FreightCar America Inc (RAIL) 2007 Q1 法說會逐字稿

Good morning and welcome to the FreightCar America Inc. first-quarter 2007 earnings conference call. At this time all participant lines are in a listen-only mode. Later there will be an opportunity for your questions at the end of today's presentation. Please note this conference call is being recorded. An audio replay of the conference call will be available beginning at 2:30 PM Eastern Daylight Time today until 11:59 PM Eastern Daylight Time on May 7, 2007.

To access the replay service, please dial 1-800-475-6701. The replay pass code is 870-826. 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.

Before we begin we would like to remind everyone that 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 cost of raw materials; and additional risk factors described in our earnings release for the first quarter 2007 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 a non-GAAP financial measure of EBITDA. Reconciliation of our net income to the Company's EBITDA is available in the supplemental disclosure included in our earnings release for the first quarter 2007. This earnings release is posted on the Company's website at www.FreightCarAmerica.com. I'd now like to turn the call over to Chris Ragot, our President and Chief Executive Officer.

Thank you, Kevin, and good morning, everyone. Joining Kevin and me today is Ed Whalen, our Senior Vice President of Marketing and Sales. We'd like to welcome you to FreightCar America's first-quarter 2007 earnings call. I'm going to discuss the highlights of the Company's performance in the first quarter and Kevin will provide a detailed review of our financial performance.

Starting with industry wide -- 11,152 new cars were ordered in North America in the first quarter of 2007, down 29% from the fourth quarter of 2006. Rail cars for ethanol and ethanol byproducts led first-quarter orders. Tank car orders totaled 4,729 units accounting for 42% of all the cars ordered, but down from the fourth quarter by 24% while covered hopper cars accounted for 4,060 units ordered, 36% of the total market, up 15% from the fourth quarter.

Industry wide deliveries of 17,148 new freight cars in the first quarter of 2007 were down 4% from the fourth quarter 2006. The industry backlog therefore decreased by [6,708] units in the first quarter but remain very strong at 79,038 units of which 78% was a combination of covered hoppers and tank cars as of March 31, 2007.

FreightCar America order activity in their first quarter of 2007 was 768 units, down from 1,031 units in the first quarter 2006. Our total backlog of unfilled orders was 6,006 railcars at the end of the first quarter. And as you know, order activity in this sector can be lumpy and we expect that trend to continue for the time being.

In the near-term we expect the market for coal cars will remain soft throughout this year. On an intermediate and long-term basis, coal as fuel for electricity generation will continue to provide over half the projected total generation during the foreseeable future. Currently 132 proposed plants are in the permitting, design or construction phase; moreover coal is becoming more environmentally friendly with investments in carbon, sequestration methods such as cold gasification integrated in a combined cycle or IGCC which can reduce CO2 gases by 90% or more.

Our first-quarter 2007 deliveries where 4,077 units. During the first quarter of 2007 we completed the expansion of our Roanoke facility, delivered the industry's first hybrid aluminum stainless-steel car for the Eastern coal car market, and we broadened our product mix to more sealed body car types.

Regarding our operating performance, total sales revenues in the first quarter 2007 was $322.5 million as compared to $292.8 million in the first quarter 2006. Profitability remained strong as we diversified our product -- production mix to more non-coal carrying car types while optimizing the production mix in low-cost facilities. I'm pleased to report we achieved net income in the first quarter of 2007 of $23 million as compared to $21.4 million for the same period in 2006. First-quarter net income per common share was $1.80 on a fully diluted basis compared to net income per common share diluted of $1.67 in the first quarter 2006.

The financial performance of the railroads have improved during the last two years by improving efficiency and by capturing additional market share of the surface transportation sector. We continue to explore opportunities and participation in the rail sector with additional car types such as the intermodal cars and the covered hopper cars. We continue to work on the diversification of our product portfolio.

Over 22% of our first-quarter revenues was generated from non-coal car carrying railcars with over 50% planned for the full year; this compares with none in the first quarter 2006 and less than 5% for the full year 2006. In addition, we're continuing our product development work on the articulated double stacked intermodal car and a complete line of covered hopper cars. Our current doublestack intermodal cars are performing well in service and our new prototype articulated double stacked car is ready for initial testing.

While we have stated our plans for product diversification, we continue to maximize our coal car heritage and pursue business opportunities as they develop in North America and around the world. On Tuesday, February 20th we delivered the first newly designed aluminum stainless-steel BethGon II hybrid coal cars to Norfolk Southern Railway Company at FreightCar America's facility in Roanoke, Virginia. This product was developed by FreightCar America in collaboration with Norfolk Southern as a modern replacement for their Eastern coal car fleet.

We are very proud to have developed this car with Norfolk Southern as it demonstrates our continuous commitment to the coal car market and the ingenuity of our employees. We continually strive to find innovative solutions to meet our customer needs.

As the coal car market has softened in 2007 we have significantly increased our focused on cost reduction activities at both the corporate and plant levels. We continue to identify and eliminate waste in our processes and strive for continuous cost improvements. In addition, we continue to optimize our production mix as 85% of our first-quarter deliveries came from our lower-cost facilities as compared to 69% in the first quarter in 2006.

To produce our railcars in the most competitive cost structure we are continuing to evaluate our manufacturing capabilities including analyzing the investments and returns required to introduce steel bodied railcars into our low-cost facilities. This is part of our ongoing evaluation of rationalizing our manufacturing capacity.

Overall our strong balance sheet provides us with the ability to fund strategic initiatives from internally generated cash flows. During the first quarter of 2007 the Company repurchased 23.5 million of common stock as part of our previously announced share repurchase program. The share repurchase program plan is consistent with our commitment to enhancing the value of the Company for our shareholders and we'll continue to explore other strategic initiatives in the future.

