Greenbrier Companies Inc (GBX) 2006 Q2 法說會逐字稿

Hello and welcome to today's Greenbrier Companies second quarter 2006 earnings release teleconference. Following today's presentation we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). At the request of Greenbrier Companies, this conference is being recorded for instant replay purposes. At this time I would like to turn the meeting over to today's host, Mr. Mark Rittenbaum, Senior Vice President and Treasurer.

Thank you very much, and good morning and welcome to our fiscal 2006 second-quarter conference call. After I make a few comments about our earnings, I will then turn it over to Bill Furman, our CEO, to make some comments about the quarter as well, and then -- and [about] the outlook, 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 1995. Throughout our discussion today we will describe some of the important factors that could cause our actual results in 2006 and beyond to materially differ from those expressed in the forward-looking statements made by or on behalf of Greenbrier.

Today, Greenbrier reported a solid second quarter, with net earnings growing to 8.6 million, or $0.54 per diluted share, EBITDA growing 66% to 29.8 million on revenues of 236 million, and our EBITDA margin grew 80% to 12.6 of revenues. All these percentage increases are comparing Q2 of '06 to Q2 of '05. This earnings and EBITDA growth was driven by significant margin expansion in both our Manufacturing and Leasing & Services segments.

The current quarter's results include a onetime charge to interest expense of 0.7 million pre-tax, 0.4 million after tax, or $0.02 per diluted share. The charge resulted from the Company's redeeming all the shares subject to mandatory redemption of our Canadian manufacturing subsidiary for $5.3 million. These shares of our Canadian TrentonWorks manufacturing subsidiary were originally held by our minority investors up there, and they are now all redeemed.

The Company's effective tax rate for the quarter was higher than our norm at 46.9%. This compares to 41.4% in the second quarter of fiscal '05 and 38.6% in the first quarter of fiscal 2006. The increase in the effective tax rate is due to the mix of pre-tax earnings among our various tax jurisdictions, [minimum] tax requirements in certain of those jurisdictions, and operating losses for certain operations that are (indiscernible) the tax benefit. We anticipate that the tax rate for the balance of the fiscal year will be close to that realized over the last several quarters of 39 to 42%, and the difference in the tax rate for this quarter was effectively about a 5 to 6% -- $0.05 to $0.06 share sewing. And we expect, as I say, a different range of taxes of 39 to 42% going forward as the result of a mix of pre-tax earnings that is closer to that realized in the previous few quarters.

New railcar manufacturing backlog increased a record 18,300 units valued at 1.2 billion at February 28, driven by new railcar orders valued at 900 million. These new orders include 7000 double-stack intermodal railcars and 7000 conventional railcars. These conventional railcars are primarily covered hopper cars and our Auto-Max railcar used for transporting new automotive vehicles. And our backlog does include a multiyear contract, and about 7700 railcars in our backlog are for delivery beyond 2007 and subject to Greenbrier's fulfillment of certain competitive conditions.

Our new marine barge backlog business also performed very well, and our backlog increased a record 60 million at the end of February, and we received three new marine barge orders during the quarter. We have completed a capital expansion. That project related to our marine operations, and we expect this will allow us to increase our revenues by about 60% at our Gunderson facility. Going forward in the pipeline, potential orders on the marine side is very strong.

Turning to manufacturing revenues for the quarter -- they were 209 million compared to 234 million in Q2 of '05. New railcar deliveries were 2800 units for the quarter, compared to 3100 units in Q2 of '05 and 2400 units in Q1 of '06. About 70% of our deliveries for the quarter were double-stack intermodal railcars, and our rail services and marine businesses, which also are included in the manufacturing segment, both turned in strong performance for the quarter.

Year-to-date, our new railcar deliveries are 5200 units, compared to 6300 units in the first half of '05. As a reminder, deliveries for our Mexican facility are included in all quarterly totals; however, our Concarril Mexican facility was not consolidated for financial reporting purposes until December 2004. Prior to that time, it was accounted for under the equity method.

Our deliveries are lower this year to date for three principal reasons, which were spelled out in the press release -- a subcontracting relationship, which has ended, that generated 500 more units delivered in '05, increases in additions to the lease fleet, and the timing of syndications of lease railcar assets held for future sale. In this regard, when you look at our balance sheet of railcar assets held for future sale, we have about 1000 cars that have been produced which will be delivered at revenue recognition purposes in future quarters. For these reasons, we expect third-party deliveries to be higher in the second half of the fiscal year than the first half of the year.

Our manufacturing margin for the quarter was 11.3%, compared to our earlier guidance of a 9.2 to 10.4% range, and compared to 6.8% in Q2 of '05. A key driver of this strong margin performance has been the continued expansion of our global supply chain, with new links established to India and further expansion of our Chinese supply lines. We believe the current momentum is sustainable; however, maintaining these margins -- manufacturing margins in the second half of the year could be more challenging due to line changeovers and a different products mix.

