Greenbrier Companies Inc (GBX) 2005 Q2 法說會逐字稿

Hello, and welcome to the Greenbrier Companies' second quarter 2005 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 call over to Mr. Mark Rittenbaum, Senior Vice-President and Treasurer.

Mr. Rittenbaum, you may begin.

Good morning, and welcome to our fiscal second quarter conference call.

After we review our earnings release and make a few remarks about the quarter that just ended and the outlook for 2005 and beyond, we'll open it up for your questions.

Matters discussed in this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of '95.

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 we reported our second quarter net earnings of 4.8 million or $0.31 per diluted share on revenues of 255 million.

These quarterly earnings were more than double the prior year's second quarter.

We also declared another quarterly dividend of $0.06 per share.

The Company's combined European and North American new railcar manufacturing backlog as of the end of the second quarter was 12,300 units valued at 720 million.

This compared to 10,300 units valued at 620 million at the end of our first fiscal quarter.

Our strong marine and railcar manufacturing backlog provides good visibility into -- well into 2006, as our marine backlog also stretches out about a year.

Our manufacturing revenues for the quarter were 234 million.

In North America and Europe, we delivered 3,100 cars during the quarter as compared to 2,300 cars in Q2 of 04.

Deliveries in both of these fiscal periods included new railcar production out of our Mexican facility, Gunderson-Concarril.

However, as you recall, we started consolidating Concarril in Q2, as we obtained 100% ownership of this facility.

And Concarril contributed about 26 million of revenues for Q2 of '05.

Our manufacturing margin for the quarter was 6.8%.

This was up from 6.5% in Q2 of '04 and down from Q1 of this year.

These margins are consistent with our guidance on our last conference call, when we stated that we expected our margins to be weakest in the second quarter, due to line changeovers, the effects of inclusion of our Mexican operations that I just referred to, and holiday shutdowns.

As it turns out, production was also affected by inclement weather at our TrentonWorks facility in Canada, where we lost six days of production and had related production inefficiencies when we started back up again, from a severe snowstorm up there.

For fiscal '05 as a whole, we anticipate operating in the 8 to 9% manufacturing margin range, so therefore, we expect our margins to be greater in the second half of the year.

This improvement in the margin is expected to come from efficiencies of long production runs and improving margins at our Concarril facility in Mexico, partially offset by the effects of the Canadian dollar and Polish zlotych, which remain strong.

These -- the -- these strong currencies put pressures on margins from products produced out of these -- out of Canada and Poland.

Our leasing and services marine manufacturing and rail services business continue to provide a stable revenue base and positive contributions to earnings and cash flow.

Turning to leasing and services, our revenues for the quarter were 21.1 million, up from 3.3 million in Q2 of '04.

We had gains on equipment sales this quarter of 3.4 million pretax, compared to no gains in Q2 of '04.

Our leasing margins were up -- were 50%, up from 42% in Q2 of '04 as a result of these gains on sales.

We regularly -- or rather, we periodically sell assets from our lease fleet in the normal course of the business in order to take advantage of market conditions and manage risk.

Indeed, during the quarter we sold some assets out of our lease fleet in order to rebalance the lease portfolio.

We also scrapped some cars that were into the economic light [ph] and we also sold some older cars to some end users, as we believe that now is an opportune time to realize some of the hidden equity in our lease fleet while we also continue to reinvest in our lease portfolio.

We expect to have more trading activities later in the year, where we invest in assets and hold some of these assets for our lease fleet, but also sell some assets to other parties and so, therefore, we would expect some more trading gains that will show up in our leasing operations later in the year.

We expect our margins for the year as a whole to run around 47%, which is a little bit higher than fiscal '04.

This increase in margin is expected to come from additions to the lease fleet, increases in fleet utilization, and the trading activities that I just referred to.

Our lease fleet utilization remains strong at 96%, and our fleet consists of 10,000 owned units and 125,000 managed units.

G&A expense for the quarter was 14.2 million, which is up 2 million from the prior quarter.

The G&A for the quarter includes about 1 million pretax or $0.04 a share, after tax, and professional fees related to litigation responses to allegations from our former chairman, Allen James.

This $1 million attributable to these items is up a little bit from Q1 of this year, where it ran about .8 million.

The balance in the increase of G&A was due to expenses related to Sarbanes-Oxley, other legal expenses, and increased compensation-related expenses associated with our higher earnings.

We expect Sarbanes-Oxley-related costs for the year will run about 2.5 million and we do expect to be -- and we are on target in all of our stocks-related matters, in terms of meeting our deadlines and reporting requirements.

We expect G&A expense in the second half of the year to run a little lower than this quarter.

And since, obviously, our revenues for the year are up, G&A, as a percentage of the sales, will decline.

Interest and foreign exchange for the quarter was 4.2 million compared to 2.6 million in Q2 of '04.

The current period includes a foreign exchange loss of 1.3 million pretax, whereas the prior period included a gain of 3 million.

So you can see that the delta between the two quarters is related to the foreign exchange.

This foreign exchange loss, which was a non-cash item, was principally related to our European operations, where the continuing strengthening of the zlotych, the Polish zlotych, resulted in a loss from revaluation of balance sheet accounts up from our Polish operations.

