Greenbrier Companies Inc (GBX) 2004 Q4 法說會逐字稿

Hello and welcome to the Greenbrier Companies fourth-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 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, sir, you may begin.

Good morning, and welcome.

After I review our earnings and make some comments about the quarter, that just ended, I'll turn it over to Bill Furman, our CEO, for some comments and then we'll open it up for questions.

First, as always, we will discuss matters in this conference call that include forward-looking statements within the Private Securities Litigation Reform Act of 1995.

Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2005 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

Today Greenbrier reported fourth-quarter net earnings of $8 million or 52 cents per diluted share on revenues of 202 million.

The quarterly earnings are a record for Greenbrier and cap off a year of strong financial results and a challenging materials availability and pricing environment.

As we will discuss in greater detail, Greenbrier realized improved results across the board in all its major business segments.

The Board declared a quarterly dividend of 6 cents per share payable on December 15, 2004, to shareholders of record as of November 19, 2004.

The Company's combined European and North American new railcar manufacturing backlog as of our fiscal year ended August 31, 2004, was 13,100 units with a value of $760 million.

This compares to our May 31 backlog of 9700 units valued at 600 million and our backlog at the end of fiscal '03 of 10,700 units valued at 580 million.

Our strong backlog provides good financial visibility in fiscal 2005 and into 2006.

As of the quarter ended September 30th, Greenbrier had a 19 percent market share of North American new railcar backlog, as compared to our share of industry capacity of about 15 percent.

This 19 percent market share is a slight decline from the second quarter, but it's a decline that we have anticipated and discussed on our prior call as when industry backlog grows and demand for various car type become broader-based.

And when our own facilities become more fully booked, we typically start to see some decline in our own market share.

Continuing on manufacturing, our manufacturing revenues for the quarter were $180 million.

In North America and Europe we delivered 2900 cars in Q4, and our deliveries for the entire year were a record 10,800 cars, which exceeded our earlier estimate for the year of 10,500 cars.

For fiscal 2005, we believe we can achieve or exceed the current run rate of roughly 3000 units per quarter realized in the last half of 2004, with the potential for some upside beyond this 3000 per quarter occurring in the second half of the year, the fiscal year.

Our manufacturing margin for the quarter was 9.9 percent, which was greater than the 8 to 9 percent range we had hoped to achieve in our last conference call.

Efforts to mitigate the effects of steel price increases and efficiencies of longer production runs aided in the margin enhancement.

In '05, we anticipate operating of the 8 to 9 percent manufacturing gross margin range with margins greater in the second half of the year.

At this stage, we are a bit cautious about achieving margins greater than this range, but we will continue to see efficiencies of long production runs, which will certainly continue the A (ph) margins, and this we expect to be partially offset by strengthening in the Canadian dollar, which adversely affects our sales out of our Trenton facility in U.S. dollars.

And similarly, there has been some strengthening in the Polish zloty against the euro, which has a dampening effect in Europe.

Our leasing and services marine manufacturing and rail services businesses continue to provide a stable revenue base and positive contributions to earnings and cash flow, and we're all up for the quarter and the year.

Rail was about an $80 million a year business this year, and marine about 15 million.

We anticipate similar performance from rail services in '05.

Marine revenues should double in '05, principally due to the delivery of 2 barges for which we began production in '04 and are accounted for on the completed contract basis rather than percentage of completion basis.

Both rail and marine are included in the manufacturing segment.

Turning now to leasing and services, revenues were 22 million for the quarter, up 4 million for the prior three quarters.

Leasing margins continue to improve to around 52 percent, up from the 43 percent in Q3 and 38 percent in fiscal year 2003.

The revenue and margin enhancement in Q4 is the result of higher lease rates, increases in lease fleet utilization, additions to the lease fleet, and margin realized on the lease syndication of railcars produced at our unconsolidated subsidiary, Gunderson-Concarril.

There was also a pre-tax gain on sale of used equipment of $400,000 during the quarter.

This compared to $100,000 in Q4 of '03, so not a significant difference.

In '05, we anticipate a margin of around 45 percent similar to fiscal '04 as a whole.

Our own lease fleet utilization is at 96 percent, and our fleet consists of 11,000 owned units and 122,000 managed units.

G&A expense was 15 million for the quarter compared to about an average of 11 million for the first three quarters.

G&A was up due to professional and consulting fees associated with Sarbanes-Oxley, professional fees associated with strategic initiatives, and higher compensation expense.

These higher compensation amounts were accrued for employee costs and incentive compensation associated with higher earnings.

For the year, G&A expense as a percentage of revenue declined from 7.5 percent to 6.6 percent.

We expect G&A in '05 to run about the same dollar amount in total as it ran in '04.

Since we are forecasting the delivery of more railcars in '05, G&A as a percentage of sales should continue to decline.

An additional comment on Sarbanes-Oxley, we continue to be maintaining our schedule for compliance in this area and expect to be fully compliant by our next fiscal year-end requirement.

The tax-free for the quarter was 33 percent lower than Q3, as we were able to utilize European loss carryforwards against our European earnings.

In '05, we anticipate a tax rate of around 35 percent.