Turning to our Leasing & Services segment, this market remains strong with revenue and margins continuing to grow. Revenues for the quarter were 27.3 million in Q2, up over 6 million from Q2 of '05. Our margins in this segment were 60%, exceeding our most recent guidance in the mid 50% range and up from 50% in Q2 of '05. We see the leasing momentum -- the momentum on the Leasing & Services side of the business continuing in the second half of the year. The margin expansion that we realized in the first half is principally due to increases in interim rent on lease railcars held for future sale and a continued shift in the Company's owned lease portfolio as higher margin operating leases replace maturing finance leases.

So, pre-tax gains on sales of equipment in Q2 of '06 of 2.2 million compared to 3.4 million in Q2 of '05. We anticipate a higher level of lease portfolio sales and trading activity in the second half of this fiscal year as we continue to rebalance the lease portfolio to younger assets and term out leases for our permanent lease fleet, and as well as we opportunistically sell assets at attractive market prices and sell assets related to our Babcock going forward.

Our owned lease fleet utilization is now at 97%. Our fleet consists of 10,000 owned units and 134,000 managed units. Our managed fleet has grown -- grew by an additional 3000 units during the quarter. We have reaffirmed our earnings guidance for the entire year of $2.30 to $2.45 per share. As our new railcar production rates have been established for the balance of the fiscal year, and into 2007, our actual results for the remainder of the year will be most dependent on third-party deliveries of new railcars, which in turn will be most dependent on production from growth of our owned lease fleet and the timing of syndication of railcar assets held for future sale. And then secondly, it will be dependent on efficiencies of manufacturing line changeovers and startup of new production lines which will occur in the second half of the year. And in this regard, we are on target and we are not expecting any surprises in this area.

We will continue to deploy cash in highly liquid (indiscernible) assets so we can -- which we can monetize when we so choose. This capital deployment will occur both in CapEx which will go into our permanent lease fleet and in railcars which we will hold temporarily and sell and manage for third parties. While we hold these assets, again, they generate positive cash from cash returns of 9 to 11% per annum and are accretive to earnings. We expect our depreciation and amortization to run about 25 million for the year, and our balance sheet and liquidity position (technical difficulty) growth opportunities. We remain very liquid with [50] million in cash under our lines of credit of 113 million. And as I commented earlier, [we have] a highly liquid lease portfolio and railcar assets held for sale that have embedded margin and unrealized gain from them.

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

Thank you, Mark. As Mark described, we're pleased with another strong quarter of operating performance. And each of our major operating divisions, new railcar and marine, our railcar repair and refurbishment businesses, and our leasing and services business, have performed very well. This integrated model is the key to future expansion at Greenbrier and growth, and we're very pleased to have improving margins and strong operating performance in this quarter.

Given the level of CapEx, as referenced in the press release that went out this morning, we have some forward momentum from that source as that capital continues to be deployed and add to our momentum.

Gross margins, as has been described, and EBIT margins and EBITDA have all trended upward. And when we look at Q2 compared to Q1, this is a solid -- very solid performance.

Just looking back to the end of 2005, EBITDA has almost doubled from Q4 2005 to about 30 million in this quarter, and puts our stock value appreciation in perspective over that time, which has been about 40%. One possible interpretation of the differential is that we need to explain and meet expectations of growth. And certainly, our multiples should improve as we do that.

2007 certainly is shaping up to give us a good shot at that goal. We continue to advance a strategy that has prepared a strong base for this growth in each of our major business units, incorporating the advantages and synergies of the integrated model that we have in our business. This strategy includes a plan for strong organic growth, but also the expectation of significant cumulative acquisitions over the next year. These, when melded with organic growth, should produce very good returns on our growth CapEx dollars and very attractive melded EBITDA multiples.

The mix within our backlog has changed. A few years ago we were running double-stack cars at three facilities. And it will be interesting in a moment to go back and look at the builds of double-stack cars over the last five years, and kind of get a snapshot of where we stand today.

Moving into our fiscal and calendar 2007, we plan to dedicate one factory to double-stack cars and to maintain our market share with that single factory. Some of the efficiencies that we've achieved at our Gunderson flagship facility here in Portland will allow us to improve our throughput and to continue to reach and obtain efficiencies that will drive operating momentum.

In addition, as Mark has referenced, our marine backlog has increased to a record $60 million. And in an [affected matter], we are negotiating contracts -- new contracts in addition to that, which would exceed that number. And that market has really -- the timing in that market has been really good with respect to the CapEx that we put in to improve our throughput in that marine business. As a consequence of that, we have focused -- refocused our business plan in marine, and expect that we can get some additional growth and value out of that unit over the next few years.

Turning to just general rail trends, we continue to see strong fundamentals. The demand for freight remains robust. Intermodal container traffic continues to be a very important driver for Greenbrier, so we will spend just a moment on that. But in general, energy prices, truck driver shortages continue to pay for rail transport, and import traffic continues to -- we have the expectation that import traffic will continue to be strong.