Subsequent to the quarter end, the zlotych has weakened some and we would anticipate at this point, based on where the zlotych is, that if this were to hold true, that the loss would not -- that we would not have as much volatility next quarter.

The interest portion should run about 3 to 3 1/2 million for the balance of the year, and excluding any effects of foreign currency, gain or loss.

Turning to the line item equity and loss of unconsolidated subs, this reflects the Company's 33% investment in the rail castings joint venture and 50% investment in the Mexican operation until, of course, the second quarter of this year when the Mexican operation was consolidated in our results.

Castings was about break even for the quarter that just ended.

This was consistent with our expectations and in the prior year, castings -- losses from the casting operations were about .7 million, due to start-up costs and temporary production issues.

The tax rate for the quarter was 41%, which was higher than Q1 due to a change in geographic mix of earnings, vis-a-vis various statutory tax rates.

This quarter a higher percentage of our earnings were U.S.-based, where our tax rate is 42 percent.

We anticipate our tax rate to run about 37 to 38% for the second half of the year, based on anticipated geographic mix of pretax earnings.

Depreciation for the quarter was 5.4 million and it should run about 23 million for the year as a whole.

Our net CapEx, that is our gross CapEx minus sales from the lease fleet, will run -- is anticipated to run about 30 to 35 million for the year, as we aggressively -- or, as we more aggressively deploy capital and leasing assets.

As evidenced by the quarter that just ended, these leasing assets are highly liquid and we can monetize these assets whenever we choose.

Turning briefly to the balance sheet, and then I'll turn it over to Bill Furman.

We remain very liquid.

The decrease in the cash during the quarter was principally due to fluctuations in working capital from operating at higher production rates.

Of course, also our Concarril operations resulted in the inclusion and the results included increased inventory levels.

As well, we made a participation payment during the quarter of $17 million that reduced our participation liability and our A.R. -- accounts receivable -- ran a little higher than normal, due to the timing of certain collection of cash receipts for transactions that occurred during the quarter.

We collected 23 million of cash, very shortly after the quarter-end, for accounts receivable balances.

We intend to tap the debt markets later this year to provide additional growth capital, take advantage of market conditions and maintain our liquid position.

And we expect that to be on the order of about 75 million of term debt that will both pay down revolving debt of additional term debt that will pay down revolving debt and provide cash and clear up our credit -- revolving credit lines for growth.

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

Thank you, Mark.

On a balance basis, a good quarter.

We had some moving parts in this quarter, which Mark has addressed and I'll recap near the end of my remarks and then open that up for questions.

Basically, turning to just the economic outlook, recently released U.S. economic growth data, I think confirm a continued positive outlook for the rail transport sector, with strong GDP growth, but not yet at levels to fuel concern, overly much, about inflation.

The consequence of this we expect would be moderated growth in interest rates consistent with a healthy economic outlook for the U.S. and in North America.

And as a consequence, we expect this outlook to continue through 2005 into 2006 and continue to have accentuated positive effects on the North American railroad sector.

I say accentuated effects because there are major drivers acting on the railroad sector, which favor the railroads in this economic climate, including what can be characterized as the North American commodity surge which is highly related to weaknesses in the U.S. dollar and highly favorable to railroads.

And also the continued robust demand for raw materials in China, and the current outlook for Chinese and American relations and management of the deficit.

Railroad operating efficiencies and fuel at a time of nominal high fuel prices denominated in dollar terms also favor rail transport, and all of this is very good news, I think, for railroads themselves, with potential for improving their margins, and for railroad suppliers.

Again, Greenbrier is in a position to continue to capitalize on these fundamentals in all of its major business segments: railcar manufacturing, repair, wheels, parts, services, and railcar leasing and management.

We also have a relatively robust outlook in our smaller marine construction division, which has its own drivers that are independent of the general economy and the forces acting positively on the railroad sector.

Finally, Greenbrier benefits from the very strong fundamentals in intermodal transportation where growth has been strong in 2004 and in the first few months of this year, container loadings continued to accelerate over the levels of last year.

Greenbrier's very strong market share has rewarded the Company with very good visibility now, into 2006 and beyond.

We expect this kind of outlook to continue.

As Greenbrier's installed base of double stack cars has increased over the years, with a very high market share, not only will we have access to parts and higher margins related to that base of installed equipment, but it takes less growth to produce the same or better level of absolute order and revenue base off of the higher installed base.

So as double stack growth continues, we expect there to be strong demand for our primary products.

We continue to concentrate on double stacks.

We plan to be building one line continuously of double stacks of the same kind of car in our new Mexico facility and that facility is booked through at this point, calendar 2006, and this has been a very useful thing in connection with our latest order announced recently.

We're also very pleased with the addition of Alejandro Centurion, Senior Manufacturing Executive, a man that we've known for some years who has joined us from Bombardier, our former partner in that facility.

We have a very great respect for Bombardier and for its chairman, Mr. Beaudoin.

Alejandro will strengthen our manufacturing team not only in Mexico, where he will server as country representative, responsible for the Concarril facility, but our other businesses there as well, but he'll also be important in our manufacturing succession planning, system-wide, in our manufacturing network.

Alejandro's had extensive experience with running businesses in Mexico.