The line item "equity in loss of unconsolidated subs" reflects the companies 50 percent investment in our Mexican new railcar facility and our 33 percent investment in our Castings joint venture.

These 2 ventures operated at a combined slight loss for the quarter consistent with our expectations.

In '05, we expect Concarril will be profitable, starting in the second half of the year, and Castings to run about breakeven.

During the quarter, we settled litigation against us related to our discontinuing logistics operation.

This settlement which reduced our loss contingency resulted in earnings from discontinued logistics operations of $0.7 million net of tax.

This is reported as an extraordinary -- or as a discontinued operation.

There are no other significant liabilities remaining related to logistics operation.

Depreciation for the quarter was 5.3 million and ran about 21 million for the entire year.

It should run about 23 million in '05.

Net CapEx, that is our gross CapEx minus sales from our lease fleet, ran about 26 million in '04, and we anticipate it will run about 30 to 35 million in '05 as we continue to more aggressively deploy capital leasing assets.

These assets are highly liquid, and these expenditures in our lease fleet are discretionary and can be monetized whenever we choose.

Finally, turning to the balance sheet, Greenbrier remains very liquid, even while our cash balances have been reduced from the beginning of the year.

The decrease in cash is principally due to the normal fluctuations in working capital, buildups in our inventory for higher production rates, and 20 million of inventory which is being held subject to a lease that will be sold during the current quarter.

During the year, we also paid down about $60 million of debt and participation, and we had capital expenditures of 45 million.

Over the past 3 years, we've paid down over $150 million of debt and participation, significantly delevering the balance sheet.

And our unused lines of credit remain at nearly 125 million.

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

Thank you, Mark.

I'm pleased to be able to report these numbers today.

I'm going to talk just for a moment about the North American rail supply sector, and it along with its railroad partners are enjoying a market resurgence which, as we all know, is in sharp contrast to the cyclical and other weaknesses of only a year or so ago.

Despite the complexities that are associated with higher commodity prices, especially steel and critical components, the industry fundamentals are very sound and favor rail transport and rail suppliers.

Aging fleets not only in North America but elsewhere in the world are boding well for replacement demand as does accelerated wear and tear on the older fleet, which has the effect of increasing maintenance on older cars now on the network and reduces the effective useful life of these older freight cars.

That, of course, in turn causes increased demand for newer freight cars.

These fundamentals favored Greenbrier in its core businesses of railcar manufacturing, especially intermodal double-stack cars where our market share has reached new highs approximating 70 percent of 2005 -- 2004 and 2005 cars on order.

And this is up from our historical average of around 60 percent.

A very strong market share in a very strong sector.

But the present climate also favors our rail services businesses where we repair freight cars, provide wheel and axle services and parts, both new and used, and manage over 100,000 railcars for others including institutional investors in major railroads.

Taken together, these repair, refurbishment and service businesses are our second largest source of revenue, approximating 100 million in revenue during our fiscal year just ended.

Railcar leasing completes the third leg of this integrated business model and has benefited greatly from improved utilization, increased freight car valuations in our own fleet, and cars held and purchased for syndication, in addition to improved margins and operations.

The stage has been set for the present industry situation by the shocks of only a few years ago.

A weak economy, deferred capital investment, and deferred maintenance post 9/11, along with the supply-side adjustments made by the railroad industry from improved asset utilization following the major industry mergers.

These forces all caused industry orders and backlogs to plummet to 20-year lows.

In turn, this fractured the supply industry, forcing consolidation and weakening balance sheets among component suppliers.

This created the environment for today's commodity-driven partial supply entrapment of freight car construction and railroad businesses.

Rising commodity prices such as fuel and steel coupled with supply-chain bottlenecks and castings and other key components have altered dramatically the supply side of the railcar pricing and availability model.

Railroads and their suppliers alike are coping with this basic shift in supply circumstances, while adjusting to the strong demand shifts that a commodity surge driven by low interest rates, a weak U.S. dollar, and China's economic phenomenon brought to the North American economic picture.

No sector in such circumstances is in a better position to benefit from these forces as they now exist than is the North American railroad industry, and by extension its suppliers.

However, it is useful to recall the words of a favorite phrase used often many years ago by Raymond C. Burton, Jr., former President and CEO of TTX.

That is, "it remains to be seen whether the railroads will capitalize fully on these opportunities or whether they will snatch defeat from the jaws of victory."

Higher costs and higher physical demand are true realities.

This is what a commodity surge is all about, and the drivers are very clear.

The issue is whether higher costs will be absorbed and by whom, and for our sector specifically whether they will be passed on to customers throughout the value chain.

An alternative is demarketing if cost increases cannot be absorbed.

Today we can see examples of both behaviors on the part of our rail and leasing industry customers working with their customers in the transport sector.

What is very clear from all of this or at least it seems so to me is that earlier supply segment models and wisdom based and traditional industry, economics (ph) are not always going to remain predictive of the future.

While it was true as a given business practice yesterday may not longer be true today.

All of this is merely to say it is a good time to be where our Company is today in this railroad supply sector and as a service partner to the railroad industry.

But we wish not only stay there, we wish to grow shareholder value and in order to do that we need to continue to keep our wits about us.

