Greenbrier Companies Inc (GBX) 2008 Q1 法說會逐字稿

Hello and welcome to the Greenbrier Companies first quarter and fiscal year 2008 earnings release conference call.

(OPERATOR INSTRUCTIONS).

At the request of Greenbrier Companies, this conference is being recorded for instant replay plus 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.

Good morning, and welcome.

After both Bill and I review our earnings release today and make a few comments about the quarter that just ended and the outlook for our 2008 and beyond, as always, we'll open it up for your questions.

Matters discussed in this conference call today include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Throughout our discussion today, we will describe some of the important factors that could cause our actual results in 2008 and beyond to differ materially from those expressed in any forward-looking statement made by or on behalf of Greenbrier.

Today, we reported our first quarter 2008 results.

Our GAAP earnings were $0.16 per share on revenues of $286 million compared to earnings of $0.12 per share on revenues of $247 million in the first quarter of 2007.

Our 2008 earnings were negatively impacted by $0.16 per share due to several factors.

11% of the impact is related to special charges and other costs associated with our Canadian manufacturing facility.

This facility was shut down last year and is in the process of being liquidated.

In addition, foreign exchange losses, which are primarily related to the appreciation of the Polish laude, impacted earnings by $0.05 cents per share.

And lastly, our tax rate for the quarter was 57.5% compared to an expected rate for the balance of the year of around 46%.

While our earnings were muted for the quarter and there is noise in these earnings, as I just discussed, similar to the first quarter of last year, much of the softness is seasonal in nature.

In fact, if you look back over our last four fiscal years, on average, only about 30% of total fiscal year earnings before special charges and other unusual items were realized in the first half of the year, with about 70% of our total yearly earnings realized in the second half of the fiscal year.

We expect this to play out much the same this year, primarily due to a number of factors that I'll now discuss.

We expect a more favorable product mix, seasonally higher refurbishment and parts revenues that will have the disposition of our TrentonWorks facility behind us.

We're in the midst of enacting cost reduction initiatives, and we will have a lower tax rate for the balance of the year.

I'll go into these more in a minute, but I want to step back first.

And as we enter our calendar 2008, there is little doubt that we are seeing an increasingly competitive new railcar environment in North America as a result of moderation in new railcar demand and a softer rail environment.

Industry deliveries exceeded industry new car orders for each of the first three quarters of 2007.

Except for our GE multiyear order that we announced in the fourth quarter of the calendar year, industry orders may be down again when the Q4-- or down as compared to deliveries when the Q4 2007 data is reported.

However, as we step back, there's also little doubt that our recent strategic initiatives to diversify our revenues and earnings basis and to shift our manufacturing footprint to lower cost facilities are also benefiting us in the current operating environment and will continue to do so well into the future.

I'll now provide some color and highlights for the quarter.

First, turning to manufacturing.

New railcar deliveries for the quarter were 1900 units compared to 2000 units in the first quarter of '07.

On our last quarter call, we said we anticipated new railcar deliveries for the year would be around 8,000 units.

Today, we believe that to be at the upper end of the range and our deliveries for the year could fall somewhere between 7,500 and 8,000 units.

Given that our November 30, 2007, backlog includes 4,500 units to be produced during the balance of '07 and since we delivered 1,900 units in Q1 of this year, this implies that deliveries of somewhere between 1,100 to 1,600 units must be filled with orders received subsequent to 11-30-07.

Our manufacturing margin for the quarter was 5.4% and as expected, this was down sequentially from Q4 of '07 due to a less favorable product mix.

Almost 60% of total deliveries from the quarter came from either covered hopper cars for the North American market or deliveries in the European market, both of which are tended to generate lower margins than our overall product mix.

You'll recall last quarter we said manufacturing margins this year would be hard pressed to meet or exceed last year's margins of 7.8% due to a less favorable product mix and pricing environment, and the startup of our GIMSA JV facility in Mexico.

We still believe this guidance is valid; however, we do expect margins to improve somewhat for the balance of the year, both to more favorable product mix and continued improved results from GIMSA.

In Q4 of last year, GIMSA produced a drag on our earnings of about $1.3 million, where in Q1 of this year, it was nearly break-even.

We expect this trend to continue at our GIMSA facility for the balance of the year.

However, these -- the results of our GIMSA operation and our overall financial results will be impacted by about $1.2 million of startup costs related to our tank car lines that we're getting set up down there for the GE multiyear deal.

Turning now to our TrentonWorks facility in Canada, it is in the process of being liquidated.

This earning has had a quarterly drag on earnings of about $0.10 per share.

This drag principally shows up in special charges, G&A expense, and interest expense.

We planned to bring this liquidation to head quickly.

This disposal will both eliminate the quarterly loss of $0.10 a share and can result in an income pickup when the final liquidation is completed, whereupon some of the losses that we've been recording over the past year now, about, could be recaptured.

As touched on in our release, our marine, repair, refurbishment and parts and leasing and services business units, which generated about $540 million of revenues in '07 all continue to perform well, and we anticipate this momentum will continue.

These units coupled with our European new railcar manufacturing business unit should generate close to $800 million of revenues in 2008.

Now, turning specifically to refurbishment and parts segment.

We expect that our second quarter will be the lowest revenue quarter this fiscal year for seasonal reasons, again, principally due to holiday plant shutdowns and capital budgeting cycles of our customers.

The second half of the year is anticipated to generate higher revenues and the sequential decline in margins we experienced this quarter from the fourth quarter of last year was also anticipated as a result of a change in product mix and we believe that the margins for the balance of this year should remain at about 15%.