He's worked in the past with Ford Motor Company, a trained engineer, a disciple of Deming [ph], and he is quite capable of directing much larger manufacturing operations, as he did he for Bombardier, running all of the North American operations of Bombardier transportation, with 5 major facilities and over 3,500 workers.

So we're very pleased to have him join our team.

We're also pleased to have received notification recently, subsequent to the quarter-end, of receipt of the award for the 14th consecutive year from TTX, the largest railcar buyer in the industry in the railroad-owned pool, of their Excellent Supplier award.

This is the premier quality award in our industry.

It has been received by Gunderson and Greenbrier's manufacturing operations for 14 consecutive years.

Each year that it has been awarded since its inception, we've also received the Excellent Supplier award for the current year for the 13th year consecutively for Wheels, and once again, all of those years that -- since the award has been initiated.

I'm very proud of the men and women of Greenbrier, Gunderson, Concarril, and TrentonWorks who have contributed to the high quality standards and the excellence and reliability that have allowed Greenbrier to receive this honor from TTX, a major customer but also a standard setter in our industry.

Mark spoke of our operating performance in the quarter.

A couple of notes about some of the moving parts.

We did have asset sales in the quarter, but we also had exceptionally high costs associated with the book for windup of the matters concerning complaints of our former Chairman, now deceased, Allen James.

And we are hopeful that these matters are being wrapped up.

Finally as it relates to this, we've been having constructive discussions with the representatives of the estate of Mr. James, concerning an orderly resolution of any potential stock overhang which would result from their estate and tax planning, and we're hopeful that we'll have a resolution which will be orderly and supportive of shareholder value in that regard.

I will call your attention, moving back to the quarter's performance to the currency, the rather exceptional currency movements.

Those are non-cash items and we will expect the G&A expense will be adjusting to more normalized level once we have the -- have behind us the very large distraction that we've had over the past year or two with matters relating to our former Chairman.

With that, I'll turn it back to you, Mark.

Okay.

And I -- just one comment before we open it up for questions.

Bill referred to wrapping up matters with the estate and we want to -- if there's any -- want to be clear here with these matters with the estate that -- that the matters that Bill refers to on open items, that the Company has always maintained that -- and continues to maintain that the -- any of the allegations from the estate and from Mr. James were without merit and that these are cleanup items we're referring to.

So with that, let's open it up for questions.

Operator?

Thank you.

At this time we're ready to begin the question and answer session. [OPERATOR INSTRUCTIONS] First question comes from Wendy Caplan of Wachovia Securities.

Miss Caplan, your line is open.

Thank you, good morning.

You mentioned on the call that the Mexican line in Concarril was -- had demand through '06.

Can you give us similar information for the TrentonWorks and Oregon facility?

For the Oregon -- thank you, Wendy.

It was a good question.

We generally don't publish detailed production schedules, but just to give you a flavor for the other facilities in our plans in 2006, we're benefiting from very strong dynamics in our Intermodal business while the order input is, and has historically been, somewhat seasonal and in increments.

We think we have very good visibility into 2006 and even into 2007 because of some of these forces that we've been discussing.

So what we're doing this year, which is a little different than what we have planned to do and have done in the past, is we are scheduling our facilities with specific car types in the Intermodal area and we've designated Gunderson as a primary double-stack facility and we've also designated our Mexico operation as a primary double-stack facility.

So we're reasonably confident that in -- at Gunderson we'll be building double-stacks throughout 2006.

We don't have orders to support that plan, but we have, we believe, the basis to predict demand and also to have some influence over demand, vis-a-vis the -- what we expect to be advantageous costs and economies of utilization and scale with respect to that market.

We are working basically off of about a year's backlog, with the exception of TrentonWorks, where we still have a little less than that.

But we're essentially booked through -- for -- through the balance of this year in all of our facilities and into the -- and into -- beginning to go into 2006, we're on the edge of 2006 with Trenton, so Trenton is the one that is probably a little weaker.

So, given kind of what we can see, the visibility that we have in terms of production going forward, the second half of the year should be less in terms of line changeovers, if I'm hearing you correctly?

The latest orders that we received will require one line changeover because we received a very large order in -- for a Maxi-I car, which is a different car than we're currently running at Gunderson.

We're going to be running the Maxi-I at Gunderson.

We'll also be running it at Concarril.

We're running it now at Concarril, but we need to interrupt the Maxi-IV line that we have at Gunderson and run some Maxi-I's in order to fulfill that demand, and it will go back to the Maxi -- to the other car types.

But Gunderson is the best facility we have for changeover.

We do that very well there and we don't expect as much of a disruption as we would have if we had a changeover, for example, at Trenton and at -- even in Concarril.

And that would primarily, Wendy, affect -- the effect of that changeover would primarily appear beginning in our fiscal '06.

Okay.

And when you talk about '06 and '07, in terms of the visibility, are you referring to calendar or fiscal?

Mark tends to use fiscal.

But in my earlier remarks I was talking about calendar '06 and '05.

Okay.

And could you talk about -- you didn't mention raw material cost.

Can you give us an update in terms of whether it's hurt you in the quarter, and what your expectations are for the balance of the fiscal year?

Yes.

