Greenbrier Companies Inc (GBX) 2007 Q1 法說會逐字稿

Hello, and welcome to the Greenbrier Companies first quarter 2007 earnings release conference call. Following today's presentation we will conduct a question-and-answer session. Until that time all lines will be in a listen-only mode. At the request of the Greenbrier Companies, this conference is being recorded for instant replay purposes. At this time I would like to turn the conference over to Mr. Mark Rittenbaum, Senior Vice President and Treasurer. Mr. Rittenbaum, you may begin.

Thank you, and good morning. And welcome to our first quarter earnings conference call. After we review our earnings release and make a few remarks about the quarter that just ended and the outlook for '07 and beyond, we'll open it up for your questions. As always, matters discussed in this conference call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of '95. Throughout our discussion today we'll describe some important factors that could cause our actual results in 2007 and beyond to differ materially from those expressed in any forward-looking statements made by or behalf of Greenbrier.

So turning to our release today, we reported earnings of $0.12 per share on revenues of $247 million. We experienced 32% revenue growth in Q1 '07 over Q1 of '06, with this growth occurring across all three of our business segments. Our earnings of $0.12 per share were below our expectations at the outset of the year, but in line with revised guidance we gave you in late December. As explained then, the short fall was due to a variety of operating, non-operating and timing factors. These factors negatively impacted earnings by $0.40 per share, with about half of the impact relating to operating issues on the manufacturing side of the business, and the balance relating to non-operating and timing issues. Each of these factors is laid out in greater detail in the press release that we put out earlier today.

While the new railcar side of our business encountered difficulties during the quarter, our marine barge, refurbishments and parts and leasing and services business produced solid results. Our backlog at the end of the quarter was 14,300 units valued at $980 million at the end of November, relatively unchanged from our August 31 balances. About half of our backlog by unit count is double-stack intermodal cars. 7,700 units in the backlog are for delivery after calendar 2007. We also reported a record marine backlog that grew to $75 million, up from $55 million at the end of August. Our marine business continues to benefit from a strong replacement demand from an aging fleet and from the double-hull requirements of legislation out of OPA 90.

Now let's turn to more detail and operating performance. First the manufacturing segment, which now consists of new railcar marine manufacturing. Revenues from this segment for the quarter were $169 million, up 19% from Q1 of last year. Our deliveries for the quarter of 2,000 units compared to 2,400 units in Q1 of '06. The current quarter deliveries have a higher unit sales value primarily due to a change of mix in North America, but predominantly conventional railcars as compared to last year's Q1, which was predominantly double-stack intermodal cars. Double-stacks have a lower unit value than conventional cars. In Q1 of '06, our prior year, we were building double-stacks and two forest products car types, box cars and center partition cars. This year, in addition to double-stacks, we produced five different conventional railcar types: mill gondola cars, our Auto-Max automotive vehicle carrying cars, covered hopper cars, center partition lumber cars, refrigerated box cars, and as I mentioned, double-stack railcars.

As we discussed on our last conference call at the end of Q4, some of our double-stack production during the first half of this year, including the quarter that just ended, is expected to be sold later in the year, and is currently held on our balance sheet as assets held for sale. Double-stack contributions to margins during the quarter therefore declined from previous periods as a result of two factors. Both lower production and a lower mix of double-stack rail cars, and a deferral of revenue recognition for certain cars that were built during the quarter. Our manufacturing margins for the quarter were a disappointing 4.2% compared to 13.3% in Q1 of '06, and 11% for all of fiscal 2006. We had anticipated the margins would be down sequentially and substantially this quarter due to the change in mix, new product introductions, lower production rates, and the suspension of production in Canada during the quarter, coupled with line change-overs. However, we did not execute as we had hoped for, and the 4.2% margin did not meet our expectations.

Now turning to our rail car repair and our refurbishment and parts business. As a result of our recent acquisitions, we established a new business segment for financial reporting purposes: Refurbishment and parts. This segment includes our network to 30 shops located across North America, and it continues to be a solid performer. We are pleased with the overall operating results of this segment, including the results of our recent Rail Car America and Meridian acquisitions. As Bill will discuss in a minute, we continue to believe that this unit has revenue synergy and growth opportunities, as well as opportunities to continue to enhance margins. For this fiscal year, which of course only includes a partial year for the Rail Car America and Meridian acquisitions, this segment should generate nearly $350 million in revenues. On a full twelve-month basis, it should generate about $400 million in revenues.

Now turning to our leasing and services segment, this segment is unchanged from the way we've historically reported it, and includes results from our owned lease fleet of 10,000 railcars and our managed fleet of 135,000 railcars. Revenues for the quarter grew 23% to $26.7 million, and margins were nearly 60% as this operation continued to generate solid and stable results. The quarter includes $3.2 million in gains on equipment sales compared to $0.6 million in Q1 of the prior year, and $0.3 million in Q4 of the prior year. We did have certain transactions -- sales transactions out of our leased fleet which were originally contemplated to close during the quarter, and now anticipated to occur later in the year. We are still seeing attractive prices for our leased equipment, and all of the sales that we realized hit or exceeded our budgeted sales prices during the quarter, and we anticipate they will continue to do so for the year.

