Greenbrier Companies Inc (GBX) 2007 Q3 法說會逐字稿

Hello and welcome to The Greenbrier Companies third-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. Good morning and welcome to our fiscal third-quarter conference call. After we review our earnings and make a few remarks about the quarter that just ended and the outlook for 2007 and beyond, we will open it up for your questions.

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

I'm going to make some remarks about the quarter, then turn it over to Bill Furman, our CEO, and then we'll open it up for questions.

Today, we reported GAAP earnings of $0.81 per share on revenues of $387 million. These earnings include a special charge of $0.19 per share, with no related tax benefit associated with the closure of our Canadian manufacturing facility. You'll recall we announced the closure of that facility when we released our second-quarter results.

Our Q3 financial results represent a marked improvement from the first half of the year, and we anticipate this momentum will continue in the fourth quarter. All three of our business segments -- Manufacturing, Refurbishment and Parts and Leasing and Services -- performed well during the quarter. Our new railcar manufacturing backlog remains stable at 14,100 units, valued at $970 million, and our marine backlog grew to a record $90 million, with nine vessels in our backlog.

During the quarter, among other things, we received orders for 1,700 units of new double-stack platforms, which are currently in production, and a refurbishment order for the cutdown of 2,500 existing 48 well platforms to 40-foot platforms. We also paid net debt down by over $100 million during the quarter.

Turning to more specifics on the operating front, at the end of last quarter, we said we were optimistic about a significantly better second half of the year, particularly in our manufacturing segment, as we improve performance and increase deliveries. Indeed, this turned out to be true in our third quarter. The improved manufacturing results, as compared to the first half of the year, came from higher production rates, a more favorable product mix, improved operating efficiencies and a positive impact from our decision to close our Canadian facility.

Revenues from the manufacturing segment for the quarter were $241 million, up from the $208 million in Q3 of last year. In each of the quarters, we delivered 3,000 units of new railcars. The current quarter includes deliveries of about 400 units, mostly double-stack, produced in the first half of the year and hung up on the balance sheet as assets held for sale. You'll recall we said in the first and second quarter that we were taking some forward positions in double-stack railcars in anticipation of demand in the second half of the year, and as it turns out, this decision has been validated in the marketplace.

We have revised our guidance on anticipated new railcar deliveries for the entire fiscal year to be about 8,500 to 8,800 units. This was up from the guidance we gave in our Q2 call of 8,000 to 8,500 units. This upward revision is due to an increase in production rates resulting from the orders we received in the third quarter and our market outlook.

The anticipated range of annual deliveries implies that 2,300 to 2,600 units will be delivered in Q4, compared to 3,000 units delivered in Q3. Obviously, this is sequentially a decline in deliveries as compared to Q3, and this decline in deliveries as compared to Q3 is due to the 400 units I just mentioned that were produced in the first half of the year that were sold in Q3. We do not have a similar buildup of positions on the balance sheet in Q3.

And the second reason being that of course we have just now discontinued production at Trenton -- that's our Canadian facility. In Q3, we had several hundred units that were delivered out of this facility.

Turning to our manufacturing margins for the quarter, they improved dramatically from the first half of the year to 8.4% compared to 3.6% in the first half of the year. When you exclude the negative margin from our Canadian operation of $0.3 million, our manufacturing margins for the quarter that just ended were actually 9.4%. This compares to 5.3% in the first half of this year and 9.6% in the third quarter of 2006. The 5.3% I just mentioned in the first half percent is after excluding the negative margin from TrentonWorks as well.

As I touched on earlier, our Refurbishment and Parts and Leasing and Services businesses continue to perform well, and we are quite pleased with our strategic acquisitions on the Refurbishment and Parts front made earlier this year. We expect this momentum to continue, and I will go in a little more detail on that.

In Refurbishment and Parts, Q3 was a seasonally strong quarter for product mix, and we did complete a rather large order for cryogenic boxcars. So we anticipate revenues to be closer to a more normalized run rate of about $100 million in revenues in Q4, but margins probably closer to the Q2 levels rather than the Q3 levels. You'll recall that we have said that Refurbishment and Parts is about a $400 million a year business, and that margins we anticipate to run in the mid to upper teens.

Now, turning to Leasing and Services, we have an owned fleet of 9,000 railcars and a managed fleet of 136,000 railcars. Our fleet utilization for our own fleet grew to 98.6%, up from 97.8% last quarter. We mentioned last quarter that we had anticipated that we could see some improved utilization as we were putting cars into service. The quarter that ended included $5 million in gains on equipment sales, compared to $7.8 million in Q3 of the prior year. So sequentially we were, obviously, a lower number, and this helps to explain some of the change in the margin.