I -- I'm probably the only one that uses this term, but I call it a commodity surge and I think we've seen various parts of the surge go through the raw material system as it relates to railcars.

We've had the castings crisis, we had the steel pricing crisis.

We now have a number of ancillary parts that have been affected last and there are -- there are a lot of things that can cause that to occur, but it has been relatively predictable from the outset.

Currently there is some shortage of wheels in the system, due to the high-maintenance loads that the heavy traffic base and heavy utilization of equipment -- which is good news for car builders, by the way, because it wears the cars out faster -- but it wears the wheels out faster, and so there's a lot of demand for wheels.

And there is a -- what I would say is fair to characterize, a shortage of wheels.

We're managing through that one.

I think there's price pressure, pricing pressure, obviously, when that kind of environment takes place.

But in our case, we're pricing that into our products and passing those costs on.

All of the surcharges are being passed on.

With respect to steel itself, certainly not yesterday's story.

It's a big factor in the cost equation for a railcar.

I think it's affecting some buyers' plans.

Some buyers are holding maybe off the market a little bit, waiting for 2006, where their views may be that steel pricing may temporize or might moderate.

Privately, I have a view that that's probably going to be the case from everything that we can read, and we're reading a lot about this.

But I would say right now the primary focus for management is in -- rather obscure things like couplers of certain kinds, yokes, and wheels.

That's the currents crisis at the moment.

But just to clarify, you are passing the steel prices through to your customers, and is that at 100% level, roughly, or -- and as we look at the backlog, does that all include escalation clauses as well?

We have either hedged positions by having closed positions with fixed contracts in and out on pricing of steel or where we have any open exposure, which is -- would be in 2006 deliveries, we have a production model where we believe we have ample coverage and we have a collar on any exposure in our relationships with the customers.

So I think that we're covered in fixed hedge positions in the context of the total steel management picture.

And I think that we now have a more stable environment so that those positions are reliable, whereas when the crisis occurred, you could have a fixed contract for steel pricing in and people were breaching contracts and breaching agreements.

I don't think that we'll find that occurring.

If anything, the outlook is -- I think we're now finding mechanisms where we can give fix prices on steel and bids and that's being requested by some customers.

Other customers want to have variation, so we're able to do both, and other car builders are doing the same thing.

Okay.

One last question and I'll let someone else jump in --

We don't believe, though, just to answer bluntly your question, where you may be going with it, we don't believe we have any unaddressed -- any significant unaddressed exposure in our materials pricing.

That's what I was getting to.

Okay.

And have you -- is there any significant change in the competitive environment?

I know there's a railcar manufacturer out there that's going public at the moment and was wondering whether you identify any competitive changes in the marketplace relative, specifically relative to your double stack cars?

I think a period of strong demand and chronic shortages of parts causes easier customer relations in times like this, so this is a good time to be a supplier.

We also have to remember that when we have good times that we may later have times when we really need the customer, so we have to be sure that we act fairly with the customer and I'm not sure that answers your question, but I think the only thing that's occurring out of this environment are, from our perspective, at this time in the environment, you know, positive things, and with that said, the degree of competition among the providers is always intense.

But we find that it's a little easier to manage in the last couple of quarters, I think, than it had been because of the incredible variable in the supply side, on the material side.

We are always hopeful when car builders or anyone in the rail sector can raise capital and reinvest it in the industry.

It makes the whole industry stronger I presume.

Thank you.

Jon Rogers of D.A. Davidson.

You may ask your question.

Hi, good morning.

Good morning, Jon.

How are you?

Good.

Nice quarter.

A couple of things.

Just -- Mark, did you give us what the gains were on equipment in the quarter?

If you did, I apologize.

Jon, it was 3.4 million, pretax.

Okay.

Great.

And then the tax rate, the 41% rate, given your current mix of production, do you expect that rate to hold?

We expect that rate to go down a bit, Jon, based on the geographic mix of earnings.

So we expect the rate to, in the second half of the year, to run in the high 30s.

Okay.

Okay.

So it'd be comparable to the entire six month?

Correct.

Okay.

And then just following up on the margin questions, are you seeing on the subsequent orders that you've gotten and especially for deliveries out into '06, are you seeing higher prices?

We're seeing lower costs.

Our whole model now is being driven greatly by Supply Chain Management, by our investments in -- so, very selective investments in relationships, such as our Ohio Castings Company, where we can facilitate judicious reinvestment in capacity and have access to capacity for couplers and castings, and we're working on all of the critical path areas to manage our costs.

In addition, our initiatives in Asia with multiple suppliers and the efforts we're putting into costs reduction will allow us, we believe, to be more competitive on margins.

With respect to pricing, it's all over the -- it's all over the map.

It depends on the car type and it depends on the transaction, and actually the will of the players involved.

And they -- maybe even how rational the players involved may be.

So those are all dynamics.

Generally I think there's a strengthening in railroad car pricing and I think it's caused by a simple dynamic.

I think the railroads are selective in how they're managing their own franchise.

They've had their issues, but they're managing well, they're managing to pass on costs, to improve their margins, to be selective about the traffic they're going to carry and they're making reinvestment in their infrastructure.

