Greenbrier Companies Inc (GBX) 2006 Q3 法說會逐字稿

Hello and welcome to the Greenbrier Company's third-quarter 2006 earnings release conference. Following today's presentation we will conduct a question-and-answer session. Until that time all lines will be placed on a listen-only mode. At the request of the Greenbrier Company this conference is being recorded for instant replay purposes.

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

Good morning and thank you for joining our third-quarter call. I'll make a few comments about the quarter just ended and then turn it over to Bill for some more comments and then we will open it up for your questions.

As always matters discussed in the call include forward-looking statements and throughout our discussion today we will describe some factors that will cause our actual results in 2006 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of Greenbrier.

Today we reported a strong third fiscal quarter. Our net earnings excluding previously disclosed charges for a tentative settlement reached with the IRS on a tax audit were $13.7 million or $0.86 per diluted share. As we previously disclosed, the tax settlement relates to the audit of our 1999 through 2002 tax returns. The IRS had been reviewing our decision to take over $52 million in deductions in 2002 related to our European operations. And we are pleased to have the settlement relating to the timing in the amount of the deduction. We took a $3 million after-tax charge of $0.19 a share related to this tax settlement that shows up in two places on our financial statement; $0.8 million of accrued interest expense and $2.2 million of additional tax expense. The settlement is subject to final approval of the IRS and as by law the Congressional Joint Committee on Taxation, we believe that this will occur before the end of our calendar year.

As well, our EBITDA grew 25% from Q3 of '05 to $32.9 million on revenues of $266 million. And our EBITDA margin grew 35% from Q3 of '05 to 12.4% of revenues. Our earnings and EBITDA growth were driven by significant margin expansion in both our manufacturing and leasing and services segment. As well we raised our guidance for the balance of the year and for the year as a whole to a range of $2.45 to $2.50 per share. That is the earnings guidance excludes the tax settlement of $0.19 a share.

Now I want to make a few comments on backlog. Our backlog remains a strong 16,900 units valued at $1.14 billion as of May 31. About half of our backlog and unit count is double-stack intermodal cars and subsequent to quarter end we received orders for an additional 600 double-stack intermodal platforms. As Bill will discuss later, outside of intermodal we continue to focus on car types where demand is anticipated to be strong and where we can recognize good margin. We are migrating to cars targeted to replace or supplement our [forest] products conventional car business.

Turning to our operating performance, manufacturing revenues for the quarter were $236 million compared to $266 million in Q3 of '05. New car deliveries were 3000 units for the quarter compared to 3600 units in Q3 of '05. About 60% of our deliveries for the quarter were for double-stack cars. And as we disclosed in the release, lower deliveries for the quarter compared to the prior year were results of changes in production rates to meet customer delivery requirements of slower European freight car market and the prior periods including deliveries under subcontract arrangement.

At the beginning of the year we said we would produce higher profits on lower new railcar deliveries. We have done that and are relatively at flat revenue outlook for the year. We also will have grown our earnings earnings per share substantially. For 2006 year as a whole we anticipate delivering somewhere around 11,700 to 12,000 units. This implies deliveries in the neighborhood of about 3500 to 3800 units in Q4 up from the 3000 units this quarter. The exact number of deliveries will depend principally on the timing of syndications of assets held for future sale and additions to our lease fleet.

Our manufacturing margin for the quarter was 10.4%; this is on the upper end of our guidance last quarter of 9% to 11% and up from Q3 of '05. Our margins continue to benefit from cost reductions from global sourcing efforts and efficiencies of long production runs. Declines that we realized in our margins this quarter from the first half of the year was anticipated and is principally due to a change in product mix. We continue to believe that margins in the 10% to 12% range are sustainable and in fact we're continuing to improve on these margins and Bill will talk about some of the initiatives in this area. The margins may be a bit more challenging in Q4 on a short-term basis though as we experience line changeovers but again, longer-term we believe that they are sustainable or that we can expand them.

Our leasing and services revenues for the quarter were $30 million, up $10 million from Q3 of '05. Revenue growth was driven by higher gains on railcar sales, increases in rental and lease fleet additions and lease railcar assets held for future sale. Our margins this quarter were a very strong 66%, again up from our most recent guidance in the mid 50% range. The margin expansion was principally due to many of the factors that drove our revenue growth. In addition, we renewed leases of higher lease rates and had a concerted effort to change the profile of our railcar types in the lease fleet and newer lease equipment with lower maintenance costs. These factors as well contributed to the increased margin.

