benefit to us on the supply side.

But it's also -- but we really did that not only for ourselves but to provide capacity for the industry.

So, you know, a significant portion of that capacity is sold externally.

But we -- we do not believe from our existing -- with our existing supply base and with foreign supply we will have a constraint with a -- a material constraint with castings throughout -- particularly in the second half of 2004.

The crunch point really is -- we're all going through right now in the industry the crunch point, between now and mid-year.

This is being driven John, by two things.

Just the recovering demand and the fact supply dropped so low in the business.

But it's being driven by a number of defective castings from a facility that has now been closed by one of the participants that went out of business.

And that's added quite a bit of replacement demand as those units have been -- they have been -- as they have been replaced.

So we expect that the castings crises that you want to call that is going to be something that will hang around for the next couple of quarters and then to the next part of the year, they will probably be some other crunch point that everyone will pretty much adapted.

We got good sources now coming.

TPX has been particularly active in moving aggressively to sponsor new suppliers offshore.

The standard car truck has brought in some very badly needed castings as it always has done in the past.

So we have some offshore capacity.

We expect that while everybody is still short on castings today and is creating some crunch, that over the longer pal its going to be OK

And you made a comment, and I may have misheard this, but you said in the second half of this year, all of your lines will be running?

Did I hear that right?

That's what we're planning.

We're hopeful to have that happen.

Not only all of our lines but we will be doing some innovative things with other lines.

In Europe, we've -- over the past four or five years, without publicizing it very much we have done an awful lot of work with out sourcing and supply chain management, to the point of working with some competitors over there, working with smaller fabricators and assemblers and we're experimenting cautiously with that in the United States and it's working quite well so far.

That's a different way of looking at it.

Why own a facility if you can contract out and make it work?

So we have some very innovative supply chain things that we have been doing quietly over the past year.

And does that mean then that you will be operating an 11,000 car annualized rate by the end of this year?

It depends entirely on the demand.

We don't want to take for granted market share or demand but we're cautiously optimistic.

You know, we just came off in two years of tough times.

And the economy, the dollar, intermodal traffic, the lumber market, these are the things that would drive our particular markets.

But right now, you know, we see, subject to supply chain constraints, we see a lot of demand, we could fill in our normal operation through the use of our leasing company.

And we have the financial capacity to do it.

So this has been frustrating, and we're striving to get there, but we want to do it in a way that is responsible and is not just a flash in the pan and a boom and bust type of thing.

And, Bill, does that imply any new car types or on existing car types?

We're continuing as all car builders are, working on new designs.

We have three different car types that we're not currently building that we are engineering.

We, of course, have the auto max design that we haven't built for a couple of years and we expect that market to come back.

We're seeing the auto market coming back now for multi levels.

With orders being placed with other builders and we have one customer quite interested in that car.

So we're -- you know, we're hopeful that we will be able to continue to see strong demand in not only their existing products but some of these new products and older products we haven't built for a while.

And then the other question, is just, on the management of lease fleet, what you're doing for the BNSF, with their cars, are there more opportunities there?

There are.

That's a big deal.

And it's important.

BNSF is a very important customer for Greenbrier and we're determined to really make this a showcase.

So we want to absorb that deal.

That's a lot of cars to manage the back office maintenance on and we want to be sure we do a very good job for them.

There are opportunities in out sourcing throughout the industry.

In fact that's one of the principle areas that we have focused on for internal growth over the last two years.

The repair business, in the integrated service and asset management business, not only for leasing companies but for railroads.

And not only in the class one railroads but the regional railroads and the short line railroads who really need that kind of out sourcing service.

So, we expect to be able to grow that business organically.

And the manufacturing business is what people focus on.

A lot of the growth in our business will be in the service and maintenance and repair business, which has been a real stable source of EBITDA for us.

At one point, during the last two years, this repair and service business provided really, really was the driver for our manufacturing EBITDA and accounted for almost all of it a year or two ago.

OK, thank you.

Appreciate it.

Stephen McBrow from Lloyd Abbey, you may ask your question.

I guess.

So, first, with respect to current industry capacity, if I heard you correctly, I think you said your ratable capacity is 15% of the industry.

