Greenbrier Companies Inc (GBX) 2006 Q1 法說會逐字稿

Welcome to the Greenbrier Companies first-quarter 2006 earnings conference.

Following today's presentation we will conduct a question-and-answer session; until that time all times will be in a listen-only mode.

At the request of Greenbrier Companies this call is being recorded for instant replay purposes.

At this time I would like to turn the conference over to Mr. Mark Rittenbaum, Senior Vice President and Treasurer.

Mr. Rittenbaum, you may begin now.

Thank you and good morning and welcome to our Greenbrier fiscal 2006 first-quarter conference call.

After we review our earnings release and make a few comments about the quarter that just ended and the outlook for 2006 and beyond we will open it up for your questions.

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

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

Today Greenbrier reported a very strong first quarter of our fiscal 2006 with net earnings of $8 million or $0.51 per diluted share and an EBITDA of 23.4 million.

This was all revenues of 186 million.

Both manufacturing and leasing margins grew substantially during the quarter as compared to Q1 of 2005.

We also updated our 2006 annual earnings guidance to a range of $2.30 to $2.45 per share.

We are encouraged by our solid results this quarter as we saw the operating momentum from the second half of fiscal 2005 carry into 2006.

The principal driver for these stronger earnings was higher than anticipated margins in both of our manufacturing and Leasing and Services segments and in particular on the manufacturing side of the business as we benefit from our global sourcing efforts and other cost reduction initiatives combined with efficiencies from our Mexican operations.

These efficiencies have come on significantly faster than anticipated now that the Mexican operations are under our day-to-day management.

Manufacturing revenue for the quarter was 165 million compared to 200 million in Q1 of '05.

During the quarter we produced 3,200 new rail cars.

This is comparable to the 3,400 units produced in Q1 of 2005.

Yet our third-party deliveries during the current quarter were 2,400 units as compared to 3,200 units in Q1 of '05.

These third-party deliveries in the current quarter compared to the prior quarter, again the 3,200 units delivered to third parties in the current quarter compared to the 2,400 units in the prior quarter, was the reason for the decline in manufacturing revenues.

I'd like to explain a bit about the difference between the units produced during the quarter versus the units delivered.

Again, we produced 3,200 units during the quarter and delivered 2,400 units to third parties.

During the quarter 200 units which were produced went into our lease fleet; as well there was an additional 600 units that we produced that went into assets held for sale that will be delivered -- that will be sold to third parties in later quarters.

So this is merely a timing difference between production and deliveries.

Until those units are delivered to third parties they're not included in manufacturing revenues or in our third-party deliveries.

All these units have contractual lessees or third-party buyers and, again, we will sell them in future periods.

And while we hold these units we earn rent on them and they have a positive effect on our earnings.

Our manufacturing margin for the quarter was 13.1% compared to 8.8% in Q1 of 2005.

The increase in margins was the result of a favorable product mix, efficiencies of long production runs, cost reductions from our global sourcing efforts, and significantly improving margins at Carcarril, our Mexican operation, which continues to perform very well.

About 85% of our Q1 deliveries were intermodal doublestack cars, whereas for the year as a whole we would anticipate closer to 60 to 75% of total deliveries to be intermodal, similar to our prior fiscal year 2005.

The higher percentage of intermodal cars in Q1 was principally the result of the timing differences that I previously discussed where many of the 600 cars that are being held for sale in future quarters are conventional railcar type rather than intermodal car types.

Turning to our leasing and services business, we remain excited about this business segment.

Our revenues for the quarter grew by over $4 million to 21.8 million and our margins grew to 52% consistent with our most recent guidance and up from the 41% in Q1 of '05.

Increases in equipment utilization for both the owned and managed fleet, additions to our owned lease fleet and rent earned on rail cars while they were being held for future sale helped drive revenue and margin expansion.

Results of pre-tax gains on equipment sales in Q1 of '06 are 0.6 million compared to 0.1 million in Q1 of '05.

Owned leased fleet utilization is now at 97%.

Our fleet consists of 11,000 owned units and 131,000 units for which we provide management services.