During the first few months of 2006, U.S. and Canadian intermodal loadings were up on an aggregate 5%, with trailer activity being relatively flat and container loadings up a little over 6.3%. These were a little lower than expectations, and expectations for the year are higher than those levels, particularly when you look at the drivers of container growth; the second half of the year will tell the story with respect to these things. In the transpacific trade, international trade, the recent transpacific conference reports indicate very strong growth in containers.

There are consensus estimates for domestic containers growth that remain in the 8% range. We are taking a relatively moderate view of growth, and probably the most important view in the industry and the growth is the largest customer for double-stack cars, TTX -- we're respectful of their views. And it remains to be seen what the order activity level, or indeed even the production capability will now be during the remaining part of 2006. I would expect that looking at the 2006/2007 forecast by the industry sources, that on average those are going to be accurate.

Because of the heavy builds over the past few years, the second half of the year, the timing of orders over the second half of 2006 calendar may be difficult to predict. But we have very good momentum with a strong backlog of double-stack cars, which we believe we can pull forward. So, we have a situation where we have already sold some of our production for our single factory, Gunderson, in 2007, and feel very confident we'll be able to maintain our market share and maintain the momentum in that very important market. Generally speaking, the outlook for intermodal remains very strong, and we are pleased with the position that we are in in that market.

Turning for a moment, and concluding just as far as more specifics on recent strategic activities and plans, aside from what was listed in the news release, it might be worthwhile to simply focus on the fact that of the 25 million that we've invested in the manufacturing side of our business, this money has been addressed to improve operating efficiencies and throughput, to expand our marine capacity, to acquire three additional railcar repair facilities, and to enhance our vertical integration through the acquisition of a key boxcar component supplier. And we are intending to expand aggressively our activities in the parts business, both organically and potentially with other acquisitions.

Second, we've continued to drive costs out of our system through our global sourcing efforts, and we will continue to expand those efforts. And while the capital devoted to those has been relatively modest, this will be a source of continued growth potential.

Third, in December 2004, effectively beginning in 2005, when we acquired the (indiscernible) 50% interest in our Mexican operation, this gave us operating control of that facility, and we have achieved significantly improved operating performance at that facility. We've expanded our lines there under -- now the facility has been under our control for a time, we have increased our confidence in the facility and the management there. And we shifted a greater percentage of new railcar production to that more profitable facility and to our more profitable facilities in the U.S. We continue to look at opportunities to expand our manufacturing lines organically, and we believe that we will be able to achieve growth in that area.

In terms of our product mix, again, we've diversified our product mix with a major order for Auto-Max, a freight car that's unitized, efficient double-stack car-like product that achieves very attractive efficiencies in terms of the use of the space on the load -- on the rail. And these are things that are important in a more congested rail environment. We'll also be building covered hopper cars, refrigerated boxcars, and one other car type already in the production schedule during 2006 -- late 2006 and into 2007. So, our manufacturing outlook remains robust.

And on the Leasing & Services side of the business, the over 100 million that we've deployed into our own railcar assets and railcar leasing assets held for sale will generate attractive cash returns, and as Mark has indicated, are a source of very readily accessed capital, if we choose to do so. Our managed fleet has grown by almost 5000 cars since the beginning of the fiscal year. We continue to emphasize growth in the managed fleet business, which in turn drives many other opportunities in our companies and in our various business segments.

We believe there's a significant opportunity to deploy additional capital in each of our three major business units, and we particularly are interested in the Leasing & Services business. In leased railcar assets, this business has performed very well, with very good margin enhancement over the past two quarters. The market continues to be robust, we have all the organizational infrastructure in place to grow that business, and it's highly complementary to our new car manufacturing business, where it helps us achieve higher margins, and acts as an important buffer for us in a marketplace where the timing of orders can be stabilized using leasing.

In repair and refurbishment, our business there has benefited from recent acquisitions. And this business, in terms of its fundamentals, is strong, with demands on the rail environment from heavy traffic creating a need for facilities. And most of our facilities being efficient, non-union shops are attractive facilities, and we're doing well in that business. We also intend to grow that business both organically and through selected acquisitions, although we might raise our [sites] to a somewhat larger level than the ones that we've done over the past 18 months. We continue to think that there will be many opportunities in that area, and we're looking forward to executing on these plans during the end of this year, the next two quarters and into 2007.

Mark, back to you.

Thank you, Bill. Operator, at this point we will open it up for questions please.

(OPERATOR INSTRUCTIONS). Peter Nesvold, Bear Stearns.

Maybe a question first on the outlook. Without letting the quality of the quarter go here yet, I guess on the first-quarter call you suggested that if you got two big orders, there might be upside to your expectations. And in this quarter it looked like operationally it's a very solid quarter. Maybe it was sort of in line with expectations due to the tax rate. Why didn't the -- why didn't you take up your outlook? Has something changed since we had the call in first quarter, or was something different about those orders than you expected?

I'm glad you referenced the performance. If you look at some of the moving parts in this quarter, particularly the tax rate, and I think as you pointed out, the redemption of the stock in Canada, we actually exceeded, I think, expectations -- street expectations, probably on an organic basis during the quarter.

