FreightCar America Inc (RAIL) 2006 Q4 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the Freightcar America Inc. fourth quarter 2006 earnings conference call. At this time, all participant lines are in a listen-only mode. There will be an opportunity for your questions at the end of today's presentation. Please note this conference call is being recorded, and an audio replay of the conference call will be available beginning at 2:30 p.m. Eastern Standard Time today, until 11:59 p.m. Eastern Standard Time on February 14, 2007. To access the replay, please dial 1-800-475-6701. The replay pass code is 860301. An audio replay of the call will be available on the Company's Website within two days following this earnings call.

I'd like to now turn the conference over to Kevin P. Bagby, Vice President of Finance and Chief Financial Officer of Freightcar America. Mr. Bagby, please go ahead.

Thank you, Keely. Before we begin, we would like to remind everyone that the statements made during this conference call relating to the Company's expected financial performance or future business prospects, events, and plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

Certain risks and uncertainties may cause forward-looking statements to differ from actual results, including, among other things, the cyclicality of our business, adverse economic and market conditions, fluctuating costs of raw materials, and additional risk factors described in our earnings release for the fourth quarter 2006 and in our annual report on Form 10-K filed with the Securities and Exchange Commission.

Forward-looking statements represent our estimates and assumptions only as of the date of this call. We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events, or otherwise.

The discussion today may reference the following non-GAAP financial measures, EBITDA and pro forma earnings per share. Reconciliation of our net income to the Company's EBITDA and reconciliation of our net income per common share attributed to common stockholders to our pro forma earnings per share are available in the supplemental disclosures included in the earnings release for the fourth quarter 2006. This earnings release is posted on the Company's Website at www.freightcaramerica.com.

I would now like to turn the call over to John E. Carroll, Jr., our President and CEO.

Thank you, Kevin, and good morning, everybody. Joining us here in the meeting today is Ed Whalen, our Senior Vice President of Marketing and Sales, and Christian Ragot, our newly appointed COO, Chief Operating Officer. We would like to welcome you to Freightcar America's fourth quarter 2006 earnings call. I'm going to, as usual, discuss the highlights of the Company's performance in the fourth quarter of 2006, and Kevin will provide a detailed review of our financial performance.

Before commenting on our fourth quarter results, I would like to highlight Freightcar America's outstanding 2006 performance in the overall North American railcar market. Our 2006 deliveries were at an all-time record of 18,764 units, with an overall market share of a little over 25%. In our view, that's really strong. We delivered a record 17,790 aluminum coal cars and achieved an 80%-plus market share in that sector. We also produced the first steel triple hopper cars for the railroad industry in nearly a generation, we developed a hybrid aluminum stainless-steel car for the eastern U.S. coal car market. We signed a long-term supply agreement with TXU that will become effective when TXU's new coal-fired power plants are permitted.

For the year ended December 31, 2006, our sales were $1.4 billion plus. Our net income attributable to common shareholders was $128.7 million, or $10.07 per diluted share. Clearly, 2006 was a super year for our Company. It could not have been achieved without the drive and execution of our management team, our employees, our suppliers, and first and foremost, our customers.

Industry-wide, 15,819 new cars were ordered in North America in the fourth quarter of 2006, down 26% from the third quarter of '06. Railcars for ethanol and ethanol byproducts led fourth quarter orders. Tank car orders totaled 6,208 units, accounting for 39% of all cars ordered, but down from the third quarter by 49%, while covered hopper cars accounted for 3,546 units ordered, 22% of the total market.

Industry-wide deliveries in the fourth quarter of 17,927 new freight cars were down 6% from the third quarter. Industry backlogs, therefore, decreased by 2,290 units in the fourth quarter but remained a very strong 85,826 units on December 31, 2006. Freightcar America's order activity in the fourth quarter of '06 was 2,199 units, up from 370--357 units in the third quarter of '06. Our total backlog of unsold orders is 9,315 railcars at the end of the fourth quarter, compared to 20,729 units at the end of the fourth quarter of 2005, and 12,176 units at the end of the third quarter of 2006.

Total sales revenues in the fourth quarter of 2006 was $398 million, compared with $267.3 million in the fourth quarter of 2005. I'm pleased to report we achieved net income in the fourth quarter of '06 of $34 million compared with $17.6 million for the same period in 2005. Fourth quarter pro forma earnings per share were $2.65 on a fully diluted basis, compared with pro forma earnings per share of $1.38 in the fourth quarter of '05.