During the quarter additions to our owned leased fleet were over $40 million and assets held for sale grew by an additional $40 million, both of these generating a positive impact to earnings.

We see room for additional margin expansion in this business segment.

This quarter we continued to gain financial strength from a cash flow perspective as well as our cash flow from operations was 8.3 million for the quarter compared to a negative 22.5 million in the prior year's Q1.

Additionally, we ended the first quarter with a cash balance of over $100 million.

As we look forward into our fiscal year, as we noted in our earnings release, our earnings guidance was of a range of $2.30 to $2.45 per share.

Our earnings for the fiscal year will be most dependent on efficiencies of manufacturing line changeovers, product mix and production rates for the second half of the year and production which will go into our owned leased fleet as part of growth initiatives on this side of the business.

We will continue to deploy cash in highly liquid assets which we can monetize when we choose.

This capital deployment will occur both in CapEx, which will go into at leased fleet, and rail cars, which we will temporarily hold then sell to and manage for third-party investors.

While we hold these assets they generate cash-on-cash returns in excess of 10% per annum and are accretive to earnings.

We anticipate generating positive cash flow from operations for the year as inventory and receivable levels either stabilize or decline.

Our balance sheet and liquidity position are poised to take advantage of growth opportunities.

We remain a very liquid company with over 100 million in cash and undrawn lines of credit of 150 million.

I'll now turn it over to Bill to talk more about our performance and guidance and some of the other metrics that we look at as we go forward throughout the year and as we manage the business.

After Bill talks then we'll open it up for questions.

Thank you.

Thank you, Mark.

While railcar backlog declined during the quarter otherwise Greenbrier turned in a very strong operating performance buoyed by increased margins in both our manufacturing and leasing segments, as Mark has indicated.

Our operating momentum was driven by long production runs of core products, a shift of production from our Canadian to other North American facilities primarily to Mexico, and continued benefits from global sourcing as well as strong productivity at our facility in Mexico and at our Gunderson facility in the United States on the manufacturing side.

I know that there has been some confusion and concern in the past about the metrics of backlog and I'd like to make a couple of comments both on the backlog and on the analysts -- or the estimates that Mark has just discussed earlier this morning, a range of $2.30 to $2.45.

We are in last stages of negotiation on two major orders and we expect our backlog to increase significantly in the current year.

We've maintained our core market share in doublestack cars.

We think we are well positioned to take advantage of this market as its fundamentals remain strong and as these fundamentals drive other major orders which we expect later in the year.

We will continue to remain disciplined to have production space available to meet the required demand when additional orders for 2006 production are placed.

At the same time we've prepared other car types for sale if our projections do not materialize for this market.

Visibility and guidance numbers assume the backlog will remain at approximately the current level, that is the levels for the quarter just announced.

Although I've said that we expect those to go up during the year and that we're working on significant orders currently.

Backlog is one metric which we look at in the Company.

It's a metric that's an important metric because it can have an effect on our production flow and the rate at which we're running our facilities.

We have announced that we are emphasizing our facility in Mexico versus the Canadian facility and, otherwise, we believe that we will be able to maintain our production expectations talked about during the last conference call in light of visibility we do have in negotiations that we have undergoing.

With respect to the earnings guidance that Mark spoke about today, in the last conference call we said that we were comfortable in the range of the consensus guidance and Mark has given more detail on -- and narrowed that range somewhat.

I'd like to -- I'd like to talk just briefly about how we set these numbers and how we see them.

We also said that -- during that last quarter that we believed we could meet these expectations on a -- without a lot of top-line revenue growth and, indeed, during the current quarter have demonstrated through stronger operating performance in both leasing and manufacturing that this is entirely feasible.

I continue to be comfortable with analyst testaments based on the organic operating business as it's currently constituted without major changes.

However, we've also said that we've been accumulating cash for strategic purposes and we are looking at opportunities in each of our business segments, the segments relating to not only manufacturing and leasing, the two major GAAP segments, but also our repair business, wheel and axles and those assets we manage for others.