We regularly sell assets out of our lease portfolio as part of our leasing and services business. Last quarter we said we anticipate a higher level of lease portfolio sales and trading activities in the second half of the fiscal year as we continue to strategically rebalance the lease portfolio to younger lived assets as we opportunistically sell assets at attractive market prices. Indeed this occurred during the quarter. Pretax gains on equipment sales in Q3 of this year are $7.8 million compared to $0.8 million in Q3 of '05. While all of these asset sales were planned and baked into our previous and current earnings guidance, we originally anticipated that some of the sales activity which occurred this quarter would occur in Q4. As we are opportunistic in the market it is difficult though to always predict the exact timing of when this sale activity will take place. We anticipate that the trading activities and gains on sales in the fourth quarter which will be at a much more modest level as compared to this quarter.

We see the momentum on the leasing side of the business continuing and margins going forward probably closer to the 55% to 60% range due to the lower gains on sales. While our own lease fleet has been flat for the year it is important to note that the net additions when we look at on a unit count base that is flat, the net additions for the year on a dollar basis have approached $65 million as we have replaced older assets with low book values with newer assets. For the year as a whole, we expect these net additions to be at about $110 million consistent with our growth strategy so you can see that we are going to be quite active in the fourth quarter.

Note to the extent that the growth in lease portfolio includes assets that we manufacture that we have embedded margin in our lease fleet and we have a lower basis in these cars which results in a higher yield on our leasing investment.

Turning to interest in foreign exchange, it was $6 million for the quarter. As I discussed earlier it includes $0.8 million of the charge related to the IRS settlement as well it includes an FX gain of $1.3 million. Going forward we would expect interest, excluding any potential FX gains or losses, that is foreign exchange gains or losses, to run about $7 million a quarter. Taxes and the tax rate for the quarter were unusually high due to the settlement with the IRS which impacted taxes by $2.2 million. Excluding the settlement, the effective tax rate for the quarter was 36% which was lower than our earlier guidance of 39% to 42%. And this is a result of the mix of geographic or geographic mix of earnings. As a reminder, we have tax loss carryforwards to offset profits in Europe and Mexico with Mexican earnings being subject to minimum tax. We expect the tax rate in Q4 to be somewhere in the low to mid 30% range.

And now to our updated guidance for the remainder of the year. As I mentioned earlier this is $2.45 to $2.50 per share excluding the IRS settlement. This implies a guidance for the fourth quarter of $0.55 to $0.60 a share. As our production rates have been established for the balance of the year, the actual results are principally going to be impacted by third-party deliveries which in turn will be impacted by how much we continue to grow the lease fleet and the timing and the syndication of our railcar assets held for the year. It will also depend on the efficiencies of line changeovers and startup of new production lines and then finally, the geographic mix of earnings.

We do see strong momentum going forward on both manufacturing and leasing and while Q4 will be down sequentially from Q3, we would remind you of a couple of things and that is that our on the manufacturing side of the business our deliveries will be up sequentially; and that the overall trend in margins can and will be maintained other than for the temporary effects of line changeovers; and again in Q4 on the leasing side of the business, there will be lower gains on sales.

We continue to [void] cash in liquid leasing assets where we can earn cash on cash returns of 9% to 11% per annum and this is immediately accretive to earnings. We expect depreciation and amortization to run about $26 million for the year. And we are obviously very liquid now with $187 million in cash in undrawn lines of credit or availability under our undrawn lines of credit of $87 million.

I'm going to make some comments about the convertible and then I'm going to turn it over to Bill. The offering that we completed late in May for $100 million as Bill will talk about in greater detail, we believe there are numerous opportunities to invest in and grow our core businesses both organically and through potential acquisition. It is the Company's view that in light of these opportunities it is best to tap the capital markets on a proactive basis, particularly when market conditions are favorable and when we are confident in our ability to prudently invest these monies in a manner which increases shareholder value. We believe the additional liquidity will allow us to act more quickly and nimbly on these opportunities.

We also believe in financing long-term investments with long-term debt and we chose the convertible market both due to the favorable conditions in this market and the diversification it gives to our debt maturities in our capital structure.