We're continuing our work on the development of new products to diversify our product portfolio. We expect to participate in the North American market for double stacking intermodal cars in 2007, and we expect to launch a complete covered hopper car product line in early 2008. Our current double stacked intermodal cars are performing very well in service, and our new prototype articulated double stacked car is being constructed.

In addition to new product development, we are scanning the globe in search of markets to apply our coal car expertise. Twenty-five percent of our fourth quarter 2006 orders were from international customers. While we have already stated our plans for product diversification, we will continue to maximize our coal car heritage and pursue international business opportunities as they develop around the world.

To produce our railcars with the most competitive cost structure, we are continuing to evaluate our manufacturing facilities. As noted a few minutes ago, our stainless-steel aluminum hybrid coal cars will be produced at our Roanoke facility on a new second production line. That expansion is progressing right on schedule, and we expect the second production line to be fully operational in the next two weeks. The investment required for this project was approximately $6 million, most of which was spent in 2006, and that's lower than our original estimate of $10 million for the project.

Overall, our strong balance sheet provides us with the ability to fund strategic initiatives from internally generated cash flows. We still believe the aggregate amount of investments with product diversification, development of lower-cost production facilities, and international opportunities will range somewhere between $60 million to $80 million.

On Wednesday, January 24, 2006, Freightcar America's Board of Directors announced a share repurchase program of up to $50 million. These shares are to be purchased in the open market at prevailing prices starting in the first quarter of this year. Our strong 2006 earnings and cash flow provide the Company with the flexibility to begin the repurchase program while continuing the strategic initiatives just recited. Our repurchase program is consistent with our commitment to enhancing the value of our Company for our shareholders.

In summary, we are very proud of our strong performance in the fourth quarter, and we are excited about the competitiveness of our Company, the long-term future of coal as an energy source, our railcar products to carry coal and other commodities, and our product and facilities diversification initiatives.

Now I'd like to return the call to Kevin to address our fourth quarter financial results in more detail.

Thank you, John. As stated earlier, our sales revenue for the fourth quarter of 2006 was $390.8 million, compared with $267.3 million for the same period in 2005, reflecting an increase of $123.5 million, or 46%. The increase is attributed primarily to higher volumes, as deliveries totaled 5,060 units in the quarter, compared to 3,710 units in a similar period in 2005, an increase of 36%. The higher revenue gains beyond unit volume reflect higher pricing related to pass-through of cost escalation.

The higher volume of railcar deliveries reflected increased production levels. Our volume allowed us to simplify our production plan as coal car volumes increased 25% over the same period in 2005, which allowed us to generate increased operating leverage. Shipments of steel-bodied cars, including aggregate cars and triple hopper cars, accounted for approximately 10% of the total volume of railcars delivered in the fourth quarter of 2006.

Our gross profit margin for the quarter was $61.5 million, compared to $33.4 million for the fourth quarter of 2005, an increase of $28.1 million. The corresponding gross profit margin rate was 15.8%, compared with 12.5% generated in the fourth quarter of 2005, a favorable operating leverage of 22.8% on incremental revenue. This gross profit margin approval was driven by higher volume, improved operating leverage, higher prices, and improved productivity. During the fourth quarter, we shipped 83% of our production from our low-cost facilities, which improved our performance compared to 2005, as our conversion cost is significantly better in these facilities. This compared to 68% in the fourth quarter of 2005.

Sequentially, between fourth quarter 2006 and third quarter 2006, the grow profit margin declined primarily due to a shift in product mix to more steel cars. Selling, general, and administrative expenses for the fourth quarter of 2006 were $9.2 million, compared to $6.8 million for the same period in 2005. The increased SG&A costs for the fourth quarter of 2006 reflects primarily public company expenses related to the implementation of SOX, higher legal costs, costs related to the leadership transition, and in dozens of product development programs to support our product diversification initiative.

Leadership transition costs will continue through the next two quarters, and we will continue to invest in new product development throughout 2007. As a percent of net sales, SG&A was 2.4% for the fourth quarter, compared to 2.6% for the fourth quarter of 2005. Net interest income for the quarter was $2.2 million. The income tax provision for the fourth quarter was $20.3 million, with an effective tax rate of 37.4%. This compares with an effective tax rate of 36.8% in the third quarter of 2006. The effective tax rate increase is attributable primarily to an increase in the blended state tax rate. Net income was $34 million for the quarter, an increase of $16.4 million from net income of $17.6 million in the fourth quarter of 2005. Net income was favorably impacted by the same factors addressed earlier.