Should we be successful in deploying cash in an efficient manner in any of these areas either by additional organic initiatives or by acquisition this would affect positively our earnings outlook during the year.

Greenbrier, turning to its manufacturing business, has increased capacity at its facility in Mexico and it's achieved productivity at that facility exceeding our original expectations for the first year of operations.

We expect to reinforce the success by continued investment in the facility.

In addition we have plans to build to additional car types which we are not now building and we'll provide more information on these plans when first orders for these cars are confirmed and announced.

Both cars are cars for which we have existing but recently improved designs.

Core demand for transport of containers, the product that continues to be the driver for doublestack business, continues to have a strong outlook and in 2005 ended the year up 8% year-over-year in the United States, 6% on Canadian railroads.

We expect demand will remain high in 2006 and 2007 for doublestack cars which are the most efficient way of carrying containers on railroads and in which we have maintained a 60% market share.

A peak base of approximately 120,000 units in the national fleet, there's a need for about 10,000 units per year to accommodate growth at present levels.

It's driven by truck traffic, diversion, increased international trade both export and import, and global sourcing trends.

During 2005 Greenbrier completed a large number of initiatives that added strength to our balance sheet strengthened our management team and strengthened our competitive capabilities.

We are in a position to grow in all of our business segments both organically and by acquisition including the two major parts of the businesses, railcar repair and railcar fleet management, which we do not break out by GAAP.

Again, our guidance expectations do not assume a significant growth from acquisition.

And if we're successful in either additional initiatives organically or through acquisitions we would expect our earnings guidance to be revised later in the year.

Turning now back to you, Mark.

Thank you, Bill.

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

And we'd ask given the number of people participating in the call that people perhaps limit to one or two questions and only come on the line once, please.

(OPERATOR INSTRUCTIONS).

Shaun Nicholson, Kennedy Capital.

Good quarter.

Just had a couple quick questions since I know we have a time limit.

CapEx, do you have a run rate for that going forward?

We would see our leasing CapEx this year run about 60 million and our manufacturing CapEx run about 15 million for the year.

I'd like to comment on that, Shaun.

Again, just to remind you that one of the things we've said consistently is that with raising of substantial amounts of cash with recent offerings that we are investing short-term cash in our leasing fleet.

And indeed you can see that substantial investment has taken place as we said it would.

That's a very liquid and fungible source of cash which we may redeploy in more permanent assets down the road.

So the 60 million Mark includes or talks about reflects a mixture of both.

Okay.

And as far as margins, I know you guys obviously jumped significantly due to Mexico.

Is that -- do you see those leveling off into a similar range of 13% or do you give a little less than that going forward?

I think, Shaun, the margins -- the actual margins for the balance of the year and going forward will be somewhat dependent on the factors that I've laid out in the earnings guidance and that would be product mix, production rates and efficiencies of line changeovers.

And so within that range that we give I would say that we could have some margin compression at the lower end of the range would imply a little bit of market compression certainly within the ranges or better than the ranges that we gave previously in the year of around 10% gross margins and on the upper end of the range with efficiencies and product mix and so on then we would be closer to or exceeding the 13%.

Okay.

And one more quick question and I'll get back in the queue.

As far as the rent you earn on the units held for sale, did you say they're -- how much did you say for the quarter did you earn on those units?

For the quarter we didn't break that out.

I think we do have some information that will be forthcoming in our Q, but the number was about $1 million.

Shaun, by background that is normal recurring.

Part of our business to remind folks most of the lease transactions that we generate on new rail cars we generate well over 100 million, probably closer to 150 million of leased transactions on new rail cars each year.

We only keep a minority of that for our permanent lease fleet and the balance of that we sell to third-party investors and we manage those assets for those investors.

And we typically hold those assets that we are selling to the third party-investors short-term and then we earn the rent on those rail cars while we are holding them.

And so this is a normal and recurring part of our business.

Wendy Caplan, Wachovia Securities.

Just a clarification first, if I might.

In your first forecast range, I believe you said that your range of $2.30 to $2.45 assumes no additional orders, and the difference between the bottom of the range to the top of the range is the manufacturing margin.