Our owned fleet utilization did drop some during the quarter to 94%, down from 97% at the end of Q4. We did not view this decline as a trend, however. Rather, as I previously discussed, we did build some railcars during the quarter that we anticipate will be sold later in the year and placed in service. And indeed after the quarter end, we did place those cars in service. And as I said, this -- our utilization should trend back up as the year goes along.

Turning to the outlook for fiscal '07, early in the year when we gave our guidance of $3.10 to $3.40 per share, we noted that the greatest variable to our actual earnings would likely be in manufacturing, deliveries and margins. Indeed, this has taken place, and we have lowered our expectations for both new railcar deliveries and margins. Today we gave new guidance of annual earnings in the range of $2.15 to $2.40 per share, along with a cautionary note that in the current climate, it is difficult to forecast earnings, particularly on the new car side of the business. While we still believe in the long-term health and growth of intermodal and the product diversification strategy on the new car side, we're currently hearing from our customers that 2007 intermodal orders will be more moderate than we had previously anticipated due to the overall economic uncertainty, improved railroad velocity, and high new car builds in previous years. We're also seeing weaker than expected demand for mill gondola cars. So we scaled back our delivery expectations, and we currently believe that our deliveries for the year will be somewhere around the low 9,000 to 9,500 units. Actual deliveries will depend on the orders that we receive for the balance of the year.

These lower production rates and delivery rates will in turn affect our overall 2007 margins. We are keenly focused on improving manufacturing efficiency. Global sourcing, our lean initiatives, and our new Mexican joint venture are key parts of these efforts. However, again, lower production rates and less favorable mix and results for the quarter have dampened our margin expectations, particularly in North America on the new car side. Our refurbishments and parts, marine, leasing and services businesses will continue to be stable sources of revenue, and they will generate about $0.5 billion of revenues in '07. They also provide good growth opportunities. In addition to these businesses, Europe provides about another $100 million of revenues. For the year, we expect manufacturing CapEx to run about $20 million, similar to fiscal '05. Our leasing CapEx is discretionary. Net additions to the leased fleet this year are expected to run somewhere about $40 million to $50 million compared to about $120 million last year, as we pare down our lease and CapEx consistent with our previous discussions to help pay for the acquisitions.

Our depreciation and amortization should run about $35 million for the year, and our tax rate should run in the mid to upper 30% range. We remain quite liquid with our new $300 million revolving credit facility. During of the year, we may seek to term finance a portion of our revolving borrowings that are acquisition, rather than working capital-related, and this will provide additionally liquidity. I will now turn it over to Bill, and then we'll open it up for your questions.

Thank you, Mark. Obviously, we were not pleased with our financial results for the quarter. And as Mark has indicated, a combination of factors interacted to make this quarter fall considerably below our expectations. As Mark has mentioned, poor execution in our manufacturing segment, coupled with the different product mix, reduced production rates, and significant losses at our Nova Scotia facility, combined to produce about half the variance, or a bit more, from expectations, and the balance was due to nonoperational items and timing, all adding up to a fairly large variance from what we expected. Our reaction to, and anticipation of these forces during the quarter, was affected by management's preoccupation with closing the three strategic initiatives concluded during the quarter, and which Mark addressed. We're very focused on correcting the areas which need attention and the smooth integration of these new acquisitions. So far that process is going well, and we like what we see in these acquisitions.

We're addressing our operating issues and expect these to be largely remedied in the coming quarters. However, we do expect issues at Trenton, our Trenton facility in Nova Scotia, continue to be a drag on earnings during the next quarter or two. While we have production of modest amounts to put into the calendar there for 2007 production, we have yet to achieve a labor agreement. And that had a significant affect on our quarter, and will continue to be a drag into the coming quarters. We are addressing a strategic plan for Trenton, and hope to be able to talk more about that at the next quarter's meeting. However, we're also adjusting our 2007 production expectations due to emerging short-term realities in the North American marketplace, and in those markets for which we specifically manufacture cars. Particularly forest products and intermodal cars. I will speak to each of those in a few moments. We are evaluating our longer term facilities, as I said, for -- at Nova Scotia. And turning for a moment to our Mexico operations, we had a series of issues in production with three lines in Mexico, each of which, while relatively simple and fixable in the short-term, had a cumulative effect which were below our expectations.

Turning to the markets and economic conditions in 2007 as it affects Greenbrier, one quarter ago I reported that the outlook for double-stack car growth looked strong. And I continued to believe that this is true in the longer term. However, during the quarter and into the new year, it has become apparent that the short-term outlook is softer than we expected due to the slowing of container growth in the fourth calendar quarter of the year, the large builds that took place in 2005 and 2006. And more significantly, improved velocity and behavior on the railroads accompanied by improved operating practices. Specifically, container loadings were up 8.1% in the first nine months of 2006, but they were only up 5.6% for the last three months of 2006. With a 6% improvement during the quarter in intermodal train velocity, railroads need fewer railcars to haul the same ton-miles as before. About 23,000 intermodal platforms were built during 2005 and 2006. Of course, we had expected and anticipated much of the slowdown in intermodal demand, and we've introduced new conventional railcar types to help us compensate. But the pause in intermodal for 2007 is greater than we anticipated, and these trends have been accompanied with the expectation of a softening economic climate in 2007. We still believe that the long-term outlook for intermodal is very strong, but it is more difficult today to predict specific 2007 demand.