The Company has received a number of questions about the accounting on the convertible debt and potential accretion dilution. The offering will be immediately accretive and is immediately accretive to earnings and earnings per share with little of this impacting the current quarter since the offering closed near quarter end. For book purposes we have interest expense of 2 3/8% plus amortization of the debt of another 1/8% and we are obviously already investing these monies at higher rates and we continue to void capital and other investments, we will continue to even have a more positive spread on our cost of funds.

Regarding the calculation of earnings per share, the treasury stock method of accounting applies to the share count, thus the share count and the calculation of fully diluted EPS only increases on a creeping basis after the Company's share price exceeds the conversion rate underlying the offering of $48.05 a share. And I'll be happy to go over the exact formula if anyone would like to off-line.

Finally it's important to note that we continue to evaluate all our strategic options for uses of cash on an ongoing basis. We are intently focused on putting our cash to work in ways which will maximize shareholder value. A few shareholders have specifically inquired about share buybacks. It is clearly a tool that management and the Board have to boost EPS and management and the Board continuously review all our uses of capital and the options for this which create shareholder value. However for now we believe we have numerous alternatives for deploying capital which we believe will produce higher returns and better long-term shareholder value.

With that, I'm going to turn it over to Bill.

Thanks, Mark. Just a brief comment on the last remark about returning cash to shareholders. I don't look at this as a way of boosting EPS. If we were to consider it, we are not currently inclined in that direction given the other opportunities that Mark has described. But we look very closely at all alternatives to improve shareholder value. And the forces that we are looking at or the factors we are looking are cost of capital, improving, adding value in excess of our cost of capital in addition to organic and strategic building blocks for the business. And we believe that we have considerable opportunities both organic and through selected acquisitions in each of the four business units, new railcar, manufacturing, and Marines construction, railcar repair and refurbishment, leasing and services. And again while these businesses are separate businesses, they are also integrated in a model which creates a chain of value among each element. So I just wanted to comment. We have had a few questions about that. We are not intending a current share prices and with a current list of opportunities to move forward with any buybacks or anything of that nature at least at the current pricing.

Mark did talk about the quarter that just ended. I'm going to try to keep my remarks brief and address just the market outlook; some of our strategic initiatives and give a little more flavor on how we are intending to use our cash and tactical plans to execute on these strategic initiatives.

I'd like to address directly the decline in our stock value within the past month, a decline that's hit other cyclicals and especially other builders of freight cars. While the capital markets have focused on macro factors and these are important, we watch them very closely, in fact the railroad segment is benefiting from forces that are much different than those that we'll operate in the overall economy. We've spoken about those and I don't mean to be repetitive but they are important in our business to understand. And these forces are well-known, higher fuel prices, the relatively weaker U.S. dollar, truck driver shortages, pricing power by the railroads that are improving their franchises, a still strong U.S. economy, and continued strong demand for imports further fueled by global sourcing by U.S. manufacturers, and finally, the Asian phenomena and world appetite for commodities.

While I know that we are interested in the individual details of what drives our business, we cannot ignore these forces. They are different for the railroad segment. That is why I continue to be positive on the supply segment and on our business.

Turning for a moment to the decision to do the convertible. We have a very, very accretive situation in that our strategy is to invest in higher rates of return by first turning to our leasing fleet. This will affect assets sales in the future as we build new freight cars and put them into our lease fleet. We have also grown our market share in Europe and expanded into new markets; our European backlog has doubled over the past six months to 1600 units. For our year ending August 31st, Europe will be about break even, better than our peers have on coming out of a weaker economy over there but with profitability occurring in our Q4. This momentum we believe should carry into fiscal '07. And while we don't intend to invest significant capital in Europe under our current plans, we believe that we because of the tax benefits in Europe, we believe that we will have some momentum from Europe in fiscal '07.

Similarly and looking at some of the areas where we believe we have growth, our marine operations have very good visibility with improving backlog and the fundamentals in this business are very positive with both good replacement demand and demand for traffic growth. This business has been a rather modest business with revenues of about $25 million increasing capacity at our Gunderson facility and our major marine capital expansions will allow this business to grow sequentially turning this into a potential $60 million a year business in annual revenue in a very short time. And we believe that with additional throughput and other benefits and other initiatives we are doing in the marine business that we can achieve a $100 million business within a year or two.