Is that correct?

Wendy, if we gave you that impression, I'm sorry.

We do expect additional orders and we expect our backlog to increase.

The range is affected more by the several items that Mark mentioned in his discussion; it will be the product mix and it will be a few other things.

You want to address that?

I think the product mix, line changeovers and production rates.

So with all the factors you'd be correct, Wendy, that it would more be dependent on the manufacturing side of the business both in terms of the margins that would result out of that and the actual number of deliveries, production rates would imply the actual number of deliveries.

I hope that answers the second part of your question.

We should explain that there is a direct connection between recognized revenue and -- on the manufacturing side that is GAAP recognized revenue and margin and the amount of investment that we divert into the leasing business because we don't recognize those margins at the time that the assets are acquired and we don't recognize the revenue.

That is to say that when we put the cars in the fleet we don't make the revenue line.

That mix that goes into the lease fleet can affect revenue and can inhibit top-line growth, but it's a positive thing because we get a very positive arbitrage on the short-term use of the cash, the option having that cash invested in much lower rates of return while we're waiting to deploy it more productively.

So this could be a forth driver and that would be the only exception to the manufacturing driven aspect of your question, Wendy.

That's fair.

You didn't mention Babcock & Brown.

Can you talk about how important that was, that venture is in terms of earnings this quarter and what kind of expectation you're having for that venture for the year?

And finally, what are you exploring -- other such ventures with other partners?

Let me take a general kind of at that.

We are aggressively reviewing our leasing strategy for 2006 and 2007 and we expect to continue to grow our managed assets and our leasing assets.

And certainly Babcock & Brown is a very important foundation point to our leasing strategy.

I'll turn to Mark.

I don't think we are giving specific guidance at that level of income contribution quarter-by-quarter.

No.

I think in our last call, Wendy, that we said maybe that we expected the investments in the rail cars from the Babcock venture to generate several million dollars of pre-tax income for the year and that is unchanged.

The contribution that the venture made this quarter is reflected through the leasing revenues, and by that I mean the additional investment that we made in rail cars that would show up on the leasing revenue side.

We did not dispose of any of those cars during the quarter so it did not show up either in gains on sales for non Greenbrier built cars or in manufacturing revenues for cars that would have been built by Greenbrier.

So it's perhaps a long winded way of saying it did not have a very material effect for the quarter because, again, we do not dispose of any of those assets, it just contributed to margin, overall margin expansion.

For the year our guidance as to how much it would contribute to overall pre-tax earnings from the leasing side is unchanged.

But it is very important, Wendy, as we've said on several occasions that it increases our diversification -- are product diversification including products other than those that we manufacture.

It also is a useful place to put short-term cash and that has had a very positive effect because we've been able to realize much higher rates of interim rent income on those assets than if we had simply parked the money we had raised on the debt market in CDs.

Thanks.

And if I might overstay my welcome for one more.

You mentioned Europe in the press release.

Can you give us some details on how it's getting better?

Probably no more than you read in the trade journals.

The European economy is strengthening.

We've had a particularly -- we've been blessed by having an operation that has achieved more than reasonable expectations given our peer group over there because the market did go into quite a slump.

There are in several of the specific product lines that we manufacture some resurgence and particularly in the U.K. market we've had a lot of recent success.

So we expect them to be a little bit stronger than we had perhaps suggested in the last conference -- the last quarter.

Thanks very much.

Peter Nesvold, Bear Stearns.

Very strong quarter.

Really very impressive, the gross margin line in particular.

Can you give us a sense for how many deliveries you're expecting in fiscal second quarter?

Peter, this is Mark.

I can give a sense of that.

I think we're going to try to less focus on the quarterly side rather than the yearly because of the timing differences on the lease syndication activities.

In many cases or of course in all the cases the longer that we hold onto rail cars before we sell them then we're getting the benefit of accruing the rent and railcar values are not diminished in this very short-term that we're holding the cars.

But I'll give you some general guidance on that.