We believe 2007 intermodal demand will be less than published industry's estimates of 8,500 wells or units. Therefore, we've slowed our production of double-stack cars against firm 2007 backlog. While still producing some cars in Q1 and Q2 in expectations of sales in the first part of the year. We will have to increase production and achieve production efficiencies later in the year to meet our 2007 financial objectives. We continue to believe that this expectation is reasonable. However, there is risk to this expectation, and market uncertainties will affect timing of revenue recognition and our balance sheet as the year unfolds. And generally we believe that the visibility for this important car type which has a great affect on our manufacturing margins, visibility has been reduced.

Earlier, we reported that demand for forest products cars had declined significantly as the housing market has fallen. We shifted some of our production to other car types, including mill gondolas for scrap steel service. But demand for mill gondolas also has weakened, and we plan to wind down production of that car type. Other car types are continuing in demand, but we expect to see an overall decline in industry new builds in North America, and a corresponding decline in Greenbrier's new car builds, as well. Industry forecasts are that new car deliveries in 2007 will be around 65, 66,000 units compared to about 77,000 in 2006. However, deliveries could be even lower than those numbers of 65,000, 66,000 units, all factors taken together. Accordingly, we've reduced our production margin expectations for the new car segment during 2007 in North America.

Despite a slow beginning for the year, I am pleased with the foundation that the Company has built for growth in the areas serving railroads, shippers and other owners of freight cars. One of the main reasons we focused our efforts on building a broader business platform is to be able to better navigate impending shifts in industry cycles. Our integrated business model allows to us provide much more than just new car manufacturing and engineering, and places the Company in a position to grow from a combination of businesses with higher margin opportunities through combined service packages. Demand for railroad transportation will continue to be strong, and our diversification and growth in wheel servicing, repair and maintenance, car management, and leasing will put us in an optimum position to create value for our customers and for our stock holders, as well as to diversify our revenue base for the more cyclical new car manufacturing business. As Mark has already pointed out, in 2007 we expect to derive about half of our revenue from sources other than new car manufacturing in North America, including about $100 million of manufacturing in Europe, where the market has rebounded.

During the last quarter, Greenbrier strengthened its new car manufacturing capability with an enhanced manufacturing footprint in Mexico through the GIMSA joint venture and commencement of Auto-Max production at our existing facility in Concarril. Gunderson Portland continues to be our primary double-stack car facility, and we're strengthening our competitiveness there by continued global sourcing and lean manufacturing. Longer term, we expect the new car business to be very competitive, and we will work to lower costs, rationalize our plant capacity to improve efficiency, and develop other car types for production to broaden our product line offering. These plans include a complete line of covered hopper cars and other cars. During 2007 we intend to continue to work on the fundamentals of our business, pay down debt, and integrate the acquisitions just made. We're expecting strength in marine, refurbishment and parts, leasing and services, and improved competitive capability in new freight car manufacturing. We will work hard to meet our issues, particularly those in Canada, and to meet our revised financial expectation. And expect to turn in a solid year, despite a weak start in the first quarter.

Lastly, I would like to conclude with some thoughts about the variability of our financial results. As you've seen, forecasting the new car side of the business can be a complex task. Historically, many on this call have thought that we have been conservative and too conservative, and a few quarters ago you were right. However, our cautionary note in forecasting this year's expectations just a few months ago, proved to not be conservative enough. This is a hard business to forecast, particularly on the new railcar side. It does point to the quality of the strategic decisions that we've made in the last year on the non-manufacturing side of our business. Our leasing, wheel services, repair and maintenance business should continue to grow and in time, have more of a stabilizing affect on the variability of our earnings. They're not quite large enough yet. But they should be in time. And we hope to find further strategic opportunities like these to complement them in 2007 and beyond.

As Mark has noted, and in conclusion, we've given you a revised annual forecast today. Our management team and our Board will continue to evaluate the concept of guidance and its benefits over the next few months. We will look to build a more qualitative and directional content into our prepared remarks for you as the next two quarters progress. Should we elect to discontinue the provision of annual guidance, we will try to update you by our next quarterly conference call. Thank you for your patience. We'll certainly be interested in your opinions around the concept of guidance in the future and on this quarter. If you could save some of those for face-to-face meetings or calls, we appreciate it, as we would like to now turn the Q&A session over to our business results. Mark, back to you.

Thank you. And operator, if we could open it up for questions, please.

[OPERATOR INSTRUCTIONS] Wendy Caplan, Wachovia.

I've gotten more than one or two or three or five questions on the business model. And as we see how disappointing the manufacturing side has been and is expected to be, can you talk strategically about whether now is the time, or is there a time, to think about splitting up the business or deemphasizing -- I know you're deemphasizing manufacturing simply because you've been growing the other refurbishment and leasing piece. But is it a business that you continue to believe strategically you need to be in, in order to have the benefits of the other businesses?