I think that would imply, obviously with your 11,500 capacity, a 75 million-build capacity for the industry.

Yet I'm curious.

There's obviously been a good amount of consolidation that has occurred.

What is the appropriate appears to appears, if will you, when, apples to apples, if you will, what the capacity may have been then versus what is a realistic number today?

Brow, that's an excellent question and I wish I knew the answer to that precisely because it's very valuable information.

A lot of it has to do with the intentions of the largest builder in the business industries and facilities that they have closed that won't be opened.

And the future of some of the participants in this business today.

But going back, you can say empirically that in recent history, there were years where 75,000 cars were ordered and built.

We did it.

We managed to do it in the industry.

And perhaps the capacity at that time was a little bit more than that.

We could have stretched a little bit more out of it.

Now the constraint is not so much new car facilities because there are still quite a number of those that could be reopened.

It's expensive to reopen one and not very prudent, unless you can sustain it.

And some of these facilities aren't as efficient as others.

But, I would say that we need about 50,000 cars per year in capacity to satisfy peak demand and probably even the average demand with the replacement has got to be somewhere in that range.

So, I would say that the total capacity today in terms of open factories and the factories that are capable of producing these cars has got to be in that range for sure.

But, we saw what happens with capacity, with the exit of some suppliers in the castings business where we went from the ability to domestically support 70,000 cars a year, 65,000 cars a year to 20,000 cars.

And so, it's very difficult to actually pinpoint that.

If I have to guess today, I would say that probably the facilities that are really operating that are efficient are in the 50,000-car area.

That's good thing.

That's not a bad thing.

That's very good thing for the health of the industry and therefore the health of the railroad industry.

Sure.

I guess obviously that thrust of the question is, is there any fundamental argument one could make that pricing this cycle ought to be better than last cycle?

And I guess to the extent that new capacity can always come back on, there are obviously lead times.

But to the extent that people are focusing in on this 50,000 car build in '05, if that's the appropriate number, and capacity was once 75, does that from your perspective infer that the industry just builds back to the capacity level and in effect we had a potential utilization rate of 70% and therefore we ultimately don't get pricing beyond peak levels?

Well, sometimes it has been said that railroad and supply industry -- railroad supply industry management can grasp defeat from the jaws of victory.

So it's quite possible that people will begin opening plants and trying to -- on the margin, improve cash flow and their market share.

But I think if the railroads are smart and if the industry is smart, we will prevent that from occurring.

We will try to find a way to partner with the railroads, so that we don't have this boon in bust situation.

It's simply not going to work for them for the railroad industry in the long run.

People will exit the business.

There will be consolidation that will remove alternatives.

And I think that the current -- the current arrangement was capacity adjusted downward, and responsible builders perhaps with one or two consolidations will work much better.

And one statistic I'm struggling with is that industry backlog, I think, was down in the first and third quarter I think it was the first in six quarters.

I have been explained that's due to the inner modal consortium, TSX perhaps not having such strong orders in the back half relative to the first half.

Is that a trend you're seeing and obviously that first half order strength would have benefited you more relative to your competitors?

What may you be seeing out of that consortium from a demand prospective today?

You are talking about TTX?

Yes.

Well TTX is very active in supplying automotive and as a pool owned by the class 1 railroad, the intermodal cars and supplies majority of those cars in the marketplace.

They are very efficient.

They have adequate capital.

And they plan their purchases and their fleet management very, very well.

So we expect them to work with the railroads to ensure that -- on the supply and demand for inter modal cars and automotive cars remains at balance.

We certainly don't see it in exiting the business if there's a ban for cars so that if you look at the basic growth statistics and forecast for containers and trailer traffic for example, or any of the other car types which they sponsor and they're into some of the other forced products cars as well, they will responsibly supply that in a very efficient way to the industry.

And so I think these quarter-to-quarter swings can't really be, you know, analyzed with any precision.

I think you have got to look at what they're talking about and their intentions and what they're planning further you know, an entire year.

And we continue to see them in the marketplace.

They just placed an order after the beginning of the year for double staff cars.

And we didn't get that order.

But we didn't have the right package particularly in delivery.

So they continue to be very active and will continue to be so I think to supply the needs of the industry.