Our diluted income per share was $2.65 for the quarter, compared to $1.38 per diluted share for the same period in 2005. Earnings before interest, taxes, and depreciation and amortization, or EBIDTA, were $53.1 million for the quarter. Pursuant to FAS 158, the Company reported an increase to its net liability for pension and other post-retirement benefits, which resulted in a decrease of stockholders' equity of $5.6 million related to the pension benefits, and $15.6 million related to the post-retirement benefits net of tax. These adjustments did not impact cash flow or net income.

With respect to cash flow, we generated net cash flow from operations of $29.6 million for the fourth quarter 2006, compared to cash flow from operations of $17.8 million in the same period 2005. The $11.8 million increase in net cash provided by operating activities was primarily due to the addition of $14.8 million in net income, adjusted for non-cash items, partially offset by a reduction of $2 million attributable to changes in the primary working capital accounts of inventory, accounts receivable net of accounts payable, and a reduction of $1 million attributed to payroll and other employee benefits.

Net cash flow used in investing activities was $3.1 million in the quarter, primarily related to the capital addition to the Roanoke expansion project. Net cash flow generated from financing activities was $900,000. Cash flow based on a per share in the fourth quarter was $2.13, compared to $1.28 per diluted share in the fourth quarter 2005.

The weighted average total number of basic shares outstanding in the fourth quarter was 12,636,176, while the weighted average total number of diluted shares outstanding was 12,797,437.

In summary, we continue to be very pleased with our financial performance. The management team continues to focus on execution and the generation of cash flow through the delivery of the backlog. In addition, we have a disciplined approach to working investment and capital investment.

With that, I'd like to turn the call back over to John.

Thank you, Kevin. As I noted before, we are pleased to report on our strong performance in the fourth quarter of '06, and the initiatives we are pursuing to ensure our stream of earnings into the future. In closing, I would like to thank you for your interest in our Company and participating in this call. I've enjoyed dealing with you. Chris Ragot will assume these duties as of the end of April of '07, and he will be updating you on Freightcar's first quarter performance at that time.

Keely, we're now ready for questions.

Thank you. [Operator Instructions.] One moment, please, for the first question. And our first question will come from the line of Robert Lagaipa of CIBC World Markets.

Hi. Good morning.

Good morning, Bob.

Just have a few questions. I guess one with regards to the order rates. I know last quarter you shared with us what the order rates were from the end of the quarter to the conference call. Can you maybe share with us what the order rates have been since the end of the year? Have you received orders? If so, how many? Are there particular car types? Any color would be helpful there.

We have received orders. Not very strong orders.

Okay. All right. Second question is just with regard to production rates. Now, obviously, over the last couple of quarters, you've increased your production rates. You're delivering 5,000 cars the last couple of quarters. If we look at the backlog of roughly 9,300 cars, obviously, that's just enough, assuming the orders into the second quarter, but that's about it. Do you have any plans to adjust your production levels over the next quarter or two in light of the weaker orders?

Absolutely. We already have. We've, we were subcontracting the manufacture of cars at a plant called Kasgro in New Castle, PA. That relationship is in the process of being terminated. We have reduced our production rate in Johnstown and our facility in Johnstown. We have reduced our production rate for the moment in our production facility in Roanoke in the second line. We'll pick that back up when it comes in, as I said, this month. And then we have not reduced our production rate in Danville yet, but we will be doing that around the beginning of the second quarter.

And what type of delivery should we be expecting, at least for the first couple quarters of the year, or if you can share the rest of the year, that would be great. But what type of step-downs in the 5,000 level should we be expecting over the next few quarters?

I don't, we don't usually share that kind of guidance, I don't think. Kevin, would you like to make a comment?

Yes, generally, we don't make a comment with respect to next quarter's or the following quarters' performance levels.

Well, even if it's not an exact number. Should it be half? Should it be three-quarters of those levels? A quarter of those levels? Maybe just some perspective on it would be helpful.

Good try.

Okay. Last couple of questions is just with regard to pricing. On the pricing front, if you net everything out, I know over the last several years have been 5% to 6% net price increases. And then it was kind of 1% to 1.5%. Exiting the year, what were the price increases looking like, net of the raw material surcharges?

Price increases for '07?