As we sell assets from our leased fleet, we're still seeing attractive prices from the sale of leased equipment, and hit or exceeded all of our budgeted sale prices during the quarter and anticipate continuing to do so for the balance of the year. Our Leasing margins were 58%. We are anticipating lower gains on sales in the fourth quarter, as we see what we have on the horizon here. So since the gains on equipment sales produced 100% margin, that means that there will be a little pullback on the gross margins in the Leasing segment in Q4 as well.

Turning to taxes, the quarter's taxes do not include a tax benefit associated with the special charges for closure costs. This is due to our TrentonWorks subsidiary having fully utilized all of its tax loss carrybacks, and we do not have any current income to offset against these closure costs. So again, going forward, we also anticipate that closure costs will not have any related tax benefit to them.

When you exclude the special charges, our tax rate for the quarter was 41.3%. This is in line with historic ranges, and we anticipate a similar tax rate for Q4. As a reminder, we expect that as we shut down our Canadian facility over the course of the next year, which of course we consider a non-operating item and has designated a special charge, expect these costs to be about $10 million pretax, of which $3.1 million was accrued in Q3, again with no related tax benefit.

As you'll recall, in the last quarter we took an impairment charge net of tax of $7.9 million, but the impairment charge was a non-cash item, while the tax benefit is a cash item. When you net all these numbers out, the net of it is that the closure of our Trenton facility on an after-tax basis will only have about a $1.5 million to $2 million cash hit to the Company.

Turning to CapEx, we expect our manufacturing CapEx to run about $23 million, similar to our prior year. We have pared back our Leasing CapEx, and obviously have been quite active in rebalancing our Leasing portfolio. So the net Leasing CapEx this year is going to being neutral to even to plus or minus a little bit from that, but about neutral for the year.

Our D&A expense for the year should run about $35 million. We remain quite liquid. We reduced our net debt levels by over $100 million during the quarter, both from the operating cash flow and (inaudible) and working capital improvements, including selling assets that were hung up on the balance sheet, and we also issued $100 million of term debt during the quarter. So on a net cash basis, we're pretty much out of our US revolving facilities, and only borrowing in our European lines of credit.

So in sum, we had a very strong quarter, and we anticipate continuing operating momentum in the fourth quarter. There lower new railcar deliveries and lower gains on sales as compared to Q3. Our strategic diversification efforts in Refurbishment and Parts and Leasing and Services have paid off, and provide a great deal of stability to cash flow and earnings.

On the manufacturing side, our decision to close TrentonWorks in Canada and improvements in operating efficiencies have also paid off. As we look forward, as always, it's hard to predict the timing of new railcar orders, which, in turn, determined new railcar production rates and linked inefficiencies of production runs. This new railcar manufacturing is still a large piece of the corporate pie. The operating characteristics of this segment can continue to create volatility in quarterly earnings and impact overall financial visibility. While we have attempted to provide as much color on our outlook as possible in qualitative terms, similar to last quarter, we will not be providing quarterly or annual earnings guidance.

I will now turn it over to Bill, and then we'll open it up for your questions.

Thank you, Mark. I am pleased with our financial performance for the quarter, following two quarters of disappointing results, which were the result of a number of issues which we believe now we have dealt with successfully.

I want to recap just some of the things we were dealing with operationally during the first half, to put into perspective these stronger numbers for the quarter. I know these results exceeded the expectations of many of those who are following us, and in a way, must add a bit to the frustration of modeling Greenbrier.

So let me just recap some of the things that affected our first half negatively, and which we believe we've dealt with. In the first half, we were dealing with a supply imbalance in the double-stack market, where the purchases of past years added greatly to the railcar fleet in circulation. Despite a relatively robust demand for underlying container movements, this contributed to a pause in double-stack orders. Also, I will say that we and other analysts in our industry misread this adjustment initially and underestimated it, unlike our major customer, TTX, which had correctly forecast it.

Further, with declining overall loadings on railroads for all car types commodities in general, with a few exceptions, increased operating velocity, in particular for intermodal cars, has affected the number of cars needed in service. So this pause had the potential to seriously affect our backlog, and accordingly, we decided to reduce our production rates in order to preserve backlog. I believe this was the correct decision. Recent orders have allowed us to increase our rates, and this will continue through the balance of our fiscal year and through the first quarter of our fiscal 2007.

At that point, we expect the new cutdown orders to kick in at full efficiency, and we plan to throttle back in production of new double-stack cars, unless market circumstances require a higher rate. But certainly, the double-stack operating profile and the supply and demand balances improved significantly over where we were at the beginning of our fiscal year, and we have firm backlog on our double-stack line into mid-2008. In 2008, we expect demand to be positive during the peak season, so we feel more comfortable with our visibility for this important product line.

