Greenbrier Companies Inc (GBX) 2007 Q2 法說會逐字稿

Hello and welcome to The Greenbrier Companies' second-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 call is being recorded for instant replay purposes.

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

Thank you and good morning and welcome to our second fiscal quarter conference call. Both Bill Furman and I will make some comments today regarding the quarter and the outlook and then we will open it up for your questions.

As always, matters discussed in the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today, we will describe some important factors that could cause Greenbrier's actual results in 2007 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

Today, we reported a GAAP net loss of $0.38 per share on revenues of $240 million. We also announced we will close our unprofitable Canadian manufacturing operation during our third quarter at the completion of the current order. The GAAP net loss of $0.38 per share includes a significant drag of $0.63 per share associated with our Canadian operations. Specifically, the $0.63 is comprised of $0.14 a share of operating losses incurred during the quarter by this facility, as well as a non-cash impairment charge of $16.5 million and a cash tax benefit of $8.6 million associated with the write-off of our Canadian operation for tax purposes.

Clearly, we are not pleased with our overall financial results for the quarter. However, while the manufacturing side of our business continued to encounter difficulties during the quarter, our refurbishment & parts and leasing & services businesses continued to produce solid results. We remained focused on integrating our recent acquisitions in order to create a more diversified and stable business model that is less dependent on the inherently cyclical nature of the new railcar manufacturing side of our business. That said, we are optimistic about a significantly better second half of the year in our manufacturing segment as we improve performance and anticipate increased deliveries.

Turning to our backlog, it was 14,300 units valued at $990 million as of February 28, virtually unchanged from the 14,300 units valued at $980 million as of the end of our first fiscal quarter. About half of our backlog by unit count is double-stack intermodal cars.

Now let's turn to more detail on our operating performance. The manufacturing segment consists of new railcar and marine manufacturing. Revenues from this segment for the quarter were $119 million, down from $185 million in Q2 of last year. New railcar deliveries were only 1200 units for the quarter compared to 2800 units in Q2 of '06. The current quarter was particularly low for deliveries due to a few short-term issues we faced. We experienced lower demand for railcar types Greenbrier currently produces in North America, manufacturing issues that led to a temporary slowdown in production of one of our product lines in North America, component supply shortages in Europe, which slowed production, and over 500 units produced in the quarter that either went into our lease fleet or that will be sold later in the year.

We expect our deliveries will be higher in the second half of the year than the first half. We currently anticipate our deliveries for the entire year to be around 8000 to 8500 units, down from our earlier guidance of 9200 to [9500] units. Since we delivered 3200 units in the first half of the year, this implies deliveries in the second half of the year will be about 4800 to 5300 units. Actual deliveries will principally be dependent on availability of components in Europe and manufacturing efficiencies in North America.

Our manufacturing margins for the quarter continued to be a disappointing 2.8%, compared to 11% for Q2 of '06. However, this margin includes negative margin of $3 million from our Canadian operation, which was shut down for virtually an entire quarter, and this contributed to the substantially low margin. When you back out our Canadian operation, the margins were closer to 6%.

As well, one of our lines in Mexico continued to experience some production difficulties as quality issues in one line caused production rates to be lower-than-expected, contributing to higher hours and inventory accumulation. This has been addressed and reduction rates are back to targeted levels. Manufacturing margins will improve because of these higher effects and the effects of lean, as we have taken remedial steps.

As we said last quarter, we expect to have a more favorable product mix in the second half of the year, with more higher-margin double-stack cars sold. These two items, along with the Canadian shutdown after the completion of the current order, should benefit margins for the second half of the year.

However, as a reminder, third-quarter margins will still negatively be impacted by losses at our Canadian facility, as the closure of the plant will begin during the third quarter and we will still see a drag from Canada in the fourth quarter, as well as the shutdown will not occur overnight.

As I touched on earlier, our refurbishment & parts and leasing & services business continue to perform well. Our refurbishment & parts revenue and margins are both up from Q1 as a result of having a full quarter of the Meridian acquisition in Q2 as compared to less than one month in Q1. We are very pleased with this acquisition and our acquisition of Rail Car America. As Q2 is seasonally the lowest revenue quarter, we still anticipate fiscal year '07 revenues for this segment to be around $350 million, and on a fully annualized basis to run about $400 million, with also a continuation of strong margins.

The leasing & services segment includes results from our own lease fleet of 10,000 railcars and a managed fleet of 135,000 railcars. Our lease fleet utilization grew to 97.8%. This is up from 94% at the end of Q1 and 97.2% as of August 31, '06. The current quarter includes $2.6 million in gains on equipment sales compared to $2.2 million in Q2 of last year. We are still seeing attractive prices for our leased equipment, and hit or exceeded all of our budgeted sales prices during the quarter, and anticipate continuing to do so for the balance of the year.