I guess one of the things that we do in running our business is we're conservative. We have a plan, we stick to the plan, and we like to do well compared to our plan. We always have execution issues that we need to be concerned about to make that plan come together. And as you probably know, looking at -- as you studied our company, and you studied it quite well, we have always had a history in our business. There is some seasonality it seems in the pattern of the business. And over the past three years, we've always had a history of doing much better in the last two quarters than in the first two. And we've also had, I must say, a pattern of exceeding expectations.

So, without -- I think we're attempting on these calls to give more information so that folks like you can assess the quality of the estimates that we make. We are, by our nature -- and what makes people, I think, successful in this business -- somewhat cautious with the moving parts, and perhaps that's a fault. But I would rather look at the things that can go wrong and prevent them, and have, therefore, positive things occur, than to (indiscernible) expectations that have a lot of execution parts and then have to explain something that doesn't quite work out.

Just a little bit further on that, and specifically regarding the two orders that we did receive; you asked about those. Those orders are very good orders for us. There's nothing in those orders that dampen our enthusiasm about the year or going forward. And in fact, what those orders do a lot for -- do a great deal for us is to give us visibility for beyond 2006. And again, both the (indiscernible) multiyear and in the Auto-Max cars, those -- the bulk of those will be built beyond fiscal 2006.

Visibility will give us a great deal of comfort in setting operating plans that will continue to drive these efficiencies. But beyond that, I think it gives us multiple arrows in the quiver as a tool to improve pricing and margins. I think that we do not have in mind sacrificing double-stack market share. Although I know that there are lots of folks interested in that space right now, and it seems like everyone is developing a car, it's a little more complicated than it may seem. And I think that we could maintain our market share. But we have adjusted our production, and we believe by having -- we believe that we can continue to reduce the real price of our product by -- improving margins by some of the efficiencies we're reaching at our Gunderson facility. The new orders that we've taken, we believe, on average are going to be attractive margins. And we know that as those lines are up and running, it will be comparable; we're hoping it will be comparable to the improved margins on our other products on double-stacks.

Obviously, I would always prefer companies that underpromise and overdeliver. I guess -- so, you're telling me that nothing -- I don't want to put words in your mouth. Has anything changed in the last three months in terms of the timing of those orders, production slots, whether it was weighted towards fiscal '06 or '07, the pricing of it, the mix of the types of cars, or anything else?

Not other than the normal execution risks that go with not having all the visibility in the world at all of the production issues worked out and all of the moving parts that go through. I think, generally, we're very, very bullish on our basic markets, as we were. I think during the last quarter I talked about the possible accretive effects of expansion in each of our businesses, particularly if we were to do that in any significant way. We have those opportunities. We continue to work on those opportunities, and that's certainly a wild card if we perform. We have a substantial amount of liquidity. And if we can increase the yield on that cash, which has been our basic plan, putting it in the leasing business in staged assets, but redeploying it into accretive transactions, that could be a source of a real boost in earnings.

I'm very optimistic that we'll be able to execute on our growth plan. And organically, we're just in a really good space right now. I think we've got to execute. My comments about double-stacks shouldn't be in any way construed as a lack of confidence in that market. I think that market is going to be very strong. There is -- there has been over the past five years, from 2002 into 2006, counting the projected -- our projected numbers for 2006 and the orders that are on hand, a compound annual growth rate in the fleet of about 9%. And traffic has been slightly under that, about 8.5%. So, I think that in 2006, in terms of deliveries, that we may be under the 12,800 number that industry [flags] are saying. However, that's going to level out in 2007. The growth is going to be there. And we've got a backlog that gives us considerable flexibility, and we think that that's going to be a very good market.

At the same time, we want to diversify and expand our product offerings. Our competitors are doing that to us; we may as well return the favor. We think we can get attractive margins in that business, too. And we are expanding our capacity. The more important part is we're expanding our capacity in areas where that expansion is more efficient. So, as we divert production from Canada to the United States and Mexico, and as we concentrate our activities in our Mexico facilities, and continue to have strong momentum there, I think that the outlook remains good.

Maybe a quick question on the tax rate. What drives an 800 basis point swing sequentially, and I guess, almost year-over-year on the tax rate. A little bit more specifically, what was the mix, and why should it recover as quickly as next quarter?

I think, as you know, we operate in multiple tax jurisdictions. The biggest impacts would be the mix between -- Mexico, Europe, vis-a-vis the U.S. and Canada, because the U.S. and Canada have similar tax rates. And then, when we refer to a minimum tax in one of our jurisdictions, we're referring to -- really referring to Mexico. And similarly, in Europe, where we have -- we're not accruing any tax benefit in any quarters where we have losses over there.