Presently about $250 million of our annual revenues come from marine construction, railcar repair and refurbishment and leasing and services. This is up from about $140 million just five years ago. These businesses tend to be a stable source of revenue in earnings and cash flow. They also generate higher margins than our new railcar business. And these are all businesses in which we intend to focus growth. However, again, I remind you that we are a business that has an integrated model linking those businesses with the business of new railcar manufacturing so we also intend to grow in each of these business segments in a balanced approach through organic and selected acquisitions.

So what about the specifics of this? As today Mark discussed we are a very liquid company. We've done several capital raises over the past year to position the Company to act quickly on growth opportunities. And we are intending to deploy that capital in each of our core businesses. We believe we can grow each of these businesses in investments with return and return on invested capital greater than our cost of capital and are highly accretive to earnings. We are examining and in the process of executing on a number of opportunities to fully deploy this capital over the next six to twelve month time horizon in accretive and value-added transactions. And again I will say that as time progresses, we will continue to look at all options in connection with changing circumstances to improve shareholder value.

Specifically on the new railcar side of the business we intend to continue to make investments which will increase our manufacturing efficiency and throughput particularly in our more profitable operations in the U.S. and Mexico. We also intend to continue to strengthen our global supply chain network including potentially acquisitions and some vertical integration. And we are launching a renewed lean manufacturing system which we expect to add further to efficiency.

Today we source materials globally with substantial sourcing and subassembly relationships in castings and other relationships in both China and India. These relationships are growing constantly and strengthening our profitability and efficiency. Our manufacturing footprint in North America and Europe is well-suited to continued expansion of these efforts. This both drives down our costs and increases additional opportunities for manufacturing capacity to increase throughput at higher margins.

Similarly we are seeking to build on our recent vertical integration initiatives which protect our supply chain of critical components. Our Ohio castings joint venture with ARI and ASF provides certain key components for freight cars. Our acquisition of YSD Industries provides boxcar doors and roofs for both new railcars and the aftermarket. We see more opportunity to expand in this area not only because the area is profitable but because it will allow us efficiencies in our global sourcing and manufacturing integration in achieving efficiencies.

In summary, our strategy for growth is to invest in each of our four business segments and to build on the synergies between them. We intend to aggressively implement lean manufacturing and drive costs out of our business. We intend to vigorously defend and maintain our leadership position in double-stack intermodal railcars where growth rates and rail loading are much greater than for other car types and for which in 2007 we believe the outlook is strong through demand generated by continued strong traffic growth in container loadings in North America.

We also continue, as Mark indicated, to focus on car types where demand is anticipated to be strong and we are migrating our focus from cars in the forest products market to covered hopper cars, refrigerated boxcars, auto carrying cars which transport automotive vehicles. These cars present an additional growth opportunity but also higher margin opportunities than the opportunities for forest products cars under the current circumstances.

For those who have had concerns about the affects on moving into different car types as it relates to our intermodal business, it's important to recognize that the initiatives in conventional freight cars are intended to supplement and to replace the lower margin products that we have previously been manufacturing. And we continue to have a strong focus and a strong mix in our forecasts for double-stack equipment.

Finally, we are very pleased about where we are with a strong balance sheet and numerous opportunities above -- to generate shareholder value. I would be happy to turn it back over to Mark now and answer any questions you may have.

Thank you, Bill. And, operator, if we could open it up for Q&A, we would appreciate it.

(OPERATOR INSTRUCTIONS) Wendy Caplan.

Hi, it's Wendy Caplan from Wachovia. A question on inquiries. Can you talk about what you are seeing in terms of order inquiry rates? And how they compare to say six months to a year ago?

Wendy, I would take that into -- I would take that in two parts, one, double-stacks and intermodal cars and the second would be the other conventional cars. Taking the last segment first, there is still robust demand across the range of conventional cars which we both now newly manufacture and which we don't presently manufacture. We've shown a remarkable resilience in the past in entering new markets when the time is right. So we see a great deal of opportunity there. And our challenge for 2007 will be to allocate our available manufacturing facilities to the best margin products and optimize our efficiency and our profitability.

Turning to the intermodal market, that market had a large build a year ago. And during this year has ended toward equilibrium. There is a very strong continued demand for international containers moving in the last five weeks at the rate of 10%, some railroads and ports, 12% to 15% growth. We see -- we rationalized our double-stack plan. We're building double-stacks in our primary factory in Portland which is well-equipped for that car. And we intend to be able to keep that car or keep that factory filled in 2007.