OK.

Great thank you very much.

The next question comes from Tom Albright (ph) from BBT Capital Markets.

Good morning.

Had a few questions that kind of piggyback on some of your answers.

First of all, you know, in terms of the market share, what was your approximate market share during the last peak?

I guess it would be 99.

Closer to our capacity it would be in the upper tens, I would guess.

And again that -- and that would, as much be because of capacity constraint at the last peak -- again at the last peak the backlogs and deliveries were closer to 75 to 80000 units so we were really capacity constrained.

And it's much more typical than in a down market that we're able to grow our market share such as we have.

In fact, if we go back and chart, since the history of the company, when we began to get into manufacturing in the 80's, in every downturn, we have increased our market share dramatically, and in every upturn, we have been stressed as we have reached the capacity limits.

We think this time we have plenty of running room through 2004 into 2005 so that will not be a constraint.

As I mentioned earlier, we are using some other techniques and other approaches to this that we think will allow us to attend to maintain our market share more.

But this is a natural safety net which Green brier has enjoyed principally again because it was a leasing business.

And again, on a last peak type of question, what was your approximate unit in 1998 or 1999 that you actually delivered from the manufacturing business?

Wow.

We got up to -- I would have to get the exact number but I believe we got up to about 8600 units.

But I don't have enough of that detail historic information in front of me to give that to you.

OK.

At least gives me a ballpark sense.

And you have described potential peak capacity at 11 to 12,000 but then I thought I heard you, Bill, say something about maybe 12 to 15,000.

I don't know if you were just kind a going on your answer?

That was a different market I was talking about.

That's the castings that we have got.

OK.

You have to look at product mix of course.

It depends on what type of car types you're running at each facility.

But if we have all three of our North American facilities open, two lines at Trenton and two lines in Concorile (ph) and the potential of one additional line between those two factories and our two lines at Gunderson plus ancillary repair operations in the shops, we reached the upper limit, you know, 12,000 cars.

OK fairly new to your story.

So Maybe this is out there.

But your percentage of sales from the manufacturing business, how much of that roughly -- I know it varies quarter-by-quarter, would go to a railroad.

How much would go to an industrial company.

And how much might go to a leasing company?

It varies -- it varies during the year, depending on who is in the marketplace.

Two of our largest customers are TTX and -- historically have been TTX and Santa Fe but we sell to all of the major railroads and major leasing companies Go ahead, Mark.

And then similarly, it depends on what part of the cycle in a down cycle where the railroads and maybe TTX have reduced their budgets, then leasing is more aggressively deployed.

And it might be to -- it might be to the ship, more to the shippers and more to the railroads and less to even some of the short line railroads and again more in a rising market there's probably going to be more activity with the likes of a TTX and class one railroad, either through a direct sale of a class one railroad or a lease which is, again, syndicated to leasing companies.

So it's really a fuzzy answer.

It depends on the car type and where we are in the cycle.

OK.

And how much did you say that gain on the discontinued operations was?

We said we had for the quarter itself we had earnings from the discontinued operation of 1.1 million.

We also said that based on the terms of the current letter of Internet that the completion of that re-capitalization of Europe will not have the materially effect.

OK.

And then what is the approximate price difference between containers a boxcar I know boxcars are way more expensive and a center beam?

A container is, what, 11 or 12,000?

Obviously it varies by spec and size of order.

But just maybe give me a sense of that.

It's the containers themselves, we don't manufacture, Tom.

But the cars vary from 45,000 per unit to 65,000 per unit, and some of the multilevel cars can exceed a hundred thousand per unit.

We haven't been building cars for automotive service for some time.

And, of course, with the trailers in containers, which are manufactured by some domestic sources but mostly foreign sources, and in the case of containers, those fit on the double stack cars.

They -- it is a little confusing because they travel on the highways as they look like trucks and you lift them off and put them on a double stack car or on a trailer on a flat car, an ordinary flat car and they go cross country on a rail.

So a lot of trucking traffic you see you see around is really going to be, going to become part of the rail network.

You see it in the ingested metropolitan area.

So, we have to go back to go on the car.

We only build the car itself.