And I'd say for the whole that we would expect that the year to -- the rest of the year to play out fairly evenly against sticking with as a baseline, as we said earlier in our last call, as a baseline the assumption that we would be around 12,300 to 12,400 cars.

The baseline of that we would expect the next three quarters to play out fairly evenly.

Perhaps Q3 and Q4 to be a little heavier than Q2.

Okay.

And you mentioned possibly ramping up capacity to other car types.

Can you tell us what those car types are?

We'd prefer not for competitive reasons to do that today.

However, as I said earlier, we will announce on the commencement of the lines and the base orders we will be making an announcement on that.

When you move over or when you change lines or ramp up -- I'm sorry, I sort of cut you off there.

I'm sorry, I actually interrupted you.

We have manufactured these cars and we do have existing but improved designs on the cars that we're going to be building.

So it's not a new car to us.

It's one we haven't built before is what I mean.

Actually -- okay.

Historically when you've changed lines over, what's in the magnitude of the cost?

If we take sort of this gross margin in first quarter -- I'm trying to get a sense for how much of a magnitude hit would it be if you switched over one line, if you switched over two lines -- that sort of thinking?

It's difficult to say in abstract terms because it varies from car type to car type.

But I didn't say that we were going to switch over materially lines.

I mentioned that we had added and were intending to add capacity in our Mexico facility.

Mark, do you want to comment on that?

Having said that, Peter, we will have some line changeover during the year, but it will partly be efficiency when you talk about the margin impact.

Clearly there will be some downtime and some learning curve, the other side of the equation on the margin side of course is pricing on the rail cars themselves.

So if you're looking for specifics of the margin impact, probably in the short run -- we can't give the specific -- in the short run there is a learning curve, but in the longer run we'd certainly expect that on all of these car types that they would be at or exceed other margins or margins that we're realizing for cars we're currently building.

Would be fair to say that the two orders you have in the hopper, possibly that most of those would be non intermodal?

No.

Okay.

A 50-50 mix or can you give me just a rough --?

I really can't.

I think it's tempting to -- it could be tempting to read into what we're saying that we're being cautious by opening other products.

And in the past we've shown -- demonstrated a very strong capability to do that.

We're doing it for competitive reasons as much as other reasons.

We want to demonstrate that we have that capacity to reduce the temptation of our competitive brethren to do the same to us.

So we are going to be building other cars for mixed reasons.

I continue to be very positive about visibility and particularly over a two-year time frame on the doublestack side and we intend to very ferociously defend that product.

So I think that we are looking at a positive development that gives us additional products that we can build, reinforcing truly the successes we're having in the facility in Concarril where we're exceeding our expectations.

So I think at this point, Peter, for competitive and confidentiality reasons we'd prefer not to discuss or disclose any more about the orders that we're in negotiation on.

Completely fair.

Okay.

I'll ask one quick clarification and then I'll hand it off.

I guess when I look at the Q&A from the last quarter, someone tried to nail you down a little bit closer to what your guidance actually was and at the time you said you thought consensus was a good target.

And at the time consensus was $2.43; you're coming out of a really strong fiscal first quarter here.

Should we be looking at the high end of that range?

Should I just sort of be assuming a little bit of conservatism maybe in that range given that that's sort of been the history here?

Peter, perhaps there was a little bit of confusion about that and maybe different people were looking at different consensus estimates at the time.

So I saw your note; we were trying to go back through our notes on the call, that at least the consensus numbers that we had in front of us were closer to where the consensus is today and that was the $2.34 range.

So when we made that comment back on our last call we were more focused on that number and I apologize if that has caused any confusion, but that's what we were comfortable --.

So in any event, our range implies that we're comfortable today with the current consensus estimate and that there is upside from that estimate.

Okay, thanks for the time.

Frank Magdlen, Robins Group.

Good morning, gentlemen; that was a nice quarter.

For clarification could you just tell us what interest expense should be for the balance of the year by quarter approximately?

I frankly expect it to run around 6 million or a little bit greater than 6 million a quarter.

So you had a favorable currency for the quarter --

Well, we did have a little bit favorable FX in there.

