Greenbrier Companies Inc (GBX) 2005 Q3 法說會逐字稿

Hello and welcome to the Greenbrier Company's third quarter 2005 earnings release conference. Following today's presentation we will conduct a question-and-answer session. Until the time all lines will be in a listen only mode. At the request of Greenbrier Company, this call is being recorded for instant replay purposes. At this time I would now like to turn the meeting over to Mr. Mark Rittenbaum, Senior Vice President and Treasurer. Mr. Rittenbaum, Sir, you may begin.

Thank you and good morning and welcome to our third quarter 2005 conference call. After we review our earnings release and I turn it over to Bill to make some remarks to about the quarter and the outlook for 2005 and beyond we will open it for your questions.

As always, matters discussed in this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of '95. Throughout the discussion today we will describe some important factors that could cause Greenbrier's actual results in 2005 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

Today, we reported our third quarter results. Our earnings before special charges for repayment of debt were 10.7 million or $0.69 per diluted share on revenues of 286 million.

After the special charges of 1.7 million net of tax for the debt prepayment charges, our net earnings were 9 million or $0.58 per share. Our combined European and North American New Railcar manufacturing backlog as of May 31 was 11,500 units, valued at 650 million. We also have a strong marine backlog that stretches out over a year and, there, our new railcar and marine backlog provide us good visibility well in the 2006.

Turning to manufacturing, our manufacturing revenues for the quarter were 266 million. They were up from 234 million in Q2 of '05 and we delivered 3600 cars -- new railcars -- during the quarter compared to 3100 units delivered in Q2 of '05 and 3600 units in Q3 of '04.

Deliveries from our Mexican facility Concreo (ph) are included in all of our quarterly totals. However Concreo was not consolidated until December 2005, therefore, the revenues from Concreo are not -- or the deliveries from Concreo are not included in revenues until December 2005. Prior to that time it was accounted for under the equities method of accounting.

We still expect our total deliveries for the fiscal year ending 8/31 to run about 13,000 units meaning Q4 deliveries will be comparable to our Q2 levels of 3100 units and will be down a bit from the quarter that has just ended. This is due to some line changeovers that occur in Q4, planned holiday shutdown at one of our facilities and timing of sales of some lease indication activities.

Our manufacturing margin for the quarter was 9.2%, up substantially from the first half of the year and in line with our expectations. We saw efficiencies of loan production runs and significantly some improving margins at our Mexican facility now that is under our control. Concreo is performing very well. We anticipate that we will have similar manufacturing margins in Q4 of this year as that we had in the quarter that just ended.

Our leasing and servicing, remanufacturing and rail services businesses continue to provide a stable revenue base and positive contribution to earnings and cash flow. Leasing and services revenues were 19.9 million for Q3, up 1.7 million from Q3 of '04. Our leasing and services margins were 52 % up substantially from the 43% in Q3 of '04.

Margins were up on the services side of the business from rate which continues to perform well and grow. We experienced rate -- higher rates on this side of the the business, due to increased equipment utilization under certain of our management agreements.

As well, there were gains on sales of equipment in Q3 of '05 of .8 million, compared to minimal gains in Q3 of '04. We expect to have more gains on sales in Q4 from additional trading activities. Our own police (ph) fleet utilization is now at 97%; this is up another percent from the prior quarter where we were at 96% and our fleet consists of 10,000 own units and 128,000 managed units meaning during the quarter that our managed fleet grew by about 3000 units.

G&A expense for the quarter was 15.3 million up 1.3 million from the prior quarter. The increase in G&A was principally due to fees related to Sarbanes-Oxley. Other professional fees increased employer-related expense. Indeed, with -- our professional fees are up as a result of additional accounting and other professional and consulting fees related to Sarbanes-Oxley and increase in audit type fees.

So G&A is for the third quarter -- included about .7 million, also included about .7 million pretax of professional fees related to the settlement of matters with the estate of our former chairman, Alan James.

Turning to interest and then foreign exchange it was 2.3 million for the quarter compared to 2.9 million of Q3 of '04. The current period includes a foreign exchange gain of .9 million. The prior comparable period included a loss of .1 million. The interest piece of the interest and foreign exchange for the quarter was 3.2 million, is expected to run about 5.1 million in Q4 as a result of increased borrowings and higher rates associated with our senior unsecured offering. Of course this is partially offset by some interest earnings on the cash that we are investing.

Obviously in the short run the notes offering is a bit dilutive; however it gives us tremendous flexibility to grow the Company and we indeed plan to deploy that capital on an accretive basis.

The line item equity loss of unconsolidated subsidiaries reflects the Company's 33% investment in the rail casting joints venture and up until December 2004, it also included our equity investment in Mexico. I'm sorry -- up until Q2.

Beginning with Q2 the Mexican operation was included in our consolidated results.