Well, that's a good question, Wendy. And the short answer is yes. We think that it brings a capability to engineer and to design not only new cars, but to modify cars. And it fits in very well with our leasing and our repair and refurbishment business. I think that it is a highly competitive business. And it can be disappointing as we've seen, when a number of factors all come together to produce a bad quarter. But I would just say that this is a bad quarter. It is not the entire year. We are trying to address the issues directly. I am confident that the one in Canada will be addressed in an effective way. The others are relatively easy. The big drivers for us are the Canadian loss in manufacturing, a number of things that occurred with new product start-ups, all of which are manageable. And just a volume issue with double-stack production, now that we've reduced the run rate and we're deferring some sales into the second half of the year.

Okay. And if I could get back to that a bit in terms of your reasons for the low manufacturing margin. Can you, or are you willing to kind of share with us, taking those, the mix issue, the lower production, the inefficiencies with the new car types and the Canadian issues. Of those four problems, can you give us some sense of what was the -- either rank them or give us some proportion of what those were?

The Canadian loss by itself during the quarter was $0.10, which was greater than we expected. We had a compounding effect with overhead absorption, and variances that we did not predict. And then there were a number of timing and slower production schedule issues affecting almost all of the lines in Mexico. There are three lines in Mexico we're running. And in each case, one case we had some quality issues. Another case we had that had to be addressed, and we addressed it satisfactorily. But we had to reduce the run rate on the line. We had some delivery shortfalls and slower start up than we expected on another line. And these, individually, were not major. But together they amounted to a significant amount. And then Mark has also talked about timing and other kinds of nonoperational items that combined during the quarter to produce these results.

If we -- and maybe I am not adding up right. But if we look at the, say, dollar difference in what you were expecting for fiscal '07 before, and what you're currently suggesting you will earn, about -- if I am taking out the kind of timing issues or the non-operating, or things that probably -- the stuff we'll get back, I am guessing that it is about -- was about $0.30 in Q1. And that leaves, if I am right, that leaves $0.70 in the balance of the year. Now that $0.70 is a big number, and assumes more than $0.20 in the present quarter, as well as the next two. Is that how we should be looking at it? Or is this worst case scenario? You're being very conservative? Or is this best case scenario? I mean, how should we think about this? Because I thought I detected a little optimism in your voice, and now I am looking at this and thinking how could that be.

Right. Just to make sure I follow, Linda. I think you're saying there is about $0.30 in the quarter that is gone and won't be made up when you referred to $0.30. And if I understood that correctly, I think that's a correct statement. And then you're saying, well that means the rest of the year there is another $0.70 that in our revised guidance beyond that. And I think that's a correct statement. That another $0.70 that we've taken our guidance down by. And I think that's a correct statement. As we mentioned, the biggest drivers to this are new railcar manufacturing volume and margins. And we've identified that we have open production space. I gave you a range of deliveries at the low 9,000s to 9,500 cars for the year. But that is dependent -- that is dependent on the actual orders received. I think rather than getting into whether or not we believe qualitatively whether our guidance is conservative or not conservative, we think -- I think Bill made some comments to that earlier. This is our best estimates today. But it is dependent on future orders. And we have definitely scaled back our margin expectations, both as a result of scaling back our production, and as a result of the experiences in the first quarter.

I think there are two things going on. The only thing I would add to what Mark just said is the mix, the product mix, matters a very great deal. And it matters not only in the current quarter, but in our expectations for the balance of the year. As I said earlier, I am very bullish on intermodal. I think it has got a very, very strong future. However, there is some moving parts in railroad operating practices and efficiencies that is have made it more murky and more difficult to predict in 2007. We've come off of a couple of years of sizable builds. And the railroads are getting their act together in container intermodal movement. And the combination of weaker shipments in the fourth quarter, coupled with the operating efficiencies that railroads have had through improved velocity, have really made the 2007 outlook more murkly short-term. Longer-term, we believe that the outlook for Pacific -- trans-Pacific trade is very positive, and this is going to be a big thing. Why is this important to our outlook? Because during the quarter and in the last month leading up to this conference call, we have changed our view of the double-stack car market for 2007 somewhat. We are more cautious in the outlook. And there is some risk in the strategy we're using to contain, or to continue to maintain our market share.

Thank you.

Peter Nesvold, Bear, Stearns.

I guess I would like to dive a little bit into the timing and the magnitude of potential gross margin recovery in the manufacturing business. I guess from a big picture it sounds like part of the headwinds in fiscal first quarter were operational. Part of them is demand, particularly as you look out through the rest of this year. I guess the first question would be, given that it seems like a lot of these operational items came up late in the quarter, should I anticipate a step down in the manufacturing gross margins in the fiscal second quarter? Or do you see them leveling off here for a quarter or two?

Peter, we are expecting to see some improvement in margin for the year overall, and in the quarters beginning in the second quarter. Again, part of this is because of, as you referred to, improvements in the manufacturing efficiencies. And then part of it again is just improvements in the mix itself. And that we had product -- further product start-ups and line change-overs during the quarter. So again, we would expect the margins to improve for the year overall and sequentially next quarter, beginning with the next quarter, or the quarter we're currently in, that being Q2.

Okay. So sequential increase in the gross margins is what you anticipate going in fiscal second quarter versus fiscal first quarter.

Right.