Turning to our leasing and services segment, which, of course, includes the results of our 9,000 owned railcars and managed fleet of 138,000 railcars, our utilization for the quarter on the owned fleet was 97.1% compared to 98.1% in Q4 of last year.

We anticipate that our utilization will remain high throughout the year, but it could decline slightly.

As an overall comment, we are definitely seeing firming of lease rates in the market, particularly on the new railcar side of the business, and at times we are seeing some very aggressive, to say the least, pricing in the market from some of our competitors on new railcar transactions and some of our competitors specifically in the new railcar side of the business.

The quarter includes $.8 million in gains on equipment sales compared to $3.2 million of gains in Q1 of '07 and $2.6 million in Q4 of '07.

The as stated on our last call, equipment sales are hard to forecast, as they are opportunistic in nature and are also often as a result of transactions that we generate in the market.

However, we do expect the gains on equipment sales will be down significantly from the $13 million realized in '07.

I want to emphasize this decline is due to our expectation that we'll have less trading activity this year than last year.

It is not a reflection in reduction in asset values, as the secondary market for leased assets remains very liquid and robust.

When you pull out gains on equipment sales, leasing and services margins were at 46% of revenues for the quarter compared to 47% in Q4 of '07, and overall we expect our leasing and services margins to remain strong in '08.

The tax rate for the quarter was 57.5% compared to an anticipated effective rate for the remainder of the year of around 46%, as the rate for the quarter was impacted by adjustments and tax estimates.

The 46% effective tax rate that we expect for the balance of this year compares to a 40% rate in '07.

Obviously, this is a fairly significant difference and a drag on earnings, and this change in '08 effective rate is due to a change in the geographic mix of pretax earnings and losses, minimum tax requirements in certain local jurisdictions, and operating losses for certain operations with no related accrual of a tax benefit.

Wrapping up.

In the currently more challenging operating environment, we are continuing to aggressively look to reduce our manufacturing, overhead and G&A costs.

We also revisit our CapEx budgets to reduce discretionary CapEx.

We believe G&A will run less than $20 million a quarter and we hope and intend to bring this amount down further.

Manufacturing CapEx should run about $25 million for the year, refurbishment and parts, about $15 million, and our net lease in CapEx somewhere around 45 to $50 million.

On the leasing side, this compares to net CapEx in '07 of zero and $93 million in '06.

Our D&A expense should run about $35 million for the year.

In sum, while 2008 may not be a strong as 2007, we anticipate a solid year buoyed by our diversification efforts.

Similar to fiscal '07, we expect the second half of '08 to be stronger than first half, with Q1 being our weakest quarter.

We remind you that while the first half of 2007 was weak, the year ended a strong-- on a strong note, just as we had expected.

While the current operating environment is more challenging, we remain optimistic about the long-term fundamentals of the rail industry and we believe we are well positioned, both in the near and long-term to successfully compete in changing environments, as a result of our strategic decisions made over the last year or so.

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

Thank you, Mark.

Well, as some of our investors and those who follow us this quarter seemed like deja vu all over again.

But it's a much better quarter this year than last year-- and for-- because of a number of factors I'm going to discuss.

I believe we're going into this year 2008 with much better operating fundamentals, even though we have an economic environment that has caused a caution on the part of many buyers in the railcar sector.

With the various factors Mark has highlighted, and are also highlighted in the press release, we have factors in the first quarter, in the second quarter which are non-continuing and will be resolved, and I see on a continuing basis this quarter in the mid $0.30- range from continuing earnings.

So it is a disappointing quarter, but I believe it is just that and reflects both a seasonal pattern and the mix of freight cars built in the quarter, and certain operating adjustments we've made for the economic realities of this environment, where we are currently operating.

A softer economy requires a freight car builder to adjust production rates in order to operate profitably and a strong cash flows through a downturn.

We have taken steps to adjust our operations to the economic realities we're facing and we believe the company is very well equipped in its car building sector to weather what we expect will be a softer economy and a dry period in the market for new freight cars compared to the relatively robust build rates in 2005, 2006 and even in 2007.

Here's what I see going on in the marketplace.

In the full year 2007, U.S.

car loads were down 2.5% off the records set in 2006.

And intermodal loadings were down 1%.

Trailer loadings were way down and container loadings were up only slightly compared to the very high single digit growth rates of the past two years.

This is not a bad record for the railroads, although a clear signal of an economic slowdown.

However, improved railroad velocity, both from needing fewer cars to transport fewer car loads and from railroad efficiency and improved car distribution also, always has a multiplier effect on the demand for freight cars.

That is what is happening now and these are simply facts that we have to face.

There are not reliable published statistics in car storage in the North American railroad system.

However, our own surveys and estimates indicate that a great many cars are now being stored or being under-utilized as would be expected with the operating environment I've just described.

This is occurring across the board in almost all car types, except certain tank cars, a market we've just entered in Mexico with the multiyear order from GE.

While global insights and others are still forecasting a reasonably robust 2008 with car builds above 50,000 cars, I do not believe the numbers are reliable for 2008, 2009 given the current economic climate.

I think the likelihood is the car builders as we are doing, will adjust their production rates to adjust to a lower level of car orders.

There are literally hundreds of miles of stored train sets, including intermodal, coal, forced products cars, DDG cars, in fact cars of all varieties and neither leasing companies, shippers nor railroads are inclined to order cars robustly in such a market.

