Greenbrier Companies Inc (GBX) 2005 Q4 法說會逐字稿

Hello, and welcome to Greenbrier Companies fourth 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.

I would now like to turn the meeting over to Mr. Mark Rittenbaum, Senior Vice President and Treasurer.

Mr. Rittenbaum, you may begin.

Good morning, and welcome to our fiscal 2005 fourth quarter conference call.

After I review of our earnings I'll turn it over to Bill Furman our CEO to make some comments about the quarter and the outlook for 2006 and beyond as well.

And then we'll open it up for your questions.

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

Through our discussion today we'll describe some of the important factors that could cause Greenbrier's actual results in 2006 and beyond to differ materially from those expressed in the forward-looking statement made by or behalf on Greenbrier.

+++ presentation

Today we reported our fourth quarter net earnings, which were $10.6 million or $0.68 cents per diluted share on revenues of $265 million.

We also announced a continuation of our quarterly dividend of $0.08 cents a share.

The company's backlog as of the end of August was 9600 units, valued at $550 million.

Obviously we had a very strong quarter, which substantially exceeded our earlier guidance and analysts expectations based on this guidance.

The drivers for these stronger results were, first, higher than anticipated new railcar deliveries during the quarter due to a very efficient line change over ramping up of production post-change over.

And secondly, we had higher than anticipated manufacturing margins as we continue to benefit from your global sourcing efforts and from efficiencies of our Mexican operation.

These efficiencies have come on significantly faster than anticipated, now that these operations in Mexico are under our day-to-day management.

Turning to the manufacturing side, our revenues for the quarter were $241 million, up from the $180 million in Q4 of '04.

In North American and Europe we delivered 3300 new railcars during the quarter as compared to our earlier guidance of around 3,000 cars for the quarter.

Again, this was primarily due to the quicker than -- than planned -- and -- planned line change overs and the subsequent ramping up of production.

As a reminder, deliveries for Concarril, our Mexican operation, are included in all quarterly totals.

However, Concarril is not consolidated until December 2004.

Prior to that time it was account of 400 the equity method of accounting Our manufacturing margin for the quarter was 10.4% up substantially from the first nine months of the year, which averaged 8.3%, and again, it was ahead of what we had anticipated.

The strong margins, again, result of long production runs, cost reductions from your global sourcing efforts, and the benefits of Concarril where we saw significant improvements.

On the leasing and services side, our revenues were $24.4 million in Q4, up $2 million from Q4 of '04.

Leasing and services margins were up 57%, up from 52% in Q4 of "04.

Increases in equipment utilization for both, our owned lease fleet and our management services business, and additions to our own leased fleet help drive margin expansion.

There was also pre-tax gains on equipment sales in Q4 of 05 of $2.5 million, compared $.4 million in Q4 of "04.

Our own fleet utilization is now at 98%, up 1% from the prior quarter and 2% for the year over all.

Our fleet now consists of 10,000 owned units and 129,000 managed units.

And our manage fleet group by 1,000 units during the quarter.

As we look into 2006, we see the drivers for earnings growth are primarily related to margin expansion.

On the manufacturing side, as we look on the new railcar side of the business, we anticipate this margin enhancement will be driven again by our global sourcing efforts, continued efficiencies from our Mexican operation, a full-year's ownership of our Mexican operation, and a higher percentage of our total [throughput] coming from out of Mexico and the U.S.

And again, these operations are currently more profitable than our Canadian operation given the strong Canadian dollar.

We have targeted margins since fiscal 2006 and the range of our last 2 quarters of 9.2% to 10.4%, compared to our average for all of 2005 of 8.8%.

This margin enhancement will be partially offset by lower new railcar deliveries anticipated.

Again, in 2005 we delivered 13,200 cars.

We're anticipating about 1,000 cars less in deliveries in '06.

As you'll recall, in '05 we subcontracted about 1,000 units to a third party.

Offsetting these lower deliveries to some extent will be the benefit on the revenue side -- will be the benefit of a full years ownership of our Mexican operations and growth on the rail services side, which is our repair, refurbishment business.

We see a greater percentage of the total work this year in our repair, refurbishment work business being done for third parties rather than our only leased fleet.

So, this part of our business will be a bigger contributor to the revenue in earnings for the overall company.

On the leasing and services side of the business, we anticipate margins should benefit by the additions to our own lease fleet.

The growth of our management fleet and our previously-announced venture with Babcock and Brown.

We look for margins to grow about 2% to 3% from fiscal 2005, which averaged around 51%.

So again, we see margins potentially in the mid-50's.

G&A should run about mid-50% level, that is.

G&A expense should run around $15 million per quarter and interests about $5 million per quarter.

Our tax rate is expected to run around 41%, as a result of the change in the geographic mix of our earnings.

Depreciation and amortization should run about $25 million and CapEx should run around $55 million, $40 million for our leasing operations and $15 million for manufacturing.

Again, the leasing -- leasing CapEx is discretionary and can be monetized at any point that we choose as these are very liquid assets.

Cash flow from operations is anticipated to turn positive this year as inventory and receivables levels either stabilize or decline.

While we see earnings growth in '06 over '05, it will likely not be at the annualized levels of Q3 and Q4.