Yes.

Net of, well, the surcharges are clearly dropping away rapidly and, in fact, materials, both raw material and component prices, are starting to drop, and so the pressure on margin hasn't really hit us yet. We foresee that happening as the market contracts, but it hasn't really hit us yet.

Okay. So would it be fair to say net of the surcharges, just base price increases, is flat the right number? Or are you actually--?

I would say, actually, due to material decreases, cost decreases or certainly flat on materials, even though there has been an up-tick in aluminum lately, that flat is probably the best answer.

Okay. And then the last two questions I have before passing it along. The expansion of Roanoke, I know you've talked about it in the past John, about potentially adding an additional facility, and I don't recall the expansion of Roanoke, so has the expansion plans into another facility gone by the wayside and now you're pursuing Roanoke, or how should I think about that expansion of that facility?

No, the Roanoke facility has been on the cards for a long time, because we got the order for the hybrid stainless-steel aluminum cars. The first traunch of those cars for Norfolk Southern, and so we had the plan to put a second line in it all along. And we are still pursuing another facility due to the cost situation in Johnstown.

And can you share with us any update on Johnstown? Obviously, with the union contract expiring in 2008, anything you can add or any color there?

No, we've had a very difficult time, and in fact, at the moment, the talks have terminated, and we will certainly respect the contract that we have until it terminates in May of '08. But we were really hoping that the union would help us make that a competitive facility, but they're not.

Right. And if I could just make a couple more in before I turn it over. With the capital expenditure plans that you have, what should we be expecting with '07? I know you talked about $60 million to $80 million in opportunities as kind of across the board, but what's the capex plan for '07?

The capex plan is fairly match and depreciation. Kevin, you might want to make a comment for it.

I think when you think about the strategic funding between the $60 million rate, we still believe that the 12- to 36-month kind of timing. So that will be stretched out over about that time period.

And with Chris on the call, any comments there in terms of strategic direction, or should we wait until next quarter for that one?

You should wait until next quarter.

Okay, terrific. Best of luck in the future, John.

Thank you.

Thanks a lot.

Thanks.

Thank you.

Thank you. And next we'll go to the line of Adam Comora of EnTrust Capital.

All right. Thank you very much. What, I'm just trying to get a sense of maybe you could give us some color on what's going on in the industry. How soft have the order rates been so far quarter to date? And do you expect that to change at all as we move through the first and second quarter?

What's going on in the industry is a very interesting analysis. There's a real hot sector, and that's kind of the way the industry works, and that's ethanol and ethanol byproducts. Intermodal is cold. There aren't any intermodal cars being bought, and the coal car segment, as you know, has cooled down. And so you've got a hot, hot segment in tank cars, two- to three-year backlog, a warm segment in covered hoppers, and a cool segment in coal and a cool segment in intermodal. And boxcars and center beam flat car business is dead as a doornail. So that's kind of across the board. To, you can move the figures around, but the forecast is total, for about a 10% increase in '07 output for the North American freight car business compared to '06.

Okay. So that, I'm trying to walk through those numbers. How many cars were delivered for all of '06, now, in coal railcars?

In coal, about 22,000.

Right. Okay. And what's total backlog for the industry right now?

About 12,000.

So that would imply, I guess, a pickup in order rates over the next couple of quarters.

No, I think '07, you might find coal cars in on the 12, the deliveries might be in the 12 to 14 region--10, 12, to 14.

Okay. Got it.

But there has to be some orders placed to get there, though.

Right. Yes, that's what I was trying to understand.

If there's a 10,000-car backlog now, you've got probably 10, because one question probably somebody's going to ask is, "Is all of your backlog deliverable in '07?" The answer is yes, and I believe all of our competitors' backlog is, in the coal car arena, is deliverable in '07. And so if there's a 10,000-car backlog total in the industry, to get to 12 or 14, you need some relatively modest order entries for delivery this year.

Yes. Actually that was going to be my follow-up question, is how much is to be delivered this year. And just to color, so how much flexibility do you guys really have in terms of stretching out your backlog so we don't sort of get whipsawed when you deliver it all in the first six months, and if we really don't get any deliveries in the next six, the back half--.

We already have. In other words, our Norfolk Southern deliveries of the hybrid cars are spread through the whole year, and our aluminum coal cars are getting spread, also.