So this is putting down (inaudible) pressure on pricings and margins in the new car sector on those cars which are being ordered as well as leasing pricing and pricing policies for new leases by some car builders have been very aggressive-- very, very aggressive, bordering on very, very reckless policies.

We'll see whether these leases work out and whether they may come bouncing back in the economic environment of the next year or two.

We have a seasoned management team at Greenbrier.

The present market environment is nothing new to us.

On a tactical level, we've done several things to respond to this environment.

First, we've reduced production rates, Gunderson's facility, where we produced double stacks, to what we believe are sustainable levels through the full calendar year of 2008.

Also, we're concluding negotiations on our existing backlog to pull up some orders from 2009 and swap cars which might otherwise be stored, for cars which can be put into service by our customers.

In other words, we'll swap out cars which otherwise go into storage in the current environment for cars that are useful to customers and we believe that this will have a very positive outcome for us in the long-term.

Our very strong backlog will give us the legs for long distance run and we expect to increase our market share, as we always have, during a period like this using sensible leasing and deployment of capital into sound leases.

We continue to operate and focus on our manufacturing expenses and, as Mark has indicated, we will aggressively cut G&A costs during the current cycle.

Meanwhile, we're clearly seeing the benefits of a stronger and more powerful network of repair shops and the outcome of a diversified revenue base and the other units, leasing, marine manufacturing, repair, wheels and refurbishment and management services that give Greenbrier a broader ability to operate in a challenging economic environment.

The outlook for railroads is very positive and this is a temporary blip that we are into in terms of railroad car supply and demand.

I think that in the second half of the year, we'll be able to demonstrate the same resiliency that we did in the second half of 2007.

Notably, our revenue mix is changing over the last two years from 2006 to 2007.

Revenue percentages from freight car manufacturing have moved from the 78% range down to 60%, and in 2008 we expect to be in the 50s, whereas margins have moved from a mixture of roughly 50/50, to 1/3 to 2/3 in 2007 and in 2008 we expect gross margin from the other more robust areas of our business model to approximate almost 75% of the total revenue of the company.

In general, I think our strategy is working very well.

We're sorry, as others are sorry about a disappointing quarter, but we remain very upbeat and think the company possesses very strong fundamentals for a challenging railroad market environment.

Mark, back to you.

Thank you.

Operator, please, if you could open it up for questions, we'll be happy to take them now.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Frank Magdlen with The Robins Group.

Please go ahead.

Good morning.

Hi, Frank.

Couple questions.

Your comment that the manufacturing-- barge manufacturing, railcar repair, et cetera, would come to $800 million, are you including new car deliveries in North America in that 800 number?

No, we are including new car deliveries in Europe, refurbishment and parts, marine barge, and leasing and services.

Those entities in aggregate, we anticipate would approach about 800 million.

All right.

So then number of barges in the backlog?

Approximately 11.

11 at this time, all right.

I'll jump back in queue.

Thank you, Frank.

Thank you.

Our next question comes from Mike Roarke with McAdams Wright Ragan.

Please go ahead with your question.

Hi, Mark, good morning.

I just have a quick question regarding the refurbishment and parts division.

Is that margin-- through the inhospitable economic environment that you described, is that margin fairly sustainable between the 15 and 18% range that we've kind of seen over the last-- over the last five quarters here?

Varying environments, I think that is a good range.

In the near term we expect it to be around 15%, at the lower end of that range.

But, from what we've seen today, we do believe the 15 is sustainable in the current environment.

Okay, and would that hold true going into the, kind of into the back half of the year, too, when you're expecting things to be a bit better?

Yes.

Okay.

Second question, too, with the leasing margin dropping below 50%, does that look like the sustainable rate over the next few quarters, too?

Well, I-- I think part-- a good part of the reason it's below the 50 is the-- when you look at gains on equipment sale and there's some other items similar to that, there's -- when we hold railcars on the lease fleet on a temporary basis before we sell them to other leasing companies, those in essence generate 100% margin, because there's no related cost of sale.

So, and in this quarter, those amounts were very low-- those two amounts were very low.

So we're actually anticipating that our margins will be a little bit higher for the balance of this year because we're expecting a little bit more activity in both of these areas.

Okay.

I thought what I had heard you say was that you were expecting reduced activity on the trading front.

So let me clarify that.

We do expect reduced activity as compared to '07 when we had nearly $13 million of gains on sale.

This past quarter, our gains on sale were either $.7 or $.8 million.

For the year as a whole, we're expecting-- or for the quarter that just ended, it was $.8 million.

For the year as a whole, we're expecting a little bit greater run rate than that $.8 million.

And as I mentioned before, we're also expecting some more interim rents before we sell railcars that will bring that margin up a little bit.

Okay, great.

Thank you.

And just one more if I could, the cash position that you currently have on the balance sheet, is that a level that you are comfortable with, or do you feel that there's room to have more of a cash cushion?

We, we feel very good about our liquidity position.

One thing I would comment on is I don't necessarily look at our cash balance, and I don't believe any of senior management looks at that.

We look at our liquidity levels in our dry powder and based on our various lines of credit and financial covenants, we have about $230 million of dry powder.

So we're into very strong cash flows this year.

So we're-- we feel very comfortable with this and as alluded to in the release, we're comfortable enough after having paid down $100 million of debt last year that should we find attractive opportunities-- acquisition opportunities in the market on the-- on a midsize to smaller size scale, that also have good visibility and strong EBITDA to it, that we would be inclined to act on those opportunities.

Okay, great.

Thank you very much for taking the questions.

Thank you.

Thank you.

Our next question comes from JB Groh with DA Davidson.

