Greenbrier Companies Inc (GBX) 2004 Q3 法說會逐字稿

Hello and welcome to the Greenbrier Companies third-quarter 2004 earnings release conference. (OPERATOR INSTRUCTIONS). 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.

Good morning and welcome to Greenbrier's fiscal 2004 third-quarter conference call. I am reminded just a few minutes ago that today marks the 10-year anniversary of our going public. 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. First, I will discuss the financials, and then Bill Furman, our CEO, will make some remarks, and then again we will open it up.

As always matters discussed in this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some 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 Greenbrier reported quarterly net earnings of 6.4 million or 42 cents per diluted share on revenues of 225 million. Greenbrier's Board also announced the adoption of a shareholders rights plan which was instituted as a part of an updating of the Company's corporate and governance policies. Unlike most public companies traded on major exchanges, Greenbrier did not previously have a rights plan due to control vested in its two large shareholders. Bill Furman and I have not changed. The plan coincides with the expiration of certain provisions of the agreement between these two gentlemen which had previously required the two shareholders to vote in concert on all matters submitted to shareholders' votes. Both Furman and James each own 29.3 percent of the Company's stock.

The plan is intended to encourage any potential acquirer to deal with the Company's Board and to help ensure all shareholders are treated equally. The plan was not put in place in response to any specific (inaudible) acquire the Company, but as I mentioned previously, as part of a governance review as part of the transition to noncontrolled company status.

Finally, the Board reinstated a corporate dividend of 6 cents per share payable on August 19, 2004 to all shareholders of record as of July 26, 2004. The Company had previously paid a dividend commencing with the first quarter after the IPO in '94 until it was temporarily halted in December of 2001 when it was suspended due to the market downturn.

Turning now to our financial results. The quarterly earnings of 6.4 million are a doubling of our earnings from the third quarter in fiscal '03 and are equal to these higher earnings for the entire first half of the fiscal year. As will be accessed in greater detail, Greenbrier realized improved results across the Board in its major business segments.

The Company's combined European and North American new railcar manufacturing backlog as of the end of June of this year was a record 14,300 units valued at 850 million. This compares to 9700 units valued at 600 million at May 31 of '04 and 10,000 units valued at 560 million as of February 29, '04. Based on industry backlog statistics that were just released, Greenbrier has a 25 percent market share of total North American new railcar backlog as of the end of June, and we received in excess of 30 percent of the orders that were let during the second quarter. Our relative size to the marketplace on the other hand just based on our industry capacity is only about 15 percent of capacity. So as you can tell we have a market share much greater than our relative size. This strong backlog provides good visibility well into 2005.

Turning to manufacturing. Revenues for the quarter were 207 million. We delivered a record 3600 cars in the quarter compared to 2300 cars in the second quarter of this year and 1600 cars in the third quarter of last year. Deliveries during the quarter included 600 units valued in excess of 30 million produced in a prior period for which revenue recognition was deferred until the current period. You may recall from earlier conference calls the customer had previously accepted and paid for these 600 cars, but a contractual contingency existed which caused us to have to hang up these cars on the balance sheet. This contingency was removed during the quarter, and again the related revenue and margin was recognized.

We anticipate deliveries for the year to exceed 10,500 units, surpassing our earlier estimates which we surveyed in conference calls of 10,000 units.

Our manufacturing margin for the quarter was 8.6 percent, up from the 6.5 percent in the prior quarter, and we believe that we can continue this improvement from Q2. Our efforts to deal with the steel price increases inefficiencies of long production run aided in the margin enhancement.

Our leasing and services remanufacturing industrial forage and rail services business continued to provide a favorable revenue base and contribute positive earnings and cash flow to the Company.

Leasing and services revenues were 18 million in Q3 similar to the prior two quarters. Our leasing margins continue to improve. They are now at 43 percent, up from 39 percent in fiscal 2003 and up from 42 percent in the prior quarter. The margin enhancement is a result of higher lease rates and increased lease fleet utilization. We anticipate summer margins for the balance of the year.

Our lease portfolio provides a natural hedge against rising manufacturing inputs as equipment is renewed at higher lease rates and the value of the lease portfolio. The hidden equity value in the lease portfolio continues to increase.

Our lease fleet utilization is now at 97 percent as compared to 92 percent at the beginning of the year and 96 percent in the end of the prior quarter. The fleet consists of 11,000 owned units and 122,000 managed units. The managed units grew by $9000 units during the quarter as our backoffice maintenance management program with Burlington, Oregon and Santa Fe continued to grow.

Our G&A expense increased by 1.4 million during the quarter. This was due to professional and consulting fees associated with Sarbanes-Oxley compliance, professional fees associated with strategic initiatives, and higher compensation expense. The tax rate for the quarter was 39.5 percent, similar to the rate we had anticipated, and we expect that tax rate to be in the same ballpark in Q4.

At the line item, equity and loss of unconsolidated subs reflects the Company's 50 percent investment in the Mexican new railcar manufacturing facility and our 33 percent investment in the rail casting joint venture. These two ventures operate at around breakeven at a substantial improvement from the 1.5 million loss in the prior quarter. We anticipate this to continue into Q4 as well.

Depreciation was 5 million for the quarter and should run around 20 million for the year. We intend to continue to aggressively deploy asset capital and anticipate net CapEx of about 25 million for the year.