If you look at the range of prices, you know, from the lowest to the highest, there's a pretty big gap, depending, just again but due to the car's stack and the amount of steel and other items that may be going in.

From the lower to the top end, there can be a 50 to 75% difference between the lowest price cars to the top price car that is in our current cars that we sponsor.

OK.

And then you mentioned your leasing utilization rate is approximately 95%.

What would you consider to be a peak-sorted number?

Is that one I look at, like, I know it's a different business but an inter pool will get up to 99% but a GATX, they have a tough time getting above 96.

Do you have a sense where peek-leasing utilization might be?

I would say 98%.

For us it would be a great goal.

We probably should be there.

Our statistics in our own fleet are being balanced somewhat by some older cold cars that have suffered from a very high utilization but weren't at a point where we wanted to sell them or scrap them.

And those are now coming back into service.

So, the statistic on our own fleet has improved.

A more dramatic statistic really is the degree that we have switched in the past two to three years, from a more, from a balanced owned and managed fleet to an almost entirely managed fleet.

Today, we manage over a 100,000 freight cars but we own only 12, so, that the balance in our business has become more on the service in syndication and fee-oriented business as opposed to trying to compete head-to-head with a GE, with lower money costs and, that's not a game, a commodity game we find particularly attractive.

We use leasing as sales tool and a source of revenue, and our leasing company is highly liquid compared other leasing companies.

It's very under leveraged when you really go through and analyze it.

And it's just a completely different kind of leasing business and it's really moving toward the management business.

Yes.

That is interesting.

I will have to talk to you off line about that.

Then I guess lastly, and I know because your mix is a little narrower than obviously a trend.

But do you have a calendar 2004 forecast for railcar deliveries?

They're kind of all over the ballpark ranging from a low of 46,000 to I think I have seen as high as 42 or 43,000?

Yes.

We do.

And off the top of my head, we are, I think there's an industry consensus that, why don't, before we, just toss that out.

We're looking at about 50,000 cars in terms of an official forecast for 2005, 52,000.

That's bumping up to around 55,000 in 2006. 2004, we believe will come in, I think the official industry forecast is 44,000.

But I'm not sure that we're going to make that because of some of the supply chain constraints that we talked about.

Sure.

Well, that's fair.

It's going to be a very good year for the industry as long as we can balance of the supply chain issues and it's going really look much better in the next two years.

All of that has to do with the fact that we have supply and demand basically back into synch.

There's probably a constraint on the upper hit.

And I think the railroads are starting to realize how important the supply chain is to their business as well and they're concerned about safety and quality in that regard.

So would it be fair to say that you believe the casting shortage has actually hindered new orders in the last few months because delivery times can't be not only guaranteed but you can't even give sort of an open-ended date right now in some cases.

I think as long as you have a supply agreement, you can protect the production plans you have for the year.

And mark keeps focusing every one on the 8,000 cars.

That's kind of where we think we can get supply.

We could sell more and we probably could build more.

But in 2004, the castings business undoubtedly, and in 2003, has created a very important constraint and a wake-up call to the whole industry, including the railroads themselves.

So, yes, I definitely would say that.

Is it a crisis?

No.

Is it good?

It's actually good - It's good because it's introducing a level of constraint and responsibility that all of us need to pay some attention to.

I know you will only be able to answer this question in hindsight but will it actually help contribute to maybe a more steady sustainable recovery and maybe take away some of the spike element or if and when the casting shortage is solved, will it actually lead to a spike, let's say, in 2005?

Can you tell?

I don't think it will lead to a spike in 2005 because I think that is being reflected now in some of these forecast, as the domestic supply of castings and other materials stabilizes, it will be able to support, along with foreign sources, which have been developed, we will be able to support the 55,000 car number.

That's a number that we have to be able to support because that's close to the replacement level of demand.

So I think it's going to be good in many this experience has been good in many ways.

It's shown it's given us wake up call on irrational pricing behavior, irrational buying behavior in the business.

It's adjusted capacity and created a constraint over the next year or two.

And it really has inhibited a lot of speculative buying for customers playing the market, especially leasing companies.

So, I think it has been a positive thing and will I improve margins and margins have to improve in the business if there's going to be a healthy supply chain.