Let me talk just for a few moments about Greenbrier's performance this year.

I am very pleased that we exceeded our own financial goals for the year.

That is the result of many people working hard together with our customers and our suppliers to meet and exceed the targets we set together.

We're very proud of our quality reputation and our service to our customers.

For those who have been tolerant this year of the supply-side, stress is experienced by all of us; workers, customers, suppliers alike.

I thank you for that patience and I assure that our dedication to those basic values have not and will not waiver.

Together we have managed our steel exposure where others in industry have not been so fortunate.

In Europe, a serious issue for us a few years ago, we are profitable where others are not.

But we should be profitable, because we took our lumps, wrote down our European assets and have followed conservative accounting and valuation policies.

Mark has spoken earlier about the stronger Canadian currency and the relatively stronger Zloty against the U.S. dollar but in Europe this weakness against the dollar is relative because the Zloty has tracked the dollar more closely than the euro and is weaker against the euro relatively speaking and this favors our location in Poland where almost all of our revenues are derived from Western European customers.

In North America, the weaker dollar has favored production in the U.S. and in Mexico as opposed to Canada although we are operating our Canadian facility on a profitable basis.

Our strategy of a global supply chain footprint in North American production diversity in all three NAFTA currencies is a natural hedge against currency fluctuations and indeed against commodity shocks.

We have increased our outsourced U.S. production during 2004 and we have increased our outsourced supply of components.

We will continue with the deliveries well into 2005 from these sources and we've also taken steps to improve our production base in Mexico.

So looking ahead to 2005 and beyond, what are we going to be doing in this exciting environment to enhance shareholder value?

To those institutions and individuals who have invested with us, whatever your objectives, I want you to know that we are dedicated to this end of maximizing shareholder value.

We have a goal to grow value as a public company, to increase the liquidity and trading volume of our stock, so as to escape the investment confines of the closely held company with a small cap and modest flow.

There are a variety of ways to do this.

Mark perhaps has spoken or will speak about them and they are referred to in our press release.

We believe the time is right now for Greenbrier to act on strategic initiatives and we are studying several.

We also need to strengthen our management team, implement action on succession planning and transition our Board of Directors to a majority of independent directors well below before the deadline set by the New York Stock Exchange late next year.

Our governance committee comprised entirely of independent directors is dedicated to that task.

We need to maintain our quality of service to our customers while reducing our costs and early in the year hope to be able to talk more about specific ways we are strengthening our global supply chain network and improving manufacturing efficiencies.

On balance this has been a challenging year, and it has been a very, very good year financially.

It is good to have and to be able to report these good numbers but it will be better to be able to report better numbers in 2005.

All of this, of course, is not enough.

For me personally, some of the joy is gone from the successes we have seen this year by the sadness at having a lawsuit by our former Chairman, a man whom I have been in business with for many years and have known and for whom I have a great deal of respect and trust.

But we need to continue aggressively our transition from a closely held small cap Company to a Company governed by independent directors; no matter how painful and threatening that process may be to some of our stakeholders, not just founding shareholders, but also employees and even our customers.

To all those stakeholders I pledged to you that we do know the value of our core values to you.

We know why you have selected us as a supplier.

If you are a customer, as a worker, if you are employed by us and as an investor.

And as a major stockholder in Greenbrier myself, I can assure you that I am dedicated to improving shareholder value, improving the numbers and producing a good report in 2005.

With that, I will turn it back to Mark.

Thank you very much.

With that, operator, can we open it up for questions?

(OPERATOR INSTRUCTIONS) Frank Magdlen, Robins Group.

Good morning gentlemen.

Either a great blowout or a great quarter.

I'm trying to figure out how are you protecting yourself on the steel and other component price in cost pushed inflation we are seeing?

Like others who are in a similar circumstances, we enter into back-to-back agreements on steel as much as we can.

There has been much more stability in pricing and we are pricing our products with what we believe are comfortable margins in any areas where we are taking steel exposure.

One area where it is difficult to hedge that exposure is in the area of scrap surcharges.

Your crystal ball is probably as good as ours in looking forward into the future.

I think this kind of market has the ability to bite you on the way up and it has the ability to bite you on the way down.

So it is a tricky business and its one we've paid a great deal of attention to over the past year.

We think we have ourselves well covered.

And of course the proof will be in the 2005 results.

About what percent of your backlog has some type a price protection in it?

In the context of our total plan for managing this commodity exposure, I would say almost all of it does.

We have some positions where we have taken steel exposure but have very significant price escalations or margins into the equation and are working to lock in values at well below those numbers.

So we may have some short-term risk we are taking, and it's hard to characterize it, it's a very complex model.

Balancing a number of pieces of our business that hedges this exposure.

Two other questions, one relates to the increase in liquidity and what you have in mind there?

What type of acquisitions are you looking at (technical difficulty)?

There are a variety of transactions that are available, I think Greenbrier is in a good position with a strong balance sheet; market timing is positive in the capital markets to support transactional objectives.

I think our basic objectives are to look very hard at the pattern of industry consolidation.

We know that that has occurred on the supply side for sub components; it has not yet done so on freight car building.