So while that's being successful for them, they're allowing their suppliers to benefit and while there's still an intense need for railroads and all of us to manage our costs, I think that we have gone through that part of the commodity shock where the shock was unevenly distributed and now it's being a little bit more evenly distributed and there's more of a -- there's more predictability in some pricing and costing behavior

Well -- and Bill, is it possible, or even hopeful that you would ever get back to the double-digit margins?

We're always hopeful and I think that, I think that -- we see margin opportunity in a variety of areas.

If you look at our business model, it's somewhat different than other car builders.

We have leasing, we have services, we have major network facilities, we have syndication and sales of railcars, and the management of assets, all of which can contribute to a value chain where we can extract margin and contribute value to the customers that justify improved margins.

And just looking at the double stack installed base, for example, which would be analogous to, say, GE's engine business, Once you have a very large installed base of equipment, that equipment has to be served and the service of the equipment can be from a variety of ways.

We can manage it.

We can lease it and manage it.

We can maintain it.

We can extract value in those areas and contribute value in those areas.

And I think that these aspects of our business model give us a competitive edge.

So when we talk about pricing on freight cars, that is not the only place we're looking for margin enhancement.

We're looking in costs management on the freight cars, and we're also looking at margin enhancement in ancillary services that not only allow us to have an edge in obtaining transactions which others can't compete with us on because we have an overwhelming value that can surround the package, but it allows us to be more competitive by having multiple bites of the apple on the various components that go into the freight car.

And it also moves into the area of railroading, which is kind of exciting, which is the outsourcing of services and outsourcing of -- as the railroads shrink to their core -- their core focuses.

And, John, just to remind you, when we look at margins on our new railcar manufacturing business, that, you know, with car prices where they are as a result of steel, you know, you were seeing prices up maybe 50 to 60% from the trough of the market.

Right.

And even up 20 to 30% from the last peak of the market.

Obviously it's higher -- we're more focused now on margin dollars rather than margin percentage, and certainly in terms of margin dollars per railcar, we -- the expectations would be, and we are realizing margin dollars per railcar, that more tend to the last peak.

But when you have a bid on a margin percentage base, so it's obviously it's much harder to get double digit margins when a car price is up 20 to 30% from the last peak.

Just finally -- a final word on that topic of margins, because it comes from cost and it comes from revenue.

And the absolute dollars are very, very important in -- as Mark has pointed out.

But the -- when we look at what we're going to be doing in Mexico, when we look at that facility in Mexico and I have to, I have to compliment Trinity for its far-sightedness in moving some facilities in there and making the commitment to Mexico, we believe that our Mexico facility can be very, very efficient, much more efficient than it had been with two companies attempting to manage it and our Bombardier partnership.

It is a facility that has a good labor force and can continuously improve productivity.

So we're expecting very good growth in margins in our Mexico facility, particularly with base loading it with a strong double stack facility.

And this whole strategy, as we play it out, will, I think, be successful and will improvement margins and for that reason, there's some foundation for the hope of the double-digit margins that you referred to.

Okay.

And presumably the service side and the parts side of the business, also, as they become a bigger portion, helps move it in that direction.

Yes, I think that as you look at -- as you look at base in Mexico, and again, not to be tempted, just with the concept of building the freight car, but building the pieces that go into a freight car and obtaining those pieces most inexpensively, wherever they may be obtained throughout the world.

And if you look at the land bridge network in North America today, and you, through ports, have access to small parts that can be sourced with quality regimens and disciplines that can then be distributed and redistributed in North America through repair networks, through -- into OEM facilities, I think that that is a very, very big area of advantage.

And in our Asian initiatives that is where we're focusing our energy, is to reduce costs, and we're having good success with it.

And particularly at our Gunderson facility.

But Gunderson, for us, is a gateway.

It's not only a facility for improving the margins and continuing what we've been able to do with leadership in the double stack car, but it's a gateway for us to -- through the North American land bridge, intermodal traffic with trains that are built by Gunderson to connect with other facilities throughout North America and to distribute pieces of railcars and parts of railcars that can be more conveniently and more inexpensively sourced in a global supply chain.

Okay.

And just finally, in terms of capacity expansion, are you thinking about that in terms of either new railcars or presumably more on the services and parts side of the business?

We continue to be excited about the possibilities of intelligent investment in the repair and parts and services side of the business.

As far as the freight car business, we're going to try to improve our -- we're going to try to improve our ability to increase revenue through efficiency enhancement.

We have some -- we have some significant capacity in -- at Trenton and Mexico and here.

And we have a potential opportunity in Mexico to expand our capacity.

If not at the current facility, at adjacent facilities.

Okay.

Great, thank you,.

And we certainly will look at -- and we'll be continuing to look, as we have been for the last year, at accretive strategic combinations or acquisitions.

Okay.

Thanks again.

Thank you.

Matthew Kelleher of Smith Barney.

You may ask your question.

Hi, guys.

Great quarter.

What percentage of the orders for the quarter do you think that you were.

I guess I'm asking, how strong were overall industry orders?

Industry orders -- since we're on a slightly different order cycle we can't exactly measure it.

We had a good quarter as far as the orders for the quarter equivalent.

In the last quarter of 2004, which I think is the last published data, we had a very -- we had a very weak quarter in terms of our percentage of the total.