Again, to the lower new railcar delivers in '06.

We do anticipate that Q1 will be our softest quarter similar to prior years with earnings more being comparable to the Q1 of last year, and with earnings being more weighted to the prior 3 quarters -- or the last 3 quarters of the year, and the softer first quarter is principally related to lower new railcar deliveries due to the timing -- the syndication or sell of railcars that are being held for sale.

So again, overall we see earnings growth, but being weighted towards the last 3 quarters of the -- of the year.

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

Thank you, Mark.

First let me begin with a few themes, which Mark touched upon and just reinforce those.

In these comments, this will set the basis for our operating plan in 2006 and beyond.

Generally, very comfortable with the range of street estimates for our fiscal 2006, although Mark has indicated we expect to see the same seasonal pattern in earnings as last year with stronger quarters in the last three quarters of the year and weaker quarter moving into the year.

We believe that the present operating momentum will build, and that the year will be a very good year.

We've -- several seasonal shut downs -- we have seasonal shut downs which affect our first quarter.

Mark has already commented on the level of asset sales that affected the quarter just ended.

While our backlog has declined somewhat over the last quarter and our historical highs, we are very focused on the double-stack container market.

There have not been recent orders in that market.

We expect major orders for late 2006 and 2007 yet to be placed.

And we believe that these orders will be required, given our own assessment of traffic patterns focusing principally on container loadings and prospects for the North American market.

I'll comment a little bit more about that in a few minutes.

The message here is that our visibility is very good.

We have a strong outlook in the marketplace.

And while there are some macroeconomic issues, which could affect the U.S. economy and globally and cause concern, we believe all of these will be generally resolved in favor of railroad freight traffic and railroads.

So, we believe it's a good space to be in today.

Our volumes to support expectations in 2006 are at levels as Mark indicated.

About 1,000 units below this year in our manufacturing group.

As Mark also explained, we subcontracted 1,000 units in 2005, which we do not expect to do in 2006.

We also expect Europe to be a bit weaker in 2006 and in 2005, although still very much a part of our strategic plan with acceptable performances -- performance in the circumstances of a weaker market in GDP growth in that European segment.

Longer term, we continue to believe -- believe it's going to be strategically important us to in a continuing global environment.

We are achieving considerable operating momentum in our manufacturing groups, especially in Mexico and at our facility in Gunderson, in Portland.

And in addition, we've made significant organizational changes during the last two quarters, and are focused very much on making our manufacturing group and our manufacturing operations very efficient.

So, we believe we will be able to drive improve numbers in 2006 with relatively constant level of revenues.

And that in itself, means that there may -- upside potential in our numbers, especially if we can broaden our product line, retain market share in our primary products, and add profitable volume.

In addition, we are liquid and have a -- have the ability to make accretive and strategically attractive investments, which could affect our operating profile and financial performance in 2006.

I'm pleased to welcome today Joe Wilsted who has joined our company.

And I think he is a key member of our financial staff.

He was former CFO of Bobcat, a unit of Ingersoll.

And Joe will be working with our manufacturing people and with our CFO, helping us continue the numbers-based value objectives which I talked about earlier.

Let me turn back now to our visibility, and more specifics about our production plans.

We remain very positive about the out look for [intermodile] as I said earlier.

And particularly for container cars, this optimism is not just a feeling it is based on careful and objective analysis of loading trends in North America.

And also an assessment of railroad car supply and velocity as it affects this car type.

Already we are backlogged in our facility in Mexico on a single line into 2007 and have a very good production base at our facility in Portland.

The key drivers of the stack market are consumer product source from Asia, and outsourcing of components and parts in an area, which we are very actively involved for our own account as many manufacturers are.

The indicators impacting the stock market are somewhat different than those that affect the economy as a whole, and they are very specific.

We track these very carefully.

We note that -- that there is very solid growth for the cumulative week forty-two, ending week.

And about an 8 -- 8.2% growth rate in containers in -- in Canada, about 7.6% in total for North America.

There is no slow down in imports from Asia, and we don't believe that there's inventory glut.

In general, we believe the supply and demand circumstances favor [intermodal.] We are going to be running an intermodal line at Gunderson and at -- and at in Mexico in 2006 and into 2007.

Because we're very confident of our visibility, we're making significant shifts in our production plans.

We have the advantage now of success in Mexico.

We intend to reinforce that success.

We also have the advantage of a NAFTA footprint with facilities in Canada, the U.S., and Mexico.

Canada is a weaker base for export today because of currencies.

We have shifted, therefore our emphasis to Mexico, and we believe that by the second part of fiscal quarter we will have made progress opening a third line in Mexico with space available and several alternative scenarios which we are now finalizing.

We will run at least one line in Canada, and depending on availability, parts may have the capacity to increase our total production over target in 2006.

And that puts us in a very flexible position to be able to satisfy customer demand.

I am mindful that in the last conference call our tune was somewhat conservative with respect to expectations for this quarter.

That is a virtue, but not always.

And I congratulate the street in forecasting our earnings better than we have suggested.

However, I caution you that the pattern for next year, we believe is reasonably set in the first quarter.

We do expect something similar to what we had in the last -- last year, but a stronger finish during the year.

In 2005 we ended an eventful year.