Please go ahead.

Good morning, guys.

Good morning.

Had a question on how much cutdown work you did in the quarter.

I don't know if you covered that or not, and what's left on that?

And I would think that that would be a favorable impact to margins in the future quarters.

We pretty much have run through that, that was in our backlog, any of that cutdown work would have been in refurbishment and parts and we don't break that out specifically and I prefer not to break that out.

But there's not too much left in backlog other than anything that may occur as a result of current discussions.

Bill may want to comment overall about the opportunities in the cutdown area or the size of the market that may be out there longer term.

Let me throw a question in there.

Would that explain the very strong second half of last year refurbishment parts margin versus what you're looking at over the next three quarters in that kind of 15% range?

No, it -- no, that is not.

That had to do with some other refurbishment work that we did last year that was a part of the mix that was some higher margin business, as well as the wheel -- we were operating a slightly higher volumes on the wheel side of the business in the second half of the year, last year, just as you might have expected because we were in a more robust economic environment in the second half of our fiscal year last year.

And the overall seasonality of that business really just is from holidays in Q1 and holidays in Q2?

Were there other seasonal demand factors that are playing in there?

Yeah, there's both holidays, our customers' capital budgeting cycles, but we feel pretty good and pretty confident that in the second half of the year, that the revenues from this segment will exceed the first half of the year and one of the areas that we really didn't talk much about, but where we're really seeing some momentum that will probably carry beyond '08 is the parts part of our business that is included in the refurbishment and parts side.

And then on-- on TrentonWorks in the past, there's been no real tax benefit associated with some of those charges.

Was that the case this quarter as well?

Yes, it was.

Okay, and then do you have sort of an estimate of what you think the market value of those cars that you have in equipment on operating leases?

I mean, obviously that's going to vary, but, you know, they are on the books for $300 million roughly.

Right.

No, there really is no blue book value on those, and there -- we definitely, as I mentioned earlier, that market is robust and we're still confident that the values exceed our book value, but we wouldn't want to put -- we wouldn't want to put a value on it.

Okay, and then lastly, if you guys-- stock where it is today and some dry powder, have you considered a buyback?

We have.

Our board is going to continue to look at this.

We think the stock is very undervalued at this point, but we also are looking at other opportunities for investment and so it's something that we'll continue to evaluate.

Okay.

Thanks for your time.

See you this afternoon.

Thank you.

Thank you.

Our next question comes from Art Hatfield with Morgan Keegan.

Please go ahead.

Good morning, gentlemen.

Good morning.

Couple questions.

I want to clarify on my understanding of the press release.

When you make the comment in there about not being able to achieve the same earnings level in '08 as you did in '07, is that based on the $0.16 GAAP number in the quarter?

Yes, it's all, it's GAAP earnings before special charges.

That's the comparison that we're trying to make.

If you look at last year, the $1.37 and then we had 85 cents of special charges net of tax related to our Canadian facility, that is how we're getting back to the $2.22 of earnings before special charges, and for this year, our comment would be that, so we would be trying to compare apples to apples there, our net earnings and then adding back special charges to those earnings.

This year, again, there's no tax benefit associated with those, any losses from those special charges, so those are going straight to the bottom line.

So--

There's no tax effect, in other words, to those special charges.

Okay, but when you make that comment, you're looking at Q1 as being a $0.16 number as opposed to a $0.27 or $0.32 number?

I'm looking at it being $0.16-plus, plus adding back the special charge of $189,000, so it's effectively a $0.17 quarter.

Okay, okay.

That's very helpful.

Secondly, Mark, just I want to clarify, when you were talking about the leasing business, I thought I heard you say that you were seeing affirming of lease rates, and then you made the comment that you were seeing some aggressive pricing from competitors.

Can you flush that out a little bit for me?

Yes.

It seemed to contradict itself.

Well, on the used car side, I think we're seeing firming in the new-- and by firming certainly as compared to this time last year, rates would be down from last year.

I don't think that would be particularly surprising.

But there's not a tremendous amount of volatility there.

On the new car side of things, we are seeing some-- some aggressive and at times erratic pricing on leases.

Okay.

So you're making a distinction between used equipment up for lease and new equipment coming out to lease?

I think they would both be down from this time last year.

I would say there is not as much volatility in the used car side as we're seeing, and as aggressive, or rates being down as much on the used car side as at times we're seeing on the new car side.

Okay.

That's helpful.

Secondly, as you have seen-- kind of for new car sales-- you probably are seeing, as you mentioned, some more competition.

Are you seeing any relief at this point in time in any of your input costs?

We have a very aggressive global sourcing program that we've talked about on-- before, and that's definitely giving us a benefit, particularly on those products we can bring in in the Pacific northwest at our Portland facility.

Longer term, we intend to use that to achieve a competitive advantage in our repair network.

So it is-- it is useful today.

Just in terms of our current system, and we're seeing some softening in certain specialties and we've been able to see even some softening in certain categories of steel.

So there has been a bit of that going on.

Okay.

Thank you.

As always, thanks for taking my questions.

Thank you.

Thank you.

Our next question comes from Peter Nesvold with Bear Stearns.

Please go ahead.

Good morning, guys.

Good morning, Peter.

I was hoping to get some more perspective on the manufacturing margins of 5.4%.

If I throw out last year, because it was a heavily disrupted year, the manufacturing gross margins are back to where they were in '02 in this quarter.

But your throughput on the railcar side is twice as high to Bill's point previously, your global sourcing efforts are higher, and the barge throughput is also probably twice as high as it was back in '02, so I guess I'm trying to understand, what has happened to just really bring that back down to trough levels so quickly?