Our leasing margins were a strong 52%. These margins were down from the prior quarter, in part due to storage and transportation costs incurred during the quarter to get some cars back in service and to get our utilization up. So now that these cars are in service, we believe that there is some room for modest margin enhancement for this segment.

This quarter's taxes include an $8.6 million tax benefit associated with the write-off of our Canadian investment and a $0.5 million benefit associated with reversal contingencies and amended state income tax provisions. The tax rate on operating earnings excluding these two benefits was 32%, in line with historic ranges. In the second half of the year, we expect the rate to be about 35% to 40%.

Turning back to our Canadian operation, we anticipate that the worst of the operating losses are behind us. However, we will not have a tax benefit against these operating losses in the second half of the year, and so there will continue to be a drag in the second half of the year that should be slightly down on an after-tax basis from the first half of the year on an operating basis.

We expect that shutdown costs, which will be incurred over the course of the next year, will be about $10 million pretax, with no related tax benefits. We consider these non-operating -- these shutdown costs to be non-operating items. Therefore, the cumulative P&L effect of the closure of TrentonWorks is nearly $18 million. However, the cash outlay is only about $1.15 to $2 million, as the impairment charge of course is a non-cash item.

For the year, we expect manufacturing CapEx to run about $20 million, similar to fiscal year '06. Our leasing CapEx is discretionary and we have pared back this CapEx from Q1. We now expect our net additions to the lease fleet this year are about neutral to $10 million positive, compared to about $120 million last year, again, as we pared down our leasing D&A to help pay for the acquisitions -- our are leasing CapEx to help pay for the acquisitions.

D&A expense for the year should run about $35 million. We remain quite liquid and continue to take steps to enhance our liquidity. After the quarter end, we issued $100 million of term debt at our leasing subsidiary, and the entire proceeds of this offering were used to pay down our revolver. As a result of this financing, cash flow from operations and proceeds from asset sales, we reduced our balances in our revolving debt facilities to about $100 million at the end of March.

As we noted in our press release, finally, given our revised new railcar delivery margin expectations for the second half of the year, as well as the difficult environment in which we continue to operate, we do not expect to achieve our previously anticipated earnings guidance. As well, we our suspending guidance at this time. We remain focused on managing through this period and continuing to position the company for future growth opportunities. I'm going to turn it over to Bill now. Thank you.

Thanks, Mark. As Mark has said, this was a disappointing quarter, driven by low volumes and poor financial performance in the new freight car side of our business. And as he has indicated, this was due in part to some operational issues and also in some part to the general freight car market and our perception of that market as it affects us and the products that we manufacture.

Taking our operational difficulties first, some of which we talked about in the last session in the first quarter, we did have to slow production on some of our products due to a variety of operational issues, including quality and supply chain availability that particularly impacted our inventories in Europe and in Mexico. And I will talk to some of these today and indicate some of the steps we have taken to deal with those issues.

In summary, I believe we have dealt with these very decisively, particularly those related to TrentonWorks, and in the other areas as well. And as Mark has indicated, I believe that on the operational side, we will have a much better performance in the second half and we will be back on track.

In the case of our Concarril facility in Mexico, I think it is worthwhile to note that not all of these issues with slower production rates, which obviously affect margin and profitability, not all of this was a result of factors within our control. In particular, production on our covered hopper car line at our Concarril facility in Mexico was slowed to accommodate customer concerns surrounding design issues and structural failures in cars built for the customer, not by us but by a competitor, in which the customer had experienced some failures recently, which caused them concern over the engineering design of our car and they asked to subject the car to extensive testing at Pueblo.

I am pleased to say that, as expected, that the car past and exceeded the tests, and this and other issues that we were able to address at that facility regarding production and performance are allowing us to bring that production back to targeted levels in the third quarter and the fourth quarter of this year.

This and other actions have given us confidence that Concarril will be a good performer in the second half. And the other factor that went on at that facility is we were ramping up on our AutoMax line and we have achieved the targeted rates on that line in the second half at the targeted margins.

Margins in manufacturing during the second quarter were of course affected by Trenton, as Mark has already addressed, and I am going to comment on that in a moment. But by poor performance as well on a gondola car line in Portland due to ramp-up of labor which we allocated to our marine operation in Portland to achieve higher throughput. Again, we expect both of these to be remediated in the second half; action taken in the quarter should contribute to higher margins in marine and the gondola car line will be replaced with other work.

Turning to Trenton, it is never an easy decision to close a facility. But the combination of a weaker forest products market, the very strong secular outlook for the Canadian dollar, uncompetitive labor and benefit costs at Trenton, coupled with geography and other factors really meant that we didn't have a choice. While this will have some short-term pain in terms of the cost to the community and to those of us who have enjoyed the relationship with our associates up there, it will mean a better economic foundation for Greenbrier as we shift and continue to shift our production facilities to Mexico and to our primary facility in Portland, Oregon, on the new car side.