It was full of many accomplishments and major restructuring of our balance sheet, improved liquidity, floating our stock, acquisition of a facility in Mexico, new ventures in Asia, continued recognition of outstanding quality of the men and women of Greenbrier who make our products and provide or services, and we did this while dealing with the more mundane tasks of Sarbanes-Oxley implementation, 404.

And the tasks all public companies had at hand in 2005.

In 2006, we begin the year with fewer issues, clearer focus -- very clear focus on where we were going, growing liquidity to consider strategic investments to improve shareholder value.

We think all of this spells out the opportunity for strong continued performance by Greenbrier in 2006 and beyond.

I'd like to take a moment to thank all of the men and women of Greenbrier who have made this past-year's performance possible.

And our suppliers, our financier's, most of all our shareholders who have had confidence, your board of directors and I are committed to increasing shareholder value while maintaining standards of integrity in customer service that have enabled us to achieve past success.

Mark, back to you.

With that, we'll open it up for questions.

Operator if you could open it up, please.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Peter Nesbold of Bear Stearns.

Sir, you may ask your question.

Hey, guys.

Really very strong quarter.

The cash flow and gross margins were really very impressive here.

Can you -- I want to revisit the deliveries comment that you made.

Did you say that deliveries would be down 1,000 year-over-year in fiscal 2006 versus fiscal 2005?

Yes, approximately 1,000 units, Peter.

Now, is that -- how were you accounting for the -- the Mexican deliveries in fiscal 2005?

Okay.

On a -- historically Peter -- both pre-consolidation of Concarril and post-consolidation of Concarril.

The Mexican operations -- the Concarril operations -- have always been included in our delivery totals.

Okay.

Okay, so you did 13.2 this year, so maybe like 12.2 -- you know -- I guess -- I'm little surprised because it felt like there was some additional capacity that you could bring on. that you were making some continued efficiency improvements.

That's true.

Our rated capacity -- I think last year we were using as 13, 000, we have taken steps to improve through-put and efficiencies.

So we believe that system-wide, including Europe, we have the capacity to produce 14,500.

The expectations that link into comments today and to our assessment of street expectations, would be, however, for a more modest target during the year, so that as I said earlier, the upside would be if we are able to fulfill -- if we were able to receive other orders, product diversification -- there may be upside.

But we will have extra capacity in Canada due to the redeployment of emphasis in Mexico.

And we expect continued operating momentum.

Our basic plan this year is to really press down on costs and efficiency to ride with operational momentum, but we are improving our capacity.

I'm cognizant of some caution expressed by some concerning market outlook, so we don't want to set targets that are unrealistic.

The market's there, we certainly have the potential to build -- build more equipment.

Pete, the other reason, Peter, that it would be down slightly is Bill's earlier comments that we have more modest expectations for Europe this year too.

So some of our -- so that would be down.

And some of the capacity increase from the 13,000 to 14,500 would be to capacity in through-put increases in Europe, but again we expect deliveries to be down there this year.

The big headline there, Peter, is that our Mexican operation is very successful.

We're expecting to put more stress on Mexico.

We believe we can execute that and we will be diverting some capacity -- some business from Canada into the Mexico facility, but we think that the combination of these things is a net add to our total capacity of 14, 500.

However, again, we're using a lower number to link in with our own operating plan, and roughly what street expectations seem to be saying about what they believe we should be able to do.

Okay.

That's -- that's entirely reasonable.

And I think it's very clear, at least to me, that deliveries arguably wouldn't be down because demand is softening.

If anything, demand here for intermodal steam seems very strong still.

I guess a question on gross margins and there's a little bit of a three-way element to it.

I'm curious, what do you anticipate the mix to be in fiscal '06 towards double-stacks?

Because, my understanding is that's a higher margin product for you.

What's the impacted fourth quarter for material costs?

I mean, you had a terrific gross margin fourth quarter.

Should we expect that going forward?

And how does that interplay with total deliveries in fiscal 2006?

Ideally, I would love a range for what you expect manufacturing gross margins to be next year.

Right.

Well, Peter, a couple of -- I'll try to pick all of those off.

But one, that you asked about was in Q4.

The impact of steel prices on margins, and we really -- as we had commented earlier, that our backlog is protected for steel price increases, in that pretty much any of the exposure that we had had in this area had washed out earlier in the year.

So there really was not an impact of steel.

The guidance that we gave for margin for the -- for -- for fiscal '06 is in the range of these last two quarters of '05, which was ranging from 9.2% to 10.4%.

So, those are -- that's the kind of targets that -- that -- that we see and that we believe are achievable.

We expect about two-thirds of our deliveries in '06 to be intermodal.

And what was that -- that was like -- wasn't that as high as 70% this year?

It was a little bit higher percentage this year.

That's correct -- that's correct, Peter.

Okay.

I'll jump back in que.

Thanks, guys.

Wendy Caplan of Wachovia Securities, you may ask your question.

Good morning.

Good morning.

Can you talk a little bit about the Babcock and Brown venture?

The 4,000 cars that you have ordered in this -- in this venture, how many of them are yours?

Are they in the backlog?

Do you have capacity to do more if -- can you take more of the orders if your capacity opens up a bit?

Where are the others being ordered from?