I think it has probably rescued competitors.

Because if we had a market where we could turn on the spiked again I just open it up, I think that we would tend to see a continuation of very bruising buying and bruising pricing tactics which probably would have harmed some of the number some of the competitors in the business.

So this will preserve for the railroads some of their options.

Right.

Thank you for your comments.

Thanks.

For additional questions, Matt Reams (ph) from Bed Cock Capital (ph).

You may ask your question.

Hey, Matt.

Good morning, mark, good morning, Bill.

Hi, Matt.

Well It's tough to get a question in around here.

The popularity seems to be soaring with your stock price.

Yes, things have changed, huh?

I just wanted some additional clarity on your operating margins you had said something between 8 and 9%.

I wasn't sure if that was the manufacturing side or the total company?

Because obviously the leasing business and some of your service businesses are more profitable?

That would be on the manufacturing side of gross margin in the eight to 9 percent range and we expect that the leaguing and servicing margins will remain around the 39 to 40% range.

That's gross margin not an operating margin?

Correct.

Then we have also given guidance on G&A expense and interest expense where we said G&A should run 8 to 8.5 per quarter and interest should run 2 to 2.3 a quarter.

I appreciate your giving more guidance.

You're still stopping short of the bottom line but I do applaud you giving more guidance there.

Just as far as working capital goes, what are your -- what do you think you're going to be spending this year in working capital, obviously with business booming?

We expect and you're talking ability working capital rather than CAPEX.

Again we did had a working capital usage for the first quarter.

For the first quarter our working capital usage was about $25 million I believe was the number in the net cash.

I'm just wondering for the year, obviously as business is ramping up you're going to have a lot more needs to build an inventory and receivables will probably grow a bit.

So just wondering kind of what your expectations are for the year?

For the year as a whole, we would expect it to continue to grow but not at the same pace from the first quarter.

And some of this really is timing of the payment of receivables and payments to vendors.

But we're expecting that 23, 24 million number for the first quarter is going to grow but at a much reduced - in a much-reduced rate.

Again, that 25 million reflects almost 13 million of rail cars acquired for purposes of interim rent.

And we have some payables, things that are going on in that whole working capital thing too.

We're going to manage this aggressively.

We expect to have -- with all of the debt pay downs and the capital items that we talked about, we still intend to end the year with a very positive cash balance, and a -- excellent cash flow going into 2005.

OK.

On the CAPEX side you mentioned 30 million and about 20 million was outside of regular maintenance capital from what I gathered.

Yes, that's our leasing company.

I think we need to change the way we are explaining our leasing company CAPEX because it's CAPEX that doesn't stick to the - to our frame very long.

We will buy freight cars, put them in our fleet and turn around and sell them later on.

So we will need to break that out better for the market, because the CAPEX is a very important determinant of free cash flow obviously.

Right.

It's really our manufacturing CAPEX.

The leasing company is a company that in the CAPEX side and its cash flow side, I think we need to explain it a bit better than we have in the past.

It's a very, very positive force in the whole company, and all of our investments are very attractive investments in it.

But the way it operates, particularly with respect to its use of cash, in our strategies for that, we need to explain it a bit more in the market.

Just as far -- obviously you have a substantial amount of excess capital.

You know, some of it is being tied up in working capital right now.

You're starting to spend more on the CAPEX side.

But if you would kind of equal all those things out over the next couple of years, what do you expect to be deploying in total capital?

And can you give us a sense of what you intend to return on that capital?

Well, that's a tough question because we're evaluating our -- in our current position, we have been for the last six months to a year, we have been evaluating each one of our businesses for internal growth and for their -- embedded value as an operating unit how they fit with the whole.

In terms of internal growth we're going to focus on our G.R.S, the Gunners and Real Services, our services business, and that will not be heavy CAPEX kind of internal growth.

There may be some selective acquisitions that will build into that.

We are expecting in internal growth to have targets in the, you know in the 20% range in assets and with appropriate leverage, depending on whether it tends to be a leasing asset or a manufacturing asset, a very attractive return on equity.

But, I don't think we can give you much more specific guidance on the amount of capital.