More importantly, in the first half of the year, we were dealing also with a number of unrelated operating issues which together created a drag on manufacturing margins, and all these now have largely been addressed. These included disappointing operating performance on one conventional car line at our Gunderson facility, operating issues that slowed production and caused inventory accumulation in our Concarril facility in Mexico and, naturally, the drag on financial performance from our Canadian facility, which has now been permanently closed. I would also add that during the first half, our marine operation was not performing according to plan, and that has now been remedied, and we are very pleased with the performance and the backlog in our marine operation.

During the first half, we have also been working on strategic issues and assimilating two significant acquisitions in our Rail Services segment. These are fully onstream now and have good financial performance, above our expectations. Beyond that, we have added several smaller facilities to this network in the past year through organic growth, and we expect to continue this pattern. I'm very pleased with this segment of our business, including parts, and it's an exciting space to be in today, given some of the dynamics of the rail industry and capacity constraints and other things that favor this line of business, in connection with our other businesses.

In some ways, this quarter reflects a return to more normal operations, and of course we have removed a big drag on continuing operations from our Canadian facility. Meanwhile, in that regard, we substituted production capacity at our GIMSA joint venture facility in Mexico, in the manufacturing segment, and we closed Canada. This substitution, by moving production from Canada to Mexico, will mean a much more efficient manufacturing platform for us in the future.

We have received certification of our GIMSA facility from the AAR. We are now building cars to customers from this facility.

Overall, we believe these adjustments are in the long-run interest of our company, and will serve in the long run more efficiently our business model. We believe our model allows Greenbrier to create value from both customers and shareholders from an interactive manufacturing, Leasing and Services product offering, with multiple opportunities for growth and positive synergies.

Today, the railroad industry is favored by good long-term fundamentals, but it faces capacity constraints, which imply changes in both operating and business practices. Greenbrier is building a platform for one-stop shopping, which will put us in the position to do more for our shipper, railroad and leasing company customers, running the gamut from railcar engineering and design to leasing partnerships, manufacturing, car management and repair. This will also reduce dependence on the more volatile new car business by allowing access to the railcar aftermarket, while still retaining a strong, diversified manufacturing business segment.

We continue work on diversifying our product mix and on other strategic and tactical objectives such as improved efficiency through lean manufacturing and global sourcing. As we said we would do previously, we've improved liquidity and paid down almost $100 million in debt from the last quarter.

Greenbrier is well-poised to take advantage of the opportunities which exist in our sector, and we will continue to pursue a pattern of balanced growth. We expect the new car market to moderate in 2008 and 2009, reflecting levels of expected general economic activity, but we remain optimistic about the future of intermodal despite equipment imbalances and surplus, which we expect to persist throughout the balance of 2007.

We have been slow to respond to the markets in some sectors for covered hoppers, especially DDG and related products, and we are serious about expanding our product offerings beyond the present mix. We believe, with our business model, that the longer-term future for the rail transportation sector and our participation in that sector is very bright.

Back to you, Mark.

Thank you, Bill. Operator, we will go ahead and open it up for questions and ask, given the large number of people on the call, that people limit to two questions, at most, when you're in the queue.

(OPERATOR INSTRUCTIONS). Peter Nesvold, Bear Stearns.

Congratulations. Glad to see things back operating a little bit more normalized.

On the manufacturing gross margin of about 8.4%, I think you touched on this a bit in the opening remarks, that you expect that strength to continue into the back half of -- [or into] fourth quarter. I guess, as I look out into 2008, is this kind of a reasonable level to expect for full year fiscal 2008, what's sort of the usual below average in the first half, above average in the second half?

We haven't given guidance for 2008 yet or provided the color yet. I think that when you look at margins such as we experienced in the third quarter that we certainly consider those more type of normalized margins, and that as we look out into 2008, as we talked on earlier, it's going to depend exactly on the mix, the length of production runs and so on and all the caveats that we gave.

But we consider it more normalized. The harder part will be the sequential order of it, and I don't think I'd want to comment now as to the first half versus the second half of the year.

Yes, I can understand that. But it sounded like in the release, you focused a little bit more on conventional cars than I would have expected. I was expecting a little bit more on intermodal, which all else equal would be a slight headwind against margins. You probably just have some after-effects, I would guess, from the operational instructions in the first quarter or two. So I'm just trying to get a sense -- is this kind of a baseline, truly a normalized baseline as opposed to typical third and fourth quarter, which are kind of elevated versus normalized margins?

I think this is more typical. The part I shudder on is the comparison of the first half of the year to the second half of the year in any particular year, because it's going to be more due to mix. But I would have to grant you that it does seem like each fiscal year, we start off a little slower and just gain overall operating momentum during the year. But again, as we look out into 2008, I don't know at this point that I see something that says through at least the first quarter of 2008 that the margins would be materially different than we experienced this quarter.