What -- how should bethink about it hitting the P&L next year?

Can you address those issues, please.

Thank you, Wendy, that's a complicated question so I'm going to let Rittenbaum handle it.

We'll try to break it into parts, how about that?

Wendy about 4,000 cars have been ordered.

Roughly -- roughly half of those have already been built, and already placed under lease.

And the -- and the balance of those will be built in calendar 2006.

Of those 4,000 cars, initially only about 10% of those cars, or a little greater than 10% of those cars, are Greenbrier-built railcars.

We certainly see that going forward that -- that there's a lot of room for that number to grow, and we would anticipate that -- that -- that -- that we would be a higher percentage of the mix.

So, I'm trying to cover all of your points.

We definitely see room for the venture as a whole to -- to grow, so that -- that these 4,000 cars are just -- are not the beginning and the end.

I want to take a pause and describe that with this venture that it's 50/ -- 50/50 venture with Babcock where we jointly invest and realize the benefits of these investments in the railcars.

The strategy is to hold these cars short-term and then sell them to investors.

Much as we have done historically, where we syndicate the assets to third party investors and then manage these railcars for investors.

Today -- where we see this going is that it would more likely enter -- be in a more formal joint venture arrangement, where we would show -- our current thought is that we would end up showing this as an equity and unconsolidated subsidiary.

But today what you see on the balance sheet is railcars that we have purchased on behalf of the venture, are shown under railcars held for sale and in part of that line item.

So I'm going to take a pause and see how much of your -- how much of --

You might address her backlog question.

Right.

Very little of it is in backlog.

Because the -- roughly 500 cars that were Greenbrier-built cars had already been built at the end of -- at the end of the year.

So, very little of that would have been -- would be in the current backlog number.

I'll just supplement that --

As far as '06 is concerned, how should we think about this venture in terms of how much it could potentially or what are the parameters in terms of how much it contributes to earnings?

I think for the current -- for fiscal '06, we see this in the $3 to $4 million range -- pre-tax from it.

We -- and we see the ability of this venture to grow in a manner where that number will grow both from -- from the investment activities, but also as we continue to do this, we'll built up an annuity stream of management fee income from the ultimate syndication of the railcars as well.

That's a very important feature of the venture over time to us, because the rest of our business, the asset management business, the repair business, the repair services business, all benefit from long-term annuity streams that are created by this foundation.

Babcock has been traditionally a very strong customer not only for us, but for the other car builders, and it gives us a chance to participate in the strength of markets in which we do not now operate, such as coal.

We placed along with Babcock whose lead on the front office work -- considerable backlog with Freight Car America, and our -- also cars have been placed with Trinity, and earlier with ARI.

Okay.

And -- and -- I think that's it.

Your -- your comment about -- just to clarify, your comment about the 1,000 cars left, can you remind us or tell us how many cars were shipped out of Europe this year, versus last? '05 versus '04?

Yes, Wendy. '05 and '04 were comparable at around 1400 railcars in each of the year -- 14 to 1500 railcars in each of '04 and '05.

And we see that for '06 being down about 400 units.

Okay.

Thanks very much.

Just a not on europe.

Our European backlog has remained reasonably good.

We know that it is a softer market over there, so our expectations are less this year, but again, it's a very important market which we continue to want to remain in, and we are successful in it.

Mark Hatfield of Morgan Keygan, you may ask your question.

Good morning gentlemen.

First, Bill, you had mentioned in our comments that you were comfortable with the range of estimates that are out there.

And just looking at first call, I see that the range goes from 212 to 268, pretty wide range.

Can you kind of give some color on what you think it takes to put the numbers at the high end or the numbers at the low end?

Well, I guess you caught me on that one.

Although I'm comfortable in that range.

The -- I guess a couple of things.

To put that in perspective, we were trying to give you an operating profile and some depth of what the operating perspective would be for that range today and what potential upside or changes might be, and those fall into two categories.

If we can increase capacity or through-put and get more orders that would be great.

And we maybe have some -- maybe we would be on the upper end of the range.

If we make a strategic move and it's highly [creative], which is the only thing we will consider, then it could be a pleasant surprise.

And finally, we're mindful that, well, at least in any last quarter or so, we have been perhaps in our outlook at least -- perhaps more cautious than -- than -- than the street.

So I'm giving some respect to the street because they seemed to have predicted what we will do well.

I think the consensus is what we really should focus on.

And -- and I -- I'm only trying to relate to you a general -- a general level of comfort with that.

There are many, many forces of course that act on a company during the course of a year.

We're generally optimistic.

We think we have good visibility.

So we're -- it's not just feelings.

This is the math and we have some objectives to reach to get there, but we think we can do it.

Well, would it be fair to say then that barring any big orders coming through, that you are kind of more comfortable closer to the consensus -- maybe to the lower part of that range?

No, I would say the consensus is -- I -- I think the consensus is a good target.

Okay.

And that's -- and that's helpful.

I done want to beat you up about that, but I just wanted to get some clarification.

Secondly, can you kind of give us a feel for -- you had mentioned that you think about 12,200 cars to be delivered this year.

Do you have any sense of the possibilities that you may see some orders come through from some of your historically large customers as we move into next year?

I can't really comment on that because our -- we -- we respect our customers, and they act with divine authority.