We had a foreign currency translation gain of several hundred thousand, but the other thing is that we had a debt offering, a 60 million debt offering that was done at the very close to the end of the quarter.

So that incremental debt really didn't show up for much of this quarter but it will in future quarters, and so that's what brings the number up.

The other thing we talked about in the past was the lumpiness or the timing of the leasing activities and syndications.

And we were looking for 3 to 4 million from Babcock & Brown.

Is there going to be a trigger event that says this is going to happen in the second or third quarter?

No, Frank, I think we're going to be more -- manage it less on a quarterly basis and more managed to maximize the return on investment.

We do expect to monetize much of that investment during the course of the year that the timing of that is likely to be throughout the year.

So the leasing revenues are going to be higher and more consistent?

Yes.

I do -- when we do monetize these you are going to see gains on sales come through and that will be where much of that 3 to 4 million shows up.

But I couldn't give you today the more specific guidance as to the breakout of the gains on sales between quarters.

Some of this will occur in Q2.

Okay.

And then the tax rate for the year going forward?

Around 40%, upper 30s to 40%.

So no material change there.

Thank you.

J.B.

Groh, D.A. Davidson.

I wanted to -- at the risk of beating a dead horse -- get a little more clarity on this kind of backlog number -- backlog assumption in the guidance that you talked about.

I thought I heard you say that it would remain stable.

Is that not correct?

Let me try it again.

The earnings estimates that we have given, the range that we have given, assumes several things and they're important.

The production -- general production guidance that Mark has talked about and certain fundamental mix and run rate assumptions, it also assumes backlog remains at the level that it currently is or improves.

If the backlog were to decline dramatically from current levels.

If we were to continue a trending downward level of backlog we would begin to examine production rates.

We do not expect that to occur.

The way I would interpret what I've just said is probably different than -- it may be different than what some because of the way we run this business what I interpret this as a very positive statement because we have expectations that we're going to improve our backlog and we also have included in this range of 2006 performance a static base assumption that we're not going to have any accretive acquisitions or organic initiatives which we have ample time to deploy during 2006.

So there is some upside in this range.

I think that that's basically where we are with the assumptions.

Okay, thanks.

And then on the leasing and management side, how has the head count changed there over the last 18 months?

Remained pretty stable?

Yes.

Yes, there's been no material change in the employment levels on either side.

A.

Thanks.

All my other questions have been answered.

Thanks a lot.

[Cort Dignan], Fidelity.

Great quarter.

I was going to ask about Europe -- Wendy beat me to it.

I wonder if you could shed a little bit more light on your sourcing initiatives and whether there's more to it from here or whether you kind of have gotten it all done or what's the outlook there?

We certainly expect more.

It's a long distance run with sourcing initiatives, but we also see it as a strong platform, a foundation point for growth initiatives -- organic initiatives.

We see business opportunity to spin out of the sourcing.

Where we are in the sourcing so far is we've supported principally our Gunderson facility in the Pacific Northwest which is a flagship manufacturing operation.

We have begun shipping out components to through the network of the other manufacturing locations and, to a lesser degree, into our repair facilities.

We have not fully exploited opportunities yet in Europe, but we intend to see growth in each of those areas I just mentioned.

Great.

Again great quarter, guys.

Thanks.

Art Hatfield, Morgan Keegan.

Just a couple, again, clarifications for me.

I'm probably a little bit slower than other people.

But in the quarter you delivered 2,600 units and you're holding six that will be delivered later.

In your backlog number of 7,100, does that include the 600 units?

No. if they are produced they are removed from backlog, so backlog is only what's remaining to be built for third-party customers.

Backlog does not include any units going into our leased fleet as well.

Okay.

So you have in essence 7,700 units in a revenue backlog that you'll recognize for revenue going forward?

That is correct.

Okay, the other issue too is just to kind of get into your heads a little bit about your confidence going forward.

You did mention that you hope that -- or you expect backlog to increase and I know you've gone over this several times.

But given what you talked about expectations for production going forward and deliveries for this year, that would imply that you're looking at levels of orders that are -- really should be an excess of the backlog that you currently have.