Bill, in your prepared comments, I think you said that the intermodal backlog was booked through mid-2008. I was hoping you could elaborate a bit on the timing of the backlog overall. How much of the backlog falls into kind of fourth quarter, how much of it is in 2008? It sounds like some of it is stretching out into 2009.

I'm going to let Mark address the numbers implicit in your question. We have a multiyear agreement that you may be alluding to, but if we're not answering your question, will you clarify it?

So, Mark, what --

I guess, to be more direct, of this 14,000 or so -- 14,100 units in the backlog as of May 31, how many units are in the backlog for fiscal 2008?

About a little less than half of that.

About half? Okay. Can you elaborate just a little bit more on the 3,900 units that are subject to certain competitive conditions? Is that just about price, or any other color you can provide on that? What is the risk that you don't actually get those orders?

We have the orders. They are subject to certain conditions annually relating to materials escalation, market conditions, but not with respect to the order itself. We have met those tests throughout 2008, so as Mark just suggested, a big piece of the backlog that was subject to to that has already passed through the sieve. We don't anticipate -- well, I should just stop right there. We're locked up on that particular agreement through 2008.

In essence, as it says there, as we disclosed, we have to be competitive on our pricing. But there is no contingency from the customer side such as industry demand or particular demand from the customer side.

It's a take or pay as long as we are competitive and other conditions are met.

I noticed that -- so you paid down $100 million in debt in the quarter. But when I look sequentially at the interest and foreign exchange expense, it actually went up. So was the debt repayment back-ended, number one? Number two, how do you expect that you look in fiscal fourth quarter?

What do you mean by back-ended?

Well, that you ended up paying down the debt towards the end of the quarter, meaning that you didn't accrue any of the real benefit to the interest expense line during this quarter. But when I look forward to fourth quarter, maybe I should expect to see that interest expense line coming down?

You correctly stated it.

So, Mark, in the past you have quantified interest expense or that line. What do you anticipate that looking like in fourth quarter?

I would expect that to come down maybe a couple million dollars in Q4, as a result of the pay-down of debt. What I'll do is also what we have normally broken out that I didn't, is the FX gain or loss this quarter as compared to the prior quarter. Let me find that, and I'll comment on it.

Or maybe what the interest rate was on the $100 million you repaid, and that might give us something to model around?

In essence, the $100 million that we repaid was out of the revolver, and we borrow at LIBOR plus 1.50%, so that's about 6.85%.

Wendy Caplan, Wachovia.

A couple questions about your Refurbishment and Parts segment. You mentioned in your press release that volumes and high scrap prices and a good mix of wheel reconditioning were responsible. Were they sort of each responsible by an equal amount, or was there something that stuck out in your mind?

I think part of what we are trying to say here is that as we brought on our Wheel Services business, particularly as you compare them to prior year and the historic data that we disclosed, is we brought on our Wheel Services business that has typically had higher margins that repair and refurbishment. So that is one of the bigger reasons overall that the margins have improved. But as to the specifics of breaking it out amongst the three pieces, we prefer not to do that, and it's also harder, hard to do it.

As a follow-on -- and I'll try to respect your comment about one question -- in terms of the mix, what should we root for here in that segment? Is wheel reconditioning significantly more profitable than some of the other activities that are undertaken in that segment?

I think that it depends on the place we are in the market. Just to add to something that Mark said, we are just having -- there's a lot of activity in the rail space. The railroads are moving their equipment rapidly, and there's just a lot of wear and tear on the railroads' equipment. So we're all benefiting from that in this entire category.

I think Mark has said that margins are a little higher, traditionally, on the wheel side than the repair and refurbishment side. But that can vary; that can change, depending on market circumstances and particularly what kinds of contracts we have in the shops.

You did say that things were going better than you had expected with the integration and the performance of your acquisitions.

The numbers are going very well, yes.

So does that mean that your mid to high teen kind of margin expectations could be a little conservative?

Probably not in the short run. I think we're also a little cautious, given some of our experiences this year. So I think where we are now is the mid to the upper teens.

Particularly you had asked earlier about scrap prices, and scrap prices do play a part of this on the wheel side of the business as we scrap older wheels. But our outlook for scrap is still good here. But I think the mid to upper teens is the range that we're comfortable (multiple speakers).

I think the most interesting thing about this franchise is the fact that we have a network of 34 facilities now spread throughout the country, and we are feeding into that network parts from our global sourcing. We're able to sell parts in that network. We're able to touch the railroads and shipper needs through a network that integrates with their network. That network extends not only to the physical facilities and the engineering capabilities we have and the parts and things we can feed into it, but it extends into the data management that the railroad is required to manage these increased volumes.