Castings generated 400,000 of earnings for the quarter; in the prior year's quarter, third quarter castings generated a slight loss of about 200,000. The tax rate for the quarter was 41% which is similar to Q2. We anticipate the tax rate to be a little less in Q4 based on our anticipated geographic mix of pretax earnings.

Our depreciation for the quarter was 6.1 million -- up about 7 -- .7 (ph) million from the prior quarter as a result of additions to the lease fleet. It should run about 23 million for the year as a whole.

Finally turning to the balance sheet we've recently completed a number of major financings which strengthen the balance sheet and liquidity and improved our public stock quote. Of course these were equity offering for 5.175 million share. 175 (ph) million senior as secured notes (indiscernible) and a new $150 million bank line that we closed earlier this week. The bank bill was oversubscribed and we increased this facility from an initially anticipated 125 million to 150 million.

As a result of all these, we have substantially restructured our debt up to the parent company level and simplified our capital structure to give us financial flexibility during the business cycles. In addition, we should realize increased G&A expense from our lowering our audit fees and simplifying our corporate structure.

Our financial outlook is strong. We do anticipate lower earnings in Q4 due to the anticipated -- either result of lower deliveries due to the previously discussed line changeovers and holiday shutdowns and higher interest expense that remained positive on the outlook.

We are very pleased with our previous announced leasing venture with Babcock and Brown. This venture is a natural extension of our existing business model and it will help not only on the manufacturing but to grow our services and repair businesses. As we had previously discussed, we tend and sell cars in the venture to third party investors. We may end up bundling our lease indications into larger packages and we historically have which could impact the timing of new recognition from quarter to quarter. We will have a better feel for this in Q4 and we will update you on that time.

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

Thank you Mark. As Mark has indicated, during the third quarter ending in May the Company concluded major financings including an equity offering which improved the Company's public flow considerably. Today over 80% of our stock is in the hands of public shareholders. So I continue to be the Company's largest shareholder with just under 15% of the outstanding stock.

This is an entirely different ownership structure from a year ago when almost 60% of the stock was privately held between myself and my former chairman, Alan James.

Volume in our stock has improved dramatically, along with liquidity in the stock, a goal that our Company has had for the past 2 years and this makes our stock more attractive to larger institutional investors.

In addition to those goals -- which have been achieved in the current quarter or in the quarter past -- Greenbrier continues to be dedicated to good governance. The majority of our Board is independent and we continue to take positive steps and are for along in further strengthening our already outstanding board of directors.

All of the issues involving the estate of Alan James issues which had consumed major amounts of management's time and which were a source of unnecessary distraction -- all of these have now been resolved favorably to the Company.

Further the Company is now poised to focus on growth and opportunity to the proceeds of our successful unsecured debt offering and new bank lines of credit. The Company closed the quarter with almost 70 million in cash, substantially no bank debt, except in certain subsidiary units insulated for parent guarantees and over 150 million of available bank lines. These facilities provide considerable dry powder and liquidity to take advantage of apparently selected strategic opportunities to which we have now turned.

We are also strengthening our management team which has turned in an outstanding performance over the past seven years. Both, during economic downturns by cutting costs without having quality and efficiency suffer as a result and more recently by managing through upturns, successfully, where others have failed or faltered in a time during which we saw the strongest commodity's disruptions of steel and other basic inputs for manufacturing businesses.

I'm very proud of our team and what they have accomplished and I am excited about all that remains to be done in what looks to be a vibrant new global environment for surface transportation over the next five years.

As some of our senior managers move toward retirement over the next few years I and our board are dedicated to sound succession planning which will make our future seem even stronger, able to absorb and manage the robust growth which we expect in revenues, earnings, and cash flows as Greenbrier embraces global markets and the challenges and opportunities of its core business here in North America.

During the quarter, we maintained our strong backlog while production increased with new orders and production (ph) at higher levels being roughly in balance. The U.S. economy remains strong while a current strengthening of the U.S. dollar brings temporary relief from higher commodity prices in steel and other inputs. Higher oil prices favor railroad freight transportation over other modes; and railroad earnings in North America provide ample evidence that railroads are able to afford capital investment in their franchises for their future, selecting more profitable traffic and selectively improving yields. All of this continues to be good news for the North American railroad supply industry.

Meanwhile, transportation and manufacturing continues to become more global as Greenbrier is global with operations in each of the three NAFTA countries in North America -- United States, Mexico and Canada -- and with our operation in Europe and a growing presence in China, in Asia and throughout Asia. Greenbrier's well positioned to take advantage of currency and commodity swings, supply chain benefits in emerging markets where it's highly engineered freight car and services programs.

During the quarter, as Mark has just also indicated, our Mexico operation exceeded expectations and has a backlog through calendar 2006. Our marine business continues to thrive and our new relationships for supply of parts, castings, and subassemblies in China take significant advances during the quarter. Finally as Mark has indicated we announced an important new railroad leasing joint venture with Babcock and Brown -- a long time customer of Greenbrier and a global supplier of project financing services to infrastructure industries throughout the world.