We are at a time when there is a great deal of study by the parties who buy these cars and lease these cars and we are having active discussions about 2007 at this time.

So just to clarify, it sounds as it from looking at the intermodal, recent intermodal numbers, that the expectation was from the buyers was lower traffic growth in intermodal. We are seeing better traffic growth. So what you are suggesting is that customers are reevaluating their demand levels and there may be more orders coming? Is that fair?

That is fair. It is fair because the 2006 data indicated there could be potentially some softening. It didn't occur. That growth particularly in the New Year's rush, the Chinese New Year's rush coming up is going to be robust. And we have to plan for growth in 2007 which is going to require another round of double-stack equipment. So on a base of 120,000 cars, 8% growth, maybe a little too simplistic, 10% growth in certain categories, you can calculate the math how many cars could be built. I think that the generally accepted forecast is somewhere in the 8 to 8000 range, some may be a little lower than that. And there are some dynamics moving around on that. But we see a very strong year in 2007 on the fundamentals.

Okay. And thank you. And on your lease fleet in terms of rates, can you give us some sense of magnitude in terms of the higher rates that you discussed in your release? And also the relatives change in age of the fleet given the portfolio mix?

Yes, Wendy, first on the portfolio mix. When you exclude our Golden West program which is the old refurbishment program of Southern Pacific we have now at the UP, when you back out those cars, about 1000 of those cars the average age of our fleet has gone from about 19 years to 16 years. As well, overall, the average rate of our lease fleet -- lease rates on our lease fleet have gone up due to the change in the mix, they've gone up about 30% or 35% on balance on unit count but there is a little bit of mixing of apples and oranges there because there is -- because a part of that is a change in younger equipment from older equipment. But on average so again overall, the rentals that we have earned per unit is up about 35%.

Also I would just say that from an average lease term of less than two years, a couple two years ago, we're up in excess of an average lease term of three years and we are pushing maturities on leases out.

Okay, that sounds like a good thing to do at this point. And finally, Europe has been an issue on a relative basis in terms of the top line. Can you give us some update as we are hearing some noise that Europe may be improving a bit. Can you comment on that please?

Europe is improving a bit. There is a great deal of momentum in the fuel driven or energy driven momentum in Eastern Europe in Russia that is carrying over somewhat into the markets where we operate in the West. We sell from our factory in Poland into the West. We're also broadening our productline there. We expect and we've done relatively well compared to our peers, European peers and other peers in that market. We have an opportunity there to have profitability in 2007 which we did not have in 2006 due to the stronger market.

Thanks very much.

Peter Nesvold.

Bear Stearns. Hey guys. Just a couple I guess line item questions and then I want to ask a big picture question on '07. On the quarter itself it looked like SG&A was a touch higher sequentially. Was there anything maybe deal related from the convert that was in there or how do you see that trending into fourth quarter?

Peter, there were no -- the costs related to the convert would have been capitalized costs and part of the 8% percent roughly is amortization of that going forward [1/8]% of the offering side. So that was not part of it. The growth in the G&A would more been due to across the line efforts either to organically manage the business or to -- on the acquisition front. Going forward we probably see G&A running at or slightly less than the amount that we did for the past three months here.

Okay, that is helpful. And then on the interest in FX, I think you said around 7 million quarterly going forward?

Pardon me, Peter?

In your comments, I think you said interest in foreign exchange going forward about $7 million?

Correct.

In fourth quarter on the leasing and services revenue, you had some [decent] sales last year -- it was about $0.08 a share I think, year-over-year how do you see the revenue in that business? I guess you have the extra $100 million from the convert, but I'm trying to drill down on the leasing revenue growth in fourth quarter. And roughly what do you think the gross margins look like in the leasing business in fourth quarter?

The gross margins we see in the 55% to 60% range. And we would overall see revenues in the fourth quarter to be down a little bit on the leasing and services side of the business, again, due both of those the margin and the revenues being tied into the -- impacted by lower gains on sales in the fourth quarter and more modest gains on sales in the fourth quarter.

That is understandable, okay. I guess big picture then and for fiscal '07 I guess I just want to flash forward three months here. If I kind of just play back what I'm hearing on this call, I mean you have cars that are building up on the balance sheet which probably reverse out in the next year. The revenue per unit in the backlog seems to be going up. And you kind of hinted that maybe there it is some opportunity for margin expansion. You can grow the lease fleet because the accretive convert and the value of the lease fleet is going up because the cycle remains strong. I mean is that a fair snapshot of how we should start thinking about fiscal 07?