Turning to the balance sheet. Greenbrier remains very liquid, even though our cash balances had been reduced by 64 million from the beginning of the year. This decrease in cash is due to normal fluctuations in working capital, whereas when we operate at higher production rates, we are a higher user of working capital and cash, as well as we pay down about $40 million of debt during the year, $30 million of lease fleet additions, and 20 million of equipment included in inventory that will be sold later in the year.

Unused net 20 million of equipment that is on lease that will be part of our syndication activities. Our unused lines of credit remain at nearly $100 million.

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

Thank you, Mark. We're very pleased to report the strong third-quarter operating results, and as Mark has said, all areas of the Company contributed to improved financial performance in this quarter. In North America, we were pleased to have the major orders from Greenbrier's largest customer TTX, and this contributed to our record backlog, which now stands at almost $850 million.

Greenbrier continues to enjoy a 60 percent plus market share in container flatcars and in intermodal flatcars generally at very very strong market share which we have maintained over 10 years, and the outlook for this market in the future continues to be strong, certainly over the next five years as the global marketplace continues to bring change and increased production specialization to foreign markets for many consumer and industrial products requiring North American land bridge transportation and container point of entry.

Basic changes in the value of the U.S. dollar also have recently stimulated U.S. exports. The intermodal market is unusual in that it benefits in both cases from these influences. That is the currency changes help and do not hinder traffic in the import side, while improving the traffic in the export side. Simply put, many products are no longer being produced in North America and must be transported by ocean container and then by rail. Intermodal has become the dominant long-haul component of North American transportation and infrastructure and a driving factor for North America's railroads. We continue to participate in that trend.

However, over car types built by Greenbrier also have enjoyed very strong demand, especially flatcars for forest products, boxcars and certain specialty cars. In 2005 Greenbrier will stretch to its maximum production capacity for its physical facilities in North America. We are not there yet, but in 2005 we will stretch to that point and is booked at its owned facilities into its fiscal 2006.

Over a year ago, we anticipated this possibility and through strong relationships with another car builder, which is not a direct competitor. This company is ARI owned by Carl Icahn. We reached an agreement to private brand part of our capacity requirements for certain car types, manufacturing these ARI facilities in the Southern U.S.. Currency fluctuations in the NAFTA trading area, particularly in Canada, along with escalation in raw materials costs, makes such a strategy very practical and beneficial for both companies. And again these companies do not directly compete in the products which are normally manufactured by them.

Today we have an order, almost 2000 railcars with ARI, making Greenbrier its largest customer. I'm pleased to report that this arrangement has worked very well and that the quality and reliability received in these subcontract orders is among the best in our systems. Our customers are very pleased with the arrangement.

Likewise, our investment in Ohio Castings, with industry leader ASF, part of Amsted Industries, along with ARI and The Icahn Group, produced not only needed capacity for ARI, Greenbrier and The Icahn Group, but for ASF and the entire industry. It is not an exaggeration to say that if this investment had not been made in the two specific casting facilities now operating in Cicero and Alliance, that the industry would have been severely restricted in car supply, leading to much greater problems for the nation's railroads in dealing with the present high level of service demand from customers. In fact, a severe industry crisis was no doubt avoided by our joined investment in Ohio Castings.

Ohio Castings has been breaking even in this current quarter; however, the value of that company to Greenbrier and to its partners is difficult to calculate, and we have transferred pricing issues that distort the true value of the investment. It has been a very very positive investment for all parties involved and for the industry and for other car builders who without the investment would have been in difficult times.

The present business environment has not been without challenge. Unparalleled steel price escalations and shortages placed incredible pressures on users of steel earlier in the year, and these pressures continue today. As other companies suffered, so did Greenbrier, particularly in our last quarter, which is where the pain was largely expressed. We believe that we absorbed most of those influences in the past quarter, and I hope we have put that issue mostly behind us.

Comprehensive Crisis Plan was developed to deal with the steel issue in December of last year. The plan has been highly successful. We pushed back price increases with suppliers. We have asked for and have received material assistance from major customers for which we are truly grateful, and we've taken advantage of the natural hedge position Mark described in our own lease fleet and in lease syndication purchases at favorable pricing. Finally, we ourselves have benefited from higher scrap prices by systematically managing our scrap and salvage costs throughout our entire system, producing substantial revenue from that source which was not planned in our budget throughout the 14 separate physical facilities in which we operate and produce scrap in North America.

The offsets from these various initiatives are approximately equal to the price escalations in steel, and we have adequate supply of steel to handle the backlog that we have in our forecast. However having said all of this, this is an issue which we much maintain vigilance and continue to work hard. We are very pleased with our ability, and I want to thank the team of people who have done this, to adapt to this very interesting and different problem in 2004.

Here are a few bullet point items worthy of some highlight for the quarter just ended and going forward. First, I want to mention that our recapitalized European operation continues to meet or exceed expectation. Expectations of the Company have produced a strong contribution to earnings in the third quarter. We have written off most of the assets in Europe. Our backlog is very strong. Our market share is very strong. The market is consolidating in Europe as in North America, and our operations are profitable, while our competitors are not, a fortunate circumstance which also is true for some North American competitors.

A second point is that global sourcing is adding materially to Greenbrier's manufacturing efficiency. This is the norm in Europe and in many industries. It is not the norm in our industry, but it will become so. At this point, our efforts number in the hundreds of thousands of parts moved halfway around the world, not only between North America and Europe over the past several years, but with Asia as a growing partner as well.