If I could think ahead maybe two to three quarters. If I am willing to look through kind of mid single-digit manufacturing gross margins for two or three quarters, I would like to try to put some bookends where you think you might potentially be exiting fiscal '07. I kind of want to preface by saying I completely understand visibility is low right now in terms of demand, so therefore production. But perhaps is it possible to put some bookends around where you think you arguably might exit fiscal 2007 in terms of manufacturing gross margins? Perhaps in a downside scenario where you continue to produce at sort of this 9,000 to 9,500 level. And maybe in an upside scenario where you return to what production was in the '05 '06 timeframe. Is there any kind of bookends you can provide?

I think if you get back up to the levels that we were at last year, we did produce overall manufacturing margins of 11% in fiscal '06. And certainly we believe that those types of margins, and even expansion of those margins are doable in the type of environment that we operated in. But we want to repeat that calendar '05 and calendar '06, the industry deliveries were in excess of 70,000 units, which are levels that are above the norm. And frankly are not levels, if you look at the industry forecasts, which I am sure you have, Peter, those are not levels that are being forecasted over the next several years here, nor are they levels that we would subscribe to.

Peter, the other thing that has to be adjusted for is the background noise that's being produced right now by our Nova Scotia facility. With suspended production there, that's going to be a drag on the manufacturing margins on a consolidated basis until we resolve that. And we have two issues there. One is the union agreement. We also have, since the Company has produced primarily for the forest products market, a combination of factors. And we have been moving a lot of our production to south in the United States and Mexico. So when we resolve the Canadian issues, and either restore it to a normal level of operations or stop the bleeding, we would be able to, I agree, get back to the levels that Mark is describing, or exceed them. Mix, however, is important. And what we have done during the quarter is slow our production rate at Gunderson. And we have had delays in sales that were other also anticipated in the quarter just reported. And those are factors that affected the margin. So if we can restore double-stack production to higher levels, which we're expecting to do in the second half of the year, then you will see pronounced effect on margins.

Sure. I guess, Mark, the only comment I would make is there hasn't been a strong correlation between your production and your backlog and the overall industry production and backlog over the last couple years, because intermodal was the first to recover, sort of the first to weaken, as the this rail -- CapEx cycle has progressed. And then you were building up the lease fleet. So I respect the comment that 70,000 builds for the industry, or deliveries for the industry, you might not see that for a year or two. But I would argue that your deliveries really never hit that type of unusual peak that we saw for the overall industry.

I understand, Peter. And I think that goes to Bill's comment about intermodal specifically, and so I appreciate the comment.

And if I can ask one or two quick other questions. You gave full year guidance -- updated full year guidance. But you didn't break out your expectations for the acquisitions, although you did to some degree in revenue, et cetera. But I guess from a big picture standpoint, do you feel comfortable with $0.60 to $0.65 per share accretive for the Meridian and for the RCA deals in fiscal '07?

Yes.

Okay. And then I guess just last question. Given that you've had this softening in order intake, does it have any impact on the Mexican JV plants as you progress through the year?

No. Our JV plans are in products where there is stronger demand. Actually, we are intending to press ahead with the JV.

Okay.

Our -- basically, our Mexico operations are in good shape. The two areas where we're getting hit again, Nova Scotia, our Nova Scotia facility, as we transition production into other facilities. It is time of transition. And then secondly, reduced expectations on run rate and timing of sales for the double-stack line.

Actually, one quick question for Mark here. Mark, going forward in fiscal second quarter and forward, with the Meridian and the RCA deals now completely in the results, what kind of SG&A and interest line expenses should I be expecting?

I think on the SG&A side we're probably in about the 18 -- around the $18 million range. The other area, as you point out, Peter, that -- and on the interest expense side, probably around the $10 million area.

Great. Okay. Thank you for the time.

Frank Magdlen, The Robins Group.

A couple questions. You talk about your backlog. And if I did it right, you have 6,600 units left for calendar '07. How much is left in your fiscal '07?

Frank, we didn't break that out or disclose that. I think I know what you're trying to get to, how many additional -- are you trying to get to how many additional orders?

Yes.

For the range of 9,000 to 9,500 cars that we talked about, it would be in the neighborhood of about 1,000 to 1,500 cars of additional orders for the balance of the year to hit those numbers.

That's your fiscal year?

That's correct.

As opposed to calendar?

Correct. Any additional questions, Frank?

John Barnes, BB&T Capital Markets.

Real quick, on the lease fleet side. If you're beginning to see some weakening in demand, are you concerned at all about continuing to add to the lease fleet? And will -- have you made a strategic decision yet on where you think the size of the fleet should top out?

We don't see a material weakening in the leasing side in car types that we're leasing. We are comfortable with the capital budgets that we have earlier spoken to in leasing. We are taking significant steps to extend the maturities of our lease fleet. And indeed are doing that on a quarter -by-quarter basis. So we're terming out as many of the leases as we can. So we feel reasonably comfortable with the leasing strategy right now.

Okay. In terms of demand for intermodal cars, you talked a little bit about just softening containers, and the rails are getting better at turning the equipment. I am curious from a competitive standpoint, do you feel like there has been any competitive change in the landscape that might be eating into some of your orders? Or are you concerned at all that one of your competitors is running prototype testing on an intermodal platform right now? Is that a concern at all?