On a more positive note, our second facility in Mexico, the GIMSA joint venture in Monclova on the U.S. Mexican border, has produced its first car. The quality is excellent, we like what we see. We are looking forward to expanding our operation there, and we believe that this will be a very cost-competitive position for manufacturing there in Mexico. Two of our three North American manufacturing facilities are now in Mexico. We believe this will be a significant improvement in the future as we look at manufacturing margins.

I think in summary that we have addressed the operating and execution issues that contributed to some of our weak financial performance in the second half in the new manufacturing -- new car manufacturing segment. Performance in other segments was universally strong, with the exception of marine, which is, of course, included in manufacturing segment.

I will say though that our performance in the manufacturing segment was also affected by the weaker market for freight cars, at least for those types of freight cars which we manufacture, including forest products and double-stacks. We slowed production in both productlines to preserve backlog, and this affected throughput and therefore profitability. And this was especially affecting us in the first half on our double-stack car line.

Speaking of double-stack car demand, I must admit that we were not expecting the pause in double-stack car orders and the improvements in velocity that the railroads have been able to achieve that has contributed to that pause in double-stack car orders. However, we remain positive on the longer-term demand for double-stack cars, and still have very good traffic fundamentals looking into the balance of this year and into the next fiscal year.

Container growth is still solid, especially in international containers, and the velocity improvements and absorption of earlier builds have certainly contributed to the duration of the pause in orders for double-stack car units in 2006 -- in late 2006 and 2007.

While there is still a lot of double-stack equipment stored, we will still soon be in the spring season, which is moving into a pickup period for this business. And much of the present equipment is not efficient for use in double-stack service for the kind of traffic that is presently moving; international traffic in particular is continuing to grow, in some cases, in the Western ports, in double digits. And we believe that both the supply and velocity adjustments will cause new car orders in the near term.

But there will also be a market for retrofit of some of this equipment and for new units to be carrying international boxes. Therefore, we don't see a permanent reduction in our throughput at Gunderson; we do have backlog for that facility. We are being conservative so that we don't run out of that backlog. And there is some upside if we are able to secure orders in the current environment and can increase that rate, having reference to the production numbers that Mark had indicated.

In general, we're very pleased with the integration and activities that have taken place in the maintenance & repair business at Greenbrier, rail services. And we continue to be pleased with the business model that we have and the performance of our leasing business. We are going to be focusing on keeping our general and administrative expenses in line with revenue and margins, and we will be doing more of that in the second half of the year. Mark, I will turn it back to you for questions.

Thank you, Bill. We will now open it up for questions, please, operator.

(OPERATOR INSTRUCTIONS) Peter Nesvold, Bear, Stearns.

Good morning, guys. On the Canadian facility, you just signed a union contract there about a week ago, and now we get news that the facility is being shut for new car development. So am I missing something here? I sort of was under the impression that you were going to continue to operate that facility. I am happy to see it go -- I mean, I feel bad for the jobs, but I think interested in the equity, I think it is for the best interest of the Company. So can you just maybe elaborate a little bit, because it is just a little confusing to me?

Yes, we did file something with the SEC that -- it talked about our disappointment in the labor contract. We were happy to have the contract to complete the work, but we were signaling to the union throughout that negotiation that we were not pleased with the productivity elements in the agreement. And we weren't pleased, nor was our Board pleased, with the threat to strike during that period.

Nonetheless, this was an economic decision. We simply don't have a productive labor agreement there and the costs of benefits in Nova Scotia have almost doubled, with the statutory workmen's comp. Its geography is against it and the Canadian dollar is certainly very strong, making sales into primary market in the U.S. in U.S. dollar-denominated transactions difficult.

So we were trying to explain to the union that this was the environment in which we were operating. We needed productivity improvements, didn't get them. But at the end of the day, all of these other factors contributed to it as well. It is the best thing that we should be moving to areas where we can have more efficient manufacturing in the present economic circumstances.

But I guess I'm just going through the headlines here just to make sure I am not missing something. It looks like you reached a labor agreement with the unionized employees at TrentonWorks -- and this was announced just on March 19th. So am I asking -- it might be a dumb question, but did you sign a deal three weeks ago, a labor contract, and now, three weeks later you decide to shut the plant down?

We told them that we might shut the plant down. We warned them that in the negotiations that we needed to have productivity improvements and we weren't able to get them, but we signed the contract; we wanted to avoid a strike. We weren't sure how this would play out, so we decided to take this to the Board, and the Board decided to shut it down.