Is that a fair assumption?

I'm sorry.

Can you repeat the question?

You had mentioned -- Bill had mentioned his confidence in the ability for the backlog to grow going forward.

If I look at your production assumptions for the next couple quarters and your delivery assumptions for this year, that would assume in essence if you got no more orders you would work down that backlog in essence to zero this year.

If you assume the backlog is going to grow, isn't it correct to assume then that you're looking at potential orders that are in excess of what your current backlog is?

Yes.

Okay.

Thank you.

I'd just like to say the obvious, that these are all forward-looking statements.

These are not orders, we haven't announced them.

We are in advanced negotiations, but it's not a deal till it's done.

So there is a risk factor in that.

But the answer to the question is yes.

And that's fair.

And I'm just trying to get a sense of how and where your confidence comes from and your answer is very helpful.

Thanks guys.

[Gary Hames], Sage Asset Management.

Just to kind of follow-up on the same general topic, you talked about the upside should there be acquisitions.

But I wanted to understand on the major orders that you talk about that are in front of you where you're in serious negotiation, if you were to get your traditional market share and on those orders and should they come through, is that what you need to do to get your guidance?

Or if that were to happen there could be upside to the guidance from a production standpoint?

Thank you.

So the question being if we get these additional orders?

In your traditional market share would that constitute making the guidance you put out today or would that -- is the assumption in the guidance something less than that so if you got your traditional share and those orders came through there could be upsides from a production point of view?

The real relevance to us in our production -- the real relevance to us in our backlog and in our order book is our production rate and the degree to which our visibility for the fiscal year is yet uncovered or isn't completely covered by the existing backlog.

So if we were to change our production rate by reducing our production rate that could be a driver.

So with respect to the year we're currently in, 2006, we have a very substantial remaining backlog in 2006 which gives us very strong visibility.

Having ad on orders will simply allow us to continue or even potentially increase production rate were we to receive those orders.

So it's not that we're relying on these orders themselves except as it relates to how we're operating the factories.

In our current frame of reference, given the work and the pipeline we have, we feel very comfortable with the guidance we've given both on production and on earnings.

Great, thank you.

Adam Thalhimer, BB&T Capital Markets.

I wanted to ask a question about the assets held for sale.

I think you said that's about 40 million in revenue.

Is that right?

There was about 40 million in additions to assets held for sale during the quarter.

If you would -- Adam, if you'd look at the balance sheet you would -- it's labeled railcars held for sale, and included in that figure as of November it was over 100 million in railcars held for sale compared to roughly 60 million at the end of August.

Okay and when those are picked -- they're then booked immediately as manufacturing revenue?

They'll be booked into -- to the extent they were cars built by Greenbrier they will be recorded as manufacturing revenue and margin.

These do include some of the cars in our lease -- that these do include some cars from our Babcock venture that were not built by Greenbrier.

The ones that were not built by Greenbrier would be those which show up as gains on sale rather than manufacturing revenue and margin.

Okay, but the 600 that you produced and placed in assets held for sale under contracts, those will be recognized --?

That is correct.

-- as manufacturing revenue when they're sold?

And then what accounts for that timing difference?

Is it just that the rails are so busy they don't even have time to send a locomotive to your plant to pick these things up?

All these cars have been built.

There are either two types of things.

There's finished goods just being that as an outright sale to a third-party customer where the cars are in transit from the plant to a delivery location and they just have not reached their delivery point and so they are in transit.

And that would just be like that's a small piece.

The other piece of it is railcars that have been built and placed under lease and the cars are all earning revenue, but we package those up into bigger transactions, into bigger bundles and sell them to third-party investors and manage those.

And so, the timing difference is merely one of the timing between when we originate a lease transaction and when we syndicate it.

Let me just pile on that because of the surplus cash position we currently have and the financings we've done, it's to our advantage to build a large portfolio of assets held for sale.

These are very liquid assets and can be sold at the time we wish to syndicate them.

If we chose we could take some of those and put them in our permanent leasing fleet.