We believe there has to be a some solution to the cyclical sorrows of car building business and we believe we can be instrumental in that.

However, if we cannot find that solution, we certainly don't want to pay an excessive price.

And if we cannot find that kind of solution, then we will find another solution.

We're looking for synergies in our manufacturing, purchasing, our repair businesses, our service businesses and diversification in our revenue base and unless we can find a true car building consolidation play.

Go-ahead, Mark.

Frank, anything we would look at would be in our core rail business.

So when Bill mentions all of these areas and diversification, they would be in our core rail business in North America.

All right.

And then any other thoughts on you want to increase the liquidity and -- do you have any parameters of what you want to do there?

We'd mentioned Frank, in the release a possible shelf registration.

I think we just begin our examining that there are some favorable attributes as far as market timing to whether that the debt or equity or a combination of debt and equity that certainly the time is ripe and it has been ripe to examine that and determine whether or not we should be acting on that.

Thank you, gentlemen.

Great quarter.

Matt Kelleher (ph) of Smith Barney.

You spoke about one of your competitors and I have a question, why did you make these steel increase prices a one-time charge likes say Trinity did?

I'm sorry, could you repeat that question?

I'm just curious as to why Trinity Industries, obviously your competitor, reported these rising steel prices as a one-time charge.

I'm curious as to why you guys chose not to do it that way.

I can't comment on Trinity.

I can comment that if we have a negative, an anticipated negative margin on a future order, and order in backlog where there is an anticipated loss on the order, then GAAP requires us to take that hit.

Take it in the quarter where we realized that we have that negative margin and indeed in our second fiscal quarter, we did have some amounts -- they were relatively small amounts associated with that.

But if the rising steel prices only result in a reduction in a positive margin, then GAAP, then you still realizing positive margin and you do not take that write-off up front.

So there is only one quarter where we had the negative margin, a negative anticipated margin where we took a hit.

But I would go further and say that in our planning for the year we have a budget.

We have budgeted margins and we have met our objectives and our strategy in the steel side with the exception of that one quarter where we did take a one-time reserve.

Our strategy has been highly successful in hedging the cost of steel.

It's been a multi-pronged effort including contributions from our leasing company, from our repair and services business, from scrapping activities of our own.

And quite successful.

We do not have -- and of course, one cannot anticipate the future.

But we do not have the same issues I believe as others have.

This is not at all to be smug about that.

We were fortunate.

We were on this early and we devised a plan that eliminated most of the exposure.

You guys did a great job.

Can you talk maybe a little bit about next year industry orders and where you think we are in the cycle?

Do you think it'll go back to the 77,000 car peak that we saw before?

Can you talk a little bit about that?

Well, I think the 50,000 level is something just over replacement demand, the replacement demand is changing somewhat as utilization increases but that also is a reflection of the kind of volumes that the railroads are seeing and the demand on the railroad movements.

There is still going to be some supply constraints on production which ought to convert, as it has it has in our case, to somewhat higher yields.

However, it remains to be seen.

We certainly have seen a surge of orders I think in the intermodal business, in coal, and some of these fundamental areas at the range of conservative forecasting; 60,000 unit, 55 to 60,000 unit range in 2005, 2006 for deliveries are sustainable.

I don't know whether the current demand levels will attempt to push the levels of orders up to those that have been sustained in earlier times like this.

I'm not sure that the railroad industry -- or the freight car business would be able to provide that capacity instantly as it has in the past.

75.

At the 75,000 level.

What is -- do you think we are operating at industry capacity now or do you think there is still excess capacity in the market?

There is industry capacity to build up to 75,000 cars perhaps but the issue is materials availability that Bill was referring to, both on steel and specialty components.

And when Bill was referring to getting up to that 75,000 level, again, during the downturn, the supply chain was weakened and particularly most notably in the castings area but in other areas as well.

So today if the industry wanted to build that 75,000 units, it could not build at 75,000 units.

So not to put words in your mouth, basically you guys feel as though the industry orders are kind of nearer maybe going to be 55,000 going forward and you see your growth opportunities by doing some strategic acquisitions and that sort of thing?

We think that in our sectoral intermodal, where we've had a strong market share we're expecting continued strong demand.

The demographics of that business and in other segments is very strong.

The order cycle in intermodal since we are backlogged and others are backlogged well into and almost through 2005, the next cycle will be for 2006 and 6 orders.

We see the underlying fundamentals for our segments as quite strong.

Subject of course to all the risk factors that go along with the kind of economy that we have today.

And Matt, certainly some of this growth is organic too, in that when you look at the last cycle, we peaked out at 8600 units.

This year, we peaked out at 10,500 and we've given guidance for next year that we think we can get up to or exceed the 12,000 level.

And part of this is organic through our capacity expansion and through during the last cycle in the 90s we just had our European and our Mexican operation coming on board.

We have those entities operating at higher levels.

We'll continue to operate Mexico at even higher levels this year and then through our private branding relationship with ARI.

So we continue to push the envelope on our own production capabilities as well as through some of our outsourcing and subcontracting initiatives that are allowing us to get more throughput through our plants.