The signing of the contract, simply, gave them what they'd asked for, and it is just not enough for us to continue to operate the plant. But this is not about a negotiation. We're not going to reopen this; we've made the decision, we're going to go on with it, it is behind us. And in no way were we acting in bad faith with the union. We explained this to them from the beginning and this is where we are.

And I hate to harp on this, but I guess I am just a little frustrated right now. I am probably not alone, and I just say that out of frustration. But can I -- I just want to understand better. Did you sign a deal three weeks ago that now is going to cost you money to get out of?

No, no. You have got to be more direct. It won't cost us money to get out of -- we simply signed what they wanted us to sign, and we've decided to shut the plant.

Yes, there is no increase in severance cost or benefits of anything of that nature, Peter, by entering into this extension of contract, and then making the decision to shut down the plant --.

That is really what I am concerned about, because -- okay. That is helpful to understand.

(multiple speakers) getting to, the answer is no.

Okay. Maybe if we could switch gears now and just talk a little bit about Gunderson. I [want] to pull the transcript and just go through a lot of the comments again. But can you talk about the operational metrics or something -- margins out of Gunderson or something -- where you were in fiscal fourth quarter out of that plant, where you were in fiscal first quarter, and then where you ended up, either for the full quarter or how you exited the quarter. Really what I am trying to gauge is how much of the operational disruptions that we saw in the December pre-report are still with us, how quickly is it improving?

Peter, we don't break out our margins by facility, and we don't want to go there for competitive reasons. Clearly, the margins were down in each of our facilities, for the different reasons that Bill discussed. But they were down, each of our facilities, the margins were down in Q2 from where they for were last year. And Gunderson, it was more a question of throughput and some of the issues on our mill gondola cars, where in Mexico it was more an issue of the covered hopper issues that Bill talked about. And in Canada, we talked about the low production rates -- well, Canada being dormant for the quarter.

Let me try to see if we can [get] this another way, just really simply. Gunderson, with the exception of improvements in the second half -- and we are reaching some improvements in the second half on the marine margins -- is a relatively stable force at the current planned production in terms of the total picture. So as far as the Gunderson part of the mix, this is all driven by throughput. We are running the double-stack line at a much reduced rate from last year, and that rate will be continued, but the margins may improve slightly.

The real driver has been -- in much of this has been our Mexico facility, in our Mexico facilities, and that is where we were suffering some throughput disadvantages in the first half that we don't expect to have in the second half.

And so when you look sequentially from fiscal first quarter to fiscal second quarter, is there anything you can quantify in terms of throughput, whether it is down in Mexico, or whether it is Gunderson, just to compare sequentially how it was looking operationally?

You're comparing Q1 to Q2?

Yes, because I don't really care about the year-ago comparison. What I want to understand is operationally, is the efficiency getting better from where it was off a very low base. And I am trying to think forward how much more potential recovery and potentially the timing delivery recovery in terms of an operational improvement.

Right, production was down both at Gunderson and in Mexico in Q2 compared to Q1, and we expect that production rates will be moderately up at Gunderson in Q2 in the second half of the year compared to the first half. And in Mexico, we expect them to be up more substantially as well. There are cars that are hung up on our balance sheet that will be delivered for revenue recognition purposes in the second half of the year.

I understand seasonally usually 2Q is down from 1Q. Putting aside seasonality, are you able to measure anything in terms of operational improvement? I guess to hear that Q2 is down from 1Q doesn't give me a lot of confidence. I am trying to understand, is that seasonal or are you really not seeing many operational improvements yet?

Well, part of it, as Bill mentioned, we slowed down some of our production rates during the quarter to stretch out that backlog. So it was not -- it had less to do with throughput issues at Gunderson at all; we had made decisions to slow down production in Mexico. We certainly slowed down production as a result of the covered hopper issues that we had talked about, and we expect those, the production rates in the second half of the year to be up significantly, both as we have improved our labor hours and our efficiencies down there. And now that we have these test results behind us and our quality in place, that these are the reasons that we will be up significantly.

And man-hours per unit, would that be another way -- do you measure it that way, which might be more apples-to-apples than throughput?

Yes.

And how does that compare sequentially 1Q to Q2?

Q2 -- I would say the second half of the year that we are expecting significant improvement. And remember in Q2, again, looking at Mexico, we slowed down our production rates significantly down there; and our throughput in Q2 compared to Q1, it was down over 10%, 10% or 15% has a result of --.

The two are related, Peter. If you slow the rate, it has an effect on the -- generally, given the manning on the amount of hours for the units. So the labor hours are improving dramatically. We expect improvement in labor hours and we do track that. We are also seeing improvement in labor hours in the second half, continued improvement through our lean efforts in both Gunderson and Mexico.