We know that some are more cautious than others, and I think that the contexts of my comments about visibility is -- is measured because I am optimistic.

I'm very optimistic.

I'm optimistic for two reasons.

I see the traffic patterns.

I have studied -- we have studied the underlying fundamentals.

We don't necessarily agree with everyone's assessment of intermodal market.

There has been an observation by one analyst that it peaked -- or it recovered early and therefore it may peak -- it's driven by fundamental objective drivers, supply and demand, and we measure those closely.

And so we're fairly confident.

And each year as the intermodal double-stack container grows, -- an 8% growth rate -- add that capacity to the system, all factors being equal, is going to take am 10,000 units.

So it's a good solid market.

And we have a good solid market share.

We just have to look at those variables.

And if you can manage those variables you can -- you can get there.

That's what I'm confused by, because I agree with your sense of where the market is heading on the intermodal side and I'm puzzled why we're not seeing more investment inspect that business today.

Is -- do you sense that part of that could be the fact that car prices have gone up so much over the last couple of years.

Well, let me say that, we're in constant discussions with your large customers, and they are very important us to, and those discussions lead us to believe that there will be orders within the next several months.

However, the -- the hesitancy has been that -- that orders aren't really required, and there have been issues with a supply pricing, and so, I think one can make a very good argument that they followed a prudent course.

We're not -- we're very supportive of the decisions that have been made.

If we -- if we enter in orders and we get a longer backlog, there can be danger in doing that for both the buyer and the seller.

And one way of avoiding it is to simply work very closely on forecasting, and that's one of the things we try to do.

Good.

That's helpful.

And finally just one quick thought.

This may help clarify something in my head, but looking at your assumptions for gross profit margin on the manufacturing side next year, they look to be very good.

My assumption would have been that given the fact that you are seeing a mix, a little bit will move away from intermodal that that would go down.

One, am I wrong in that thinking?

And two, if I'm right, is that because of the increase in the gross profit margin in '06?

Is that because of the benefit that you should see throughout the year from Mexico?

I think it's operating momentum partly.

It's also that the mix hasn't changed overly much.

It has changed a bit.

Slightly declined on double-stacks.

The operating efficiencies of better plant utilization and better plant mix cannot be overlooked.

Mexico really -- we really intend to reinforce our successes down there.

And as everyone knows, currencies can effect a lower margin manufacturing business, so Canada is not -- Canada is not the best place to export in the United States from today.

And you are paying something of a penalty to manufacture there, [indiscernible] your competitors in Mexico or North America.

So we are shifting some production, but we'll have the opportunity to do specialized cars and keep a line running in Canada.

Keep a very good base there.

And they have been very successful improving efficiencies.

So, I think there is a lot of potential upside.

I'm just not comfortable predicting it.

We set aggressive targets for ourselves, but we are trying to give you guys fair picture.

And maybe we're guilty of too conservative, but we want to give you a fair picture of risks and opportunities in the marketplace.

Now that -- that's very helpful.

Thanks, guys.

J. B. Groth of A.D.

Davidson, you may ask your question.

Hi, most of my questions have been answered.

Mark, I had a quick question on the gain on sale.

If I look at statement cash flows and subtract off last nine months, it looks like $2.5 million after tax in gains on sale.

And it sounded like you said $2.5 million pre-tax.

I -- what am I doing wrong here?

You are referring to the -- you are referring to the -- yeah, I did say that there was $2.5 million pre-tax for Q 5 of this year.

Okay.

And what -- and I'm sorry I'm not --

Well, if -- you're year end statement of cash flow says 6.8 total gains.

Right.

So the first -- the difference is what we realize in the first three quarters of the year.

The $2.5 million was for Q -- Q4 and the cash flow would have been the amount for the entire year.

Okay, so it was only stuff going on in the lease -- in the leasing area, nothing else?

Correct.

Okay.

Okay.

Thanks.

Peter Nesbold of Bear Stearns you may ask your question.

Hey, guys just a quick follow-up.

With some of the production possibly moving down to Mexico and Canada -- a little less in Europe -- what kind of impact does that have on the tax rate in fiscal 2006?

Some of this, Peter, we had given guidance that the tax rate over all we expected to be around 41% and that's a little bit up from where we ended up this year at around 39% and change.

And that is due to all of the changes in geographic mix.

A lesser percentage of total revenues coming from Europe.

Greater percentage out of the U.S. and Mexico.

When you take all of that into account, that's how you get to the -- to our guidance of the 41% tax rate.

Okay.

Sorry if I missed that.

No problem.

Just one clarification.

The guidance on deliveries, that assumes continued order flow?

I mean, certainly intermodal is lumpy and we know that and there will be quarters where it's incredible and quarters where it's a little bit weaker, but your delivery guidance does assume that you get continued order flow, I would assume roughly in line with what you have seen over the last 12 months.

Is that fair?

I -- with our backlog there, Peter, it -- 2006 is substantially played out, as you can see, though our backlog is slightly less than the -- what we're giving the guidance for the year.

So, there is some open space to be played out in '06.

But the -- the backlog gives us very good visibility into that 12,000 and change units that we're -- we're -- we're estimating.

Yes, there are some additional order spaces that would need to be filled, but not very much.