So, historically we expect that our mix of earnings between these three major regions would come back more into balance where they've been in the past few quarters in Mexico. We're certainly making money. But again, the minimum tax kicks in, and partly due to the amount of [stage] cars that we have on our books. We can control this down in Mexico, obviously, because we do have a number of stage cars. I mentioned earlier 1000 stage cars on our balance sheet, and those will flush out in the quarters ahead. And we're certainly optimistic about the trends that we're seeing in Europe. And so for these reasons, we expect that our mix of geographic earnings will come back closer to what they've been in the past few quarters, and why we would expect the effective tax rate to come back to where it's been in the past few quarters.

One other quick question and I'll get back in queue. What's the significance of buying out the Canadian subsidiary minority shareholders? Is there some kind of operational change you're making there? Was it a contractual reason? What was driving that decision?

This was a vestige. The background -- when we acquired Trenton in 1994, 95, there were minority investors out there. Originally we only owned 51% of the facility. Back -- the past few years we have been buying those minority investors out. There was a last vestige here. If you look at the balance sheet at the end of -- end of August and November, we had a little less than $4 million of minority interest in the form of mandatorily redeemable stock.

So, this deal was negotiated a while back when we were buying the investors out. There were some last remaining mandatorily redeemable shares that contractually we did purchase this quarter, and this resulted in the [0.7] million pre-tax of onetime interest charges. Operationally, this does not affect things at all and it has not affected things. These have been very good minority investors. We've been delighted to have them. They still remain on the board and are active in helping us in our operations in Canada. But there should be no additional hangover affect at all from this.

Wendy Caplan, Wachovia.

Can we talk a little bit more about the margin, please? You spoke to the fact that the embedded margin in the backlog -- I think you were saying -- seem to be as good as the margin that you reported this quarter. Can you speak specifically to that, and also give us some sense of the cars that are to be syndicated, what kind of profitability we should look for there?

I think, overall, it is a correct statement that our backlog, we believe, has very good margin in it, comparable to the type of margin ranges that we've been realizing the past few quarters. Of course, from any quarter the margin is going to vary, depending on the exact mix of that quarter as well as line changeovers. And that is why I made the comment that it may be a little bit more challenging in the second half of the year to obtain these margins, because we are going to have line changeovers, a couple of different line changeovers. And the mix in the first half of the year was a little bit more weighted towards intermodal. When you take the first and second quarter combined, over 75% of the deliveries were in intermodal railcars. And we had said earlier that we thought for the year as a whole -- and the benefit of intermodal, of course, is that we are getting efficiencies of long production lines, and we haven't had line changeovers.

So, these are the reasons, without getting into specifics of margins, car type by car type, which we prefer not to do for competitive reasons, and also because you really can't look at them on a static state. After the second half of the year I made my comment that -- a comment about what could potentially happen on margins. But overall, as we look at the backlog, as we look at the orders that we took, where we expect there's future demand that will allow us to continue with efficiencies of long production runs -- and also there are some proprietary car types in that backlog -- why we are optimistic that overall these margins can be maintained or expanded (indiscernible) when you couple that with our sourcing efforts.

Speaking of the competitive environment, now that you have more public competitors, we get to hear a lot more from them about their plans. And Bill, you mentioned that they're going after intermodal cars. Now, some people don't understand that process. It sort of seems like you weld together a couple of pieces of metal and you're done. Can you talk about the process to introduce a new car type when you haven't built it before, and how soon your competitors could be in the marketplace?

The market isn't homogeneous. There -- I think the first thing to say is that there are several designs and design applications and configurations of designs that are in use from a higher capacity, heavier car, a stand-alone car, which has tended to be Canadian traffic -- multiple car platform cars for domestic service, and multiple platform cars primarily for dedicated international service.

There are only a few parties, secondly, that acquire this kind of equipment -- TTX and others. And the railroads are very concerned about velocity and efficiency. So it's an area that takes careful study and quite a bit of work to maintain a knowledge base.

On the engineering (indiscernible) the cars are highly engineered. They have, by their nature, a mechanical dynamic that is unusual. It allows a container to be carried only a few inches from the clearance above the rail, and almost to the maximum height of the clearance on the overhead side. So, the stress on the platforms is severe. And the designs of the cars themselves -- there are some patented features of the designs, and location can be important, as can be in car building. And we're in a very good location here on the west coast, with good access to raw materials and an ability to put the cars in service.

There are many, many things that make it an interesting market. I think we welcome competition. The pricing in that market has actually in real terms come down as the pricing of railroad service has comedown, and we're getting margin improvement as to improve our efficiencies. We have talked about the fact that we have been -- while prices of cars have generally gone up because of steel price increases, we've been able to improve our efficiencies, and most of the margin increases are just coming from a long learning curve. And we think we are very, very competitive on the car. So it will be difficult, as it would be for us, to go after someone's coal car design and put it in one of our facilities, and design it and build it and set up to do that. It will be difficult. It's easier to say it than to do it. Having said that, I think it's easier for us to get into other people's markets, and it's tempting always to do so. We're doing it, and we expect others to do it to us. We're doing it in part because others are doing it to us, and so it's just a nice, fun game.

A couple of other things. If we kind of listen between the lines, it sounds as if you were suggesting that there may be some kind of leasing-related acquisition coming up. Should we think about that in terms of being accretive to the '06 year, or '07?