Got it. Okay. And just getting back to my first question, can you give us any sense for what kind of inquiries you're seeing? I understand things are lumpy, but do you expect the orders to pick up in the second and third quarters? Because it sounds like the first quarter's going to be relatively weak.

I wouldn't say necessarily the second and third quarter. I think that by, I foresee the coal car sector, just the coal car sector, aluminum coal car sector, and differentiate that between the hybrid and the aluminum, because we do foresee Norfolk Southern continuing their program, which adds to the aluminum cars, because we file that under a steel car. And so aluminum car-wise, I think as we get into '08, you'll see the order rates pick up fairly strongly because of the coal-fired power plants that we track coming online '08, '09, and as you know, the TXU proceeds. And that appears to be online. So I wouldn't foresee the order rate on aluminum coal cars picking up until, say, late '07 into '08.

Okay, Thank you.

So as far as the turn of the backlog is, if you have them quicker, you can turn them.

Okay, thanks.

You're welcome.

Thank you. And next we'll go to the line of Bob Schenosky of Jefferies.

Thank you. Good morning.

Good morning, Bob.

Just a couple of quick ones. In the backlog that currently exists, how much of that is actually the aluminum coal car?

About 80%, 70 to 80, maybe 70%.

Okay, great. And then--.

Our international orders are aluminum coal cars, and so there's a good piece of our backlog that is coal cars for Colombia.

Okay. So is the entire order Colombia?

Yes.

Okay. And how does--?

Multiple customers.

Okay. And how do those, on those customers, how does the price and margin compare to the U.S. sales?

I think the price and the margin on the Colombian business will be okay.

Okay. And then, I don't know if you'll be able to forecast this or not so early on, but do you have the, a potential idea in terms of percent of sales growth for '07 that would actually be non-coal?

A rising percent. You know, we're almost all coal in '06, but a rising percent in '07 of, oh, maybe 20%.

Okay. And I would take it, John, that that would dominate the second half?

I don't, I foresee in the coal car arena, there are some inquiries. I wouldn't say the inquiry pile is absolutely dead. There are some inquiries there for business in '07, and that's why I made the comments I did about backlog and output of aluminum coal cars in '07.

Okay, great. And finally, are you seeing any cancellations in existing backlog at all?

No.

Okay, good.

And to appeal to your comment that we read, that I'll repeat to that, our backlog is all for delivery in '07.

Right, great. Thank you very much.

Yes.

Thank you. And next we'll go the line of Jason Feldman of UBS.

Good morning.

Hi, Jason.

Hi. When I think about the last downturn, 2000 to 2003, you had a much higher percentage of your cars back then built at what you would call higher-cost facilities than you do today. Given, though, that the Johnstown contract runs through mid-2008, how can I think about the kind of cost structure now versus then? It seems like the variable costs, or average variable cost, is probably down, but if the fixed costs stay maybe even higher because you have the addition of Roanoke? Or should I be thinking about it some different way?

I think a little differently, Jason. I think the fixed component is probably a little bit higher than it was during the last cycle. But the low-cost production plants give us a different cost profile. So I think probably you should see a little better operating performance during this cycle than you did during the last cycle. If that's what your question is.

It's basically right. Because when you say that you will honor the contract at Johnstown through mid-2008, I guess I'm trying to figure out exactly what that means. Because I've also read that there's no work really booked there, or no substantial work booked there past the first quarter.

There are, there are essentially no employment guarantees there, either.

Right. That's what I'm getting at. I said, even with the contract through mid-'08, you still have substantial labor costs if there's no work to be done there, or--?

No.

Okay. Okay, so it's not, it's not a huge chunk of fixed costs just sitting there unproductive, even for the rest of the contract period?

No.

Got it. Just a quick clarification. On the intermodal, I believe the term that you used was that you intended to participate in that market by the end of '07.

Yes.

Does that mean that you intend to be able to accept orders by the end of '07, or--?

No, build.

You intend to be building for customers by the end of '07?

Yes, and we think, our view is that's when the market starts picking back up again. Actually, intermodal, I made the comment that the intermodal market is really cool, and it is, because railroads have actually started operating more efficiently. The market's still growing very nicely for intermodal containers, you know, 4%, 5% or 6% a year. But the railroad, particularly the western railroads, the Union Pacific and the Burlington Northern, are operating more efficiently.

Okay. Got it. Couple of other quick ones here. Do you have any thought as to the time frame for the $50 million share repurchase? You said you were going to start this quarter, but over what kind of period?