Yes with one exception. The railcars held for sale of the amount on the balance sheet, the 60 million on the balance sheet, those will wash out but they will be replaced by other -- will continue to cycle cars through there that we put on these transactions. So I expect in '07 that that 60 million balance will be at least that amount if not greater as we continue to grow our leasing activity and to hold assets longer. So we are constantly cycling railcars through that line item, railcars held for sale.

Okay, that is helpful. Thanks.

[Kevin Matsda].

Good morning, BB&T Capital Markets. Just a question on the guidance. You said, if I heard you right, it implied $0.55 to $0.60 in the fourth quarter. And I'm just wondering if you can talk a little bit more about that, why it would be down about 30% sequentially when your volume guidance is up about 25% sequentially. And it doesn't look like in terms of your gross margins on the manufacturing side or the leasing side that you are talking about anything terribly different than what we just saw other than maybe the sale on gain on sale of assets.

Right. I think there is perhaps three factors to consider, Kevin, again the gains on sale which regularly occur but they were very heavily weighted towards the third quarter. So we are going to have substantially lower gains on sale in the fourth quarter, those were $7.8 million pretax. Secondly, there was and FX gain, a foreign exchange gain of $1.2 million pretax that it is hard to predict or bake into the numbers that we'd have a similar amount in the fourth quarter. And you are correct that on the manufacturing side that we would have higher deliveries to partially offset those. And perhaps with a little bit lower gross margin due to the line changeovers and startup of new production lines. And when you bake that all in together that is the reason for the lower guidance on the Q4 versus Q3.

All right then. And in terms of the changeover that you just mentioned, can you talk a little bit more about how big of a disruption that is? Because again, your unit guidance is up substantially in the fourth quarter and the 10% to 12% gross margin is not much different than what you've been running. So is there really a big disruption from changeovers?

No, there is not a big disruption but when you begin new lines as we're doing in Mexico, you'll have a ramping up and that will be occurring in the fourth quarter and partly in the first quarter of 2007. We will also have some regularly scheduled vacation dates at some of the factories that will insert downtime into the picture as well.

Okay and then my last question is it looks like your full year unit guidance of 11.7 to 12,000 is a little bit less than what you'd said previously. Can you just talk about how you make the decision to when you build a unit if it goes -- if you sell it to a third-party customer or you sell it to yourself back into your own lease fleet?

We look at operating issues concerning portfolio mix and balance, how much exposure we have in certain car types, quality of the lease and the market and the interest by buyers and the same counterpart issues that they are concerned about with their fleets. We are also using this lease fleet to realize a very attractive arbitrage on our cash. And we're intending to invest that cash increasingly in higher rates of return so the lease fleet is repository of cash and that can affect the timing of sales so if we find a very positive organic add for example in our repair network for our facility or if we find an acquisition that is attractive, we can deploy cash out of that lease fleet because they are all on lease and they are money good.

So it is not that you are taking care of your own lease fleet at the expense of a customer given that you've got nearly 17,000 units in backlog and you only produced three or so this quarter and it seems like you could have produced many more?

A couple of points there. When we -- our backlog and our delivery figures are external backlog and external delivery. So anything that we produce for and take into our own lease fleet or anything in the backlog that we intend to take into our lease fleet are not included in these numbers. And indeed this is part of the reason why the lower guidance on deliveries is that as we have said is that we are growing our lease fleet and that's been a strategic decision we've made through the year. So our production rates are actually running what we did -- had outlined earlier. It's just that we are taking -- I made the strategic decision to take more into our lease fleet.

None of this impacts the third-party customer because we're here to serve the customer and we regularly generate 150 million to 200 million of a lease transactions in a year. And what we are doing is just turning the dial as to how much of that we own for our own portfolio versus sell off to third-party leasing companies and then provide back office management services. So this doesn't impact the use or the equipment at all.

Okay guys. Thanks for the time.

[Matthew Kelleher].

Smith Barney. My question is a more macro. What were industry orders for the quarter and overall industry backlog and what are the predictions or what do you guys think '07 may look like for the overall industry?