Our objectives in this area are to improve efficiencies in the multiples of tens of millions of dollars and to reduce manufacturing costs by quantum amounts without sacrificing safety or our employees, reliability, quality and actually enhance these bullet point objectives.

We are well past the first threshold of a $10 million annual savings in this long-term project. In Portland we were very fortunate as no other car builder is fortunate to be situated on a deepwater port facility in a progressive port city with close physical ties to Asia. We plan to exploit this geographic advantage to the fullest in the future to the advantage of our customers, our supply chain partners, to our stockholders and to our employees here in Portland.

As a public company and another important point, we have many areas for improvement. These include our stock liquidity, our float, succession planning for senior management and continuity of the Company, manufacturing efficiencies as earlier described, and cyclical diversification and growth in earnings. We have active initiatives in each of these areas. This is a company that is in transition as reflected by some of the governance changes that we are making and have made at the most recent board meeting. We are fully on schedule to complete Sarbanes-Oxley as required with full compliance. We have set up at the latest board meeting a governance committee which will consist of outside directors headed by our newest director, Duane McDougall, former President and CEO of Willamette Industries. We are reviewing a succession planning for the board, and the governance committee will operate in this area.

In 2005 Greenbrier will go to a majority of independent directors, and some of the actions that we are taking are consistent with the transition from a company which has been closely held and closely controlled to a company which will be managed by independent directors, and I assure you that we will be addressing many of these areas that are important for a company with a capitalization of our size.

One of the final points I would like to mention is our repair maintenance services business. This is a growing part of our business model. It is an area of proven performance not only in bad times but as well in good times. Our Gunderson Real Services unit driven by wheel business and the increased levels of activities in the nation's railroads has turned in a very good quarter, and we expect more of the same. Also, our growing management services business, which links with that unit, has been quite successful with its major customers. We are very thankful for the business of BNSF Santa Fe who has placed enormous confidence in us to manage the backoffice work on much of their fleet, and we are hopeful of growing that kind of business in the future.

An example of one of the successes that we have had in that unit, there is a contract to supply wheels as the lead supplier to General Electric's railcar business throughout North America.

Now I want to address a few closing remarks to our employees and our suppliers and customers who may be listening to this conference call. To our employees I would like to thank you for your sacrifices over the last several years and the hard work you have contributed to our recent success. I know many of you are stockholders, and I know you are concerned about the future of the Company and that you listen into these calls. This is a good thing.

Ours is a business that provides excellence in engineering, manufacturing and service. You do that, and I want you to know that we appreciate it. Also to our customers, I want you to know that we appreciate your confidence in us, and we are dedicated to serve you. We exist because of you, and we value your trust and the trust you place in us, and we hope to remain worthy of that.

And to our stockholders, let me say that we are working hard to support the confidence you have placed in us as well. Thank you for that confidence and please stay tuned.

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

(OPERATOR INSTRUCTIONS). Mike Houser (ph).

The Robbins Group. Congratulations on another milestone. By my read, this is the highest manufacturing revenues in five years.

Thank you, Mike. Nice to talk to you.

Thank you. With the question about the market share, it seems like -- is the capacity -- is there really that much capacity in the market, or is it because of maybe supply issues with castings and so forth that you're able to take a market share -- I guess what I am wondering is if really maybe the capacity in the market has shrunk and that you're really now have about 25 percent capacity rather than just 15. I was just wondering if you can comment on that?

Well, Mark is talking about weighted capacity. There are factories that are not fully on stream that can be brought up by our competitors. I think that we still have substantial capacity in the industry.

We ourselves in 2005 as I said are going to be using the full limits of our physical capacity, but we have been working on strategies to allow us to maintain a higher market share as we more typically do in a downturn. I think our market share peaked at about 30 percent of the market. We have had some very active orders in the marketplace, but we are still not at a backlog level that is anywhere close to where it was a few years ago. So there's quite a bit of gas left in this.

It is very difficult to tell, Mike, exactly what factories will or can be brought on economically, and the policies of the various builders really don't have a lot to do with this, whether they will indeed open a factory and loss money to do that for a while. I guess it is hard to get the full plant started up.

On the casting side, certainly having castings available, having allocation from our own factories has been useful, and it has constrained some production and perhaps some speculative production in 2004. I think in 2005 there will be more of an equilibrium in castings, and there should be adequate demand unless some unusual event occurs as it had occurred a year ago with some failure of some castings from a particular supplier.

Thank you very much. Can you give me some idea about how you look at your utilization relative to last quarter? I know that in years past there was inactivity up at your Nova Scotia facility, and I'm just wondering combining the North American operations, how would you look at utilization? You mentioned there's a lot of gas left. Are you anywhere close to coming to reaching full capacity, or how do you look at that?

As 2004 plays out and moving into 2005 without getting specific about when we will hit that spot, we still have two of the factories that are not fully utilized, TrentonWorks in Canada and the Gunderson-Concarril facility, our 50 percent joint venture with Bombardier in Mexico. However, both had very strong backlogs, and we will be bringing them up to higher levels of production.

There is more available production in Mexico today than there is in Nova Scotia. That is partly just the product mix that we have down there. So we are yet to reach I think our full levels in Mexico and in part in Canada. However, some of this is made more difficult to analyze because we do have a very active line running at ARI, and that production goes into our pipeline as well.

Do you want to add anything to that, Mark?

Did that answer your question, Mike?