Well, it'll go throughout the quarter, Jason.

But--?

We'll come back and report as to what the, how many shares we bought, on one of these conference calls.

Okay. And is there, and I kind of remember, I vaguely remember reading --should we expect in the first quarter, any additional compensation expense and SG&A related to the management transition?

There will be some additional compensation expense related in the first quarter, and then, and a little bit in the second quarter, and then we'll be through with it by then.

Okay. And then the last question is, is there any kind of status update you can give us on the progress of some of the international joint ventures?

Yes, we are proceeding along with the joint ventures in Russia and India, and the one in China has gone kind of, it's clear in third place, but we're bouncing along in the analysis. We're behind schedule in the analysis of the Russian and the Indian ventures, and, but we're still very active and still believe that's the right thing to do.

Okay. Thank you very much.

Yes.

Thank you. And next we'll go to the line of Henry Little of Wealth Strategies. He must have taken himself out of queue, so we'll next go to the line of Mike Marburg of Ramsey.

Hi, guys. I have just one question that wasn't answered. The RSI data suggested that over 3,000 aluminum coal cars were ordered in the fourth quarter, and when you back out your international, you're about half of that versus your historical market share of about 80%. So did you lose market share in the fourth quarter returning these new lines coming up, or is that data misleading?

No, we did lose two orders in the fourth quarter that, Trinity didn't add, well, I think that their one line is already shut back down again. I don't know that for a fact, but yes, we did lose two orders to Trinity.

Was it on price, or is it something you can talk about, whether that's a trend, or are they--?

Ed Whalen, would you like to make a comment?

Yes, I think the other thing we observed is, as far as being built by Trinity moving into fairly short-term leases with end users, I think it's more an issue of delivery rather than price. They had closer end delivery than we did.

Okay, thanks.

Thank you. And next we'll go to the line of Mike Valencia of Two Rivers Capital Management.

Hi. This is actually Kevin Silverman at Two Rivers Capital. I just had a question about gross margin. It looked like in the quarter, on an incremental basis, you were in the low 20s on gross margin, and I'm wondering as you flex down, how much of that was related to fixed costs versus movement in pricing and raw materials prices. So can you give any sort of color on the mix there?

We work really hard at having fixed costs not be fixed, and Kevin, I don't know if you want to add to that.

Well, in answer to your question, I think we see a mix as you shift out of aluminum cars. Ten percent of our volume in Q4 was not aluminum. As you look back earlier on the quarters, most of our shipments, over 95% of them, were aluminum. So the margin is impacted first by the mix. And then in terms of operating leverage, you have higher volume. So as the volume ratchets down, you're going to see some degradation in the gross margin performance. But as far as costs, we've been able to match material costs with our selling prices, so that shouldn't have an impact on the gross margin performance per se.

It's mostly mixed, then.

That's correct.

And then just secondly, if I could add, your cash, it looks like you could buy back about a third of the Company right now. How much of that cash do you view as just sort of safety cash to get through a cycle, versus cash you want to deploy into some high ROI types of uses?

I think if you think about our cash, we've committed $50 million to a share buyback program. We've kind of outlined uses right now in the area of $50 million, potentially higher than that. I think that cycle to cycle, we'd like to keep our cash roughly 5% to 8% of net sales. So that's kind of how we think of it.

Do you have any interest in moving into other businesses with that cash, or can we think about you as pretty much doing what's on your plate now?

I think we have thought about exploring other product development initiatives, potentially in the area of primarily rail. So we pretty much right now stick to our current sector.

Do you have any long-term forecasts so just you could kick around in terms of rail market share versus truck? There seems to have been a glacial shift here recently. After about 100 years, I think rail's gaining some share. What is, what's your outlook? Is that going to continue into the foreseeable future, do you think?

Yes, and here's why. Ethanol and ethanol byproducts are rail commodities, and the rails are doing an excellent job of hauling intermodal. And they're doing a better and better job of hauling coal. Those three commodities alone are well over 80% of railcar loadings, and so the increases in real rail freight we have seen, we expect to continue. And, by the way, that's why we don't expect to see a cycle down of the likes of 2002.

Thank you very much.

And next we'll go to the line of Rich Sheldon of GLB.

Hi, Guys. This is Rick Sheldon. My questions, I have three questions. My first question is, you guys are carrying a fairly significant accounts payable balance relative to your accounts receivable, and I was just wondering about what the timing of that paydown is, and how much of the cash balance on the balance sheet will go to pay that down?