So in a way, this is an outsourcing play with not just railroads but railroad shippers, other parties who are managing and shipping on the railroads, leasing companies and shippers working with their fleets to maintain them, to minimize transportation costs and to increase velocity. That's how we're selling these services in the longer term.

J.B. Groh, D.A. Davidson.

Could you give us a little detail on maybe what barge deliveries were in the quarter, and just some more color around that business and how you -- you mentioned that performance was turned around since the first half of the year. Maybe you could just give us a little more clarity on that?

The barge revenues ran at about the annual rate that we talked about, the $60 million annual rate. So the revenues this quarter were around $15 million. I think our comments -- you recall, in the first half of the year we said we were having production inefficiencies that were affecting both marine and railcar over at Gunderson, and those really have been -- are behind us now. The labor hours have come down. We have also washed through a contract that turned out to be a less favorable contract for us. So the production inefficiencies that we described earlier extending over marine.

The issues with marine involved manning and ramp-up to a higher rate, and it wasn't top line; it was the margins were suffering because of execution. So the top line had suffered somewhat, but it was more on the margin side. But we anticipate that in the second half, marine will be back to the standards that we had set in our business plan.

So some of that was related to new equipment coming online?

More manning and throughput.

Maybe you could comment briefly on labor availability in your local markets?

Portland continues to be a market that's under some stress, although that might moderate slightly, and we probably are at the peak of that issued today. We're getting adequate manning for the jobs that we have at Gunderson today. We have no manning issues material at this point in Mexico. We do have a contract renewal at our Concarril facility that is going through negotiation today. When I say today, in the current month. That's an uncertainty, but we expect that to get resolved. In our other shop facilities, we have adequate manning.

Frank Magdlen, The Robins Group.

What is going on in Europe and what is your backlog in Europe?

Europe is a little disappointing, and I'm actually glad you mentioned that; I should have said something about it. The financial results are so-so. We have a good backlog, a little over 2,000 cars, 2,500 cars in Europe. We're in an unusual situation where we could be selling and building cars in that. It's a very hot market right now, but we had some operational issues. We have made some management changes there, and I think we're restoring that business to normalcy.

We do expect to have -- we got one or two important issues over there that we're resolving, but we generally feel that it's just not meeting its total potential, given the strong European market. The problems have been largely supply chain-driven, shortages of wheels, bogie components. That's been most of what has plagued us in Europe over the past six months. I think that our reach exceeded our grasp in taking some orders over there, and the supply chain just wasn't able to keep up with it.

The backlog, then -- is that primarily for 2008? What would we expect maybe on a quarterly production rate from Europe?

I think the backlog is primarily for 2008. On a quarterly basis, a little harder, again for the reasons we described earlier and some of the supply chain issues over there. I think at this point, again, overall we're trying to stay away from quarterly guidance and in particular over in Europe, where we'd be even more reticent on (multiple speakers).

Let me just crystallize my remarks about Europe. I would say that Europe has the potential for some negative surprises, but I think it also, on balance, has an opportunity for positive contributions, given the current state. We are fully booked through next year with the current production rates and mix, and I think our challenge is to fine-tune that backlog and improve the financial performance out of Europe, which I think we will do now that we have made these management changes.

Then we assume 2,600 cars were produced this last quarter, in total?

Yes.

On the cutdowns, what do you believe was the fleet utilization rate of the older 48-foot cars that you're cutting down for your customers?

I don't actually know. No one publishes that data. Anecdotally, I would say that there is a large amount of intermodal equipment stored in preference to more desirable equipment that can be fully loaded, so that there's no wasted space or wasted train start opportunities on the railroads. It's in the tens of thousands of cars, but I don't have the specifics or the specific velocity or loadings for this particular kind of car.

Mark, when you look at the refurbishment parts, then, at $400 million, are you including the additional cutdown work?

Yes.

Art Hatfield, Morgan Keegan.

This is Logan Stevens in for Art. Can you walk through the accounting treatment of when you put the cars in the held-for-sale category, and when you take them out as far as the timing of the revenue and the expenses?

If it's a railcar that we produced and it's hung up on the balance sheet as an asset held for sale, think of it as finished goods inventory. So it's just hung up on the balance sheet as finished goods inventory. Then when we sell it either outright to an end user or when we sell it to the third-party customer, then we record the manufacturing revenue at the sale price, and then that amount that's hung up on the balance sheet flows through cost of sales.

Then, doing the math on your backlog from quarter to quarter and your deliveries in the quarter, you've got about 2,800 orders in a quarter. You said in your comments that you had about 1,700 new double-stack orders. Can you talk about the mix of those remaining 1,100 cars or so?

A quarter -- you are referring to the mix of --

Of the orders in the third quarter.