Yes. (multiple speakers). No, it is okay. I'm just taking what I can get. I was hoping to get -- I know it is fluid depending on what lines you bring on when, but it just seems like -- it sounds like you still have a lot capacity, and with the gross margin expanding over last quarter, I am trying to get a feel for how much of that was maybe improved -- controlling raw materials costs versus if there is any pricing pressure. It sounds like if you have 60 percent of the intermodal market, that you're able to get some pricing that you're probably pretty happy with.

Well, pricing is still tough. I think we're trying to -- as the railroads are trying to cope with the fact that customers are very demanding and pricing continues always to be an issue, we're trying to improve manufacturing efficiencies as a way of enhancing margin. We're trying to avoid taking unacceptable risks on raw material costs, and I think we have been successful in that regard. We're getting fair pricing, but we're attempting to make some of our efficiency out of manufacturing and in dealing with materials costs and we're doing that as I said earlier.

I will say that at Gunderson where we are running at nominal capacity we are still somewhat constrained. I think the industry is today still somewhat constrained by availability, reliable availability of truck castings despite the fact that we brought on Alliance with the ASF, ARI venture in Ohio Castings and Cicero, and each of those facilities is now producing 1000 of pieces of castings for the industry. Every builder and every railroad that requires castings for replacement of flawed castings is still struggling with getting all the castings they would like to get today.

As soon as that issue is more manageable later in the year, we are hopeful of improving Gunderson's throughput and production rate by a modest amount, perhaps 10 percent or 15 percent.

I guess that's the way to look at it, rather than how much capacity you have at your facilities. As an industry how much -- what are the choke points, and what capacity is available there? Will that expand, and will you be able to continue to take the market share that you have been having to operate optimally?

One last question. With the stepup in revenues, can you see that staying firm through -- I imagine you've gone into your best quarter here. So is that likely to stay and trend up from there, or was this an unusually large high quarter in that we should maybe temper it downward (multiple speakers)?

Mike, we have a number of other questions we are going to have to take because we have some other people on the call. But briefly (multiple speakers) --

Mike, you know, our indication is the Q4 is about 10,500 units, and it indicates that it will not be going down. But the two reasons for that is, one, there is the 600 cars in the quarter that were produced in a prior period. So that was kind of an anomaly. And then secondly, there will be a plant shutdown, scheduled holiday and maintenance shutdown of the Trenton for a couple of weeks. So you can back out the 10,500 from the 7800 and get the number of units we are forecasting for Q4.

But having said that, we would not want you to allow uncorrected the observation that this might be our best quarter. I'm not expecting that this is going to be our best quarter depending on the horizon that you're looking at.

Well thanks and congratulations.

Mike Peasley.

BB&T. Congratulations. Great quarter. Just to follow up real quickly on the 600 cars we were just talking about. On an apples-to-apples basis, can you give us an idea, Mark, how the -- I know it was $32 million in revenue -- can you give us an idea of how the margin was impacted at a manufacturing level? I mean you reported I think 8.6 percent gross margin. Absent those 600 cars, what would that gross margin have been?

I might try it a little bit different way, Mike. But absent that gross margin or absent those cars, the gross margin would have been higher by about a little over 1 percent I think. But those cars were produced over a year ago when the pricing environment was much more tough. So the margin on those cars was less than the 8.6 percent average. It may be closer to half that number.

I would like to interrupt and just say that I think that the quarter margin is somewhat understated not only by this factor that you just mentioned, but by another factor that was involved with one of the other units. So I think that the margin was somewhat understated in terms of the actual run-rate organically.

Right. The second thing that we had going on is that we did have some included in that some other inventory adjustments. So when you take all of that out and you look at the actual margin on what was produced during the quarter, it is closer to the 10 percent range.

Is that sustainable going into Q4, the 10 percent range? It seems a little high.

I don't know. With the backlog we have got and with some of the manufacturing initiatives into 2005, we think we can -- and with a caveat we have a plan in effect to manage materials -- we think we should be able to improve. But this is what we're attempting to do.

That is great. This is an easy one, a two-parter. You said, Bill, the industry orders, deliveries and backlog figures were out. I have not seen them. Can you tell us what those are, number one? And then number two, maybe, Mark, would you breakout your European backlog versus your North American backlog?

The industry orders that came out for the quarter were 19,770 units. The industry backlog as of the end of the quarter is 51,446 units. Our European backlog is 1700 units with the value of the balance of that in North America. That is as of the end of May. But at the end of June, it is a similar number.

Excellent.

And, of course, the industry (inaudible) at the end of June.

Yes. And then to move over to leasing, leasing rates have improved. Can you give us an idea across car types which car types you're seeing a greater increase in lease rates versus some of the others?

I really think, Mike, it is across the board. As industry car loadings are up and the car prices of new railcars are up, this creates a good opportunity during the downturn. We elected to go short on our leases and did locking and lease rates at low lease rates so that we could take advantage of the upturn when it happened. It certainly happened dramatically. So we are really seeing it across every car type. It is on utilization type leases where you earn based on how much the car is utilized, not just on absolute dollars when you are leasing at a fixed lease rate as well.

It is a great time to be in the leasing business with unattached cars, and Mark and our leasing guys have played this very very well. This is a very interesting situation with steel pricing and costs associated with railcars. Most of the manufacturers should by now have reached a strategy that has dealt with steel and some of the disruptions from inflationary pressures in the economy. But the commodity movements that are taking place in the nation's railroads to put the railroads in the spot now where we were a number of months ago.