I know Canada is still a bit of an overhang, but it seems like there must be more than just the Nova Scotia plant in there.

I'll let Mark respond to that in more detail, but in terms of the general things that are occuring, we are still reaching our pitch point at GIMSA, so there's still a little bit of a drag there in terms of not producing the kinds of positive margins we are currently reaching on a run-rate basis.

So there's that factor, and principally it's, it's the combination of a lower production rate of double stack cars, revenue recognition on some of our Auto-Max product, and just a general mix issue, I think, that is effecting us.

There is a lot of noise, though, as it relates to Trenton when you're looking at the GAAP numbers.

Right.

And Peter, while there is noise, just to clarify in the margin, the quarter that just ended there's not a lot of -- Trenton is -- the noise from Trenton is principally during the special charges or G&A expense rather than margin, but as Bill mentioned, our GIMSA facility is still finding it's footing so the margins are very low there.

We anticipate that to continue for the balance of the year, but again, longer term, we're very upbeat on that, as well, as we talked about in our prepared remarks.

In Europe, we're finding the margins are lower due to some supply chain issues that we had worked out and unfortunately, while the market's very robust over there, much of the backlog that we're producing this year with that backlog was booked at a time where the market was softer and so frankly we're not enjoying as much of the benefit in that market of the return this year that we would have-- that we would like.

So when you look at the mix of deliveries, that is depressing the margin, along with really covered hopper cars, which is more of the commodity car type, which virtually all of the car builders other than pure tank car builders, other than really union and Freight Car America, virtually all builders are building covered hoppers today.

It's more of a commodity car type and for us that tends to be a lower margin car.

So there's a number of variables out there.

We did say that we expected-- that we expected some margin enhancement as the year goes on, but not a tremendous amount of margin enhancement.

The market environment, as Bill alluded to, is very competitive today.

Are the GIMSA results consolidated in your results, or does that flow through the JV line?

It is consolidated and then the minority interest is backed out, so you would see that-- actually the minority interest was an add-back.

Our share of the earnings-- or we had a slight loss from our share of the results were slight loss for the quarter.

And Mark, you made reference to $230 million of dry powder and that you're comfortable with your coverage ratios.

I find it a little hard to measure where your interest coverage ratios are, just given the way you report externally.

Can you tell me where are your interest coverage ratios right now and how does that compare to the covenant?

We have two primary interests coverage ratios, one under our revolver and one under our high yield notes that are typically EBITDA to interest, or EBITDAR to interest plus rent test.

You cannot in either case take them straight off of the financials, particularly on the high yield notes.

I don't have the calculation in front of me for this quarter, but we're substantially-- in one case the ratio is set at 1.75 to 1 and the other cases at 2.25 to 1.

In both cases in the calculation of the ratios were substantially in excess of the-- of the required ratio, but I don't have the numbers in front of me and probably would prefer not to disclose them.

Okay, and then last question, there's been a lot of press out of Nova Scotia about pension reform.

Have you accrued at this point for any kind of pension liability that you're going to be on the hook for as a result of the legislation?

We believe -- well, first of all that occurred after the quarter end, that legislation.

So we do believe that we're adequately reserved up at TrentonWorks, but the quarter that just ended, there would not have been an accrual for the pension.

And again, we believe that we're adequately accrued up at Trenton.

Got ya.

Okay.

Thank you.

Thank you.

Our next question comes from Brandon Cook with J.P.

Morgan.

Good morning.

Good morning.

Just a question on the car type outlook as we look through the balance of the year.

You talked about 60% of the cars coming from covered hoppers, and European markets in this quarter.

Should we think about covered hoppers becoming a more important part of the mix as we go through the year?

Any color around that would be helpful.

Covered hoppers overall are an important part of our operations.

We are building covered hopper cars on two lines, one in our Concarril facility and one at our GIMSA facility and we're very happy with our position on covered hoppers.

I don't mean to minimize that at all.

In fact, we've been gaining market share in this area.

The reality is that is more of a commodity car type.

Having said all of that, we are anticipating some higher production of some other car types, so that if you look at the total mix, we believe that we'll have a more favorable mix as we'll have in the second half of the year, as an example, more double-stacked railcars that are part of the mix and more of our motive carrying car that will be part of the mix.

Okay.

When you look at the pricing environment by car type, obviously the broader market's under pressure a bit.

But are you seeing a big difference, differentiation between car types and the level of pricing you're able to get on intermodal versus the covered hoppers or Auto-Max?

Well, I think there's pressure, very aggressive pressure across the board on all new car transactions, whether those are manifest in terms of a lease rate, where there's been considerable aggressiveness, or in car pricing.

Probably a little less so in car pricing than on the-- on actually the leasing that some parties are willing to engage in.

Some of that has to do with surpluses of cars that were ordered perhaps on speculation, or even a speculative position that people are taking in cars in the current environment.

But I think it's across the board.

I think it's effecting all builders, and it's going to continue through the period of time when railroads are storing cars as they are.

Okay, and just a final question, in your press release you talked about the $800 million that was set to come in fiscal '08 outside of North American railcar building.

Numbers seem a little higher than I would have thought.

Within the manufacturing segment, I generally think about-- maybe about $100 million in revenues coming from Europe and call it $60 million coming from barge.

Are those ball parkish right numbers to think about in the manufacturing segment?

Good question.

I think the European is a little bit light, and that's really the result of two things.