What gives you confidence in that? You've had two disappointing quarters here; so, I mean, I don't question that you're optimistic about the back half of the year, but what do you hang your hat on? Why should we believe it, to be blunt?

Well, in reality, Peter, we saw the labor hours come down at the end of the second quarter. So we are already seeing that, we're seeing the labor hours come down both in Gunderson and in Mexico, Gunderson being Portland. And we have increased our throughput rates -- we've increased our production rates back up in Mexico. So we are already seeing the evidence of this.

Okay. Two other quick ones and I will jump back into queue. Mark, in your prepared comments, you said second half manufacturing margins up from first half. Fair to say you're talking on a reported basis and not on a kind of adjusted basis, adding back the overhang from Canada?

That is correct, Peter. The one question is the $10 million of shutdown costs that we will incur over the next quarter that would be stripping that out. It would be -- we would like to show that as a separate line item, but we will have to see how we report that in the second half of the year. So excluding the shutdown costs at Trenton, we would expect to see -- we would expect to see improvement in gross margins on the manufacturing side.

Last question. You have levered up pretty significantly here in the last 6 to 9 months. What kind of debt covenants do you face and how close are you to triggering any of those?

The term debt financing that we did gave us a lot of additional cushion under one of our offerings and covenants in one of our facilities, so that that no longer really becomes an issue. It's really our debt-to-capitalization or debt-to-equity covenants. Our second quarter was our tightest quarter, but we expect that as the year plays out that we will have more than ample room on this, and that it is not an issue, and that we certainly have the full support of our banks.

Just to clarify, the only meaningful debt covenant you face across all of your capital structure is debt to equity?

Either debt-to-equity or debt-to-capitalization, correct.

Okay, thank you.

(OPERATOR INSTRUCTIONS) J.B. Groh of D.A. Davidson.

Morning guys. Can you hear me okay?

Sure.

Mark, I just want to clarify on that $10 million of remaining costs related to Trenton. You mentioned in the release over a year, and then it sounded like you said it is not all going to be in the third quarter, is it. Or how does that spread out over the next four quarters?

It will be over the course of a year, over 12 months. As we incur those costs, we will take the charge, we will take the charges. Most of those will be labor severance type cost and labor related costs. But yes, it will play out over the next 12 months or so.

But given that it's mostly labor and severance cost, can we expect most of that in the third quarter, or -- how should we think of that when we are modeling in the gross margin? Assuming that you don't --?

Most of it will be in the third and fourth quarter. And certainly it would be our preference to show that is to be able to break it out on the face of the statements, but we will have to see how that plays out. We will certainly -- rather than just show it in cost of sales -- but we will see how that plays out for accounting purposes, for reporting purposes.

Okay, so then I know that you have pulled the guidance -- and I think Peter covered this -- but sort of our baseline gross margin would be the 6% adjusted. So that is your baseline for the improvement over the second half of the year, instead of the --?

Again, there will be some operating -- well, two parts to this, J.B. We are producing cars up at Trenton right now; that order will be completed during the quarter. So that is going to flow through cost of sales. And there will still be some operating costs, even in the fourth quarter. We won't -- the shutdown won't occur overnight, and we still -- there are certain costs -- there are operating costs and there are certain costs that are included in the $10 million. So we -- if you're referring to gross margin, then you know, there is still going to be some of this hitting the P&L.

The other thing that is going to happen in the second half of the year is that our operating losses at Trenton -- we are going to have no tax benefit associated with whatever costs we incur, whether they are operating or these closure costs, we will have no tax benefit associated with that.

Okay. And then, you know, in the release, you mentioned that you have got 7700 units in backlog that are subject to some -- fulfillment of certain competitive conditions. Can you remind us what that means?

That is part of our multiyear contract, and those are cars that they are firm backlog that have pricing in them, but that we have to be price competitive on that backlog, and that is the contingency associated with it.

So it almost sounds like -- well, not an option, but how would you -- so you have taken a deposit for those units? Or --?

I'm sorry, is it what for those units?

Have you taken a deposit for those units?

No, no, it is backlog that has pricing. We have to be competitive. We always -- it is within our control whether or not we are competitive. And as long as we are competitive on pricing, it is a take-or-pay contract.

Okay, so it sounds like -- almost like a purchase right or something. Okay. And then could you maybe give us the barge deliveries in the quarter versus last quarter?

I may need to get back to you on that. It might be easier to look at it in terms of revenue recognition. And both in the first and the second order, the revenue recognition was in the range of $12 million to $15 million; and in the second half of the year, we would expect it to be slightly higher than that.

Because last quarter, didn't we have something flip from the end of the quarter into this quarter? Has stuff continued to slip to the right and is that why you're getting a little more in the second half, or --?