I think our plans for acquisitions are -- many are called and few are chosen. It takes a long time to execute in some of these. There are -- we've looked at larger ones and we've looked and executed on a number of smaller ones. I think we're trying to raise our sights somewhere in the middle.

It's possible in our business, in the leasing business to grow organically much faster than through an acquisition. And I think that the growth you've seen organically in leasing is more characteristic of the opportunity. Also, in leasing, leasing is tied very closely with our repair services business. And that repair services business can drive leasing opportunities, and vice versa.

For example, one of the specialties of Greenbrier is to re-engineer and repair and reconstruct a car into its best use. There's substantial demand for that kind of lease-related investment and efficiency contribution to the railroads today using our own car shops and our engineering capabilities. And we're doing -- and we're targeting a lot of those kinds of transactions. So, we're not dependent in our leasing business, given the nature of its integration with repair, on getting line space either from our own facilities or from other car builders. As we all know, line space today is very difficult to obtain. It's still at a premium. And many backlogs are out, as our Mexico facility is, through -- effectively into the second half of 2007, to the end of our 2007.

So, it's difficult to build new cars for leasing and have the capacity to do it. In terms of acquisitions, it's usually more efficient in the leasing business to build a fleet rather than to acquire one, although we're open to those kind of opportunities. And I think there are those kinds of opportunities in our Leasing & Services business, and we are indeed looking at that.

A couple more and then I will let someone else have a chance. You referred to TTX. I'm not sure I understood what you were saying. Should we expect an order this year, or do you think they'll hold off until next year?

I think that TTX has been able to call the traffic patterns very well. And I go back to what I was saying about deliveries, and I don't think I finished that part of the discussion. In 2004 there were 12,000 units, or so, built in North America, and in 2005 there were 14,500. And thus far in 2006, the build is -- in backlog and scheduled production is closer to 8000. The forecast is for 12,000. I don't think that we agree that 12,000 cars are going to be built and delivered -- units are going to be built and delivered this year. I don't think -- I'm sure that TTX doesn't think so. It's very difficult to predict.

There's been a number of factors moving on 2006 traffic, including port congestion, a slow or a late lunar new year, some stored double-stack trains in excess of what was the case last year, which are coming out of service now, some real uncertainties concerning international traffic patterns. So these things have all kind of come together. And I think that we probably, after two years of putting a lot of double-stack welds into the business, we're all kind of -- I think there has been a bit of a pause.

Now, usually these orders, when they come, come in the spring or summer. And we're certainly equipped to -- we know what we're going to produce during that timeframe, and it doesn't -- it matters. We think there will be orders in the second half of our fiscal year, and that's in our plan.

But during -- the important thing is during the second half of our fiscal year and in 2007, we have a finite capacity. And we're very confident that looking at that finite capacity of double-stack cars at Gunderson that we will be able to sell that capacity out. I think we will remain the preferred builder as long as we are reasonable on our pricing policies and we continue to stay in close touch with our customers -- we should have every expectation of success. And the outlook for that period is very strong.

And finally, --

I couldn't speak for TTX. We won't know until they decide -- they decide what they're going to do.

It's been a long time, I think, since we've heard anything positive out of Europe, but it sounds like there were some positive things in terms of demand. Can you speak to that and kind of what's driving it? And are we profitable there at this point?

In the current quarter we were not profitable. But it wasn't the predominant influence -- tax effect that Mark had indicated. When we are not probable there, there's the regrettable reporting consequence that the entire loss is reported as after-tax profits and consolidation. So, any contribution that's negative is always noticed with emphasis.

What's happened, as we talked about last quarter, is that the level of traffic has picked up. There's been some difficulty among our competitors. We have sailed through this fairly well, and actually increased our market share. We've taken market share away from our competitors. We have a very strong base for export out of Poland and to the UK. And there's just a large number of orders that -- prospective orders there now. So, we see a much stronger -- a stronger position, driven by two things -- more demand than has been the case in the last year or so. DB is going to be investing aggressively. They've made announcements about that. There's a need for an improved fleet in Poland, which will be served in one form or another over the next few years. On the revenue side -- or the demand side is strong. And I think there's just been some (indiscernible) not been as successful as others in that market. And we've benefited from that.

You're definitely correct, Wendy, that we're more optimistic about the European operation -- not the operation, but the European market and our position in that market than we were six months ago.

[Kevin Maska], BB&T capital markets.

First a question on SG&A, if you can help me understand what's going on there. It looked like it was up about 23% year-over-year on a down revenue quarter.

Right. One thing I'd mention on the G&A side is to probably look closer to the last several quarters here than the first half of last year, and that we have been averaging more at the 15 to 17 million range, and that's been more the run rate, so, I think, appropriate to look at. And part of this is that we have been staffing up more as we are operating at higher production levels. And I think that the 15 to 17 million is a more realistic range going forward than the 12 to 14 that we had in the first half of last year. And this is not pinpointed to one area specific, as well as just, again, operating in a more robust environment. So, I think the comp is perhaps a bad comp, but we're hopeful that we'll come down a little bit from where we were this quarter.