One, we're building at higher production rates over there and frankly with the depreciation of the dollar against the Euro principally, the revenues translate into more U.S.

dollars.

So that $100 million in Europe is a little light.

Okay, but the barge is pretty close?

Yes.

Okay, thank you.

Thank you.

Our next question comes from Paul Bodnar with Longbow Research.

Please go ahead.

Yes, sort of-- see a little more color in terms of what's going on in the European operations in terms of (inaudible) any more profitable.

Then secondly also along those lines, I mean does the European revenue number then kind of look more like $140 million type thing for '08 then?

I'll let Mark talk to the revenue number.

There were two forces that were acting on Europe going into 2007-- in 2007 going into 2008, they're still operating, although we're cleaning them up.

One, Mark mentioned that was-- that we had a lot of our backlog that was booked at earlier pricing, and the second was supply chain disruption and we had a management change over there, I guess, as even a third.

Supply chain disruption caused a-- operating difficulties there.

Those factors have been addressed.

We're still working off the lower priced backlog and I expect that this will be-- will continue through at least the first half of our current-- of our current year.

Longer term, though, as Mark has indicated, Europe's economy is more robust.

We have stuck to our guns in Europe and want to continue to do that because of the interaction in the global marketplace and particularly the opportunities to reduce costs in our supply chain.

Regarding your specific question on your-- just give you a feel in '07, European revenues were about $150 million.

This year, we believe that they could come in closer to $200 million.

Okay.

That's helpful.

Secondly, also within the leasing business, how does revenue break down there between the cars that you manage and the cars that you lease?

And in particular I guess in terms of what the net impact would be of a slight decline in utilization rates?

I-- I could give you more of a revenue breakdown.

Our management services revenues are about $25 million on the 138,000 cars that we manage.

The overall margins on the management services side of the business tend to be less than on the owned fleet, as you might expect, because the management services is not very capital intensive.

I would not want to share, or it's not a simple algorithm to share what a 1% either increase or decline in utilization equates to in terms of revenue or margin because it would depend on where that change was coming from.

In other words, which cars are generating and what kind of margins were on the cars that were generating the specific increase or decrease in utilization.

Okay, and then lastly, in refurbishment parts, I mean how does the back half of the year you said would improve versus the first half of '08.

How does that look to-- compared to the back half of '07, which was pretty strong?

Just bear with me a minute.

Sure.

You might want to come back to that one.

Yeah.

I think as compared to last year, we would anticipate somewhat comparable-- somewhat comparable numbers in the second half of this year as compared to the second half of '07.

In other words, you know, around $115 to $120 million of revenues in each of those quarters.

Okay, and then you said seasonally that second quarter would head downward.

I mean how much, how much further down I guess would that go?

I guess, I would say within the same ranges of the first quarter.

Whether it's plus or minus, a little bit from where we were in the first quarter of this year, which was just over 100 million.

We would expect that kind of a ball park.

Okay, and then I guess kind of further along in terms of the economic environment just (inaudible) how does the-- do revenues end up tracking in economic decline in '08, '09 for that business overall?

You know, if you stop getting the benefits of -- you still keep doing some of the same cutdown work.

Does it pretty much a (inaudible) GP or GP down and (inaudible) track along with it or -- what's the best way to look at that?

Again, I don't know that there's a simple algorithm.

The wheel services side of our business-- and when you look at the total revenues, wheel services are going to be in excess of $250 million out of the-- maybe even a little bit closer to $300 million out of something that of total revenues that are in excess of 400.

That would tend to have the less-- least amount of volatility to what is compared to repair and refurbishment work, which, again, would be more capital budgeting process.

But there's going to be some on the wheel services side of the business.

Of course that is going to be -- there is going to be some variance based on how strong the economy is because just more railcars moving and moving at higher velocity.

But again, I don't know that you could develop a simple algorithm.

Overall though, that would probably tend to be the lease sensitive side of the business.

Okay.

And then just one last housekeeping question, I guess.

In terms of the tax rate, you said that was going to average 46% for the year, or will be 46% in each of the remaining quarters of the year?

It will average 46% for the balance of the year is what we believe.

Okay.

Thanks a lot.

Thank you.

Our next question comes from Matt [Reams] with [Buckhead Capital] Please go ahead.

Good morning, gentlemen.

Good morning, Matt.

You had guided the interest expense of about $36 million for the year.

That's a little bit higher interest expense and FX in the first quarter.

Can you tell us what's going on there?

Right.

Well, part of that is that, again, we had about $1 million of FX losses this quarter and certainly we would hope and also would take-- are taking steps to try to minimize the amount of FX loss.

If losses were to continue at that amount, then we would be obviously running closer to $40 million rather than $36 million.

There's not a tremendous amount of term debt amortization this year.

So that's why our original guidance was around $9 million a quarter and why we came in closer to $10 million this quarter.

Okay.

So you're still -- are you going to change the interest expense guidance?

Or are you going to wait to see how the year progresses?

I think right now we're not.

I think for the balance of the year we would-- our expectation would be that that would come in closer to about $9 million a quarter, maybe even come down a bit.

We're taking some measures to try to improve on working capital that could -- and as we flush out some inventory and assets that hold for sale, where we would hope that the balance-- the debt balances would come down a little bit.

Okay.

You started to allude to one of my second questions, was what order of magnitude will you get working capital gains this year?

I think you've talked about lean manufacturing.

Obviously manufacturing is slowing, but in the second half, will working capital gains be offset by increasing orders in anticipation of GE, or just production increases?

We are expecting that we'll see some improvements in working capital.