So this is a good time to be leasing from existing portfolio. I think all the leasing companies are enjoying an upsurge in profitability. It is needs to be managed closely, of course.

We have heard, and it is going to vary, that some parts of the country and some railcar's lease rates are up to like 20 to 30 percent. Can you ballpark an average of what you're seeing across the cars?

I would not want to comment on that. I think it would just be general. General strengthening and it is very specific to individual customers, of course, and the relationships with the customers.

That is fair. Last question. Your backlog is at record levels. Margins are improving. You know where you are from a capacity standpoint. At this point, the visibility seems pretty good. What would keep you from issuing some form of guidance either for 2005?

Well, I guess, Mike, as a policy we have really tried to -- we historically have not given guidance on specific revenue or EPS numbers, and I think that will continue. As we get into '05 and perhaps the end of '04 with our fourth quarter, we can try to if we're comfortable enough give some thoughts as we have this year on what we might anticipate in terms of deliveries and margin expectations and somewhat down the P&L to give some people some guidance in that area. But I think we will shy away from specific earnings expectations.

We're discussing that subject, however, and I think that it is a good thing if we have visibility as we have today for us to be able to give guidance for us to at least consider it. I think it would be useful for Mark to hear from those who are covering the company, and we would appreciate -- I would appreciate -- your chatting with him about that policy decision.

I know that other companies, many other companies do this, and just because it has been a policy in the past does not necessarily mean we should stick to that policy.

No, that is a good answer. I have thought of one more question. I know there is a lot out there, so I will finish up right here. But just on steel availability, Bill, you mentioned that for your backlog as you have it now, do you believe you have adequate steel resources or procurement as it stands today? Is that on-hand? Is that with contract? How does that break down?

The sound you are hearing is us knocking on wood that all these contracts that we have and the relationships we have we will reliably play out. We certainly did not go out and stockpile on the ground the steel. But we have worked very hard with long-term suppliers of steel, with new sources of steel. We have bitten the bullet on some price increases on steel and worked hard to get availability. So we believe for the orders that we have in place, and even for any expectations for improvements in our orderbook, that we will have adequate steel supply.

The issue really is pricing and reliability of delivery and quality. We think all of those are manageable with the team we have put in place to manage that issue. It is an incredibly complicated issue, however, and it is not to say that we cannot still be vulnerable in making mistakes.

Sure. Great. Well, congratulations again. I appreciate your time.

Frank Maglin (ph).

The Robbins Group and congratulations on the quarter. Going forward or in this year of your 10,500 plus cars that you hope to deliver, are any of those that are manufactured through your subout agreements?

Yes.

Can you give us a little idea as to how many and what kind of margins you get on that business?

Really frankly we really have not broken out our margin either by product type or by plant for competitive reasons. This contracting relationship has existed really since going back earlier in the calendar year. And as Bill mentioned, overall about close 2000 cars either have been built or will be built.

I can say to you that it was very carefully designed and specialized by individual car types that meet the particular strengths of the factory network involved and, therefore, is at least normally profitable to both of the two entities. So this is a very unusual relationship where we really worked together to produce an attractive cost template. So it is going to produce material profit to us in 2004 and 2005. But beyond that, I would not as Mark said, we would not want to give specifics due to issues of confidentiality.

I can understand that. Of the 10,500, approximately what percent will be coming from that arrangement?

We would not want to break out production by facility, Frank.

Okay. That is buried in there. That is all right then. Thank you very much.

Bill Vogel. (technical difficulty)--. Mark Glasgo.

(technical difficulty)--. MKG Financial Group. Congratulations on a great quarter. (technical difficulty)--. The 600 deferred revenue, the part (technical difficulty) -- what percentage or how does that affect the manufacturing base?

I'm sorry, Mark. You were not coming through clearly at all. It was muddled. I know you were asking a question about revenues, but (multiple speakers).

Can you hear me now?

I think he is asking about deferred revenues and how did that affect the quarter?

The income picture. (technical difficulty)--

Okay. The 600 cars included in the current quarter deliveries those were produced in a prior period. They had a value in excess of $30 million. Again, they were produced, delivered or produced, and the customer accepted them and paid us cash for them, but because there was a contractual contingency at the time of the original production, they were hung up on our balance sheet and recorded as inventory and deferred revenue. That contingency was released during the quarter, which allowed us to recognize the revenue and the margins on the car.

What we had discussed earlier is that the margin on those particular cars was less than the overall margin realized during the quarter of 8.6 percent, and if you look at just the margin for the cars that we produced during the quarter, which again would exclude these 600 cars, our margin on those cars was closer to 10 percent. Did that answer your question?

(technical difficulty)-- (inaudible). The net effect on the net income for the quarter from just those cars?

The net effect of net income, I guess when you take out -- you look at those cars and you also net out some inventory adjustments that we had during the quarter, then the impact of those cars less the inventory adjustments was nominal.

Okay. Very good. The other question I have is that you mentioned the benefits (technical difficulty)-- here on the West Coast and the (technical difficulty)-- in Asia. Is the Asian market a market that you are already looking at as a potential for the future?

I think you're question, Mark, is the Asia market a market for us to look at in the future? It certainly is a market for the future for supply as we have many successful companies here in the Northwest which base a model on components coming in from Asia. There is certainly a very large Asian market for railcars as well, and that can be a good thing if carefully approached. However, our primary thrust of my remarks was devoted to efficiency and manufacturing and a global supply chain network, which includes not only Asia but Europe and other parts of the world. And we are in a very good location here because of the deepwater facility, our dockside -- we can bring a vessel in dockside, and we are in a very very good spot for trading in particular with Asia. In Nova Scotia we are in a good spot to trade by water with Europe and we do that.