Well, it is always a concern. But we expect harsh competition, and we think that the effect that that will have is principally in putting pressure on margins and pressure on pricing. But we continue to improve efficiencies for that product, and it is a core product for us. We believe we can be very efficient with the double-stack line. It is going to be difficult to compete with us, although we expect others to try. As they do that, we of course, are returning the favor. And so we're cheerfully developing our plans for the covered hopper and other markets that they're in.

Okay. Are you -- any concern that you're a little late to that game?

No. We've been in the market before, and we've got a good facility in Mexico for that. And the new GIMSA venture is a good facility which will give us multiple lines. So I think we have got a good -- a very good manufacturing base there. The one thing that isn't competitively driven, but it's on the same point that all of us ought to keep in mind, when you're hearing us talk about a little more caution for 2007, one of the areas that I am concerned about is the railroads themselves, and their behavior, and their reaction to conditions that are fairly new to them. Which would be constrained infrastructure capacity. And how they deal with improving efficiencies under conditions of constraint can affect car demand in many areas, not just the areas we have been talking about.

Okay. Very good. And then lastly, just in terms of future orders, obviously we've had a couple of good years in just about all car types. Have you seen yet that the rail has really begin in earnest replacement programs? Most of what I have seen thus far has been to keep up with the economy. We have only seen a couple of announcements, Norfolk Southern buying -- announcing they are going to replace 30 some odd thousand coal cars over the next ten years. Have you seen anything in your car types where the class ones have announced major replacement programs that you think you will benefit from, either this year or next?

The thing that's driving our intermodal business is largely growth. Although in the next three to five years, there will be replacement. There is a mix issue in the double-stack car fleet and the intermodal fleet which will be addressed by new car builds. In general, I think that railroads will respond to their throughput and efficiency constraints by trying to operate cars that are efficient, that are well maintained, and that don't have down time. So I think the market will reward quality and new high capacity equipment. So directionally, I think you're correct that there will be a tendency for that replacement.

Okay. All right. And then lastly, just on a comment you made concerning looking for additional opportunities this year, especially on -- to couple with the acquisitions you've already made, could you give us an idea of how much additional debt you're comfortable with? Obviously, if the core operation is under a little bit of pressure from an earnings perspective, that's probably going to impact cash flow to a certain degree. So maybe there is less cash from operations to invest further. And it is probably going to necessitate some additional leverage in the Company. Can you give us an idea what your comfort level is with your balance sheet today, how much more you would be willing to absorb from a debt standpoint? And what kind of opportunities you think that allows you to pursue? Is it similar to what you've already bought in terms of size? Or are you looking smaller? Are you looking larger? Just give us some framework there.

Well, if an opportunity came along that we couldn't resist, we would have to have an approach that would be a structured finance approach to tapping that opportunity and certainly we could find partners that would allow us to do that. However, I think our game plan for the balance of 2007 is very straight forward. We're going to integrate these acquisitions, pay down debt, and stick to our knitting, deal with some of the operating issues that we've talked about on this call. We are liquid. We have a good balance sheet. We think we can withstand shocks, and if necessary, even disappointments. Our management team has gone through a number of cycles. We're very equipped to seize market share in down cycles. We're not anticipating -- we're not talking about the -- a down cycle here and the edge of a cliff. We're just seeing a softening and a timing issue in the double-stack intermodal market. I think it's going to affect us in 2007. But I believe that as we get out of the first two quarters into the second half of the year and into 2008, generally, the outlook for rail is very, very strong, and I think it is a good place to be in.

Very good. Thanks for your time.

Frank Magdlen, The Robins Group.

Good morning, again. I did get cut off. But a couple questions. Is Europe going to be profitable?

We believe so, yes.

All right.

I am only saying it that way, because I'm not sure you will believe me if I say just yes.

No, we all have some degree of trust on that.

Yes.

Also, are you willing to give out the number of barges that are in the backlog? I am assuming they're getting more expensive because of the legislation, the double-hull. But I don't know what that relates to in the number of units?

Frank, it is about six units. I don't have the exact count, but it is about six units that are in the backlog.

All right. And, Bill, have you mentioned all the new car types that you're in now, during the conference call? Or could you just review them?

We are building double-stack cars, cars for the waste market which will be beginning to built after this month in Nova Scotia. We're building covered hopper cars, auto carrying cars, and a mechanical refrigerated car in Mexico.

And then grain hopper cars. And we'll be winding down the refrigerated box car. But we'll continue -- we'll be building all the other car types that Bill mentioned.

And as we referenced in our comments, we're building gondola cars for the steel market. At Gunderson, we expect to be winding that one down, as well.

All right. I think the other issue that people are grappling with is to get back to your '06 gross margin. I don't think we totally understand the basis -- or the gross margin disparity or difference between the intermodal, and say a hopper car or auto to get that difference. Are we talking 300 or 400 basis points difference?

Frank, I think it is as much the production levels that we're operating at and the length of the production runs. You're right that we haven't broken it out by car type for competitive reasons. But it is not only the mix of the car type, but it is the runs, the length of the runs, and the fact that all the car types that we just rattled off, we were introducing during the course of the year.

Okay. Thank you very much.