We don't think that's a considerable balance at all.

Well, I'm not saying that it's a considerable balance, but relative to the cash.

Working capital managers think that's too low. But Kevin, you can talk about payment.

Yes, most of that payment's due within the next 60 days. What we really try to do, Rick, is look at our inventory and try to match our inventory to our payables. That's the strategy, so we don't look at it as a cash issue. We look more at it to match payables and the inventory, which I think is not uncommon.

Okay, fair enough. And then, just in terms of pricing and the trend and direction of pricing given that the market has now come off and there's, I guess, excess production capacity for the aluminum cars, with regards to your lines and Trinity's lines, what is the overall direction of pricing, and how aggressive do either you guys or Trinity need to be in order to maintain the current level of orders and/or market share?

Well, I don't think there's any elasticity in pricing will create new business. Clearly, people only buy coal cars because they need them, and so I don't think if you drop the price considerably, you'll attract any new business. So the business that does come to the market will be real needs for coal cars, and so will there be margin compression? Sure. Whenever the market contracts, there is margin compression.

Okay. And then my last question is given the situation in Texas with the environmental issues and the inevitable delay of these TXU plants, it looks like the first two are going to be built at the Monmouth lignite plants, but then you have potentially the extension of what TXU was saying on their time frame for their Powder River Basin plant. Where are the incremental coal car orders coming from? You have a shift from PRB now to Northern Ap and Central Ap production and then even Illinois basin production, because people are putting scrubbers on. And then the second part of that question is, where are the announcements of these new coal plants? And what coal plants are you talking about?

Well, I'll give you a very good example. We're negotiating right now with a Midwestern utility for a sizable piece of business for 2008 for a new power plant coming onstream that will have eastern coal, but the cars will be such that they can convert over to western coal if they would like in the future. That's the kind of things that I think we foresee happening. The statistics for new coal-fired power plants are well known, and they are considerable.

Okay, and do you guys, what happens if TXU delays, for some reason, a plant or two and you don't actually get orders for TXU coal cars in 2008, or you get a couple orders in 2008 and then some in 2009 and some in 2010? What, for the portion of their capacity that they have contracted for as far as your plants go, do you have to leave that open, or can you fill that, backfill that in? Like, how does it work with TXU?

No, the way the contract is set up is that they have the, they have agreed, we have agreed with them to a certain delivery schedule, and if they don't need the cars in parts of that schedule, they can move them up.

Okay, but how does that relate to, does that mean there's a specific schedule as to the timing of deliveries, and if they say, "We don't want it," then you can go and offer it to somebody else? Is that how it works?

Yes.

Okay. Thank you very much.

Thank you. And next we'll go to the line of [Zar Fargeese] of Scotia Capital.

Hi, guys.

Good morning.

Good morning.

You mentioned that your potential deliveries for this year could be half of what they were last year. The last time I looked at, sort of looking at your historicals, the last time you produced at that level, your gross margin was half of what it is right now. Do you sort of expect a similar amount of operational deleverage if you started producing that little?

No, because, what Kevin said earlier, that our production is now concentrated at our lower-cost plants. More than 85% of our production in '06 and '07 will come from our lower-cost plants.

So, just for modeling, how should we think about how much deleverage you'd get?

Well, I think that it's going to depend on the mix, first of all. What type of product it is, being able to generate higher margins on the aluminum business. So that's a function of it, and then you're going to get a little bit less margin or a little less degradation of margin related to the operating leverage. But I think if you look cycle to cycle, we'll perform, probably 25% to 30% better.

Okay. Okay, that's helpful. Last question. You guys were pretty precise on the last call about how many orders you had to date, 2,073. I know you said it's not very strong for this quarter, but what does that mean exactly? Does that mean 50 cars? Less than 100 cars? What is not, could you just offer the same degree of precision you offered last time?

No.

Okay, thanks.

Thank you. And I'll turn the conference back to our speakers.

Okay. Well, thank you, everybody, for participating in the call, and we look forward to talking to you next time, and have a good day.

Thank you. Again, ladies and gentlemen, this conference will be available for replay after 2:30 p.m. Eastern Time today through 11:59 p.m. Eastern Time on February 14, 2007. You may access the AT&T replay service by dialing 1-800-475-6701 and entering the access code of 860301. That number again is 1-800-475-6701, with the access code of 860301. This does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.