It was less than -- somewhere around 5%, as I recall.

And so that's not unexpected, because we're very focused on a few car types and the orders in those cars types don't necessarily correlate with what the total base may be.

But a lot of the orders that have been coming in industry-wide have been in tanks and covered -- and in hopper cars, and we are not currently running lines in either of those.

As far as the overall industry is concerned, the backlog's around 60,000 units, may have dipped a bit to 58,000.

We're expecting to be on track with deliveries as, you know, I think the industry -- as industry statistics show, around 58,000, 59,000 units for 2005, and 2006 would be expected to be about at the same level.

The Q1 deliveries, again, calendar Q1 deliveries for the industry will probably not be out for about another 10 days.

Obviously we still have another day in the quarter and then it's usually released somewhere around 10 days after the quarter end.

Great.

The -- are you comfortable with the street estimates showing that you're going to have a much better -- my rough numbers show that that puts you earning $1.20 in the second half.

Are you comfortable with what the street's estimating?

Matthew, we don't comment on or haven't given guidance, vis-a-vis the street estimates.

What we have said is that we expect the second half of the year to be significantly stronger than the first half of the year and play out much -- much in a manner similar to the way that our last fiscal year played out, where the second half of the year was much stronger than the first half of the year.

But we have not given and we have also said that we expect to deliver around 13,000 units for the year.

But we have not given specific earnings guidance.

Perfect, thank you very much.

Good work.

Thank you.

Sean McDaniel of SNM Research.

You may ask your question.

Yes.

Good morning.

A couple of quickies.

Just to talk a little bit about that question on the backlog.

Was that 58 to 60,00, or 58 to 59,000 in that range, you were looking at, that's your forecast for the industry backlog at the end of '05 calendar?

Actually, the backlog for the industry ended up in '04 at 58,000 units, just north of that.

Okay.

The industry puts out forecasts which we -- we concur with, that over the next five years that deliveries should be in the 50s to 60,000 car range per year.

The forecasts do not try to forecast a backlog, but if you're presuming that deliveries are running relatively constant in that range, then your -- you might be able to back in to the backlog.

While there'll be volatility from quarter to quarter, that overall backlogs would stay up around these levels over that five-year cycle.

Okay.

For example, in 2005, the consensus industry study expects 59,000 units to be delivered.

That may be a little light, given some of the dynamics that are going on. 60,000 in 2006, and then the industry has it dipping slightly to 55,000 in 2007 and 2008, slightly under that.

One of the things that's occurring, though, is the railroads are really operating "everything it got" and there's a lot of obsolescence that's being accelerated by this situation and it's difficult to assess, between that dynamic and the dynamic that occurs with velocity, if traffic does fall off slightly, to determine if there will be any sort of dip in 2007 and 2008.

When you look at the total fleet, 50,000 cars is just about what's required with very little growth, to replace the fleet and keep it functioning as -- as at least we read it with the obsolescence factor built in.

And as you look at the cars that are being run out there today and the service level problems that -- and the complaints from some shippers about the stuff they're receiving and in transit complaints, you're seeing that there's a lot of stress on the railroads to either fix that equipment, which is good for a company like us, because we'd be happy to help them fix it, or to buy new equipment.

So we think that these numbers are, for what they represent, and they're not screened for any secular shocks, any cyclical shocks, but given the tea leaves as we can read them, particularly the international currency situation and the China demand for commodities, these are times which truly favor railroads.

If the trucking industry can do some things, perhaps there's some risk factors associated with that.

But right now the railroads are in a very good position, and that means the railroad suppliers are in a very good position, I think.

One other quick question on your European business.

Can you talk a little bit about Europe and demand trends over there in railcar?

I know one of your competitors mentioned some weakness and I've seen some articles about some production cutbacks over there for them.

We've made -- yes, I think that's a good question and we didn't mean to neglect that, although Mark was just -- just written a note that we hadn't mentioned and we should pick it up in a question.

We expect the European, western European economies to continue to have reported growth much lower as a result of the strong Euro than the U.S. economy.

And we expect that that will have a dampening effect on demand in the western market, which is the predominant place where we and the other North American car builder builds freight cars.

In other words, we have eastern -- we have central European manufacturing facilities but we sell into the western European market.

So that's not a good -- that's not a good dynamic.

The -- so we expect some softening in demand.

As far as our operation is concerned, we have had very profitable -- or profitable earnings.

We're expecting to have a 2005 at expectation levels and we see some softening in demand in 2006 and 2007, which we'll adjust to accordingly.

Offset against that, we see some unexpected strength in our Canadian facility, just because of the North American demand level.

So we feel that our European operation will perhaps not achieve the same levels of performance that they have had in 2005 and -- we're not looking forward to 2006, but we believe it will be profitable.

Any plans to cut production in your European manufacturing?

Not -- nothing that would be -- it would be material to the total performance of the Company, I don't believe.

Okay.

Great, thank you.

And nothing we'd comment on, probably.

Thank you again.

Frank Magdlen of The Robins Group.

You may ask your question.

Good morning, gentlemen.

Hi, Frank.

How are you?

Good, good.

You should be feeling good.

On the balance of the year for the deliveries, is that still -- is it going to be pretty evenly distributed between the third and fourth quarter?