All of these initiatives executed in our third quarter will be important building blocks for future growth (technical difficulty) as well as supply chain benefits.

One area that we continue to watch is swelling growth in Europe's economy, which has affected freight car demand overall. However, our European operation has remained profitable and has achieved its financial targets in a more uncertain period. The recently weakened bureau in recent months will bring relief from that slowing market; and we expect long-term European market to be important part of our global network.

Turning to opportunities, we are examining a number of carefully selected strategic opportunities. We recently invested about $5 million in our oceangoing marine construction unit here in Portland, Oregon which will allow us to improve throughput and productivity and profitability of that unit taking advantage of a very good outlook for replacements in the Pacific Rim for oceangoing towed barges.

We -- during the quarter -- received for the 15th consecutive year, the Quality Award for Excellence in Supply, the quality awarded by the world's largest buyer of freight cars -- TJX Company -- here in North America and we acquired an additional shop at Green River Wyoming, well-positioned to work with commodity traffic in that important basin.

Our strong EBITDA and cash flow for the quarter is worthy of note; and our cash flow from operations should improve as the higher levels in inventory and receivables, which had been built during the upswing, creates a more stable state of cash flow and allows us to continue to generate profitable operations for future investment.

We intend to invest in each of the four major parts of our intergraded business model, freight car manufacturing, leasing, freight car repair, and management services. We intend to stay focused and work in those areas that we know to participate in an outlook that we consider to be very strong for the next five years -- not only in North America but for surface transportation globally. Back to you, Mark.

Operator, if we could open it up for questions now.

(OPERATOR INSTRUCTIONS) Peter Nesbold, you may ask your question.

Bear Stearns. Looking at revenue up 59 million year-over-year on flat delivery. Can you break that down between the consolidation of the Mexican facility repairs, marine, pricing, and mix?

Principally, Peter, it's principally due to the Mexican operation the inclusion of the deliveries this quarter in Mexico in the revenue line compared to the prior year where it was not. So that was the substantial majority of it.

Can you talk a little bit more about supply chains? What's getting better? What's getting a little worse and are you at a point yet where you would feel comfortable talking to potentially increasing production levels next year in fiscal '06 versus fiscal '05 as supply chains get easier?

First on the supply chain, Peter, while we continued to see some isolated issues in different specialty items -- particularly bearings and some items of that nature -- we believe the issues that have plagued, broke our manufacturers in the past with steel pricing and availability -- have pretty much passed as well as castings. We are very pleased with our investment in Ohio Castings which has been a source of very important strategic strength, allowing us not only to provide for our own operations but to actually -- through that venture -- sell to the entire industry, including our competitors. We are also, with the Babcock venture, now in a position where indirectly we are buying substantial volumes of assets from freight car companies with whom we compete, such as Johnstown, the former Johnstown.

The -- why don't you repeat the second part of your question?

I guess what I'm looking at is, my sense is demand still outstrips capacity for railcars. And assuming that demand continues to remain as strong as it has been would you be in a position to be able to produce more than 13,000 rail cars in fiscal '06, given that there's been some directional improvement in supply chains?

We would expect that we would be able to operate at higher levels in '06. This is partially offset by in '05 we had a subcontracting relationship with ARI where they were building cars for us and that -- some of that capacity is going away. They were building cars on a licensing basis and that is more winding down now. We are ordering certain car types from them on a nonlicensed basis but the two in that area probably offset each other. We might be able to squeeze out a little bit more where the pickup would really be, would be through the venture. That is not necessarily our own cars but, as Bill talked about, ordering cars from others.

We also have some open capacity that we could where we could increase input output in Canada and in Europe. Not just add with respect to the cars that we were acquiring from another company that we expect the income from that activity to be equal or exceeded by the new relationships and initiatives that we have launched in leasing.

So we will -- I believe -- more than make that up and actually improve on it by a different mix between our four business segments profitability. I think that it would be very good for us to strive for a stronger balance between our four units and overall net cash flow and possibility -- while we believe manufacturing is a strong core business and a strong core competency -- the interaction between these four units is equally important. And we are focusing our growth in each of those four units, not just in manufacturing.

One quick modeling question and I'll get back in queue. In terms of SG&A and you had some sales in the fourth quarter -- SG&A, if I strip out the roughly $400,000 I believe you said the deal cost is that sort of pro forma SG&A that actually we think about for fourth quarter and beyond? Second, can you just give a sense for the potential magnitude of average sales in fourth quarter from a modeling perspective?