Well, finishing up '06, we think that the current industry estimates around 73,000 cars for the calendar year are approximately correct. Recent orders in backlog have continued to be strong. The forecast and looking at the total industry in 2007, about 60,000 freight cars versus 73,000 cars. So there is a forecast of a slightly lower build or delivery rate in 2007. We're not sure. In the past few years these numbers have moved up from the point where we are as they've done this year and because we've had revisions through the year. So I think that that may be a bit light. And of course for us you've got to look at the mix of cars. We continue to see a lot of strength in the growth of intermodal freight cars in 2007, 2008.

Great. Thank you. But you used to have like a quarterly -- how many cars were ordered this quarter and how many were delivered for the industry.

The June numbers won't come out for another 10 days or so. The June quarterly numbers so we are working off of March 31 numbers.

I got you and I've got those. Okay I'm just early. Thank you, sorry for my confusion.

Those are available and are distributed usually by the industry as soon as they come out.

Yes.

And the last order was fairly substantial. We don't expect that the order rate will be at that height, but it's going to be continuing decent orders I think.

Great, thank you very much.

[Eric King].

It's Merrill Lynch. Could you focus on cars manufactured versus order in this quarter. If I look at the cars up for sale, it looks like it went down a bit. So what was the actual number of cars delivered in the quarter?

Actual numbers, with third-party deliveries was 3000 cars.

I'm sorry, I meant the number produced in the quarter then?

The production was roughly a little bit less than that.

Was it about the 2700 range?

Yes.

So then 2700 seems to be a bit below capacity. Were there multiple line changeovers in the quarter?

There was a significant line changeover, one in our Mexico facility. We're continuing to refocus in our production from Canada to Mexico in the U.S. and there was a startup of a line in the quarter or at the beginning of the quarter at our Gunderson facility.

The biggest impact, Eric, would have been is that (indiscernible) over in Europe where we were -- so Bill was referring to our North America that there were significant activities over in Europe where Europe was a little bit lesser rates for the quarter and they will be coming back at much stronger rates in the fourth quarter and going forward.

Okay, great. If I look forward to Q4, if sales -- if the delivery target is 3500 then what is your production target?

Our production would be in similar to slightly higher ranges.

From Q3 or --?

From the 3500 that you mentioned.

So you are actually looking to produce about 3500 cars?

Correct.

If I shift to the CapEx, for year-to-date you spent about $67 million. How much of that is spent on your internally built cars that you are putting into your lease fleet?

Well, that 65 million is first of all the net number, that is our gross CapEx minus what we've sold. We don't break that out completely but it is fair to say a portion of that CapEx is our cars that we build and a portion of that CapEx is third-party cars such as through our leasing ventures and just trading activities. So probably overall it's about half and half.

So about 50-50 internal and third-party bought?

Yes.

And if we look at the composition of your lease fleet now, how much of it is intermodal versus tank cars or coal cars?

Very little of our lease fleet is any of those three car types. We have partly on the double-stack side is that most of those have been at direct sales. We have not taken a position in tank cars. We have build up a nice smaller part of our portfolio in coal cars. But overall our lease portfolio would be weighted to other car types such as a boxcar and hopper cars.

Thanks a lot guys.

Melinda Newman.

Melinda Newman from Post Advisory. A couple of things. You might have already given this and I might have missed it. Can you give me the number of cars in the lease fleet owned and managed?

Yes, it is 9000 owned cars and 135,000 managed cars.

Okay. And then I think you mentioned something about the number of cars held for sale is down significantly. Generally I think you are aiming on average to be to restore that to a higher number. What again should we expect in the fourth quarter and what is your general aim for sort of a normalized number for cars for the dollar amount of cars held for sale?

You are talking about the balance sheet amount?

Yes.

I would expect that the number at a minimum be the 60 million and that it could grow upwards.

You are anticipating that coming up again in the fourth quarter?

Potentially yes. So this, Melinda, gets to some of our guidance for the year on deliveries and the range of earnings just depends on the exact timing of when we sell those cars out and then recycle them with newer or with additional cars. (multiple speakers) As mentioned earlier, we have a tremendous positive arbitrage (multiple speakers) with those cars.

Sure. It just seems like 60 is kind of more the baseline number than the average.

Yes. By baseline you are referring to --

Sort of a low -- if I look back over the last seven quarters or something the low is sort of 50 to 60. And then you've gone up to as high as 100. And all the capital raising quite a lot of it was I thought to provide liquidity for this activity. So I was just wondering you do expect to bring that up, it is just sort of the timing?