Are you still ramping in Mexico?

Is Mexico about a break-even for the quarter?

For the quarter, Frank, was maybe a little bit of a -- it was about break-even for the quarter for the second half of the year.

Again, we expected -- we had mentioned earlier that if we expected it to be accretive to earnings and we still believe that to be the case.

We actually expect that in the -- the third quarter will be our highest quarter for deliveries, due to both just line changeover that will be occurring and some holiday shutdown that will be occurring in the fourth quarter.

The line changeover that Bill had referred to at our Gunderson facility that will be happening near the end of the fiscal quarter.

And then a holiday shutdown up in Canada, coupled with some timing of some cars that -- on our lease indication side, so that we expect the third quarter to be the highest deliveries in getting to that overall 13,000 units.

We are expecting some improvements in throughput efficiencies under our revised plan, which will offset some of the changeover at Gunderson, and that just means higher daily output is what I'm talking about there.

Okay.

And then Bill, you talked about some of the buyers might be waiting for '06 to place some orders and I know that previously you thought you'd get some orders in the spring and then maybe July time frame.

Do you still think you're going to have another -- or other significant orders, say, mid-summer?

Or do you think that might be pushed out a little bit?

Well, right now what I'm doing is looking at the economic statistics and the demand growth.

We have a very substantial effort to examine the intellectual underpinnings of the Intermodal business and we go to each port.

We've looked at the dynamics of capacity, potential bottlenecks.

We look at the port plans for bringing containers in, what their shippers are saying, and we digest that and we compare it to the other data that's available in the industry from sources such as customers and so on.

And we really work hard at that.

So I think that it's not such a -- if you want to abstract from it a little bit, if you just look at the volume of container loadings and the gross amount of container loadings and the growth that's been occurring, we've got -- we've got a situation where containers have tripled in volume and we have almost 10,000 -- 10 million units now moving.

And even modest growth is going to increase the requirements for double stack demand.

But we don't have modest growth in container movements.

All of the tea leaves indicate that container traffic is going to continue to grow at unprecedented paces.

Constrained, probably, only by the ability of the railroads to handle train starts and so on.

And there simply isn't any alternative under the U.S. business model for -- to have that kind of growth.

So what we're looking at in 2006 and 2007 is, as long as we don't have some kind of major disruption in supply or demand due to some external event, terrorism or something of that nature, we see that the dynamics as pushing -- as pushing this traffic.

So we feel comfortable planning our production more definitely and not relying quite so much on the individual orders.

Now, having said that, we still expect TTX to be in the market this year.

We work closely with each of the major customers for railcars and with respect to double-stack cars, TTX is the dominant player and there are only a few others that -- besides a few leasing companies, that buy double-stack cars.

So we're working very closely with those customers and we expect that we'll continue to do so and that orders will be placed -- additional orders will be placed sometime in 2004 for production in 2006.

But we feel comfortable, notwithstanding that, with our cost model and with our service design package to have very definite plans about what we're going to be building in 2006.

And we do intend to build double-stacks at Gunderson and double-stacks at -- in Mexico.

Okay.

I think that we may modify that plan, because this last year we've been running double-stacks at all three facilities and I think we'll probably be able to do double-stacks at those two and have a superior profit profile.

All right.

Are you able to give a little more color as to what might happen to the stock that's in Allen's estate?

Is it something that the Company would be willing to redeem?

I really can't give much more comment, other than we're -- is just to repeat what I said.

We are in constructive discussions with them.

We understand the issues that they're facing and sympathetic to those issues and we also recognize the importance to the Company of having an orderly management of any potential overhang that would be created by their estate-driven needs.

So other than to say that, and to say that we're hopeful that we'll have a resolution that will be not disruptive and, in fact, supportive of shareholder value, I'm not really allowed to comment on it.

Okay.

Is it fair to say that the debt, the 75 million that you plan in debt, does not include any dealings with the estate?

I think that's -- that was a planned debt offering in the normal course of our business.

Okay.

And Mark, will that -- I'm going to -- that will -- you don't need to go to a rating agency because of who might be buying that debt or -- ?

We haven't -- we haven't commented yet or made final plans yet on the form of the debt offering that we'd comment on.

Today, we do not have -- just as an ancillary comment today, we don't have a public debt rating.

But we haven't commented further or made any formal announcements on the form of the debt offering.

All right.

Well, thank you very much.

Adam Thalheimer of BB&T Capital Markets.

You may ask your question.

Good morning, gentlemen.

Most of my questions have been answered at this point, but I did want to delve into the manufacturing margin in the quarter.

Is there any way that you can quantify the impact of the three factors that you mentioned in the press release and give us a sense of, you know, where that manufacturing margin would have been on a more normalized basis?

Well, there -- it -- I guess, Adam, I appreciate the question.

It is hard to break it out between the three, other than to remind as well that typically we -- every second quarter we are, of course, affected by the holiday shutdowns and so we typically have less deliveries.

And we also have the lost production for that.

But when you get into the line changeover and into the inclement weather and the startup of Concarril, it really is hard to break out or quantify each of those pieces.

It is fair to say, and we have said before, that at this point, Concarril was operating at a lower gross margin than other facilities, but by the second half of the year, we expect it to be on par, and as Bill mentioned, the longer-term outlook for our Mexican facility is very bright.