The first part I think, Peter, was regarding G&A for the fourth quarter that you strip out. I think we said about 27 million related to settlement matters with the estate. We do expect at Toronto a little bit lower in the fourth quarter and somewhere around 4 to 700 -- or 700,000 less for the fourth quarter is probably a good starting point for modeling. I didn't hear that -- the last part of your question. (MULTIPLE SPEAKERS)

-- magnitude. Order of magnitude.

Sorry, Peter.

The order of magnitude of the potential lack of sales out of leasing fleet in fourth quarter.

I think probably the magnitude would be similar to Q3. We don't expect a huge amount but probably somewhere between .5 million and 1 million pretax (indiscernible) gains on sales.

Wendy Caplan.

Wendy Caplan with Wachovia. Can you talk a bit about the backlog at the end of the quarter? Clearly, sequentially, it was down. What are your expectations for TTX for the balance of this year and next year? How long the backlog goes out at this point and what the pricing looks like in the backlog?

I will take the very first part of that and then perhaps turn it over to build. It is down slightly, Wendy. We did operate at higher production levels this quarter compared to Q2, not only with deliveries but also cars that wouldn't (ph) be going into our lease fleet during the quarter too. So you are seeing some of the sequential job I'd do to the higher production levels and obviously the order rate during the quarter was very good and perhaps I'll turn it to Bill as far as the outlook and so on in TTX of pricing.

It's a good question because as you know so much of what Greenbrier does in the manufacturing side is heavily focused on intermodal. We have to plan our manufacturing in connection with what we perceive to be the major customers and there are only a few in that area and TTX is, certainly, one of the largest buyers of freight cars in the world. With respect to container growth, the first part of this year, containers still are growing at a robust rate in North America -- around 8%, a little less than what they were doing last year. We think that is a good solid number. We have been in close contact with TTX. I would expect that TTX will be focusing on their 2006 need; and it's possible that, as it has in the past, our backlog may move downward as we go through the quarter cycle with them.

I think some of the other factors that might influence that would be perceptions concerning steel. There has been a lot of speculation about what pricing in steel especially particularly plate steel that that stuff doublestack is going to do and there are many schools of thought on that and it's possible that has been some hesitation to order, because of those reasons. So while we think that we have very strong prospects, we could see a slight weakening in our backlog just due to the cycle on a quarter to quarter basis. But it does appear that there has been a number of movement towards very large orders and I expect that trend to continue; and it is quite possible that we would get other large orders that would preclude space from one customer or another.

So it's very very thin to be a very strong market.

Generally we are striving to improve our margins in the business. We are not doing that particularly in pricing; but we are doing it through reducing costs and we are being successful at that.

So your cover -- just to clarify. You're covering steel costs and do you or do you not expect a TTX order in this calendar year?

I would expect a wood (ph) order this calendar year but I wouldn't want to second-guess them. I'm not quite sure. I've been away for the past week and so I'm not exactly current on what may have occurred in the last ten days. But I would anticipate that they must order for 2006. Or face the potential that they may not have space. We are heavily booked in our two doublestack facilities. We are going to take a disciplined approach to producing doublestack cards. We want to keep room for conventional cars which we're promoting through our Babcock venture and those cars are very attractive, as well as intermodal.

So I think that I think that TTX has been somewhat more cautious this year. It has been ordering and we had an order in the current quarter. Whether they will feel that's -- whether they will feel they need to pop off 2006 or a little later in the year.

But the year has still got quite a long time to run. So I would say certainly I expect them to order something for 2006 this year, yes.

And, Bill, your reference to some management changes. What should we be thinking? Where is that and does that include you?

No. Not for at least for the next five years at least (technical difficulty) pleasure of the Board of Directors and I meet with those guys every quarter. But things have been going very well. I'm very excited about the Company. If you look at the age of some of our senior managers and some of our senior board members you'll see that we need to be attending on a current basis to succession planning over the next three years. I expect a few of our senior financial and operational manufacturing people to be looking towards retirement; and we need to ensure that we have a strong bench and we are doing that two ways.

We are looking at additional talent as we grow and we are expecting considerable growth. We intend to grow the Company. In all four of the segments. In order to that we need a stronger bench. So not only by looking for selected outside talent in some of the key areas over time, but to develop the middle management team that we have in place is very strong to prepare some of them for the future.

One last question if I might? Mark, can you give us the operating cash flow and CapEx numbers year-to-date and for the quarter? Or just for the quarter is fine.

The CapEx for the quarter Wendy -- bear with me.

While he looks for that let me say that Mark isn't going anywhere else either or I will kill him. Have been traveling with him for six weeks. We are now fully bonded. So he and I will remain.

Thank you and I just realized that those numbers are -- you gave us so I don't need them. Thank you very much.

Thank you.

John Rogers.

D. A. Davidson. Mark I know you said this and I apologize I missed it, but what was the gain on sales of equipment in the quarter?

.8 million, John.

28 million?

.8. $800,000 with tax.