One of the ways that we've helped protect ourselves and achieve these higher throughputs is through our castings investments.

And so while the industry as a whole is having capacity limitations and damp effects, (ph) I think we've been able to perform better than most in this area.

Well absolutely.

You guys have really been gaining market share in the simple terms.

We certainly have in our core targeted businesses.

Historically we gain market share in downturns and we lose market share a bit as things normalize in an upturn simply because our capacity can become stressed.

This allows us to be somewhat more selective but we're very dedicated to our intermodal business and we're expecting strong underlying demand in intermodal for the next several years.

Thanks for taking all my questions.

I didn't mean to dominate the Q&A.

Thank you.

Windy Caplan of Wachovia Securities.

Thank you.

Good morning.

Bill, your comments in the release and on this call about shareholder value.

A couple questions -- some more color on your acquisition comments.

Just to clarify, are you suggesting that you would buy a railcar competitor manufacturing competitor in the freight area?

Do you mean a manufacturer -- you mean another car builder in my terms?

Yes.

We're examining all of our strategic opportunities -- all strategic opportunities that may be available Wendy, without getting into specific details in our core areas of competency which is freight cars, freight car services and so on.

When you talk about a shelf registration and the potential of doing equity or debt, public equity or public debt, you would do this with a use of proceeds as well, correct?

You're suggesting that that would be in conjunction with this -- with an acquisition?

When we talk about use of proceeds, Wendy, we would look at it either as part of an acquisition or on a stand-alone basis what the use of proceeds with just organically.

As you know, Wendy, filing a shelf during the time that the shelf is clearing gives the Company some flexibility in movement either to support on a follow on basis an acquisition, or to take advantage of the capital markets in anticipation of a strategic move.

Do your -- kind of looking at strategic options, does that include a sale of the Company as well or not?

Wendy, we are open to any sort of transaction that will drive value.

It appears to us that Greenbrier is in its current position more logically put to grow than to have that other alternative; however, I think one has to be open to all options that may present themselves.

That's fair.

A couple other questions about the quarter.

Could you cut for us the backlog and deliveries in terms of by location, in terms of country, and as well if you could give us that information sort of split conventional versus intermodal for both backlog and shipments?

The answer is probably no to your questions.

But first I want to be sure I answered your first question, Wendy, just so we will be clear.

We are certainly intending if we do an offering of any securities to have use of proceeds.

We are not talking about stocking cash away in a sock or something like that.

I want to be clear on that.

We anticipate that there are growth opportunities and there are strategic opportunities in our industry that are exciting So we are considering the shelf as a tool in the process that we anticipate in the next few months.

To go back to your second question -- .

I didn't think you were going to put the money in a sock.

I understand.

Thank you.

Wendy, we haven't broken out the type of information you have asked historically for competitive reasons but we can give a kind of a breakout between North America and Europe.

This year about 1500 of our deliveries were out of Europe and our backlog assembly, about the same amount of our backlog is Europe with the remainder in North America.

As you might anticipate, our North American backlog is weighted toward intermodal cars.

Over half of our backlog is intermodal cars, probably well over half of our backlog.

Okay.

When you talk about the prior peak in terms of your production levels versus what you could do next year, clearly having a nice full backlog gives you a lot of ability to optimize production with those long production runs that we root for.

Historically I think the prior peak operating margin was in the low double digits; 11, 12 percent.

Can you talk about what the variables would be to keep you from getting there or would in fact get you there or beyond there as we look forward given this strong period of demand?

Well, Wendy, just to make sure we're talking apples to apples on operating margin, how are you defining operating margin?

Earnings before interest and taxes.

Okay, I wanted to make sure you were not talking about manufacturing gross margin.

The same factors really that have been out there, the critical ones on the cost side have steel and the effects of steel pricing, the volatility of steel pricing that we've managed through this year; the availability of materials so that we don't have production and pipe issues.

And then those are the two probably two biggest items on the cost side other than some unforeseen type of an event.

The market certainly remaining robust is a big one and as Bill alluded to if kind of really for next year those would be the items longer term, the items would be, as Bill mentioned that would drive demand would be the pricing of steel and the effects that would have on the cost of railcars and whether that's passed through the supply chain in through the customer chain so this type of demand can be sustained.

To be truly blunt about that, Wendy, with the backlogged in motion we really have an opportunity to gain efficiencies while that backlog is running.

I think the real issues are the value chain and how pricing gets passed through.

Because that's the trick, after all.

There is still a lot of production capacity in this space so we expect heavy competition.

We will be competing for other's product lines and they will be competing for ours and there is certainly lots of options out there in freight car manufacturing.

So we can't escape it.

But if the railroads are able to pass on, as we expect them to continue to try to do and to do, their increased costs to customers and if they look at the cycle correctly and are averaging their investments, I suspect that margins will have an opportunity to continue to grow.

Some of that is going to be dictated however by competitive behavior and frankly, no one can predict that imponderable.

Two last quick questions and I'll let someone else jump in.

Can you give us some capacity utilization sense in terms of your plants?

And secondly, have you seen any dissipation in terms of the availability of -- or the bottlenecks of component availability?