(technical difficulty)--. Good and again congratulations on a good quarter.

Steven McBoyle.

Lord Abbett. First maybe with regards to capacity, can you just refresh me as to the number of plants that you have, what capacity you can build to, and then perhaps the additional capacity that the ARI relationship provides you?

That is a good question. Let's take our physical facilities first. We have three physical facilities in North America geographically situated in triangle beginning in Portland, Oregon on the West Coast on a deepwater facility. We have a facility in Trenton, Nova Scotia, not far from Halifax on the East Coast and the Northeast, and we have a facility, Gunderson-Concarril, in Sahagun, Mexico, not far from Mexico City. We have a number of other repair facilities, but I think your question is directed to our new manufacturing facilities. Depending on the product mix, these facilities have total capacity that would consist of approximately 12,000 units annually.

And the ARI relationship in terms of the number of lines that they would provide?

Right. I'm sorry I interrupted you.

Just following up on what additional capacity in terms of number of cars could be produced with the relationship you have with ARI?

We are currently using one line fully dedicated to Greenbrier at ARI, and I suppose theoretically a couple of thousand cars.

I think that is a good number. And, of course, we have given our -- that is our North American footprint. And then so when we talk about our share of industry capacity at 15 percent, of course we are only including our owned facilities. We are not including ARI when we say we have 15 percent of industry capacity. But obviously if you add all that up, then you come to about 14,000 units. And then we have a separate facility in Europe and Poland, but that serves the European marketplace.

So if we paint a continued favorable order picture here, is there a scenario where you either need to think of additional capacity yourselves or thinking of furthering some of these strategic relationships with backlog of 14,000 and I guess 14,000 in capacity currently?

Over the past six or seven months, it is reflected in our G&A cost. We have had -- we have expended quite a bit of effort and time and money on a review of our strategic position, and that review does and will include the issue of capacity, how to get it in the wisest way, and we are working to improve access to capacity through those strategic initiatives.

I might add that we change our behavior as a company depending on the cycle we are in, and the cycle that we are in today is not unlike the phenomenon we had in the last upturn where we were able to sell our factories out because of our leasing capabilities, because of the bundled services that we provide. We were able to sell out early, and we have had a history of purchasing railcars from other companies, including the last major time we did this was gondola cars from Thrall (ph), which is now part of Trinity.

So this is a practice that we have had. We don't anticipate a major capacity constraint for us within the context of a normalized market, and I think that we will have access to capacity through arrangements like the one with ARI. We may make some modest increases in capacity with an existing network, and we are reviewing strategically other options as well.

And second and last question, just do you define this cycle as a normal cycle? I think if I remember the last quarter you perhaps thought the industry order rate of 18,000 was somewhat unsustainable. Yet we sit here today with industry orders in this quarter higher than that rate. Is this a normal cycle? What are you hearing from your customers in terms of how sustainable this meaningful strength is?

Well, I think that we have gone through a period of a very abnormal adjustment to structural changes in the railroad industry coupled with a recession, and that has really taken the statistics and pushed them off of the chart in a negative way. And I think there is some catch-up that has to take place.

But in terms of a normalized environment, somewhere between 45,000 and 50,000 units a year is required to maintain the national rail fleet on a secular basis, and we will have activity that goes up-and-down as we stabilize those kinds of levels. With growth as the railroads are currently enjoying growth, we may need more cars built. I think that it is very difficult from quarter to quarter to predict.

This was an unusual quarter. The quarter we are currently in is an unusual quarter because there were some very large orders placed at intermodal. But I think that the outlook is very strong largely driven by economic factors and particularly currency factors that favor the railroads because of the movement of commodities coupled with the fact that there is just no alternative for most of the consumables in North America, other than to move by land bridge or by port. So I think it is a very positive outlook, but I would hope that the industry does not overbuild and get to a year of 80,000 or 90,000 cars. It would be hard for me to see how that could happen in the next year just because of capacity constraints and probably behavioral constraints by the participants. I think we are all a little gun shy, including the railroads of overbuilding.

Great. Thank you very much.

Bill Fogel (ph).

JL Advisors. Thank you. I just wanted to clarify something. In terms of deliveries, I did not get that number for the second quarter?

I am sorry are you talking about industry or are you talking about (multiple speakers) --

Industry.

I need to gather that. I did not disclose that; I disclosed orders and backlog.

Okay.

I am sure I can get it for you. We can get it for you in just a moment or two if you will stay on the line. It is in this manufacturing book, isn't it? We will get that for you. You can either call back if you are in a hurry to get off.

Why don't we do it off-line then?

Great. Okay.

I am showing no further questions at this time. (OPERATOR INSTRUCTIONS).

Thank you very much for your participation today if there is no other questions.

I am still showing no questions. Actually we do have a follow-up. Steven McBoyle.

Just a quick question with regards to a follow-up on the steel issue. At this time, is it fair to say you are only writing contracts with escalation clauses, and secondly, of the contracts that are currently in place, what percentage would you say have escalation clauses and are covered on that point?

It is not fair to say that we're writing only contracts with escalation clauses. We are fully pricing steel, and we are attempting to lock contractually steel commitments for forward commandments on the sell-side. So we are using a slightly different technique, and we are using different techniques for different customers. We are very conscious of this.