Just following up on the backlog numbers a little bit. In early May I think you said your backlog was about 750 million? Did you deliver $100 million worth of equipment in the last couple of weeks of May? Just trying to reconcile that with the 650 at the end --?

No, John, I think we would have to set. There wouldn't have been that kind of delivery -- I am having a little hard time reconciling with what you are referring to as far as the early May number that you might be looking at versus the disclosure and the release.

I guess what I was thinking about and I may have this wrong but in early May, when you announced the TTX order, you had said that (indiscernible) backlog was 13,000 units at $750 million.

I don't have that in from the but that sounds a little unless you have it in front of you, that sounds a little while off.

I was just looking at my notes, I may be off there. Sorry.

I thought it was maybe (MULTIPLE SPEAKERS) unfortunately we are not where -- we just don't have that at our fingertips. I know you are referring to the earlier release but that sounds a little off, John.

Looking at a year ago in May and looking at our backlog quarter by quarter just to give a little more color to the question Wendy asked and where you are headed with this question, I think. You look at our external backlog as published for the street in May '04 was 9,600 units; August '04, 13,000; November '04, 10,000; February '05, 12,000 and now 11,500 cars. So our backlog has bounced around between 9 and 12,000 cars in the past year and above that.

I expect that kind of pattern just because the timing of orders. So I don't think we have to look at backlog quarter by quarter; but I think the stability in that past year and previous is important.

The think we look at in looking at and evaluating backlog is underlined demand for intermodal loadings, particularly container loadings, and the supply situation with cars and of course, who is in the market for the cars. I think that it is quite clear that additional equipment will have to be added in 2006 that has not yet been ordered. And time is running a little short for the premium production space.

The other question, Bill, is backlog with the orders as strong as they are. What is your thought on margins now more over the next couple of years? Is it possible we could ever get back to double-digit margins on a consistent basis? I'm talking about that manufacturing business.

I think it is possible to do that, yes.

Frank Magdlen.

Robbins Group. Could you give us a little help a little bit on the repair business? You've made some acquisitions and what's the quarterly or annual run rate on that relatively stable part of your business?

That business is now about $100 million running at about a run rate of 100 million a year. That's up from just a couple of years ago. We were running about 80 million. So now we're up to about 100 million per annum.

Our margins are higher in that business than in new car manufacturing and we had a strong push to improve those margins. That business is, however, integrated with our leasing activities, our asset management activities, and our manufacturing and engineering activities. So it is truly an integral part of this whole business but it's a part of the business that we intend to grow prudently, consistent with the integrated model.

In isolation, brake car repair plants by themselves without a fleet and demand and plan to build the plants and had good margins is not particularly good business. But we have originated over 60,000 units of doublestack equipment installed out there and that equipment will need repair work over its life. And as the builder and engineer of the dominant amount of intermodal equipment in North America and doublestack cars, particularly, we believe we are well equipped to provide engineering -- major engineering services on that equipment. As well as other equipment.

What does better margins mean, though? Is it a couple of percentage, 200 basis points or is it 10,1000 basis points? Or something, I don't care (MULTIPLE SPEAKERS) would help.

On the former end, a couple of hundred basis points, probably, Frank.

You had explained or talked about some of your contract having collars on them? And are you prepared to help fill -- color that out, fill that out a little bit as though -- exactly what does that mean? Do you have to give something back if steel were to go down substantially in price?

If steel went down substantially in price, our margins would be neutral. Where we feel confident on our supply, we will have some amount of room in our supply agreements where we might realize the benefit from favorable steel pricing or favorable steel developments. We are working very hard globally to obtain the best pricing, the best quality of steel in other specialties. So we allow ourselves some room for margin improvement but, basically, our policy as with all other areas of the Company is to hedge so that we don't have commodity exposure. With currencies, interest rate, or specialties to the degree that those can be locked in. For steel.

I know you talked about Europe a little bit but does it have enough in place now to stay profitable or what is your outlook there?

It still has a reasonably good backlog. Has been profitable, we note with interest the position of other car builders in Europe, and the difference is fairly significant in profitability. That is not good news when others are losing money and we are making money. But I think, just in recent month or two as the euro has strengthened it has been much more interest in the European market. So I'm still cautiously optimistic about Europe, although it is something that as we talk about the positives we ought to talk about the risk factors and the potential negatives. And I would say that just because of currencies and because of the slower growth in some of the structural changes going on in the railroad system over there would be these public offerings contemplated in the future that there has been an adjustment on the demand-side in Europe.

I think the supply side continues to look positive because there continues to be consolidation and eventually all the weaker players well fall out, we believe.

Frank we do expect Europe will be less of a contributor in '06 as compared to '05 due to the slowdown over there. As Bill says we are still optimistic about the future of Europe but '06 should be a lesser year of contribution for us.

Adam Thalheimer.