You're right, there will be some partial offset from ramping up of the tank car line that's going to come up in-- where we're producing cars in the fourth calendar quarter this year.

But in Europe, we are working aggressively and have some, to bring down our inventory balances where we have worked, in particular we're carrying a fair amount of inventory and also today is we're finding we're footing on the first production line at GIMSA, where we would hope to achieve some improvement.

So overall, we're trying to bring down the inventory balances during the balance of the year.

I don't believe these are going to be seismic shifts, but maybe in the neighborhood of 20 to $30 million would be a good target, or a good goal for us.

For the year?

For the year.

Okay.

That's great.

SG&A came down nicely this quarter relative -- I think you were guiding to $21 million a quarter and you were going to be intensely focused on reducing SG&A.

You have now guided down to closer to $20 million, I think, a quarter.

I know you had one-time costs with investment banking and other types of things going on last year.

What can that quarterly SG&A number come down to, kind of given the environment we're in?

We're still-- we're still working on that, Matt.

We certainly believe, as mentioned here that we can bring it in under $80 million.

We're setting some more aggressive targets then that-- that I think we haven't completed our work in this area.

Certainly if you went back to '01 or '02, you would see -- which was of course a much worse operating environment, you would see we took some very aggressive measures and cut out about $10 million of GA or more.

We're not necessarily indicating that we took some pretty drastic measures there.

We don't think that we're at that point in this cycle, but I think on our next call, we'll be able to provide more guidance on just how much further and what kind of targets we've set in this area.

Okay.

That's great.

I know sometimes those kinds of things are difficult to talk about in a public format.

Just getting back to Europe, longer term, I thought Bill's comment was interesting that you lumped it into less cyclical businesses.

And I think several years ago you were looking at exiting that business.

Do you expect that longer term, Europe can perform, or get to margins similar to North America up into the teens-- low teens?

We think with a continued evolution of the business model in Europe, perhaps approximating more closely our model here, that we can have a viable business in Europe.

If we find that we cannot, we won't hesitate to look at other-- look at other alternatives.

The opportunities particularly in sourcing and parts I think are a value in Europe and now with the currency differential changing as it has, we may find that there are some unexpected opportunities that Europe can be of value to us and even in North America.

So the less cyclical component is getting more into kind of parts and service type arrangements?

The term less cyclical is not the correct term.

Perhaps it's-- it moves to a different beat there and moves in a different, perhaps in a different cycle.

It's -- the outlook currently in Europe, and we believe for a few years there, is going to remain strong in the rail sector due to a number of forces that are finally achieving full impact there in the European economy and in the rail system with privatization and a lot of very robust activity in the shipment-- shipment of freight in the, Europe and with trade with Russia.

What about the margins longer term?

Can they approach North America in much better environments?

I think they can, Matt.

You referenced the teens.

Of course teens for new railcar margins in North America would be on the upper end of the range, but overall, your comment can we get to the type of margins that we realize in the railcar in North America, yes, we believe we can.

And in fact historically there have been sometimes that we have done that.

We just have not been able to do it on a consistent basis.

Okay, and what's your production -- (overlapping speakers).

It remains a difficult environment, and we are examining the -- we're examining the entire business model there.

We're making some progress in Europe, but it's still -- we are still very conscious of the distraction that it can present.

So we'll continue to evaluate it.

And what kind of production capacity do you have in Europe?

Roughly about 2000 units.

Okay, and--

Per annum.

I think you had mentioned it was about 1500 units you were expecting to produce this year?

Yes, if you -- that's correct.

Okay.

So you still have room to increase utilization over in Europe without having to make substantial investments?

Yes.

We have it on the margin, on the margin we do.

With any of our plants where we give a rated capacity, including Europe, where we say 2000 units, or any of our plants, that really is with all the stars lining upper effectively, where you're having long production runs of a minimal number of car ties, but, yes, we could squeeze out a little bit more over in Europe.

If I could just ask one more question, I know manufacturing has typically occupied the majority of senior management's time.

With the manufacturing slowdown, what kinds of things are you doing related to parts and refurbishment to really try to accelerate that-- the growth opportunities without having to invest a lot of additional capital?

Last year, as was indicated in some of the year end information, we did three organic transactions in terms of growing the repair network.

We're finishing up integration of the two acquisitions at the tail end of that now, still getting some benefit from that.

We have continued to focus very keenly on that segment of the business and I think the numbers are reflecting it.

Are there any particular opportunities?

I know like Kansas City Southern's trying to become much more efficient operator, expand intermodal, things like that.

Are there specific things that you're working on with, you know, the rail companies or lease companies to begin to take on a lot more work there?

Yeah, but if I told you what they are, then everyone would rush after them.

So we have a number of things that we don't want to publish yet.

We're very excited about this network and if you insist that we give you the 20-second first on it, it's a network business.

We've got a very efficient network.

There's a very strong demand for what we can provide, which is reliable service, short dwell time, bumper to bumper coverage with the customer, and it plays right into what the railroad's current needs are today, which is reliable partner in producing velocity and efficiency in their operating model.

Okay.

Well, that's fair enough.

Don't--

(Overlapping speakers).

-- right now to enhance that segment of the business.

I'm sorry.

I didn't catch the last part.

We're working on a number of operating and other deals to enhance that business.

We intend to continue to grow it and make it stronger.

Okay.

Well, I appreciate your comments.

I know it's obviously competitive issues.

Maybe we can talk more about that offline, but thanks for your time today.

I appreciate it.

Very good.

And we have time here for one or two more.