They would be some conventional railcars and cars for the European market as well. A lot of those orders, again, were for the European market as well, which would be a variety of railcars, both tank cars and coal wagons, primarily.

Operator, we're having a little difficulty hearing you announce the person that would be cued up for the call. I don't know if there's a technical problem there.

Okay, and you are ready for the next question?

Yes, please.

Jim Lebenthal, Levy Harkins.

Never a dull moment at Greenbrier Companies.

That's true.

A question for you, looking at the investing cash flows, just for the quarter, so comparing it to the second quarter that you reported. I see that the proceeds from sales of equipment went up by about $50 million. I'm trying to get a handle on how you guys manage your portfolio of capital assets there. It looks like, in that $50 million -- am I correct in saying that that includes the 400 cars that you mentioned and also a drawdown of 1,000 from the leasing fleet?

No. In going back to the question that was just asked, the 400 cars that we produced in prior periods and then sold this quarter was hung up in assets held for sale. So when you look at the cash flow statement, the decrease in the balance of assets held for sale includes -- if you compared the second quarter to the third quarter, that would include those 400 cars and some other cars that we washed out of assets held for sale, too.

So the change, if you're looking at the change in the proceeds from sales of equipment, that would be out of our owned permanent lease fleet of railcars. So we were selling, and that's what shows up on that line, and that's what generated the gains on sales this quarter.

Sorry I missed that in the earlier question. But then, to go to the bigger question -- and again, it's just trying to get a handle on how you guys manage your assets there. It looks like, roughly speaking, the capital expenditure line in the quarter, the CapEx, was roughly the same amount as the proceeds from the sales of equipment. Not that they necessarily have to be linked, but do you guys look at those two line items as, in essence, linked? Perhaps a better way of asking the question is, can you break down what the CapEx for the quarter was spent on?

That's a good question, or at least the question that I see behind it is a good question, because you are really addressing yourself to net CapEx in our leasing business.

Pretty much. But obviously, the CapEx can be spent on more than just the leasing business.

Right. I think we do look at the net CapEx, and historically, our net CapEx has run about $40 million to $60 million per annum. This year it's close to neutral, so we're going to spend about $110 million on gross CapEx this year, and yet we are going to sell a similar or even greater number out of the lease fleet.

As Bill mentioned, all of the leasing CapEx is discretionary. We intentionally did [put it in again], saying that we look at this on a net basis. We did pull back this year, for two reasons. One, we said with our recent acquisitions we wanted to pay down debt. Two, we believe we are an active portfolio manager, and we believe this was a good time to be rebalancing the portfolio and harvesting some of the embedded equity in the older equipment in our lease fleet and reinvesting it in newer equipment in the lease fleet.

More fundamentally, though, I think that you've got to recall that our fundamental model in leasing is to originate -- initiate, originate, take into portfolio and then sell assets. It's that cycle that I just described that gets reflected in these numbers. So the flow into the portfolio and the flow out of the portfolio is all by design. We add a lot of value in that process, not only in enhancing our margins on the equipment going in and out of the portfolio by originating transactions, but we add permanent value to our fleet by entering into maintenance management and other contracts to serve the fleet of cars that we originate.

Guys, that was very helpful. I'm not going to take up more time, but Mark, I may give you a call later.

John Barnes, BB&T Capital Markets.

A couple of quick questions here. The percentage of your backlog, your current backlog for your own lease fleet, just as a tie-in to that last question?

Glad you asked, because car backlog, the backlog that we disclose, is only third-party backlog. Anything that is for our owned lease fleet we don't include in our backlog statistics.

So if I go back and take a look at your comments, I think it was either when you announced fourth-quarter earnings or first-quarter earnings, somebody asked you the question, is Europe going to be profitable? Your answer at the time was, we hope so. You elaborated a fair amount on Europe, and I'm curious; with the operational difficulties there and the potential for negative surprises, is Europe profitable yet? Is it close to profitable yet? Is this the year it's profitable? Or can you just give us a little bit more color on profitability?

Well, some quarters it's profitable and some quarters it's not. This quarter, it is just about profitable, so it's not performing where we want it to be. There are issues there, but if I believed they were earthshaking issues on the downside, I would have said so in the earlier remarks. As I said, I think there's more opportunity for enhancement, given the strength in that market, which we expect to continue through 2009.

I want to understand. This seems like this is the piece that is kind of still weighing on the Company. A lot of the other stuff -- you all are to be congratulated on getting out of Canada and some of the other changes. But Europe seems to be the one area that continues to kind of crop up. I guess your comment on the potential for negative surprises is what concerns me.

It this is a good, hot market in Europe right now, why are the operational issues so significant? If you can't make money, I guess is what I'm getting at -- if you can't make money when the market is red-hot and there is great demand for cars in Europe, when can you make money in that market?