Okay.

All right.

Thanks.

Thanks for the time.

John Barns of BBT Capital Markets, you may ask your question.

Hey, good morning, guys.

Good morning.

We have done a fair amount of research recently into lease fleet utilization, lease pricing, that type of thing.

And given what GATX has said about their lease fleet -- their railcar fleet and just utilization, which you said today and given the -- what we see as continued strength in the economy, is there a chance to grow the lease out of the business more substantially in '06, and you know, maybe offset some of the -- you know, I guess the little bit of year-over-year weakness in the manufacturing side?

And what I'm trying to get at is, what level of growth in the lease business are you comfortable with?

Well, just a couple of quick reactions to the question and then I'll answer it.

First, we don't expect weakness in our manufacturing side.

We expect -- we're -- we're -- we're kind of signaling flatter revenues but stronger performance, and we have got specific reasons why we think that that will occur given all of the mix and other things we have talked about.

But on the leasing side, we believe there is upside in leasing.

We continue to focus on our leasing fleet opportunities, and we have four business segments that work together to produce a lot of value, so it -- the nuts and bolts of this can be a little difficult to to see from the outside.

However, we think there is opportunity in the leasing side.

We're going continue to emphasize that momentum.

We're just giving you a best case today in terms of trying to help with 2006 expectations.

And John, I think where you would really see the growth on the leasing side is -- our formula on the leasing has been that we have been a large originate of transactions, but our leasing strategy has been to hold only a portion of those transactions for our own account, roughly $40 to $50 million of CapEx a year on the leasing side of the business that we take for our own account.

And the rest we originate, take down, and then we hold those short-term, sell them to investors, and manage those assets for investors.

And the -- we're -- what we're doing through the Babcock venture is substantial expansion of our overall leasing and services strategy of investing in railcars, but we will continue to only hold a portion of those for our own account.

And where the growth will be on the -- where we originate and then sell to third party investors. and manage for investors, and the guidance earlier is that for this year we saw about $3 to $4 million of pre-tax growth coming from the expansion of these activities.

And as we look into 2007 and beyond, we think that number of $3 to $4 million pre-tax can get to a bigger number.

That's a very good point.

Let me just talk about -- just for one -- one second then, our basic business model in leasing.

We do own assets four an account.

As Mark says, we originate a lot of volume because we have a revenue -- a sales network.

And we have visibility into the marketplace for transactions that are available, plus we have the ability to place transactions as a car builder and leasing company that others don't have.

So we're trying to get more mileage out of that capability and spread our overhead in the other parts of our business.

We have become over the past several years, much more focused on asset management in the network part of our business where we are managing 130,000 cars for others, including our own 10,000 cars.

So, we emphasize the direct ownership, and yet we continue to build our own account and put those transactions on good long-term leases.

But when we work this model -- as we grow this model and you look particularly at the service side of our business, which is very much back-office oriented, we are very, very efficient service provider.

And the annuities we create from this business are very valuable in present value today, but they are realize in net income over time.

And so what we're really doing is migrating or mutating our business to get more efficiency out of it, and to reinforce that long-term annuity stream and asset management part of the business.

In a way it's a diversification, but also an enhancement of the more portfolio oriented model of leasing.

And we do see some upside there and changes in continued -- some continued evolution of our leasing strategy in 2006.

Okay.

And -- and -- I would much rather you manage the asset, not own the asset.

I have got no problem with that.

I think the returns on the margins are better in that regard.

But I guess the point I getting at is, do you still think that the appetite is there for that investment?

There certainly seems to be.

And then, as a follow-up to that, there seem to be more assets available to put in -- into management with the rails, and especially Burlington Norther announcing that they are largely getting out of the ownership of some intermodal equipment.

Or do you see things like that and making that piece of the pie much larger going forward?

I mean, you say $3 to $4 million is what you saw, you know, growth.

Can that $3 or $4 million morph into $10 to $15 million, or is it going to be a little bit slower growth than that?

I think that just depends on the relevant time frame.

We are talking about 2006.

I think Mark is talked about a realistic target.

There are in all of the things we said, though, some upsides strategically.

If we shift we're very liquid, particularly in our leasing company.

We have got a lot of punching power there.

So, if we see opportunities that are useful to refine our model, I think there's additional upside, but we're giving you, again, kind of a base case.

Our intention, however, is to move in the direction that we have been talking about here today, to -- toward an asset management model, an origination model, a service model, quality providing model, that reinforces each part of our business unit.

It helps us to originate new railcar transactions by selling railcars and leasing them to institutions which we then manage.

We receive fees and add value for the management.

Some of those cars get circulated into our repair network.

And we're growing our repair network.

So we receive multiple value points from this integrated model.

It's not unlike what aircraft engines and maintenance models do in other kinds of businesses.

It's a good business and we do intend to grow it.

So, we're just giving you the base case for this year.

Okay.

All right.

In terms of the backlog, you know, there's a lot of -- there's a lot of comment, that backlogs have peaked.

Now we're seeing more of a constant rate here, but the last couple of quarters we have seen kind of a continual drop in the backlogs.

I'm just curious, do you think we have just about seen the bottom of where backlogs will bottom out at this level?