That is part of it, yes. And indeed, sequentially in Q2, our revenues were up from Q1; and in the second half of the year, we expect our revenues to be up from the first half of the year.

Okay. Thanks a lot.

Art Hatfield, Morgan Keegan.

Morning, guys. I actually had the question about the 7700 cars, and thanks for the answer that you gave. But just one follow-up to that. Is there a reason that you kind of pointed that out now? Are you seeing pricing pressures in the market and you just kind of wanted to make clear how your backlog stood relative to that?

Art, I think it has always been in our 10-Qs and 10-Ks, and I think we always also had it in our last quarter press release. So it is always -- it has always been disclosed. Maybe we have -- so I don't think there is new news there. Whether it has always been in the press release versus the Q on a consistent basis, I just don't know without looking at it. But I am sure last quarter that we had it in there and this is nothing new.

Okay, I just didn't recall it being in the last press release. I knew it was in your other filings, and I just thought -- I was curious if there was a particular reason why it popped up. But if you say it has always been there, then good enough for me. Thanks. That's all I got.

Ramez Nashed of Morgan Stanley.

Hi. Could you discuss your outlook for CapEx spending, please, going forward?

Yes, for the balance of this year, it is going to be modest; it is going to be about $10 million for the balance of the fiscal year. And that will be manufacturing CapEx. What we have talked about as our leasing CapEx on a net basis is going to be about neutral for the year.

Each year, we evaluate what our leasing CapEx; manufacturing you should think about is about $20 million to $25 million per year. Some of that is maintenance CapEx, about half of that is maintenance CapEx and the other half of that is discretionary. And the leasing CapEx is totally discretionary so we have not made our plans yet for fiscal '08.

Got it. And the second question is from a management perspective, is there anything different management is doing going forward versus what has been done before, if I may ask you?

I'm sorry, anything different that management is doing as compared to before -- and then you broke up the little bit.

Exactly. No, I was just saying if I may ask that question --.

I guess I am trying to ask you your thoughts about management performance so far -- are you satisfied?

Well, we're not satisfied with the financial performance, but we believe, with the exception of the operating issues that we have addressed and talked about, that much of the performance has to do with the market and our adjustment in the production rates. We have been hit very hard by the decline in the forest products business and we have a pause in the intermodal marketplace. When that occurs, it affects the production rates. That rate affects profitability through overhead absorption.

And we are very focused on the operational issues, we are very focused on the margins, to try to get the margins to improve and increase our cost competitiveness. We have a number of cost reduction initiatives that we have implemented in the last quarter, and we are going to spend some time working on trying to communicate our business model a bit more to the market. So those are some of the changes that we have made as a result of looking at the first quarter.

Thank you.

[Eric Kang], Merrill Lynch.

Hi. I was calling with a question on TrentonWorks. If we look at Q1 versus Q2, was the loss in Q1 comparable to that of this quarter?

For our Canadian facility?

Yes.

Our loss in Q1 was about $0.10, whereas our loss this quarter was about $0.14. And again, in Q1, we were operating at Trenton, where in Q2 we were not operating.

Okay. As we look through your backlog, how do you think about the cadence of production going forward? Is it more weighted toward the out years? Do you have flexibility in how you manage that?

I have some concerns about the overall nature of the freight car backlog, with respect to the mix, particularly the degree to which the backlog mix in the industry is driven by ethanol. I think that a lot of confidence in intermodal. But much of our behavior has to do with our viewpoint on the market and preparing for the nature of the market ahead of us.

So the cadence that Mark has talked about is weighted toward heavier production in the second half than in the first half. That should help our margins. And in addition to that, the efforts that we have taken to address the specific issues that we had with the production rate and the quality issues in two of our lines, one in Mexico and one in Portland, I would think will have an effect.

Clearly, Eric, we have had the discretion in some of our backlog to slow that production rate down, and we have made some of that decision, as we have discussed, to preserve backlog.

On the other end, if you are looking at our backlog and saying we have this very big backlog, why are we not accelerating some of that production, we are doing it for two reasons. One, the concerns that Bill has expressed and our desire to preserve backlog. And secondly, there are -- in many of those cases, there is defined timeframe when the customer wants the order.

Okay, if you go back to TrentonWorks for a second, what are you planning to do with the -- if any equipment is left there, are you planning to sell that, are you going to move it to other facilities?

That that we can use economically in our other facilities, we will use, and that that we cannot use, we will liquidate.

Are you worried about that finding its way to competitors?

Pardon me?

Are you worried about any equipment that you sell finding its way to competitors and exacerbating the supply situation?

There is little doubt that that will not find its way to competitors.

Okay. On the new term loan facility, what was the interest rate on that?

It was LIBOR plus 100.