We have obviously got the company in a very liquid position but remember that we came through a very bad recession and a very bad industry adjustment and now we're going into a different phase.

Our first step of the strategy is to invest in enough leasing business so that we arbitrage the cash.

There's no reason to have 75 million in cash on a balance sheet earning 2% interest rate or 3%, or I'm sure you're making much but not much more, when we can get a 10% cash flow rate of return on it by having it in our lease fleet, and have it perfectly liquid and sell it and maybe even make a bigger profit on it than we would if we sold the same car doing it otherwise to a customer.

So, this is something we're doing during this year.

And what we need to do, probably by the next quarter, is really put our guidance on our CAPEX, our internal growth plans and our use of capital and what we expect to return on it.

I think it's an excellent question.

But that's really helpful.

We appreciate that.

Obviously, you guys are doing a great job.

Our shareholders are extremely happy.

We have been with you now for probably about two years.

And, you know, probably seen the worst and now are beginning to see the best so we're extremely happy, as I'm sure you and your employees are.

You know, the morale must be pretty high over there.

I would say that the morale is improving and discipline will continue until it does.

But just to compliment back to you, you had some confidence in us when things didn't look so hot and I think you made some significant investments, I know you did, you guys, and I think you had to figure it out the right way and I'm glad you had that confidence and I hope we can continue to justify it.

You know, it seems like, you know, people are spending a rot of time, a lot of time looking at the industry trends.

Obviously, there's tremendous opportunities still within your business model and then as you begin to put a lot of capital to use as you have talked about it at, you know, very high rates of return, you know, we're looking forward to seeing kind of where your earnings power is going over the next couple of years.

If you get back to margins similar to what you had several years ago and you can put some of this capital to work at a good rate or even higher rate of return from your manufacturing side, it looks very positive going forward.

I'm excited about some of the things we're doing on our efficiency side, our cost side and manufacturing operations.

Improving pricing is always tough in a concentrated buying market.

But we, we expect margin improvement as we have talked about.

We haven't talked a lot about how we can improve our manufacturing yields but we're doing some very attractive and interesting things there and we're striving for efficiency, reliability and quality and I think we have improvements to make in our efficiency areas in some of these factories.

So, we are doing that and I think that that will be a source of some profitable growth of earnings and cash flow in the future.

Great.

I guess that's about it really.

Just, great job and much success in the future.

Thanks for your questions.

I appreciate it.

OK.

Mike Doersch from M.K.G. financial again.

You may ask your question.

Just one quick follow up on a what if on the steel situations.

Are we sitting in a situation where a year from now we're going to be worrying about steel shortages and certainly in isolated Stipes of steel that you might be using?

I know this sounds kind of off the way in a way, but we have had a lot of consolidation in the steel industry, and similar to the railcar industry, and is any increased demand going to be met by the U.S. market and or foreign market now that steel tariffs have been lowered?

You know, I don't know about the effect of the steel tariffs but I'm on the board of a public steel company, the only outside board I sit on.

It has been a very, very valuable experience.

As we watch scrap prices almost doubled we have watched China's demand drive demand for scrap, divert scrap from domestic users.

Again it's a supply side that you thing that has caught many unaware.

There's serious talk in the steel community about spot shortages for scrap of mainly in operation.

This is big issue to us in a trickle down basis and anything other build at because we rely on -- we rely a great deal on the mills that use scrap as a raw material.

And so if there was botch shortages that would constrain capacity, these would -- these would be forces that would -- we have to cope with.

And it's more difficult in some ways to protect yourself from that.

But having multiple suppliers is important, and we have taken steps to do the things that we can do and I'm sure our competitors are doing the same thing to protect ourselves on steel.

And all of the steel producers are trying to raise their prices.

So that's going to be an interesting market.

And that thing in china is a real barnburner.

It just doesn't look like it's going stop for quite a while.

Yes, thanks a lot.

That's my last question.

Thank you.

Eric from Taxa Capital, your line is open.

Al right thanks for talking my call.

The question I just wanted to follow on the supply chain theme a little bit.

You asked, one, you mentioned that you hedged some of your steel costs and I just wondered how you about doing that.

Did you actually delve sort of futures yourself or is that just through contracts with suppliers?