Adam Thalheimer, BB&T. Congratulations on a strong quarter here. I wanted to -- looking at the stock selloff here during the call and wonder if some of that is due to your Q4 guidance of down sequentially? My assumption would be it is only a few pennies off of what Q3 was. And is that an accurate assumption or are you guys thinking more than that?

Adam, historically, we have not given specific earnings guidance but I think what we -- I would like to make a couple of comments about the fourth quarter. Indeed, when you look I think the guidance was that we did expect it to be down. I think if you did the math you would come out to more than a few pennies but I think we were also trying to convey -- and perhaps not successfully -- these are really due to timing issues of deliveries. Principally due to deliveries within a quarter and it is not an invitation that overall we expected to deliver lesser railcars in '06 or, sequentially, we think that we are trying to give guidance in our earnings on a downtick.

So I think even the analysts' estimates that contemplated that Q4 was going to be down sequentially from Q3, that just like backlog -- our backlog figures can be up-and-down during the year that there can be some timing differences that affect our quarterly earnings.

I don't want to speak for Mark but I think one of the things I think he is trying to achieve is that since our earnings have been on a very positive upward trajectory, it's useful for us to at least comment on the fourth quarter with respect to some of these timing issues so expectations that they have been for this continued linear growth -- at least in that quarter -- we wanted to make those remarks.

I missed your interest expense estimate for Q4. Did you say 5 million?

The interest expense estimate for Q4 is approximately 5 million.

Going back to the repair and refurbishment business it looks like you're up to 17 facilities now with the inclusion (MULTIPLE SPEAKERS)

16.

Okay, 16 total. I thought that's where we were after the Alabama and the Louisiana acquisitions back in March.

I think there was -- if some of this was just maybe the way we count it, we included one of our manufacturing facilities both in repair and refurbishment and in new at one time and whether or not you count them separately but there was an increase of one facility this quarter. The one that we -- or one facility from our last announcement I should say. We did announce during the quarter two GE facilities but this is one additional since our last announcement.

And the refurbishment was what? 10 to 15% of revenues in Q3? Something like that?

Yes. Correct. That's close -- about 10% of total -- about 10% of manufacturing revenues.

In terms of pricing, railcar pricing, is there any way to give us a sense of how much that has increased over the last year at this time? A customer coming to you, how much of an increase am I looking at versus last year?

Well, largely price increases have been driven by factory cost increases; and these have ranged on a net basis, 20 to 30% more than -- a little bit over a year ago when pricing did not reflect the higher factory cost.

So you see some people holding off on orders but right now it is not a huge concern?

No. Just because the basic demographics of need unless one concludes that there is a real falloff in U.S. economic activity, particularly with intermodal there isn't a lot of alternative to the consumption patterns that we have in the U.S. and the patterns are pretty much locked in. So we see a very positive growth profile for a little bit over the next five years.

Again Adam what we also caution is, of course, in our industry there is a relatively small number of large buyers. So there can be some very large orders that are let and then a pause and then another group of very large orders and so indeed if one looks back, historically, which is there is a Web site that the AR has on this. I think it's wsiweb.org but if you look back, you can see the orders in the backlog bounce around from quarter to quarter but what we are really looking at is the trends.

And what we are trying to indicate is that we are still -- the market is still a very strong market out there and there is virtually no surpluses of equipment and, indeed, all the stories you read about the rails is that they are really straining to handle the traffic that they do have.

Arthur Winston.

Pilot Advisors. I know you said that some of the inputs are up with 20 or 30% but could you be more specific as to what's the selling price, percentage change for a railcar in a backlog this year versus a year ago?

Partly of course, Arthur, you wouldn't just want to take our backlog figure and divide it by a number of units because there is -- because it will depend on the product mix.

I had no intention, I just wanted to take an identical car that backlog issue (MULTIPLE SPEAKERS) --

Maybe on the order of magnitude from this time a year ago maybe 10%.

10%.

It would be more like 20%, a little longer than that.

Right so Bill is saying if you go further back and if you go back from the depth of the cycle back in '01 prices are probably up closer to 40%.

Very good; given the way that Mexico is coming on, would you think that the traffic margins in the railcar manufacturing backlog is higher now than it was three and six months ago?

Yes.

Art Hatfield.

Mark, I probably am a little bit slower than everybody else but I want to make sure I understand this correctly. This quarter you produced 3600 units and that includes Mexico. Last year, you delivered also 3600 units. That number included Mexico also but the revenue from those cars was not included in the revenue line last year where it is this year. Is that correct?

Absolutely correct, Art, because Mexico is on the equity method last year so we just reported a single line item in last year's financial results on the P&L.

I wanted to make sure that you didn't report the cars that way so that deliveries were included in the number.

Yes we include -- we have always included all of our operations, even Mexico -- including Mexico -- in the delivery and in the backlog figures.