Well, the past few years we have made money in much worse markets. I think, if you look at the things we have done, as opposed to the things we were saying about Europe right now, we've made significant management changes over there very recently. I think that speaks for itself. The fact is that we believe we can restore Europe to a reasonable return.

The reason we've kept Europe and haven't shed it is that we're trying to build a global network of supply. It has been disappointing on the supply chain in Europe. We haven't integrated that supply chain under our network here in North America. But we will continue to evaluate Europe. We recognize that Europe can be a drag on management energy and resources, and if it can't perform financially, we will do something about that sooner rather than later.

Good questions, though. I appreciate your asking them.

Like I said, you guys are to be congratulated for the other changes, and you just hate to have, one, Europe, that's kind of been kind of a constant source of frustration. I can hear the frustration in your comments, and I'm just trying to get to, okay, look, in a great market, what have we got to do to make this thing profitable? I'm glad to hear that you're willing to think strategically about other options if it won't perform.

Then my last question -- I'm sorry, real quick -- I think the guy that asked the last question made a good point, that money can be spent in a number of ways. If you guys are going to have a very lean CapEx year, in terms of the number of sales kind of offsetting your CapEx, and you've paid down a bunch of debt and you've got a clean balance sheet, what is the use of your balance sheet, on a go-forward basis? I would argue that you're getting to the point of being kind of underlevered here.

Well, we continue to look at strategic alternatives for growth. We are happy that we paid down the debt, and we have a fairly balanced network now. We want to diversify some of our product offerings in the manufacturing segment, and we expect to participate in some of markets we're not participating in today. I think that will fully utilize our balance sheet.

Coupled with that, I think, is that with the balance sheet, as you point out, with the balance sheet and the pay-down of debt, certainly we would be comfortable with these debt levels by turning back on the leasing spigot in fiscal 2008.

What do you think about the acquisition pipeline today? I know valuations have been creeping up in some of these properties. In things like you bought, like Meridian and things like that, I'm just curious as to how much is left out there, and how aggressive are you willing to be, given current valuations?

Right now we're still, with respect to our GRS business, we are in an organic growth mode. We've added some significant facilities. Those come at a very low EBITDA multiple, when we do that. We're intending to bolt those on, and look at an expansion of our parts network before we really make a major change to that, although we will continue to look at opportunities. So other than that, I won't comment on it. We're very pleased about that segment of the business, however, and we do intend to grow it aggressively.

Paul Bodnar, Longbow Research.

Congratulations on such a great quarter. I just wanted to see, in the Refurbishment and Parts business, how, I guess, volatile could that business be moving forward? Is there things like that that are going to prop up, like this quarter, where you get kind of a little surprise there in the positive direction? How much is really [impacted by] by freight [movements] and traffic?

I'll let Bill speak to the strategic or how the industry affects the overall volumes. But we continue to see this kind of the static state as about a $400 million a year business that we can grow both organically and by bolt-on acquisitions. The mix of the business in specific projects that we work on can impact the quarters.

So yes, we can see some volatility. We said earlier in the year that Q2 tends to be seasonally light. It's also a shorter number of work days, so this is just yet another reason why we stay away from providing any kind of quarterly guidance. But overall, we see it as about a $400 million a year business, static state.

As far as how industry levels and industry outlooks can affect that, I don't know if you'd like to add some color, Bill?

No, I think I've already said that we're excited about that segment, because we think that the railroads are going to continue to need good service partners on a network basis.

What type of order activity have you seen since the end of the quarter? I guess, more so, are you seeing any kind of increased competition for your intermodal car with other companies now producing that car? Is that --?

We've received some borders which we haven't announced since the end of the quarter. Those will be in support of our facility in Mexico. We have received -- what was the second part of your question?

Just have you seen increased competition in the space in intermodal?

There is competition throughout the industry in all car types, and we expect competition. I think we've been successful for many years in maintaining our market share in intermodal, and that's an important goal for our company. So in many ways, competition is good for all of us, including our customers. We expect to see it.

Just along those lines, real quick, is that impacting just the competitive pricing situation for that car type?

It's more the softness in the market, but the margins -- competition always affects prices. I think it also affects our willingness to work hard to reduce our costs.

[John Rappaport], [Krankety Advisors].

Great quarter, obviously. I noticed that the number of railcars subject to competitive conditions went down from 7,700 to 3,900 this quarter. Should we assume that that's the number of railcars you guys expect to deliver on that multiyear order in 2008, or is that not the right way to look at it?

I think that's the right way to look at it.

Then just going through what you guys said about Europe, that seems to imply backlog for North America is somewhere around 6,000 for 2008.

I think we said about half of the backlog was for production in 2008. Then we said that Europe has an excess of 2,000 cars, so if you take about half and subtract over 2,000 cars, that's what the North American backlog would be that would be produced in 2008.