I think it's a lot like a gopher being digested through a snake, the ball just moves farther along the snake before it vanishes.

You deal with one segment -- say castings and then pretty soon you're dealing with another.

I don't think that it's time to declare a victory on the supply side challenges at all.

I think that's a real recipe for making a mistake.

There are a lot of different needs for repair that have heretofore been handled by repair service companies.

Demand has increased dramatically and it's putting pressure on that part of the supply base that has heretofore been available for new cars plus there is export opportunities.

A weaker dollar as it exists causes everything to be cheaper so it just changes the whole paradigm.

I don't think that we're through this completely.

I just think it moves from one key component to another.

I think that the whole concept of protecting your source of supply and aggressively managing supply cost is the key to operating in this kind of environment.

And I think there is a real danger for all of us to say, make decisions based on the experiences of the past.

Supply has shifted.

Demand has shifted.

There is just a different industry fundamental.

I think this is going to continue to pose problems for those who are not alert and on their feet.

We hope to be alert and on our feet.

Thanks, Bill, and finally the capacity utilization question in terms of where we are in the plan.

Our predicament always is if we want to maintain market share, Wendy, in our primary products we have to dedicate our facilities to it.

We are currently fully at capacity including our outsourcing capacity and some of that may have to shift.

We do anticipate opportunities for enhanced margins in 2005.

We expect her overall market share to decline slightly, to continue to decline as industry capacity is filled in other areas.

The trade out there though is we should be able to obtain better margins.

Thanks very much.

Mike Peasley from BB&T Capital.

Bill, Mark, good morning, nice quarter.

I've got to say it is getting a little bit harder to ask questions these days.

I guess that's a good thing.

Let me go back and kind of follow-up on Wendy's margin question.

You've talked about '05, 8 to 9 percent is your goal for the year.

And you know to me, it just seems cautious and you alluded to that a little bit but I understand you still have some supply concerns and challenges but looking at what you've done this year where things have been so terribly difficult, next year it seems like you've got a very favorable backlog with a lot of intermodal orders which you are so good at; you've got pricing in your corner; why is it 8 to 9 percent and maybe not something closer to 10 to 11 percent?

You probably hear Dr. Jekyll and Mr. Hyde talking here because I think Mike what you are hearing is that I've expressed some caution and Bill has expressed some optimism.

And so you have to decipher between that, I think perhaps Bill's optimism is based on the some of the things that you just mentioned.

And that perhaps we could exceed what -- could exceed that 8 to 9 percent range.

I guess I'd have to say in managing through a difficult time you set targets and you don't want to fall short of your targets.

We've done a good job this year of exceeding our targets.

We will set targets and have set targets for the coming year and we're hopeful of exceeding those.

Perhaps we are cautious.

I know we've been accused of it in our forecasting, internally and elsewhere but I don't know that that is such a bad thing.

Agreed, agreed.

That was a good answer.

And then you know your production forecast somewhere around 12,000 looks good.

My question would be on the third-party agreements you have or a partnership, if you will, with ARI, for example.

Do you have that capacity locked up for '05?

I know it's worked out real well for you this past year?

In the current world all things are variable.

I think we are fine through our backlog but obviously alternatives for all car builders have increased and ARI has its own fish to fry.

That was our strategy for 2005.

We are working on our capacity in our owned network and 2005.

And we're continuing to look at other options for enhancing our outsource capacity.

We are fine through the backlog and I'm not sure if Mark has announced how much we have actually on order.

We haven't broken that out but it's not a substantial amount of the -- it's not a substantial amount of the backlog that is there and as Bill says, we're fine in the backlog and as the market demand grows, the question is do we more inward for that capacity rather than reliance on ARI that we have had either built or will have built either or in backlog over 2000 cars.

Let me touch on the acquisition, your acquisition comments to earlier.

I will just hit it from maybe one more angle.

Obviously additional capacity and diversifying maybe your manufacturing base across the railcars would be good.

Is that something you're more focused on rather than penetrating the leasing market a little bit more?

We are operating in three segments currently; leasing, manufacturing and a whole bundled area of repair, repair services and freight car services.

So were we to do an acquisition as part of the strategic move, and we think the timing is right for some strategic development for the Company, we would be looking in those segments.

Okay.

And we have and continue to examine opportunities in these segments.

I think our challenge will be to execute on one of them and that would be a useful goal.

It's not baked into any of our numbers; however, correct me if I'm wrong, Mark.

That is correct.

Let me continue to jump around just a little bit more.

I've got a couple more questions.

Leasing results were obviously quite strong.

How much of that, Mark, was lease rates?

I know you dabble a lot more on the spot side of the market and just curious what lease rates had or at least what that impact was?

That would not have been an overly significant piece in the fourth quarter compared to the third quarter, Mike.

We have been locking in our least rates.

It is true that on our utilization type leases because some of our leases are utilization that are variable based on the use of the equipment and that continues to be very strong.

More of this would have been the additions to the lease fleet and principally the additions to the lease fleet.

And then there were some modest amounts from the sales and then the syndication of some railcars that were produced out of our Concarril facility.