But these are very liquid assets and they are a source of very positive income which is a good alternative to a lower yield security investments.

So on $100 million arbitrage that we're getting on interim rent from these (indiscernible) is very, very key to our original decision to borrow to tap the debt markets.

Okay.

But in terms of the 600 cars, those are under contract and they're just kind of waiting to be picked up?

Absolutely.

And in fact, of that 100 million there was the 600 during the quarter and there's a couple of hundred that were also carryovers from prior quarters too.

So there are these -- even a greater amount included in that 100 million total.

And then just your current productive capacity, it's around 14,000, is that right?

Yes.

And then you talked about increasing your production in Mexico.

What would that take your total productive capacity to?

We don't look at it that way because we are deemphasizing our Canadian facility while currencies remain in their current profile.

I think we could build the cars in Canada but we're basically saying while we want to keep that factory open and we intend to build some cars up there we don't intend to use its full productive capacity.

So how would you answer his question?

I'd leave it at that and say that if we can bring on additional in Mexico maybe we'd be talking about another thousand units or so.

Great.

That's all I needed.

Thanks a lot.

[Sean McDaniel], [S&M] Research.

Good quarter.

I wanted to ask given the one month lag between yourselves and the calendar year end, if you could provide any sort of guidance or commentary on what you think orders for the industry were for the fourth calendar quarter?

We don't have those statistics.

They haven't been published yet and we don't have -- so we can't answer that.

We feel and it's consistent with earlier forecasts for the year and I think it's, as I recall, somewhere in the 65,000 unit range for the year.

And in going forward, I know I had asked this question last time.

There were some issues about -- you said there was some disagreement within the industry.

I know -- can you talk a little bit about the forecast for full year production or for orders next year or I guess for the current calendar year what we're looking for?

I think we had talked about 60,000 to 65,000?

For the industry you're referring to?

Yes.

The only thing I think we were -- maybe we confused the issue by talking about the difference between orders and deliveries.

Right.

And so the 65,000 units that we gained or that bill referred to would have been deliveries for the year and --

Yes.

The current industry forecast is around 65,000 for the year, again, which would be very close to the actual for 2005.

Okay.

Very good, thank you.

George Melas, Lord Abbett.

You talked quite a bit about the importance of the production rate.

Could you maybe give a bit more light, and I'm not sure you can, on the production capacity in each of the three plants and what you manufacture in each of the three plants and how you think that's likely to change especially as you add capacity which seems to be in Mexico?

Sure.

Our primary doublestack facility is in Portland, Oregon and currently we are building only doublestack cars in Portland, Oregon.

We have a backlog at that facility into -- well into the second half of our fiscal year.

We are also running one line of doublestack cars at a lower production rate than is the case in Portland in our Mexico facility.

We have built doublestack cars in our Canadian facility.

We are not building them there today.

And basically that production has been shifted -- that product emphasis has been shifted to our Mexico facility.

We are building conventional freight cars at our Canadian facility, primarily forest products cars, and we're building conventional freight cars in our Mexico facility.

As far as the actual numbers, I think we published those before Mark and you made --.

I think we'd prefer not to break down the rated capacity among our various facilities for competitive reasons and otherwise.

And as Bill mentioned, those rated capacities are dependent on a number of factors.

So we'd again prefer not to break down capacity and actual run rates between our various facilities for competitive reasons as well.

And in Mexico, do you need added space in order to add some line [rates] and capacity or would you have the capacity within your existing footprint there?

When we acquired the rights to the facility we had capacity that we weren't using and we're continuing to deploy that.

And there is also -- we're also looking at other options in addition to that facility.

Okay.

So in a way if you add capacity in Mexico it probably would not be -- you would not have to disrupt the production process on your two existing lines there.

No, that is a positive thing about our Mexico facility.

We have some flexibility there by virtue of our long relationship with Bombardier and that facility has some size and resiliency that is attractive and we did acquire that at a very attractive value as well.

I'm showing no further questions.

We appreciate your participation on today's call and thank you for your interest in Greenbrier and have a good day.

Thank you and goodbye.