I guess my question was, is your current projection scheduled for 2008 -- is that assuming a significant number of incremental orders, or should we assume that's pretty much a run rate, the 5,400 divided by 4?

I think, certainly -- or stated another way, do we anticipate if we have backlog of 14,000 units and about half of it is for delivery in 2008 --?

I'm just talking North America, sorry.

Do we expect additional orders in 2008? Absolutely, yes. We expect that, indeed, this quarter we book some additional orders. But it's very rare indeed that all of our facilities are booked out a year in advance. So yes, we have open space in our fiscal 2008, and yes, we anticipate orders to fill that space.

Then, just on the leasing rates you guys are seeing on your current lease fleet, it looks -- and this is just very back of the envelope, but it looks like they were down a little bit this quarter. Is that a fair characterization, or is that more a function of mix shift?

I'm sorry, can you repeat the question?

It looks like the leasing rates, based on your leasing revenue this quarter, were down a little bit. Is that a fair characterization of the market this quarter?

I don't believe so. I think it may have to do with exactly the breakout of the leasing revenues, the type of revenue, whether it was services revenue, leasing revenue and what we call interim rent, and that's the rent on cars that we -- again, that assets held for sale, that if those cars are under lease and we're collecting the rent on those cars before we sell them to a third-party leasing company. That piece was down due to lower overall balances of assets held for sale. The direct answer is no; it's not a result of lease rates coming down.

Then just to go back to the last question, obviously, there are a number of competitors talking about entering the intermodal space. You guys are talking about entering and broadening your car type. Are you guys at all worried about overall pricing and competition? It seems like everyone -- historically, this has been a business that you had a couple of competitors who were very focused on narrow product lines, aside from Trinity. Is that changing over time? Is this just going to be a more cutthroat business going forward?

It has always been a tough business. If you think it has been an easy business, it has not. It's a competitive business. It's difficult to break into other car types. We've had a good track record when we've dedicated ourselves to doing it. We usually execute quite well on that. We have only had a few issues over the decades that we've been public where we have failed, and I don't think anybody else has that kind of track record. So I think we are better poised to compete with others than they -- if we are determined to do it, than they are to compete with us.

I don't mean to be smug about it. We just have to work very hard at improving our efficiencies and our costs, and we will have the benefit of a proven car learning curve and continuing production runs to defend that space. But the changes we've made to improve our footprint in Mexico and the improvements we're making through lean manufacturing and global sourcing at Gunderson should allow us to continue to be competitive if we judge the market correctly.

Alan Robinson, RBC.

I'd just like to expand quickly on a previous question regarding refurbishment and parts. Now that you have a couple of quarters of increased refurbishment work under your belt from your recent acquisitions, could you give us some color on how you see your competitive position now in this area, and perhaps comment on whether this business has provided any challenges you didn't expect, in terms of the response to the competition, since you've taken these acquisitions on board?

I think two questions are the competitive landscape and any unexpected negative --

Right, exactly, with specific regard to the competitive response.

There is a lot of fragmented competition in that space. There are only a few major contenders for the kind of model that those contenders are likely to pursue, which is an integrated model providing network services to network customers with big fleets.

So I think it's a very positive potential profile. Having said that, there are a large number of mom-and-pop stores out there, some of which are very good, and that gives us an opportunity in the future for roll-ups. But it does create considerable competition.

The nature of our business is such that our customers desire vibrant competition, so they will always ensure that the landscape includes that competition. But I don't think that in any way that's a negative; I think it's a positive. I think it's very positive space.

As far as the integration, I think the integration has gone exceptionally well, but particularly with the Meridian acquisition. We must remember that we have worked with Meridian for many, many years in the joint supply agreement, with an exclusive outsourcing contract with the Union Pacific Railroad for wheels. So we were quite experienced in working together.

Operator, I think we'll take one last question, please.

[Eric Kang], Merrill Lynch.

A quick question on the railcar sales this quarter. It looks like you sold, I think, as previously discussed, about 1,000 cars. Were those cars you mentioned -- were they older? Was the mix representative of the overall fleet? Could you just give us a little information on that?

It was a pretty good mix of the overall fleet. When you say 1,000 cars, because last quarter, we said we had 10,000 cars in our owned fleet; in this quarter, 9,000 cars. There is some rounding, because we report to the nearest thousands in our owned fleet, so we didn't actually sell a total of 1,000 cars out of the lease fleet. Generally speaking, it's pretty representative but more skewed to the older equipment.

So should we round to under 1,000, over 1,000?

Rounds to under 1,000.

And they were slightly older than the rest of your fleet?

Yes.

Thank you, and thank you all for your participation in today's call. We appreciate it. Have a good day.