So, 15 to 17, you think, is a good run rate for the second half?

Yes.

I might just add that you can see our operating margin and leasing has improved dramatically, and almost all the revenue adds have gone into gross margin. We don't break out our G&A as between manufacturing and leasing. Leasing has a higher component, generally, of compensation selling and administrative expense than manufacturing. And so that revenue growth was not entirely free, but it was very profitable. And I think that we're also -- we also have some of the costs that have been associated with that differential that are somewhat unusual accruals for incentive compensation and things of that nature.

These units that are built but held for sale, I think I heard you say you have about 1000 of those units now, and I think we heard about 600 or so last quarter. So, there's more of that going on. Can you help me understand what the issue is there? What's holding you back from delivering those units?

Sure. I'll try to clarify the prior quarter as well. That is really a timing issue. These are all railcars that have been placed under lease. And again, our -- we -- when we place cars under lease, we have two choices -- either to take them into our lease fleet on a permanent basis, or sell them to third parties. When we sell them to third parties, we refer to that as syndication activity. And typically we bundle these assets up and then sell them in bundles.

We stated earlier in the year that our strategy this year was going to hold -- would be to hold onto assets longer before we sell them to third parties. And the reason we do that is that when we're -- it's very simple. When we hold the cars, we are earning the revenues on them, and we're earning cash on cash returns of 9 to 11% per annum. So, it's very profitable for us to do that, and you see that recognized in part by the improved leasing margins. And the value of the cars is certainly holding up. There's no diminution in value of the car while we hold them short-term. So this is purely a timing issue, where we're choosing this year to hold onto assets longer before we sell them. And this is why you've seen the number grow a bit over time, and why you might see deliveries bounce a little bit from quarter to quarter.

So, just to recap, there are two categories of leasing investment -- one for portfolio, and one on leases that are held in for later sale. And it really is just a cash arbitrage (indiscernible) leases held for sale. We're really using our cash to invest in these railcars, collecting the interim rent as an alternative to short-term investments that would not be accretive. That allows us to create liquidity for expansions, organic and through acquisition, that's more permanent. And it's a source of liquidity when we access those. But it has caused the revenue to reflect -- the manufacturing revenue to reflect the fact that we are holding those in inventory.

Just Switching over to the marine business, it seems like you're making a little more prominent mention of that business now. We see the 60 million backlog. Can you just tell me what the capacity of that business is, and what it will be when you finish these capacity additions that you're doing?

That business has grown from -- it's very modest with respect to total revenue, but it has considerable potential because of a number of forces acting on particularly the west coast, but in the marine business generally. And it's grown from 12 to 15 million a year, to doubling that. And this capacity increase will cause us organically, with the facility we've got in place, to do more than that. Our margins are improving. So, it's a nice little business, and it has, more interestingly, a lot of growth opportunity associated with it.

There's a lot more we could do with that business. It's been submerged as part of our manufacturing operation. Now the surge of activity has really finally come in that market, and it looks like it's sustainable for four to five years at least, maybe 10 years. And we're thinking that this is a very good small platform for growth, much like when we began our repair and services business. And that business has doubled in the last five years in revenue, and is a very good foundation for much larger growth at this point, to levels of well above 100 million a year.

Just one last question, if I could. On pricing, it seems like the pricing implied -- the revenue per unit implied in your backlog is much better year-over-year. I assume you're getting better pricing there and in your lease rates. Can you just comment a little bit more on that?

On the backlog, I think, while certainly we're in a strong market, I think as much of that on a per-unit basis is mix, in that -- just because the amount of materials that go on a conventional railcar is higher than the amount of materials that go on an intermodal double-stack platform, the average unit sale price is going to be higher -- again, with the recent orders that we announced, brings our backlog levels -- the mix between intermodal and conventional cars is a little more weighted now, or a little less weighted, I should say, to double-stack. So, I think you're just seeing the average unit sale price go up as a part of mix, and cost increases would be the -- material cost increases would be the two biggest components on that end. Certainly, as we talked about earlier, the outlook on margins is still very, very good. On the leasing side of the business, I think your question is are we seeing freight -- continued strong lease rates in the leasing side of the business?

Yes, exactly.

Clearly, we have had a strategy of both -- several different strategies. One, increasing the lease terms, so our lease renewals extending the average remaining lease term on our fleet out. The second is to balance the fleet so a little bit younger fleet. And then the third is, of course, as cars come up for renewal, to increase our lease rates. And that has definitely been what we have been executing on all three of these fronts. And lease rates for newer cars as they come up for renewal have been going up.

That's a very interesting point, because what used cars, older cars are benchmarked against by railroads, or users or shippers, is the cost of a new car. And with the steel component and other costs associated with materials, new cars going up, the value of those used cars has gone up as well. So, that manifests itself in two ways -- higher rents when the cars are re-upped for lease, and potentially higher market values. And that would cause most leasing companies today to have embedded profitability in their lease fleet in sizable amounts. And we're no different than others in that regard.