Kim Burkhardt, Burkhardt Research Services.

You mentioned in your press release that the Company has expanded its railcar product lines in North America, and you've also been on completing your acquisitions and building more railcars in Mexico. How is all of this going to impact your volume of car building at your Oregon plant?

The Oregon plant is our primarily double-stack car plant. So what's driving production at that plant is the -- is that particular market. And that's the plant where we slowed production for double-stacks. We are building gondola cars in that plant. We can build multiple car types, but that's the primary purpose for that plant.

Okay. Thanks a bunch.

Mike Roarke, McAdams Wright Ragen

Question on when you're planning to disclose, I guess, the historical operating metrics for Meridian in some type of pro forma filing?

It will be later this month, Mike, in a couple of weeks we'll be filing that.

Okay. So later this month, then?

Yes.

Okay. Great. Thank you. One other thing, too. Would you be able to discuss pricing trends for both new equipment and the equipment you sell out of the lease fleet from time to time?

Mike, I will take the lease fleet. We talked about that a little bit earlier. And we're still continuing to see strong prices for assets out of our lease fleet, and we do not see that abating. I will let Bill talk about the new car side.

Okay.

I don't think that there has been material abatement in pricing. There is price pressure through competition, but I would hesitate to quantity it.

Thank you very much for taking the questions.

Peter Nesvold, Bear Stearns.

Two quick questions here. First, in the December release and today, you indicated that you had been prebuilding some intermodal double-stacks in anticipation of selling them later in the year. Are those committed orders? Or were those units that you built to fill production holes in the schedule?

We have both. We have a firm backlog, firm committed orders for 2007. And we are building some cars and leasing those cars in anticipation of selling them later in the year.

Okay. And, Bill, if I can reconcile some comments here. Because on the one hand, I mean, I'll preface it by saying I look at leasing demand typically as kind of the variable supplier of capacity in an industry. And all of the comments, but for maybe a short-term dip in utilization in fiscal first quarter, everything you're saying is telling me that leasing demand is still very strong. But on the other hand, you're saying that the manufacturing, the OE demand, is softening. Normally, I would expect to see the inverse of that. That the leasing demand starts to dry up first, and it is followed by the manufacturing side. What am I missing there?

I think that -- let's go back to what the drivers were for the quarter. We have some purely operating issues having to do with our Mexican facilities that were in combination disappointing for the quarter, and they have to do with execution. Those are easily addressed. We have a suspension, a reduction, and a labor negotiation going on in our Nova Scotia facility, which took a big hunk out of the quarter. That facility is being driven by forest products. The forest products market declined and certainly, there is softness in the forest product segment of the leasing business. But our leasing business is fairly diversified. We're in all car types, with the exception of tank cars in North America. So we don't see the -- we dont' see a softening overall. While there are some pockets of -- some pockets in the forest products markets, and one or two other car types that have softened somewhat in the leasing side.

You are right that there is a lag effect. And if there is a significant downturn in freight car construction and pricing pressure, if we were to have changes in factor costs like steel, then you could have a reflection of that in lower leasing prices. However, the global outlook and the estimates for 2007 into 2008 are for a -- well, a softening of production, a softening demand for the new car business, it isn't an abrupt drop off. So I think it will be -- I think that the build rates will be somewhat lower than industry forecasts in 2007 and 2008, but still very solid. And I think that the railroad traffic is going to sustain the kind of production of newer high capacity cars that were talked about by one of the other callers.

Okay. Thanks.

Frank [Bick], Pilot Advisors.

Just on the bigger picture in terms of the railcar manufacturing, if 70,000 were manufactured, give or take, and we're going to be in the 60s. I guess I am hearing that a lot of cars are older, 25 to 30 years old, and they are going to need to be replaced soon. Is that true? Is that what might drive not even close to a huge dip if demand is a little softer?

Well, it is true that the railroad fleet is aging. The railroad operating practices, and the changes in safety practices have put new life into some of that equipment. Where the impetus again comes for new construction is for improved designs and improved capacity. Again going back to the central challenge that a railroad president has today, and this affects shippers and owners of cars. The central challenge is to how do you optimize your network capacity? So the driver really will be more efficiency, reliability, speed, velocity. These are the things they're looking for. And new car construction is driven, if you -- driven by improvements, if you can make improvements in that model. So a higher capacity car, a car that is more reliable, it would tend to push out the older, lower capacity cars, and cars that have higher maintenance or less reliability for service.

Okay. And cars that are being made today versus 20 years ago, they actually move faster? Is that what you're saying, as well? That just the speed is faster? Or, no -- ?

No, it's just -- it is the capacity, and in some some cases the length or the use of the -- or the use of other aspects of the rail envelope. Other elements that fit into the rail envelope.

Okay. And then you mentioned Canada, Nova Scotia a bunch of times. And in terms of in the quarter we're in right now, the second quarter, is there any production? Or still no production?

We will be resuming production in the second quarter up in Canada for a particular order up there.

Okay. And if you were to say -- is it half the issue demand and half the strike? Or is it more strike, less demand?

We don't have a strike going on there. We are trying to conclude a labor agreement. It is the demand for the cars that have been built in Nova Scotia. It is a combination of that and the efficiencies of the plant, and the fact we've been moving our emphasis toward the U.S. and Mexico.