L plus 100. And does the structure of that facility limit your flexibility in terms of supplying and selling railcars?

No.

Great. Thanks a lot, guys.

[Jim Leventhal], Levy Harkins.

Good morning, guys. Can you hear me? Listen, I'm going to ask you about the leasing business; give you a break about manufacturing for a second. Fleet utilization seems like it's pretty high and I am just wondering, does that imply that lease rates on the margin are going up? And if you could just give me a level detail, sort of by car type, on how lease rates are looking, that would be helpful. Thank you.

We see least rates as -- it does not mean that lease rates are going up; we see least rates generally as flat. We have -- we think we have a healthy profile in our equipment mix. We have improved dramatically in the last two years the average age of our fleet, and I think that we probably have a little bit different set of dynamics than other companies would have; each leasing company has its own individual profile.

I don't think we would want to comment on car type by car type. But generally, we just see a fairly static -- a static market. Of course, having said that, the forest products markets have adjusted, and that is off of a base of some softness in that business, but most of our equipment is leased longer-term.

Could I also just ask a follow-up? Are you seeing any third party transaction levels that imply an increase or decrease in the value of the cars in your leasing fleet?

I would say the values -- to compare one quarter to another, the values are still -- it's still a very robust market and secondhand values of railcars remain strong.

Thank you guys. I will get back in queue.

[Josh Mayhoff] of RG Capital.

Hi, guys. I wanted to just kind of ask, going back to the manufacturing margins, and this is somewhat just to get me a better understanding of the business -- you talked about kind of some demand declining from the forest products business. And if I understood you, you said you kind of reduced your utilization to preserve or extend backlog.

I just kind of need to understand that just in general, because I just look at if your utilization is declining, your fixed costs aren't being absorbed, your margins are going down. So if you could kind of explain to me why you slow production to preserve backlog, if I'm understanding the correctly, and how that -- that seems to me just intuitively it would hurt margins -- and if there is something I'm missing there.

Well, I suppose that you could say that slow is better than no production. And I don't mean to be flip, but margin is not the most important thing in the longer run; it is having the ability to recover in a cyclical business. Managing a cyclical business is a little bit different than managing a business with a really steady, level demand of product. And we just -- we don't want to run out, because when you run out of backlog, you see what the profile looks like for TrentonWorks.

Okay, so it is a question of if you are not running anything through it because you have gone through your backlog too fast, then you have calamitous --

Look at it more like a -- rather than a sprint, a long distance run, a longer distance run.

So in terms of obviously operating, what is your ability to kind of -- let's just say that for whatever reason, things continued on a downward slope instead of starting to improve just overall economically, what is your kind of ability to rationalize capacity to kind of match that? What is the kind of lag time it would take you to kind of keep it a -- keep margins kind of -- if you wanted to, say, keep margins flat in the face of continuing decline in demand?

We have shifted our production with these moves announced today to more competitive facilities. Over the past year, we have done that, and that is going to have an effect. We have changed our production mix. We're accessing cars that if you look at the forecasts from the industry sources are going to be in more demand, the covered hopper cars of various types; we're looking at other car types. And we believe that the fundamentals are very strong in intermodal.

So we are not particularly pessimistic about our ability to go through a cycle like this. We have gone through many cycles and we have got an experienced management team. We are experiencing a pause in double-stacks and we have had some operating issues that have affected margins and performance. And we are capable of rationalizing these units if it is required, but we are not expecting that to occur.

That double-stack, is that unique to yours or are you seeing that kind of across the board, all of your competitors are seeing that same --?

I can't speak for my competitors. My sense is that there is -- that the velocity improvements and the velocity changes that are going on in the railroad side of the business will have some longer-term effects than some of the car types that have lower turns and lower velocities; and that the current levels of backlog will, over time, decline in some of those car types.

All right, the double-stacks now, I don't know exactly how this works, but that would seem to me that given the kind of congestion on the railways and you can only make a car so long, it would seem to me that the double-stack should be one of the more robust. Is there any reason why that is not the case?

It has been complicated by the improvements in railroad velocity and the railroad's efforts to improve velocity. With respect to the efficiency of some of the equipment that is stored today, single-level equipment and longer 48-foot equipment, that isn't as efficient. Some of this equipment will has to be refurbished and reworked.

So you will have some, in effect, replacement demand and rework opportunities that will be longer-term in nature, and there is going to be a significant demand for international units to handle international growth and perhaps for some domestic units in the next few years.

Both of that will benefit us. You are on the right track that intermodal is the strong area of rail, and that is where the growth in rail traffic is coming from. So there is nothing fundamentally that has changed about intermodal. What we are talking about here is more of a slowdown in the new railcar orders to bring the equipment needs back in balance as a result of improvement in velocity in some of these cutdown programs that are taking place with less efficient equipment.