Maybe begin to peak back up a little bit, or do you think you have another step function down in terms of the size of the backlog over the next couple of quarters?

I think there's still momentum in the reaction to the rail resurgence.

A lot of things going on.

Railroads are changing their pricing structure.

They are becoming much more profitable than they have been before.

Their recovery their cost of capital.

This is good omen, because they will have more confidence in reinvesting in their network, and that's got to be good for the supply industry.

Actually, backlogs have been relatively stable in our own segment, where we're highly focussed in intermodal.

There has been a pause.

We have explained some of the reasons for that pause, and we think there are good reasons for it and sound ones which we don't criticize.

That in fact helps us to -- helps both the buyer and seller mitigate some risk.

I think there's still going to be some legs in the market.

This has been traditionally a cyclical business.

There have been, however, supply and demand shifts that tend to effect more long-term -- the rail industry in a positive way.

Fuel efficiency, and fuel pricing is one.

The Asian phenomenon.

China is another.

And our [relatively] weak currency is a third.

Some of those forces stay in effect, I think the outlooks for rail is good and I think there is still a lot of momentum.

It can't go on and on and on forever with backlog growing.

There's a need for replacement demand in the 40 -- 40 -- 50,000 car range.

We think the next five years is going to be reasonably stable, in terms of our best estimate.

And I think that most industry analysts agree.

And there's going to be a very good period here, short of any major disruption in the U.S. economy from the risk factors that are obvious that everybody tracks.

Okay.

Thanks for your time, guys.

Thank you.

Mark Hatfield of Morgan Keygan, you may ask your question.

Yeah, just one quick follow up, guys.

You had mentioned at the end of August, the backlog was 9600 and we focused on that number today.

Can you give us any incite into up the backlog transpired at the end of Q1?

Last year?

No, for this year.

I mean you just ended your first quarter.

Did that backlog change much --

We have got another month to go in our first quarter, actually.

I'm sorry.

You are one month off.

I'm sorry.

It's okay.

You have got a good substantive point.

We haven't announced our orders, but we -- we have set a tone today I think of reasonable optimism.

We have not given any specific guidance --

Right.

I guess we -- you know we have made the comment that there have been those significant intermodal orders that have been placed since the end of the -- since the end of our third fiscal quarter, so you could imply -- you -- that -- that may have some implications for what -- what our backlog is today, the backlog today.

But again we haven't disclosed those figures.

We, of course, -- we've received over all orders since the end of the quarter, but no -- no intermodal orders since the end of our last quarter.

Okay.

Thank you.

Thank you.

Frank Magdlen of Robins Group.

You may ask your question.

Good morning.

A couple of questions.

How big would a syndication have to be on the Babcock deal for you to make it economic feasible to do that?

How many cars or dollar amount, or what?

Frank it's a good question in the -- in that it drives to the timing of railcar syndications.

We would see, probably a minimum of 100 to 150 million of equipment, so the implication of this is that the timing of these will -- historically we have syndicated more on a quarterly basis, and this could change the timing more to a semi-annual or an annual basis.

So there could be a little bit more -- little less frequently, and for larger amounts, and we would expect that, as an example that at the end of this quarter that's some of the reason for the lower deliveries that we will have.

And that it could also during the course of the year impact -- create a little bit more lumpiness between the quarters.

And we'll have a better feel for that when we have our next conference call as we submit our plans with Babcock on these syndications.

I think the important thing to keep in mind, is this is a fundamental business of which this syndication is simply the monetization in the financing mechanism that closes out a chapter.

We are very fundamentally, along with Babcock -- we are very fundamentally focused on the business of managing leasing portfolio, originating sound leases, putting cars on lease, maintaining re-marketability, doing all of the credit and other responsible organic things that have to be done to run a good leasing business.

So the syndication is a form of financing.

It's more efficient in many respects.

And it certainly fits with our model and we've had good compatibility with Babcock.

So far we're very pleased with the way that has worked out for us.

But -- I don't want to get -- I don't want to give the impression that the syndication is more than it is.

It's simply a part of the total picture of running a sound leasing company, and that takes good -- it takes a conservative credit perspective and portfolio perspective in order to do it safely.

Okay.

Two other questions.

On the backlog that you have, we used to talk about the surcharges, but I thought you had callers on some of that so that if you had a significant drop in commodity costs that that also got passed back to the customer.

Is that still correct?

Most of our -- most of the transactions in backlog have locked positions on -- through contract or have pass throughs on pricing.

There is so much closure to scrap surcharges that we would have callers associated with them but not in a material sense in the existing -- in the current backlog.

Okay.

And then is there -- two other questions.

What's the forecast for Marine in the first quarter if any.

And -- we'll take that one first?

And then also, what is the run rate also on the repair business now?

Has that gone up or it is still --

We're probably closer to about $30 million a quarter, per quarter on the repair and refurbishment in '06.

And that -- on the Marine side our -- our Marine -- I think -- I'm not sure that I have that right at my fingertips, Frank.

And maybe I best come back to that.

For the year, we would expect Marine to be in the $25 to $30 million range. but I'm not sure I have the break out between the quarters at my fingertips.

We have experienced some slight delay and -- in the Marine expansion, some -- somewhat to storm related and transportation related -- with regard to the new crane.