Okay. I guess would there be a time where you wouldn't even need that facility? I guess, that could be a possibility, as well?

Well, when have you this kind of operating profile, we would be remiss if we weren't exploring every option for that plant. We're looking at it very hard right now.

Okay. And that plant makes what? It could make, what, 3,000 units a year?

Right.

Okay. Thank you.

Justine Ho, Post Advisory.

Wanted to talk about working capital. It looks like you had a use of cash of working capital to the tune of, want to say, $45 million or so. Can you talk a little about that, and what is your outlook for the full year? Would you end up being able to generate some cash from working capital, or be neutral? And maybe talk a little about that?

We are focused on a working capital management program, Justine. And we would expect that we'll be working to bring inventory levels down. And also that on the receivable side of the business, that receivables will be coming down, as well. We had a large accounts receivable due to some trade terms that we collected on after the end of the quarter. So as we look at the year as a whole, we would expect improvements in this area, and the net working capital balances to come down.

Okay. And just overall, so you'll improve from the use of cash in Q1. Overall, do you think you can generate cash, or be cash flow neutral from working capital, given that's based on your 9,000 to 9,500 I guess guidance on your railcar deliveries, and -- ?

We do, Justine. But I go back to Bill's comments, that some of this will be affected by the timing of orders. And that we have dispositions on the syndication side. And that that will be a driver for the actual deliveries for the year, and of course, that will affect the inventory levels that go along with it. So part of this is the moving piece of exactly the timing of orders and then when production is converted into deliveries. But if it plays out as we hope and anticipate, then, yes, it would -- working capital would generate -- the changes in working capital would generate cash.

Okay. And you mentioned earlier that your goal is to reduce debt. And maybe if we can talk about the free cash flow to reduce debt, and I am assuming that you anticipate some free cash flow that is going to be generated. First the thing is, on your revised EPS, are you looking at -- what's the revised EBITDA for the full year?

We haven't provided that. We haven't provided that information, Justine. It would be in excess of $100 million. But again, we haven't provided an EBITDA number for the year.

Okay. Well, when I look at what you mentioned on CapEx, you mentioned that the manufacturing CapEx will be about $20 million, and the net CapEx from fleet would be $40 million to $50 million. So if I were to use the $50 million, that's about $70 million right there, plus roughly 35 in interest. That's about $105 million, plus what you would have to pay in taxes. I am wondering about your goals on the reduction of debt, and I guess where do you -- can you quantify it at all?

Well again, I think it would go back to we said that we are not looking to additional acquisitions this year. The actual reductions in debt would come from, you could take the CapEx numbers, but ultimately it is going to be the cash flow from operations which is going to be dependent on our earnings and the working capital reduction. So until -- because they're moving pieces here that we talked about before on the order and delivery side, we really can't quantify how much, because it will be dependent on how the year plays out. But again, we cut back our CapEx programs for the year, and we're not in an acquisitive mode in the short-term here.

You can expect some working capital management that will generate a fair amount of that though.

So it is more an objective of where we're going to reduce our CapEx and our acquisition budgets this year, and use our operating cash flow to pay down debt.

And what is your comfort level on the total leverage of the Company?

We can -- I think that is partly dependent on the mix of our business. And someone asked earlier about is it tied to acquisitions as well, and it really depends on the type of acquisition. On our debt -- our revolving debt facility allows us to go up to 75% total debt to total capitalization. Certainly we view some of that more as a safety valve. Today we're in the low 70% range. But again, it would ultimately depend on the types of businesses and the mixes of businesses. As we talked about earlier, the low 70% based on today's business on a static state, we would like to see that come down a little bit.

Okay. And you mentioned that sequentially your manufacturing margin will improve. Do you expect to iron out the operating inefficiencies from the line change over within the -- by the second quarter will it be all ironed out? Or is that more of -- I guess I am wondering about the timing of when will you fully iron out the inefficiencies on the line change over?

Well we're into the second quarter now. We are making good progress. We've identified each of the areas that need to be remedied. And again, it is not -- the big factors that are drivers are the Nova Scotia issue and the product mix set in intermodal. But on the others, we believe that we'll have them resolved by the end of this quarter for sure, and we'll may be making progress on them during the quarter.

Okay. So it sounds like at least for the inefficiencies from the line change over the result by the end of the quarter. But the more bigger drivers, Nova Scotia and the product mix. What you mentioned earlier, which based on this quarter's gross margin is about 4% on the manufacturing side, and that you think you can get to back to the levels of '06 and the 11% range, would that be the case even if the product mix stays the way it is today?

To be clear, Justine, we were not intimating that by the end of this year that we would -- this fiscal year, that we would be back up to the 11% range. We talked about scenarios where we could achieve the type of margins that we achieved last year. But that's not what we're forecasting or suggesting.

Okay.

Justine, these are important questions. I might suggest, since some of them are fairly detailed having to do with the balance sheet, that you might want to have Mark give you a ring after the conference call, and we can go through some of those for you if you want.

Okay. Great. Thank you.

Operator, if there are no further questions, I think we'll conclude the call for today. We appreciate your interest. And I will be around to answer any additional questions. Thank you. Have a good day.