I probably misspoke in the case of steel by using the term hedging it.

It's just a long-term we went long on tonnage required in our business plan for the products that we anticipated we would need.

We also have excellent historical supply relations with some of our major steel suppliers and they support us.

We have had an active Marine construction business throughout the downturn.

And the fact we have been able to give tonnage to these businesses when they were down, has helped us maintain supply during the upturn.

More of a function of pricing.

I don't doubt you would be able to get steel but I'm just curious for the price.

Is work in steel still your biggest supplier at this point?

They are for plate at Gunderson, yes, but we use -- we use other suppliers as well.

OK.

Ask we have diversified in our plate, anticipating that we don't want to be entirely reliant on our we can still.

But your prices are going up significantly.

So, I misunderstood you.

I thought you had hedged.

Well, what we did do is go out and protect it for most of our back log lower prices would prevail.

But this year -

If we had operated in the ordinary course in a contractural manner.

I wouldn't want to be more specific.

Fair enough.

And sort of on supply chain as well, the castings that you're talking about, who are I just want a little more color if you would, on that market.

I mean, who is supplying you castings?

Is that you mean do you see casting restarts, significant restarts happening in the U.S. or is that going to be sold for foreign sources or what is your take on how that is going to be resolved.

Well there's one major supplier of castings that has emerged in the United States and that's -- in North America, and that's A.S.F., which is a unit of Amsted industries.

The other castings companies that have been in the business, buckeye, ABC-NECCO have gone into receivership The former buckeye has been brought out of receivership by a company called Columbus castings is an active and valuable supplier.

It has had some startup operation issues over the past year.

We joined together with ACF industries, with Carl's company, to bid on the assets of buckeye, the price got too high so we decided to go a different route.

That's when we made an investment in the Cicero facility, with ASF.

And so the three participants in the North American market today are ASF, Columbus, and Ohio Castings, which were one-third partner with ACF and ASF.

We have a supply agreement with ASF, and they are -- they market the product out of the Ohio Castings business.

Naturally, we would get along with our partner, an allocation of some of that product.

But it's been a very, very important development for the industry.

And that's where the supply is coming from.

Offshore, standard car truck supplies the barber design through sources in Asia and India.

We're getting castings from India and China. (inaudible) has been very helpful to the industry in blazing the trail there along with standard car truck.

And so we expected that to be the sources of supply that will address the surges.

As far as price competition, domestic sourcing is still the preferred approach due to delivery advantages and pricing and costing advantages, although - we are uncertain about what ranges the case over time.

So by the end of 2004, there should be enough capacity available to deal with the normalized car-building year.

And between a 40,000 car build and 55,000 car build, we will have gotten back to the point where we have a substantial percentage of the total requirement in North America and that's probably the way it ought to be for the next few years at least.

OK.

Just in terms of gathering information if I wanted to, and these are all private companies correct?

Unfortunately they're all private companies, right.

That's what I thought.

Thank you so much.

Congratulations.

Our final question comes from John Rogers from D.A. Davidson.

Hi, just one quick follow up.

Did you lose any significant production last week?

What if you were going to ask that question.

You were probably stuck in your driveway all week, weren't you, John?

I know I was for a couple of days.

We did -- we were shut at Gunderson for a week.

Not only that but we had a damaged roof -- I think damaged -- literally part of the roof in one of our manufacturing bays fell in.

But we had inspected the plant.

We had ice accumulation.

We're expecting to make that back in operation this week.

And, of course, for those not in the area, that was due to the severe weather that we were literally shut down for a week there and in our corporate office.

Gunderson had about -- almost a foot of ice in one area on the Marine ways so they lost Marine production as well.

As far as the damages concerned with its fully insured, we have a 100,000 deductible on the property damage.

We're not expecting that to be material.

And we have business interruption insurance if we have material -- a material financial effect after we have recovered from the schedule.

OK.

Right.

Thank you.

We were a little ahead of schedule over there anyway.

They have done a fantastic job of bringing that back on line under very tough conditions.

Thanks, John.

OK.

At this time there are no final questions.

Thank you.

Thank you very much for your participation today and look forward to talking to you on our next conference call.

Have a good day.