We are improving our capacity for through-put, and that should affect us in the -- I would suppose the Marine in the second half.

It's not going to have a meaningful effect -- material effect rather on the year's performance with respect to that change, though.

Okay.

And then -- that's it.

Thank you.

Frank Bisk of Pilot Advisors, you may ask you question.

Yes, hi.

Could you just give a little more color on -- I guess your major customer, or customer orders?

And in terms of, I guess, when was the last time there was a big order, and I guess there hasn't been one for a while.

I think you were saying there -- have you -- did you say there was going to be -- you think there would be one in '06?

Is that what you said?

Could you just clarify what is going on there on the intermodal side?

Let's see, this is still '05.

Right.

Calendar year.

Right.

We're just closing our '06 or '05 year into our '06 fiscal year, and sometimes we aren't precise about whether we say calendar or fiscal.

We do expect orders for our calendar, and fiscal 2006 intermodal car production.

We still have some space in the latter part -- in the second half of calendar 2006 that we have.

And we do expect -- we do expect orders either this -- in 2005 calendar or early in 2006 for that space.

The last time that we received a really large order -- Mark, do you want do comment on that?

I think that was back in the -- in the April, May time period, would have been the last big intermodal orders.

Our two largest customers are TTX and historically and BNSF.

We have a number of other smaller customers.

Babcock and Brown has ordered cars from us in the past, but those are the two principal buyers of double-stack cars in North America today.

There are many users of double-stack cars and we have not generally made a market for leasing in that car because it hasn't been necessary.

Well, we could make a market in leasing for the car, but we haven't done it.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] One moment, please .

Sean McDaniel of SNM Research, you may ask your question.

Yes.

Good morning, guys.

I guess I hopped in the call a little bit late.

On the backlog side -- just to beat this horse a little more -- do you have a calendar third quarter backlog number?

So it's Sept 30 -- what your backlog was?

I know what your [log] 31 was, but do you have it at September 30, by chance?

We haven't disclosed our September backlog to -- so we haven't -- we haven't disclosed that number.

Okay.

Can you tell if it's -- do you happen to know if it's higher or lower than August 31, or you don't even want to say that?

It would have been slightly lower than August 31.

Great.

Okay.

And then, also, comment a few minutes ago.

I think I heard someone talking about replacement cycle.

You guys were talking and replacement cycle.

Did I hear you say 45,000 replacement cycle is what your forecast is or 50,000 to 55,000.

If you just --

It was a pretty sloppy range that I gave.

And it's sloppy because people don't seem to be able to agree on it.

I think a generally accepted replacement demand -- particularly given the propensity of railroads in this kind of environment to add the higher capacity cars is probably closer to 50,000 units a year.

Closer to 50 than 55 you think?

Yeah, probably.

Okay.

Just a rough -- that's a rough number that people throw around.

Okay.

I think the aggregate, or so the forecasted data as far as going forward, is about 60 to 65,000 or so for North American an aggregate.

In addition -- so there's replacement of 15 and maybe another 10 or so?

Is that still a good number to work with or do you think it's come down a little bit?

Those are industry statistics that seem to have been adopted.

And I think that's generally the outlook.

Deliveries are -- are -- in North America, for 2006, in the 65,000 car range, dropping down a little under 60,000 in 2007.

And more normalized toward a weaker year 2008, 55 to 60,000 in 2009, 2010.

So you may have overstated it slightly according to ARCI and Global Incite information that's regularly published.

Just a cautionary note.

These statistics are generally very reliable longer term.

They often miss cycles.

So, in a shorter term, they can be very accurate because we know what is going to be produced, but they are affected by decisions on run rate and through-put.

And then as you get out in the longer periods with individual years they can be higher unreliable just because of the nature of whatever cyclicality exists, but I think that they're -- generally the outlook is very positive.

And the reasons for that are fundamentally much different than they have been before, and seem to argue that some of the cycle has been taken out of the business.

At least while these demand shifts have -- remain in place.

China, fuel, and U.S. currency.

All right.

Would you say that it competitively -- maybe just as a final question then on the industry.

It seemed like -- would you say competition is shifting more towards people focusing on quality and specific features, you know, away from so much price competition?

Or is price competition heating up?

Or sort of what is going on with respect to competition.

Price competition is always keen in this business.

There are a number competitive alternatives, all good ones.

And the financial strength of the participants has improved with the economic recovery.

And with public financings that have been done in the case of Greenbrier and Freight Car America, and others.

The pricing is always important.

However, these cars operate in a hazardous environment in some cases.

So, safety and quality are very, very important to the customer base.

And there is a trend to -- particularly in the operating departments of railroads who run all cars, whether they are owned and leased by shippers, to really pay attention to the life cycle costs of cars.

And so there is that trend, but pricing is always important on the front end and can't be -- and cannot be over -- overemphasized.

All right.

We do get a -- we believe we get a small premium for our quality.

We have had a good quality reputation, but that's not something that you want to rest on that loral.

You have to be competitive in the marketplace every day.

Great.

Thank you all.

At this time I have no further questions.

Thank you very much for participating in today's conference call and for your interest in Greenbrier.

Have a good day.

Thank you for participating in today's conference.

You may now disconnect.