So we'll go ahead and we'll take-- go ahead and take those.

Thank you.

Our next question comes from Steve [Barger] with [KeyBanc Capital].

Please go ahead.

Hi, good morning.

Hi, Steve.

Hi, I had to hop off for a second.

Just tell me if this has been covered.

But, in your comments, you cited mixed cost reduction initiatives and a lower tax rate as drivers for improve-- earnings improvements for the rest of the year.

Can you talk about the relative impact of each of those, which one is more critical to allow you to get the improvement or what might be least important there?

I wouldn't -- I think you could do some math yourself on that, if you take the tax rate.

Obviously that's an 11% swing in the tax rate that goes straight to the bottom line for any future earnings.

Then also we have said that-- we have said that we expect our refurbishment and parts margins to remain around 15% and that the revenues from that segment will be about 115 to $120 million in the-- per quarter in the second half of the year.

And then we said slight improvement in new rail car margins, that still the upper end of the range of that is 7.6%.

So you could probably go ahead and rank those yourself based on that.

No, I appreciate the color there.

Thank you.

I would like to ask you a question about the per diem.

Are you -- as you see the slight reduction in the utilization rate on your lease rate, are you seeing an increase in inquiries for per diem and would you expect to see that as people wait for even better lease rates, even though you talked about the more aggressive environment?

In a market like this, it's not unusual to lease -- if you have cars coming up for lease, to lease short rather than going long.

Just as it's usual to go long in a stronger period.

We went on our portfolio to the degree we had cars that we did not want to put into per diem service which have higher revenue yields.

We went long on most of our fleet.

We have an average term now of about three years.

We are -- so we're easily able to go through this economic cycle with a lot of -- without a lot of negative effect on our core fleet.

On the margin, there will be issues and it will -- we'll evaluate putting cars into per diem, if we convert from term to per diem, typically we can have a good swap on revenues.

So that's an offset we'll look at.

We have an unusual capability to keep cars in service, due to the way we're organized and we-- and our connection with the system through our various business units.

So per diem is a strength that we have, but it can be a risky area as well.

So we don't want to get overloaded on it.

And you have not seen a significant shift in that direction in terms of inquiries at this point?

No, no, we haven't.

No, we haven't is the short answer.

Okay.

One last question, I know on the parts and service side of the business, it's a little more fragmented.

Are you seeing more aggressive bidding out there with lower utilization rates, similar to what you may be seeing in terms of the leasing or new car side from some of those smaller, maybe less rational competitors?

No, not materially.

Not that we can't counter by the benefits of the network.

What we're selling is reliability, short dwell times and short-- shorter transportation moves, and a network has a substantial advantage over individual car shops.

So I think there's going to be quite a lot of opportunity-- continued opportunity in the, in perfecting this network over time.

All right, very good.

Thanks.

Thanks.

Thank you.

We have time for one more here.

Thank you.

Our last question comes from John Barnes with BB&T Capital Markets.

Please go ahead.

Hi, good morning,guys, Mark.

Most of my questions have been answered, but I had two quick follow-ups.

Number one, on the shutdown of TrentonWorks, you indicated that, as part of the lower SG&A run rate that you expect the TrentonWorks-- that shutdown to kind of take some of the pressure off costs.

Can you kind of quantify what costs you believe you're incurring associated with that shutdown that's not captured in the special charges?

Well, the total cost is about-- is running about $500,000 a quarter, so this quarter-- this quarter was slightly higher than that.

But so part of the breakout of that is in special charges.

The balance of that would be in G&A other than about 100 to $150,000 or so that's in interest expense.

So each quarter it will be hard for me to give you in advance how much of that would be in special charge versus G&A, but-- but on the whole, the -- maybe $400,000 of that or so will be between those two line items.

Okay, all right.

And then just a clarification on a point you made earlier in your comments about a more favorable product mix in the second half, can you just elaborate on that a little bit?

I mean are you-- does it go back to the thought about longer sustained production runs?

Is that kind of what you're alluding to, or is it better-- better priced product or, can you just elaborate there?

Yeah, I think it is really a pure mix thing.

We said that in the first quarter here that 60% of our deliveries either came out of Europe or covered hopper cars.

We anticipate that that number will be-- that percentage will be lower in the second half of the year, primarily as a result of the greater percentage of double-stack intermodal cars and our -Max car.

Let me just add to that.

We have spent quite a lot of time and during the quarter ended and even prior to that, working on a sustainable backlog in 2008, so we are very comfortable now with the backlog we have in terms of having the ability to sustain more stable production in 2008, and there has been some effect in the lagging, or in the trailing quarters of the efforts that we've made to reposition ourselves.

It's very, very important that we do reposition ourselves to adjust to the economic realities.

I think we've achieved that now, so going into the balance of calendar 2008, I think we have a very sustainable production book which will give us more predictability and the benefits of longer runs.

Okay.

Very good, thanks for your time, guys.

We, we've run out of time here, so we'll -- we appreciate all your interest.

I know there -- several of you may have additional questions.

Sorry we didn't get to you.

I would invite you to contact me afterwards, after the call.

We do have board meetings and our annual shareholder meeting got scheduled a little bit later in the morning and this afternoon, so I would encourage those of you trying to get a hold of me try to do so sooner rather than later.

As always, I want to thank all of you for participation in our call and of course we'll be webcasting our shareholders meeting later on today for those of you that would like to participate in that.

Thank you very much, and as I said, we appreciate your interest in Greenbrier.

Have a good day.

Thank you.

That does conclude today's conference.

You may disconnect at this time.