Correct me if I'm wrong but I didn't think your lease fleet grew that much from the third quarter to the fourth quarter if at all.

There would have been some ramping on effect of cars that had come on in the third quarter and then some I think there was some modest addition in the fourth quarter with the ramping on effect.

And then again.

So it's not one thing that is sticking out as I guess what I'm saying, Mike, it's a combination of all of these things.

Fair enough.

Looking at Mexico and your castings joint venture.

Were those losses roughly equal?

No.

The Mexican piece would have been a little bit greater than that in the castings, about a little bit on the positive side.

And what we had indicated is what we'd indicated is that we expect Mexico to be profitable in the second half of the current fiscal year as we've been ramping up our production there.

Great.

All right, I think that's it for now.

I will turn it over.

But congratulations on a great quarter.

Thanks for your time.

Tom Albrecht.

We thought we'd play a little tag team here.

Just a few other questions Mark and Bill, I know you gave some thoughts on SG&A but I wanted to ask specific to the fourth quarter increase you talked about professional fees, Sarbanes-Oxley, strategic advice but also higher bonuses.

How much of that $2.6 million increase versus the third quarter was roughly bonuses, compensation?

And secondly will you be accruing more evenly throughout fiscal '05 now that you've got a better sense of your ongoing profitability?

A couple things, Tom, is on the piece that would have been higher for the quarter would have been that incentive compensation that was correctly tied to earnings so it might have been more formula based.

So that piece will always be variable each quarter.

And then the year end, we've had a pattern of a little bit more of the G&A expense related to incentive compensation at the end of the year where we know where our year is ending up so I think that pattern will continue.

I do not have the exact breakout of the compensation, the increase in the compensation for the fourth quarter so I have to get back to you on that.

That is fine.

At least the answer on the flow helped a little bit.

Bill, what do you contribute the Intermodal share gains to this past fiscal year?

I mean going from roughly 60 percent to 70 percent is fairly dramatic when you've been pretty constant for eight or ten years.

I think we've been fortunate to have a good reputation for reliability, this has been a year that has tested that.

And we have come through this year well, not to say that we haven't had some disappointments, we are very pleased that our customers have worked with us in those occasions where supply problems issues have caused some slowness in our delivery schedules.

I think that reliability is very important, we are reducing our costs and trying to earn return on our capital that is reasonable and we have been willing to dedicate more of our facilities to maintaining our market share.

This is not exactly a science because to some degree we can't control the order placement or the timing of that placement in the Intermodal market.

So some of it may just be hiding a tiny difference.

We are pleased that we have in our Intermodal productline a very strong depth in various engineered solutions of a variety of cars both 40 and longer equipment.

And our product's performance and lifecycle costs generally have been superior in the marketplace.

That is what I would expect but I wanted to hear it as well.

Also let me piggyback on Mike's question on leasing.

Let me be more specific.

Did you have a lot of railcars come up for lease renewal that you chose to put into the spot market versus three and four months ago, as opposed to rolling them into longer-term leases?

No, in fact our strategy has been just the opposite.

During the downturn when our equipment was coming up for lease term renewal we typically kept them on shorter term leases and the spot market waiting for the recovery and during the recovery we've been more focused on terming out those leases at favorable rates.

So the terming out of those leases creates tremendous value in the discounted debt cash flow of the leases.

And so it is a source of dramatic value enhancement and safety.

One other thing I would say is in earlier question we do not dabble in this leasing business, it's cold and calculated and we run our leasing business much differently than other companies do.

It sometimes is hard to explain that to outsiders but it's a model that's worked very well over the years through good times and bad times and we are taking advantage of some of the good times.

One of the places we have put surplus cash is in our operating lease fleet and Mark manages this intensely.

And at the current time is very liquid.

So you will see that our operating fleet is growing but we're not really playing the spot market, we are looking, as Mark says, to lock in desirable long-term rates on our equipment.

Mart, what is the latest average lease term, if you've got that for the portfolio?

I don't have it right at my fingertips;

I think it's about 2.5 to 3 years.

I think it's in the 10K.

There should be some indication of the maturities in the footnote there.

I'll be sure to look for that.

Let's see, I know you mentioned that castings was probably slightly profitable but you talked about a breakeven kind of figure.

Is that again just part of being conservative?

I mean if that thing ramps up it ought to -- even though it's not your primary business it ought to seem to be having an even brighter outlook over the next 12, 15 months.

You are referring to the casting side, Tom?

Yes.

Remember our primary reason for the investment in the castings business has certainly been a very good investment but it's to protect our supply lines as well as of course -- as with any investment like this, there's transfer pricing issues that we wouldn't go into.

That would affect the profitability of the plant.

Our forecast for the year is that baked into our numbers is that it would continue to operate around the breakeven level.

There is no doubt Tom that much of the value of the castings investment is reflected in the margins at the operating level.

And will continue to be so and probably and more positively so in 2005.

And quality coming out of there, I think there might have been some startup issues a while back but what is your latest read on quality?

We are very fortunate to have 2 very good partners in that business.

ASF is a worldwide leader in castings and the Alliance factory in particular is a superb place.

It's meeting or exceeding all expectations.

I'm very, very impressed with the management of that facility.