Our own view is that we are managing the steel issue probably somewhat differently than others are doing, and we are addressing it from a five-point approach. So I think that as far as the percentage of escalation, we have escalation in most of the contracts that we have done up until very recently, and we have steel commitments with pricing on other orders that do not have escalation.

So it is fair to say you feel --

We feel hedge. But again the problem with this market has been that people sometimes -- it is hard to hedge an already closed hedge position. So if you have a contract to deliver steel and someone fails to perform, your recourse becomes somewhat complicated in an environment like this. So that's where many companies, including we, have had problems. We think we have worked through those after spending well over six months now hammering away at this issue.

So on a go forward basis, more an allocation than a pricing-related issue?

I think it is fair to say that we are comfortable with both pricing and allocation, but we still have work to do.

Sure. Thank you very much.

I think you can see, though, reflected in this quarter's performance, we are catching up with that issue. The issue really would be now, what is it going to look like in 2005 and what kind of risk profile do you want to assume, and what do you think we are going to have in the steel market? So that -- those are some big issues of course.

Dan Sargent (ph).

BlackRock. Just a quick question. Can you comment on capacity in Poland, current utilization, and then what is the implication for EU expansion for rail CapEx in that business?

Yes, I can. We are fully utilizing our facility in Poland today. As in North America, we are using sourcing models where we are engaged with sourcing partners for subcomponents and even entire -- the majority of railcar components. For example, we build tank wagons or tank cars in Europe, and in some of the tank car lines we're running, we are outsourcing the tank itself. In some some cases, we are outsourcing some of the underframe and the bogeys in all cases.

But we are fully utilized at present into 2005. I would say that the product mix in Europe has a great deal to do with capacity and throughput. Larry, do you have -- (multiple speakers)

We might get 1000 to 1500 cars a year out of Polish facility, again given what the product mix might be. The European marketplace is a much more adverse marketplace, so we are operating running a lot of different product lines and a lot of different products over there. So 1000 to 1500 a year. I think your last question was regarding the outlook for the European marketplace with EU expansion.

The reason we went to Europe originally was we believed with EU activity that the distances traveled would be much greater and that there could be an opportunity in Europe for a rail freight Renaissance. That has been slow to materialize. Nonetheless I would say that there seems to be a solid environment in Europe on the demand-side. There has been much more overcapacity in Europe, a much more problematic marketplace, and we certainly had our difficulties over the past several years in Europe, most of which have been cleared up with production changes and manufacturing changes.

We have been very successful retaining strong customer relationships in Europe. I think the EU market will be stable, and really the benefits that we see in Europe are that the supply base, that is the number of competitors in the marketplace, is consolidating, and the customers are going to a high-quality reliability model where they are prepared to pay a bit more for that reliability and quality, as opposed to just buying at price and sometimes buying big problems with low prices, a common issue in our industry or in any industry I guess.

Just to say a follow-up. Long-term I think that the outlook for freight wagons over there is going to be good just because of the congestion and the other issues that are driving the economics.

Yes. Well, my impression was you have different gauge rail tracks from Eastern Europe to Western Europe and that that was supposed to be a potential area for the redistribution of EU income towards the new accession states.

Well, there is a lot of technical stuff going on to address all of the gauge differences. There is pretty much a standard type of -- not standard in the sense of the (inaudible) of that term, but a uniform gauge throughout the EU trading market, including parts of Central Europe. It is really the Ukraine and Russia that has some different gauge issues. But they pretty much handle those technically, so there is rail traffic exchanging, and that whole market is a very interesting one over time for many reasons. Long long distances when you get into that cross trans Siberian movement into Asia. A lot of problems with it currently, but a lot of long-term opportunity there.

Okay. Thank you.

Matt Reams.

Buckhead Capital. Given your needs or cash requirements for working capital and CapEx, can you just explain or talk about your ability to generate excess cash in the foreseeable future and what your priorities are for deploying that?

Yes, I'm glad you asked that question. That is a terrific question because it takes some analysis on the cash side. Our EBITDA is improving quarter by quarter. We have about $20 million EBITDA this quarter as I recall. We are going to exceed our EBITDA forecast probably for the year.

We are producing positive cash flow, and we have been reinvesting in that cash flow in the following ways. We have been paying down debt. We have been buying leased assets to replenish the runoff of our Go West (ph) service, which is causing our lease revenue to increase and our lease profitability to increase significantly. We changed our leasing strategy somewhat to enhance earnings and revenue, taking advantage of the current environment for syndication activity. So we have invested about 20 million in syndication activity.

Some of these things are electives. We look at -- we split out manufacturing capital expenditure from leasing capital expenditure. I think what Mark is publishing is our normalized investment goal is 25 million. However, the relevant part of that that is not liquid in our model is the manufacturing investment.

Which is only about 5 million.

So the way to look at the leasing investment is that if we need that, we can sell the assets and usually make a very good return on the assets due to the fact that we manage them with that goal in mind so that they are very very liquid. So we have adequate -- we are under-leveraged as a leasing company. We are very liquid as a leasing company, and the leasing investments we have made are very liquid, and we have access to, therefore, quite a bit of liquidity for our size. I don't see liquidity as an issue.

So if you are -- I thought you said 25 million for CapEx this year and 5 is really for maintenance CapEx?