Going back to an earlier question, we didn't expect the falloff in intermodal demand to be as abrupt as it was this quarter. It has been driven by railroad velocity improvements. The underlying demand, container growth, remains robust. We are making adjustments in this current year, including changing our production rates as a result of that unexpected development. But it hasn't changed our fundamental view of the market for double-stack demand or intermodal.

Just a little bit on the mix. If the forest products was down, could the Chinese -- the tariffs on the Chinese forest products' imports, could that help somewhat on your forest product demand side here, or would that be offset by possibly less intermodal if the Chinese are shipped -- if there is more tariffs on Chinese imports?

I think that is more driven, the forest products, by the slowdown in the housing market. And until that market rebounds with the significant amount of (indiscernible) that had occurred over the past few years, that we don't expect a rebound in the forest products car market here.

If you don't mind, I think we are going to give a couple -- take a couple more questions from a couple more people. I would be happy to talk to you off-line, and then I need to conclude the call.

Okay, that would be fine.

Adam Comora, EnTrust Capital.

Hi, great, thanks. I am trying to bring together the two -- the statement that there has been a pause in new order. First of all, new orders in the quarter were what, 1200 cars; is that about right, because you delivered 1200 and your backlog stayed flat?

That is -- I don't have it right in front of me, but that is in the neighborhood, correct, you're right that the backlog remained flat. There was a little bit of production that's hung up on the balance sheet as well as we talked about, so that actually the new car orders -- I am getting to that our production was greater than our deliveries for the quarter.

So since our production is greater than deliveries, that implies that our orders were a little bit over -- new orders were closer to about 1400 to 1500 cars.

Into 1500, okay. And how should we be thinking about this pause? Do you think we are going to get an order rebound here in this quarter, or judging by the actions that you are stretching out the backlog, this pause could continue longer than that? Just help me understand what is causing that pause and how long that pause could last?

Well, what we said is that we do anticipate orders, additional intermodal orders during the balance of the year to be let in the market. We certainly hope and believe that we will be able to participate in those orders. We're not going to try to market time when those orders come, or try to predict when those orders come.

In fact, we did have some intermodal orders occur during our second quarter. I don't want to get into the quantity of it, but we did have some orders in the second quarter and we do expect intermodal additional orders to be let this year.

Okay, thanks.

Paul Ross of ING.

Mark, there is an item on your balance sheet of $82 million for assets held for sale. Could you give us a better idea what portion of those are in Trenton and which are not? And what portion of that do you expect to realize in cash over the next 12 months, and what would you do with the proceeds?

Right. None of assets held for sale as of February 28th are from TrentonWorks. And again, what's in assets held for sale is either finished goods wheels inventory, finished railcars that are in transit, or railcars with leases attached to them that we sell to third-party investors. All of what is in railcars held for sale will turn over the next 12 months. It will be replenished with other items of a similar nature, so we constantly will have amounts in railcars held for sale.

What we anticipate is that those balances will come down over the course of this year, primarily as we bundle up these asset syndications, these lease syndications. So at the end of this fiscal year, we expect that $82 million to be lower than it is today. And as a whole, $82 million is probably on the upper end of what we would see on that line item on the balance sheet.

Mark, is 35 at the end of the fiscal year a more realistic assessment for what it should be, or what type of range should we plan for?

I would say probably the 35 to $55 million level. Some of this depends on the timing of lease syndications. I just want to emphasize as strongly as I can that all of that line item is a very liquid line item. All of the assets in there are readily -- can be readily monetized.

And by that he means they are on fixed lease terms, and we don't have a great deal of inventory or a significant amount of any unleased or unmarketed equipment in that number.

I understand. Just in the Trenton situation, I suspect that either in the next quarter's balance sheet or at fiscal year-end, we will get a number for the expected realized value of the Trenton facility?

Yes.

Does it includes some land? I mean, can you give us some idea about what the book value is up there?

No, I think what we have done is with the $16 million impairment charge, we have taken it down today to basically what we think the net realizable value is. And we think that that impairment charge gets us down to net realizable value.

Yes, but I don't know that you gave us what that net realizable value is after the impairment charge. I know what the impairment charge is, but I don't know with the opening book value is.

Right, you are correct about that. We would prefer not to divulge that, but we believe that we have marked it -- just fair to say that it is nominal amounts.

Will we get it at the end of May?

No, you will get it when we ultimately do have actual realizable values, but I'd just say the amount of assets left on the books, of PP&E left on the books is nominal, and that of course the inventory and receivables as you would expect, there is not -- those are just at market.

Mark, thank you very much.

With that, operator, I think we will wrap up our conference call. We appreciate your participation and if there are any other questions, feel free to call me off-line. Thank you very much for your participation today.