Just as a further comment on that, Art, in as much as we have baseloaded our Mexico facility and made that a primary facility from a year or two ago, we expect the contribution -- profit contribution -- irrespective of the way the revenue is recognized to have a much more much different profile. That package (ph) suffered from some governance issues when it was owned by two companies, when the business was owned by two companies. Also we just didn't have adequate revenue and commitment there on the revenue side. So we didn't have throughput at the factory.

We've got that out and we are very pleased with what has occurred down there.

Great; that's all helpful. One other thing too. Is it conceivable that as you see potentially some customers try to push out orders or hold that they are hoping that they see some of your input prices come down particularly way on the steel side, the prices on certain car types will come down and they are trying to time the market for better price for equipment?

Yes, I think that's definitely tempting because car prices are at historical highs with higher factored cost. There's a great deal of speculation about steel pricing. Steel pricing, scrap pricing has come down in recent months, weeks. It has not come down in some key areas like plate as much as others; and there's quite a lot of discussion and interest in what global buying patterns and shifts of demand might mean, with respect to -- for example, China, which is exceeding the U.S. now in steel production, although in lower quality and not generally for export.

So those are the forces that people are looking at and generally there is a kind of a kneejerk thought -- well, these higher prices may come down. That's not exactly the right way to analyze it. You really have to look at the underlying supply and demand forces and in our view, we will be in this period of higher commodity prices for an extended time, relatively speaking, as long as the policies of the government and the global economies cause the U.S. dollar to be relatively as weak as it is. And looking at what others are saying about our dollar, there are those who are saying the problem with the dollar is not that it is too (inaudible) -- or that is to say it may absorb -- it may readjust downward.

So these are the forces that are going to affect those commodity prices and it's anybody guess. But there has been some pause and some caution and rightly so because we have to match production and purchases with that production and I think people can generally make some decent bets on some of these steel prices because they have moved down on car techs (ph) that haven't affected intermodal.

But that is something that you feel right now is only something that could affect demand and the short run as the rails continue to grow traffic and continue to get squeezed on their capacity, those orders are going to eventually come there, regardless of what pricing does.

Yes in the situation with heavier commodity movements and with heavier traffic loads on the railroads, the equipment they do have, they are working much harder that equipment wears out, requires more repair which is good for our business. And it actually accentuates the incipient demand for the railcars. So I think that while timing is very important and some of these big orders are timed, depending on how boards of directors decide to allocate capital and their own view of such matters -- at the end of the day, the fundamental economic forces are going to drive that demand to be realized. And the forces that are acting on the railroads today are very very positive; and they play out through all of the areas, all of the four segments that we provide services to the railroads. Not the least of which is repair and other mechanical engineering services to the railroad network. Not only here, but in other markets.

Barry Hines.

Sage Asset Management. I have two questions. One is, could you give your estimate for CapEx and depreciation for the full fiscal year. And do you think you have a preliminary number for the new fiscal year on those two? And, secondly, early in the call you mentioned a number for the delivery decline in the fourth quarter, relative to the third. And I missed that number. If you could repeat that, I would appreciate it. Thank you.

On the CapEx and depreciation, the depreciation for the year or for the current fiscal year should run around 23 million. We would expect in '05 or I'm sorry -- fiscal '06 that it would run closer to 25 million. The CapEx for the year if you can just give me one minute on that. And then -- while I'm getting to that -- the deliveries for the fourth quarter we would expect to run around 3100 units as compared to the 3600 units this quarter.

Our gross CapEx for this fiscal year includes -- is running about, it will run about $80 million and you have to subtract -- you don't have to but subtracted out of that is what we sell out of our lease fleet and this year we have sold about 25 million, maybe 30 million for the year, as a whole. So our net CapEx this year would run about $50 million -- this current year -- and we would expect a similar number next year.

(OPERATOR INSTRUCTIONS) Steven McBoyle.

Lord Abbett. First, was wondering if you could break down the backlog between intermodal cars and conventional; and secondly, obviously, you've talked at great length with regards to demand levels within intermodal. Just curious on conventional, obviously, you've got a wide range of boxcars there. To what extent are you seeing incremental demand on those types of cars or softness in others?

About 80% of our backlog is in intermodal. And I'm sorry; I didn't hear the second part of the question. If you could repeat that part of it?

Just within the conventional side where you are seeing incremental demand what's (MULTIPLE SPEAKERS)

We continue to see strong demand for boxcars driven primarily by replacement and the aging fleet, operating capacity to higher tonnage cars, replacing a large pool of technologically in marginal equipment even some 70 ton equipment remaining out there. But beyond that some older 100-ton equipment.

On the flat car side, we see waste. We see grain and lumber and other forest products that move on flatcars but the grain, of course, would be in covered hoppers. I might just point out that in our Babcock venture we are participating in the acquisition of 15 coal trains and I think that might be up to a larger number by now.