Our Cicero facility, it is true that as we were trying to -- it was an older facility, as we were bringing that up, we had issues but it's performed admirably and both we and the industry are very fortunate that ASF and Carl Icahn and we put money into this business otherwise we would've had a tremendous supply shock.

But were reaping some benefit from that as you would expect from making an investment in that business.

Just two other quick things.

Bill, I know somebody asked you sort of about this but I wanted to come at it from a different angle.

Mark, you mentioned well over half the total backlog is related to intermodal cars, but given the share gains you've had I'm just wondering whether you talk about your backlog or what you maybe actually did during fiscal 2004, can you break it down even if it's very rough numbers, percentage of your production that's intermodal cars, center partition lumber, boxcar, etc.?

I mean well over half a subject too and a lot of room in there.

Let me try to give you some guidance on the new car side again.

We said that about 1500 of our deliveries were European.

Of course the balance of that being out of North America.

Again I wouldn't want to break it down into exact detail here but of our North American deliveries, probably over 60 percent of our North American deliveries would be double-stacks.

And the balance would be conventional and that would either be boxcars.

Center beam would have been the amount of production.

Okay.

That helps.

I think that's reasonable guidance as far as '05.

As well, we're also bulkhead flatcars is building bulkhead flatcars in '05 but currently that is our lineup.

Intermodal cars, bulkhead flatcars, boxcars and center beam cars are in our backlog in North America.

And then we have a variety of cars in Europe.

I couldn't help but resist asking the question.

You gave some good financial parameter guidance on SG&A, the tax rate, production, etc.

I want to ask about earnings.

We began this morning with a consensus '05 estimate of $1.61.

Obviously you finished very well here in Q4.

Any thoughts on how you feel about consensus?

For '05?

For '05, fiscal '05.

No, I don't want to make any specific earnings guidance although I suspect Tom, for you and others with the detail the information that we gave that that ought to give you some things to chew on there and to model out.

I love the world we operate in.

Anyway that's my questions.

Keep up the good work, guys.

Thank you.

John Rogers from D.A. Davidson.

John, we were just not going to close this call until you came on.

I was going to stay here till noontime.

I appreciated it very much. (multiple speakers) at some point you'd let me through.

We had our "Do Not John Talk" button on.

I appreciate that.

A couple of quick things.

In terms of the pricing that you're looking at right now for cars, are you -- I assume what you have in backlog is a significantly higher price than what you delivered in '04.

Is that right?

Yes.

When I say significant, the pricing environment has continued to escalate so if you go -- I don't know if the word significant -- I'm getting some sign language here -- but the average railcar costs continue to go up.

I just don't know what you mean by significant.

I guess what I'm trying to get to is your comments especially yours, Mark, on margins for next year then it's really a function of line changeovers and things like that that might depress margins?

Yes, well --

I mean hold them back.

This may be what you're getting to, partly.

John, it's just the mathematics.

As car prices continue to go up, a 10 percent margin on a car that's gone up 25 to 30 percent over the last -- from the depths of the markets is obviously much harder to maintain 10 percent margin on a car that costs $80,000 than a car that costs $65,000.

And so I'm really glad that you brought this up because the margin dollars that we might realize on the railcar are going up on a dollar basis but it obviously puts pressure on the margin percentage.

Right.

I don't think that in any way, John, this has been a tremendous windfall for car builders.

I knew that someone -- on may be tempted to see it that way.

We have cost increases that are obvious and so we've obviously had to increase our prices.

The throughput advantages are very real.

But the railroads are not entirely enthusiastic about paying higher prices for railcars.

There is pressure on margins but the same unit of time and physical throughput produces more dollars at a lower profit than a lower margin.

There is some downward pressure on margin just by the nature of these high commodity prices and whether they're going to be passed on.

The other question I had is more for you, Bill, is in terms of car types over the years you've gone in and developed some other car types and looked at them.

But one area that you've kind of avoided in the past -- I don't know whether by design or just coincidence, but some of the commodity carrying cars, the open hoppers, the tank cars.

Would you look at going into some of those markets?

As you followed us over the years you know we've migrated from one product type to another depending on the marketplace and one has to be a bit flexible at that way.

We do build tank cars in Europe.

We are not building tank cars now and in each of our locations, our physical locations which we own, we're somewhat distant from those marketplaces.

But we have built covered hopper cars and we have many designs and continue to have design initiatives so that we would be capable of -- if we had capacity we weren't going to dedicate to running lines, diverting into other car types.

I believe we could be competitive on those, especially if we threw the same sponsorship resources behind them as we typically have done in our -- with our leasing company.

In North America, John, really we are equipped to build any car type other than coal cars and as Bill had mentioned with tanks, although we've built some up at Trenton in the past but those are the markets that we're not really equipped at our existing facility today.

But all other car types we are and we have built all other car types.

While the market is strong obviously we'd like to stay in the car types that play to our strengths, intermodal and as far as products most notably.

Great.

Thank you, congratulations on the quarter.

We are showing no further questions at this time.

Thank you very much for attending today's call and if you have any other questions, we will be pleased to answer them later on.

Thank you.

Goodbye.