[Eric Cane], Merrill Lynch.

I had a quick question about your railcars held for sale. You have about 1000 in that bucket; is that right?

Yes.

And the value on the books is about 83 million for that?

Correct.

So that implies roughly 83,000 a railcar?

Actually, the total cars in that number is closer to 1100. My comment earlier -- there is about 1000 that were produced out of North America that are for future sale, and then there's just some other cars that are in transit to a customer outside of North America, and also cars in our Babcock venture that were not produced by Greenbrier. So it's about -- (indiscernible) directionally you're correct, that the relative value was around 80,000. But I think if you divide by 1100, it will be slightly less than that.

Call it high 70s to 80,000 a car in that bucket. And you have (indiscernible) equipment on operating leases -- that's about 250 million. Is that over 10,000 railcars?

Yes.

So, directionally, if we have to think about the market value of the equipment on operating leases, what's the order of magnitude of the difference between the book and the market?

The other thing -- you would -- there's a different mix there between new and used equipment. And I think if you're just taking -- use the simple math, you're seeing, well, it's coming out to about 25,000 a car, and that's both due to depreciated values and a different mix between new and used. But overall, we probably think that the market value exceeds the book value of our lease fleet by maybe 30 to 40%.

So, there's 30 or 40% above the 250. And in the railcars held for sale, is that at the price that they will be sold for, or is that at your cost?

That's at our cost. And probably a bogey for that is our average margins, which was a question Wendy Caplan was getting to earlier. With more being close to what our embedded manufacturing margin is (multiple speakers)

So potentially, there's 10% on top of the 83, and 30 or 40% on top of the 250?

(multiple speakers) best way to look at it. And of course, on the leasing side of the business, you're correct about that. If one were looking at the liquidation value, we did say earlier that we are looking at certain cars in the fleet that we may choose that we expect to realize some of that value -- not in a big portion of the fleet, but that we would look at [culling] the fleet a little bit.

And on a different topic, have you guys thought about increasing dividends or doing a share buyback?

The Board considers all of these kinds of things to address shareholder value every quarter. And we announced our dividend policy for the current quarter. But we do view -- we're really focused. In the last two quarters we have focused very much on the drivers of shareholder value, particularly the component of our company and our potential for the growth component of our stock. We've put a lot of building blocks in place to enhance that value. And as we do, we'll certainly revisit both of those areas.

Kim Burkhardt, Burkhardt Research Services.

My question this morning is about average speeds or efficiencies industry-wide. Do you see any increases in efficiencies happening throughout the industry, or not?

You weren't put up to that question by Bob Yates, were you?

No.

We were just looking at that the other day, because that's an important driver of intermodal demand. And this is a big topic with railroads today, velocity of cars moving on rail. And it's a great opportunity for companies like us to help improve velocity in the repair business. Lamentably, although I think most of the railroads have goals of doing it, that goal is -- it's a little hard to attain when traffic levels are as high as they are. It's a difficult job for the railroads. I can say that some of the -- that both of the western railroads are very focused on that. And companies like TTX are putting their policies together to help them reach more higher velocity goals. But at least in the areas that affect us the most, we haven't seen a great deal of improvement; some declines on some of the railroads, and just not a lot of improvement in many areas. And that's one of the reasons why the railroad executives are putting so much focus on doing that, because it can certainly help their throughput, help their revenue flow, and it would be good for everyone if they could improve their velocity.

I think we have time for about one more question. We apologize that perhaps we haven't gotten to as many people as we'd like, but perhaps we can take one more question.

[Steve Logan], Morgan Keegan.

I had a quick question on kind of looking at the capacity that you have available on the manufacturing side. Looking at your backlog, if you ex out the 7700 railcars that are [to be] delivered beyond 2007, it leaves you with approximately just over 1500 cars per quarter over the next seven quarters, which is a little below your average deliveries. I'm trying to get a sense for how much capacity do you have available to grow into, and how much of that will be offset by the increased deliveries to your owned lease fleet.

I think we're trying not to get into specifics about our open production space. You're -- directionally, if you're just backing out the 7700 from the [18,300], then I think I follow your math. Frankly, at this point we're very comfortable with the backlog that we have and the open space that we have. We think that gives us a lot of room for maneuverability. And at the same time, we have firm orders in markets that we are very strong that we -- we believe that we'll add on to.

So this -- we more look at it as the backlog that we have over the next year and a half gives us a lot of -- gives us a strong foundation to build on. We haven't set -- I will say the backlog that we disclose is all backlog that we intend to sell to third parties. So, when we disclose backlog and we disclose deliveries, that has already excluded any orders that we have that we're taking into our own lease fleet.

With that, I think we'll wrap it up. (indiscernible) and we are here today, available to answer any other calls. We appreciate your participation in today's call and your interest in Greenbrier. Thanks and have a good day.

Thank you for participating in today's teleconference. You may all disconnect.