So -- but beyond that, we really cannot quantify from each piece.

We did give guidance that we expect the margin for the year as a whole in manufacturing to be in the 8 to 9% range, compared to the 6.8% for the quarter.

Right.

So I understand, it's tough to break that out.

But if you did try to, I mean, would you be close to that 8 to 9%?

I'm not sure I understand the question, because we will have margins that -- a margin can fluctuate in a quarter, both due to a line changeover where we will have some learning curve and the initial production inefficiencies at the beginning of it as well as obviously, of course, we're going to have lost production days.

And so that is going to create some volatility for a quarter.

We try to give guidance when we see those things occurring, to make a comment on a margin for a quarter.

And similarly, we did say that Mexico only contributed about 26 million of earnings -- or, I'm sorry, of revenues -- for the quarter.

And so while its margins are lower than the Company as a whole, as a percentage of total manufacturing revenues, that's still only 10% of total manufacturing revenues.

So it's not a -- was not an overly material piece of the equation for the quarter.

I would say that -- if I get the sense of your question, and looking at this from my perspective as opposed to trying to make the numbers thicken and tie out, that I don't see reflected in the second quarter any fundamental issues that are of concern, but I'm very optimistic that as the balance of the year plays out and as we achieve our volume objectives, particularly as we -- as we bring on Mexico with the volume that we have there to run and with the different strategic plan for Mexico, that we're going to find these margin improvements realized and perhaps even underestimated.

I think that the other fact that we constantly have to keep in mind that we're focusing on reducing our costs as well as improving our pricing.

But as we look at the -- as, so far, at the bringing on of the Mexico plant and we look at what we expected to see this quarter there, actually I'm kind of encouraged because the -- their financial performance was a bit better than the plan on the changeover.

This was a quarter when that -- that ought to have shown up if it was going to have a negative.

I don't see any issues really with the normalization -- normalization of the margins.

We have weather problems every year, in seems, this quarter.

We have these holidays that affect us, and it's just something that seems to be a pattern that we can't break out of.

Okay.

That's fair.

I just have two more small things.

First, I think you gave a leasing margin forecast.

I just missed that.

Can you repeat that for the second half of the year?

We expect for the year as a whole that the leasing margins to run into the upper 40s, around the 47 to 48% range.

Okay.

And then finally, with the litigation costs related to James, I mean, you said that those will continue.

I mean, would it be possible for you to give us a sense of whether they might continue at the kind of $0.03 to $0.04 per share run rate, or do you think that will -- you know, the impact will be a little bit less, going forward?

Well, we hope they -- we're actually hopeful they will not continue.

The quarter we're in, we're having costs associated with all of the carryover issues and litigation.

And so this quarter, the quarter we're currently in, we would expect to have costs.

I'm not sure that they'll be at the fairly stratospheric levels that they've been in the last two quarters.

Okay.

So --

We're hopeful that relief is in sight.

You know, emphasis on the hopeful.

Things are never done until they're done.

I understand.

That's all I had, thanks a lot.

All right.

[Inaudible] of Sage Asset Management.

You may ask your question.

It's been answered, thank you.

Steven McBoyle of Lloyd Abbott, you may ask your question.

Yes, I was wondering if you could elaborate on the Mexican facility.

Now that you control the facility, how much flexibility do you have to add lines?

Well, we have two lines dedicated down there.

We're running -- we're running double-stacks on one, and we're running forced product [ph] car on the other.

We have fabrication facilities dedicated to the lines.

If we -- our plan is to create a strong foundation for efficiency, for the factories, so we achieve our manufacturing performance goals, reliability, quality, work force integration, and as we achieve those goals, we would only at that point consider bringing on new capacity.

Is there new capacity available?

There are adjacent facilities where we could conceivably have another line.

And there's -- it's conceivable that in that very large facility that which Bombardier continues to own, that they might make some additional space available.

We do not have, baked into any of our plans however, currently anything other than the two lines we have available there now.

One of which will be dedicated through 2006 to double-stacks.

And the other is -- will be open for other product types.

Okay.

And just so I understand, because I guess this is a point I'm a little bit confused on, Bombardier, the facility they own: that is a separate facility from this one?

No.

We had a joint venture with Bombardier where the venture was leasing the facility from Bombardier and they operate in that facility a locomotive construction and transit business.

They have a large contract with Mexico City for the provision of the transit system in Mexico City, where they're running that work in that facility.

And they do other work for their North American customers in that facility.

So they own a very large footprint.

The venture which we own jointly with Bombardier -- and Bombardier doesn't build freight cars in North America.

They build freight cars in Europe, but not in North America.

So the joint venture leased space from Bombardier and we bought their interest in the joint venture.

We continue to have Bombardier as a landlord.

Okay.

And their plans, in terms of maintaining that facility and continuing to build locomotives out of that facility, going forward?

The best our research is that they plan to continue -- continue the operation of the facility.

We have a lease, a relatively long-term lease arrangement on the facility, all of which is disclosed in our public documents.

Great.

Thank you very much.

All right.

At this time we have no further questions.

Okay.

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

Have a good day.

Thank you.