Exactly. I would think you know it may go slightly -- it certainly is going to bounce around but overall it is our intention and we have been holding cars longer before we sell them and then recycle them out again. So it can and will move but on balance I think that you will see that number, that 60 will be at the lower end of things.

Okay. And then another question, on the gross profit on sales from the lease fleet. I just want to confirm that that is really only sales from the lease fleet versus these railcars held for sale? And that all that gross profit and the proceeds, the gross profit is in the leasing gross profits and the proceeds are in the leasing revenue?

You are correct, Melinda, that all of the -- when we have gains on sale those are out of our own lease fleet. The railcars held for sale are principally cars that we build. And you are correct if they are cars that we build then that will show -- when we sell them, it will show up in manufacturing revenue and earnings. There is a smaller number of cars that we invested in. You will recall we had a venture with Babcock, invested in railcars that built by third parties to the extent that we have acquired those cars and then sell them. That will show up as a gain on sale rather than manufacturing revenue in earnings because they are not cars that we built.

Okay. And then last question, on the manufacturing -- I think people are trying to triangulate to this number. On the manufacturing gross margin I think in earlier calls this year you had said you were going to have quite a lot of changeovers that would bring the manufacturing gross margin down sequentially. And we see that. But given that in the fourth quarter you are expecting higher production, higher delivery, can you comment again if you already have on the amount of changeovers and directionally, sequentially, what you expect the gross margin to be relative to the first two quarters of this year? And that is it.

Okay. We did have one that changed over that started at the end of the third quarter and it is carrying into the fourth quarter and then we're going to have, as Bill mentioned, another changeover at another one of our facilities that will occur or two changeovers that will occur at two of our other facilities in Q1. This is North America only. We're having several things, activities over in Europe. And really the increases in deliveries in the fourth quarter as compared to Q3 is as much related to a pick up in activity in our European operation.

On the whole, getting to your question as to margins, we would see that margins that is more likely for margins for Q4 will be closer to those of Q3 rather than the first half of the year due to the very fact of these I just described.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Peter Nesvold from Bear Stearns.

Hey guys, I just wanted to sharpen the model here. What happened in terms of marine revenue in third quarter? And what do you expect to happen in fourth quarter?

Peter, if you can give me a minute on that. I think overall that -- I think overall that the revenues are pretty evenly spread through the year. And then deemed that it was around 10 to $12 million for the quarter and we'd expect a similar amount in the fourth quarter.

Did that conclude your question, sir?

Yes, thank you.

[Mike Roark].

MacAdams, Wright, Reagan. Good morning. A question regarding your thinking on share repurchases. Is it fair to say that given the stock price's current quotation that you felt that there were better potential returns on invested capital elsewhere?

I think it is fair to say that we see better returns on invested capital at this point in time than a share repurchase, just setting that as a global statement.

Okay. Broadly would you be able to sort of shell out I guess on a weighted average basis what you are targeting for an incremental investment return?

I would say that we don't want to address specific opportunities. We've looked at what we believe to be our weighted average cost of capital and we are seeking to have investment returns that exceed that cost of capital.

Okay. Is your manufacturing capacity currently still about 14,500 units?

Correct, that would be our capacity North America and Europe.

Would you be able to offer any thoughts right now on your thinking regarding additions to that capacity?

Our strategy currently is to refine the efficiency of that capacity. And I think we have dramatic value potential in such refinements. We are well along in that process with three lines now running in Mexico, full production utilization at Gunderson and other refinements that we would continue. It is possible that we could increase that. But we are not definitely finding that at this point.

Okay, so with the refinements and current capacity, you see that as being enough to satisfy demand going forward here in the intermediate term?

The only other thing -- yes, I think given our targeted markets, the variable there is that if we enter other car types which is possible. We have other parties competing in our primary products and as that continues, I think it is only fair that we look at theirs. And we are doing that. Also our lean and global sourcing initiatives will increase our throughput which will by itself with the same footprint improve capacity. So we think that these refinements will in themselves improve capacity given the current footprints.

Okay just one more, please. Are you able to say who the 600 orders came from close to the end of the quarter?

We are not, no.

Okay, thank you.

(OPERATOR INSTRUCTIONS) I am showing no further questions at this time.

Thank you.

Thank you very much for your participation. And we look forward to talking to you again on our next call. Have a good day.

And that does conclude today's conference. You may disconnect at this time.