Right. That would be a net CapEx number. When you look at buying net CapEx, that would be what would be going into our lease fleet versus what we are selling out of our lease fleet minus what we're selling out of our lease fleet, plus about 5 million of manufacturing CapEx.

Okay. Just as far as working capital, obviously as you are ramping business up, there is a lot of requirements there. What should that run this year, and maybe even next year, how much more would you have to utilize in working capital to meet business demand?

We are probably really at a peak right now. I do not see it getting much higher than this, in fact, on the inventory and the receivable side. We could expect perhaps some modest improvements in that area with those two coming down.

And then, of course, what you saw at the bottom of the cycle is that a lot of that inventory when we were producing at much lower rates then the -- when you get to those cyclical lows, then that really does go down a lot and that converts to cash. So again we would expect the working capital needs to really have peaked about now.

All of our control in our management models in this business though after and during the downturn have been converted to cash flow models. We are evaluating our performance on cash flow, the ability to generate free cash flow, and it is important when you study us to recognize the difference between the manufacturing CapEx and again the leasing CapEx as we described it. And I agree with what these guys are saying on the working capital. We have a little higher (technical difficulty)-- of receivables right now due to the recent order activity and some of the stagings going on.

Well, if you are going to be reinvesting in the business, particularly on the leasing side, do you have a target where you would like to have debt, or would you really prefer to just continue to increase the scale of your business?

We have used the leasing fleet in some way as a way of investing our surplus cash. We had about 70 million of surplus cash which we are investing at very low rates of return, and the rates of return on surplus cash today in the marketplace are quite low. By putting $50 million of investment in our leasing assets, 30 million for so-called permanent investment and 20 million for staged syndication leasing, we were able to achieve the annualized rates of return on that cash close to 10 percent per annum. And that is a great, much greater, return than if we had left the cash in the bank.

However, the important thing to understand is that leasing assets, especially in a market like this, are very very liquid. There is a very heavy demand any marketplace for properly constructed leasing assets, and if we wanted to convert those assets to cash, back to cash, it would be a fairly simple matter for us to do that in the current climate. That can change, so we evaluate the leases very very carefully, and we want to be sure we are adding only good leases to the portfolio in this regard. But we could turn that to cash within a very very short period of time within 30 days.

(multiple speakers) -- in the latest quarter with your leasing and services business going up, or was that just all related to reinvesting this cash?

I am not sure I heard the first part of the question, but the revenues and the margins going up were twofold. One, there was some leased fleet additions that we had just discussed. But, two, the lease rates that we are realizing on the fleet are growing, too. But when we have lease renewals, they are being renewed at higher rates, and our equipment is on so-called utilization leases rather than a promise to pay a fixed monthly rental where one your legislation you get paid based on the hours and the miles, the cars traveled, those types of leases are performing better, too. So it is a combination of the two that are driving the revenue and the margin growth.

Finally, I think you would have to add that some assets were underutilized and were not fully deployed in revenue service. So the on-lease service, as you pointed out early, has gone from 92 percent last year to 96, 97 percent. We have very few cars that aren't fully utilized in the fleet now. We still have some.

Okay. Well, great. Obviously with the increase or the initiation of the dividend, you must feel very positive about your cash flow and you would like to return some of it to shareholders, but also continue to reinvest in the business at higher growth rates.

Yes.

Just one last question. With the shareholder rights initiative, do you intend to -- was that put in place because there will be some insider liquidations that could be quite sizable over the next couple of years?

I think it was generally put in place, as Mark said, as part of a review of our corporate governance, but also part of the recognition that we have been a small cap company. We have been a controlled company. We are transitioning to a time when we are not a technically controlled party company because the stockholders agreement has expired. And as a matter of responsibility to the outside stockholders, the board voted to put in a rights plan that was really for the benefit of protection of public shareholders. But there is no imminent transaction that is created. This is part of an overall review.

For example, the other things that we are doing is moving toward a majority of independent directors, the creation of a governance committee. Independent directors now constitute all three of our committees. We have today a Board of Directors which does not have a majority of independent directors and we're moving in those directions. So it is part of a pattern.

I think the major thing, with two big blocks of stock and no voting agreement, we want to be sure that the Board of Directors would have an opportunity to fully evaluate any offers which may come in for the company potentially involving either one of the 30 percent blocks. So that evaluation for all shareholders would be potentially enhanced, and the board would have an opportunity to engage in a review of such transactions and active participation in such transactions.

Okay. Well, great. Thank you and wonderful quarter. Obviously your comments to shareholders were appreciated, and likewise we think the efforts you guys are doing is tremendous.

Thank you very much. That is very nice of you to say.

Frank Maglin (ph).

The Robbins Group. Just a follow-up on the cost of Sarbanes-Oxley. Are you willing to quantify what that cost you in the quarter?

No, but it is too much.

It is a continuing burden, and I think it is certainly an issue for all medium cap, and companies are going to have to grow just to be able to afford Sarbanes-Oxley. I think, though, that we have been able to benchmark what it is costing us. I think we're doing much better both on our schedule for compliance and implementing Sarbanes-Oxley. We had some relief on that schedule by the way, so that will be to our benefit on the cost. But we are doing it in a very cost-effective way. I'm very pleased in benchmarking against others of our size that we're doing this in a reasonable way. But it is expensive as you know.

Yes, no question. All right. Thank you.

Thank you. I'm showing no further questions at this time.

Thank you very much. Thank you for participation in today's call.

Have a good day.