Could you just characterize the relative demand levels that you are seeing on conventional vs. intermodal to the extent that you've talked at length here with regards to intermodal going through a bit of a soft patch here, just with regards to timing? But are you seeing that same dynamic within conventional?

I don't want to leave you with the idea that I think intermodal is going through a soft patch. I think there's always a question about timing. So we are trying to answer the questions that we've heard honestly. I personally believe that intermodal while its rate of growth has dropped a bit in the first half or the first part of the year from the double digits that it has experienced will continue to be very strong.

Secondly, we are very focused on our doublestack markets. We routinely hold space in advance because we have a good idea where our customers are going to require equipment. And that we allow the other cars -- the other kinds of cars -- to take up the slack in our production plans. The way we are operating the Company today is, we can predict with fairly good certainty how many doublestack cars we will and should produce over the next two years. We are allocating the balance of that space to our conventional car programs and we believe the markets in those areas near as we specialize are very strong. And we are also looking at one car type that we haven't built for a number of years to add to that portfolio.

Quick question on Europe. Are you considering any production -- reduction in their manufacturing reduction in Europe from a capacity prospective?

Would we bring in tips (ph) from Europe (MULTIPLE SPEAKERS) for the North American market you mean?

Within Europe are you considering any capacity reductions at this time?

Not capacity reductions. Our throughput will depend on our order of backlog and we could see slightly reduced throughput in Europe if the orders -- if the backlog can't be maintained.

Last question (MULTIPLE SPEAKERS) when you talk about the backlog being -- .

As to maintain we have a good strong market share in Europe. We have good product offering but we think that that would be in answer to your question. We are not reducing our capacity in Europe. We are not taking out any reduction capacity permanently or anything like that.

Last question, you talked about marine and rail backlog good through 2006. Does that include Trenton Works?

Yes it does. That includes all of our new railcar facilities and it also, on the marine side, it as well where we produce here; and in Portland that is out about a year as well.

Now with respect to interpretation of that question it -- all of the backlog restocking, that includes all of the factories. Of the factories we have, we have -- we continue to have space -- more space in Canada, more flexibility in Canada than we have in other facilities as far as visibility is concerned. So that is a source of potential increase in production.

Peter Nesbold.

Quick follow-up. I guess I just want to clarify. Were the comments earlier that you believe we have hit a cyclical peak in the backlog and we are going to gradually work it down from here? Or was the comment that we are entering a -- well, orders always tend to be lumpy. You get a little bit of seasonality so the backlog may be down modestly in fiscal fourth quarter but we haven't necessarily seen a cyclical peak in backlog. Which of those two is the (MULTIPLE SPEAKERS) -- ?

The latter. I don't think we've seen a cyclical peak in the backlog. I think there is a trend to where larger orders in a time like this because there's concern about blocking production space and, indeed, if we don't get intermodal orders in this kind of market, we may change our behavior and not hold space for intermodal. Over the years, we have quickly moved when intermodal has very rarely declined because it's had a very positive trendline. However during the last 10 years there was a time when intermodal faltered for 1 year due to oversupply -- a situation that does not exist today and we were quickly able to replace that with conventional equipment, due to our leasing capabilities.

But I don't expect that we have seen necessarily -- we're not trying to signal a peaking of our best backlog. I expect our Company to grow substantially, particularly through strategic initiatives. And I do think that from time to time you can see backlog swing within a 2 to 3,000 car range up or down. And that is all we were trying to say. Due to timing of orders and our own policies having to do with holding space for valuable customers. We don't want to -- we want to keep our market share in doublestacks and we can, if driven to it, lease our own cars so. In our situation it's slightly different than other car builders because of that focus.

Peter, I sense by your question and perhaps a couple of other questions that we received that perhaps we maybe haven't answered this; or want to try to set the record straight or be very definitive. I hear that we are very bullish. We are very optimistic on the market. This is not the peak. We believe or (indiscernible) at the peak about what we can realize in terms of earnings or growth here. On the backlog side of things, in addition to what Bill is saying, we don't look to just book out our facilities, to book 'em out production and the availability of space is a very guidable commodity today. And the ability for a customer to get a car when they need it from any of the builders is a very valuable commodity; and we are not just interested in booking the out space to book out space. Adnor (ph) is the industry, (indiscernible) anybody's benefit to just or we're not just focused on the order rate in the backlog, in and of itself but we are very optimistic about the future here.

That's very helpful.

I think we have time for about one more question here and then we will apologize. We are going to need to wrap it up as we have a board meeting today, too, but I will be available to answer calls during the day as well. And I will have a little bit of time after this call but we will need to take one more question if there is one and then wrap it up.

I'm showing no further questions at this time, Sir.

Okay. Thank you very much for your interest and we appreciate your participation in today's call.