In summary, we are encouraged by our performance in our first quarter as we diversify our product portfolio and we are excited about the competitiveness in our company and the long-term future of coal as an energy source and our ability to provide products to this important segment. Now I'd like to return the call to Kevin to address our first-quarter financial results in more detail.

Thank you, Chris. As stated earlier, our sales revenue for the first quarter of 2007 was $322.5 million compared with $292.8 million for the same period in 2006, reflecting an increase of $29.7 million or 10%. The increase is due primarily to higher volumes and more diverse product mix. Deliveries totaled 4,077 units in the quarter compared to 3,966 units in a similar period in 2006, an increase of 3%.

Shipments of non-coal carrying railcars accounted for approximately 22% of total revenue generated in the first quarter of 2007. Our gross margin for the quarter was $44.1 million compared with $41.1 million for the first quarter 2006, an increase of $3 million. The corresponding gross profit margin rate was 13.7% compared with 14% generated in the first quarter of 2006.

The change in gross margin was driven primarily by a more diverse product mix. We continue to leverage our low-cost facilities, shipping 85% of our production from these facilities during the first quarter. This compares to 69% in the first quarter of 2006, which is significant as our conversion cost is much better at these facilities.

Selling, general and administrative expenses for the first quarter 2007 were $10.3 million compared to $8.3 million for the same period in 2006. The increased SG&A cost for the first quarter of 2007 reflects primarily leadership transition cost and investments in product development programs to support our product diversification initiatives. We will continue to invest in new product development programs throughout 2007. As a percent of net sales SG&A was 3.2% for the first quarter compared to 2.8% in the first quarter of 2006. Net interest income for the quarter was $2.4 million.

Income tax provision for the first quarter was $13.1 million with an effective tax rate of 36.4%. This compares with an effective tax rate of 37.4% in the fourth quarter of 2006. The change in the effective tax rate is attributable primarily to an increase in domestic manufacturing deduction tax credit.

Net income was $23 million for the quarter, an increase of $1.6 million from net income of $21.4 million in the first quarter of 2006. Net income was favorably impacted by several factors addressed earlier. Our diluted income per share was $1.80 for the quarter compared to net income of $1.67 per diluted share for the same period in 2006. Earnings before interest, taxes, depreciation and amortization or EBITDA were $34.7 million for the quarter.

With respect to cash flow, we use net cash flow from operations of $700,000 for the first quarter 2007 compared to generating cash flow from operations of $22.4 million in the same period of 2006. The change in cash flow was primarily due to timing of collections on accounts receivable which were partially offset by a reduction of inventories of $27.4 million. The receivable amounts were collected in the month of April.

Net cash flow used in investing activities was $2.6 million of which $2.5 million was for facility upgrades and machinery and equipment for our Roanoke, Virginia production facility and primarily the result of our capacity expansion at that site. Net cash flow used in financing activities was $24.2 million related primarily to the stock repurchase program.

We have demonstrated a track record of enhancing shareholder value with our investment at the Roanoke plant and our stock repurchase program. We will continue to evaluate other strategic initiatives as we maintain our focus on maximizing returns for our shareholders. The weighted average total number of basic shares outstanding in the first quarter was 12,597,791, while the weighted average total number of diluted shares outstanding was 12,744,575.

In summary, we continue to be pleased with our financial performance. The management team continues to focus on execution and cost control to generate cash flow. With that I'd like to return the call back over to Chris.

Thank you, Kevin. As I noted before, we are pleased to report on our strong performance and the initiatives we are pursuing to ensure a healthy stream of earnings in the future. In closing I want to thank you for your interest in our company and participating on this call. We look forward to updating you again in our next conference phone call. We're now ready for the questions. Thank you.

(OPERATOR INSTRUCTIONS). Robert Lagaipa, CIBC World Markets.

Good morning. Just a few questions. I guess given the production levels in the first quarter, a little bit over 4,000 and the backlog of about 6,000, obviously that would imply at current levels that production would run out sometime in the third quarter. What are the production plans moving forward? Are you going to ramp down from these levels in the second quarter and kind of ramp it down further? Or are you going to hold it up in the second quarter and then ramp it down later in the year? Obviously much of that depends on order rates, but, all things equal, what are the production plans moving forward?

I'd like to take a look at that with you, Bob, right now. This is Chris Ragot here. We haven't talked before so hello. Obviously the combination of the order activities right now, it's event driven for us, event based driven. So every day, every week we're looking at the possibility of filling in our production line. So I feel encouraged that the marketplace right now is overall okay for us. We're moving forward and we're looking for additional orders.

As far as production is concerned the second half of this year, we're looking at our capacity and we're looking at our manufacturing foot print and we're trying to optimize the combination of incoming orders with our production. So there's nothing clear-cut at this point in time. We are prepared in the latter half of this year to take action necessary to produce the kind of results we're looking for.

Okay. A follow up to that -- as we look out longer-term, with TXU and the proposed buyout and a lower number of plans, that of course could affect the long-term orders of the exclusive agreement with them. And also in light of the fact that -- we're hearing more and more about environmentalists and legislation that could possibly restrict coal plants and favor nuclear. What's your take on that? Are you hearing anything from customers about concerns relative to that? What is the long-term outlook in light of some of these issues?

I'll let Ed Whalen today speak a little bit about the marketplace and the green outlook as what you're probably referring to.

Exactly.

In the meantime, I did have a meeting with TXU and some folks down there last month. We had a very good meeting. They confirmed to us that the agreement that we have with them for future orders with our cars is still in affect and they're expecting us to perform on that agreement. The outcome, what happens with TXU is obviously still up in the air. But I will tell you that our relationship with that organization is still very strong. They are expecting us to be their supplier of choice in the future. So I was very pleased with that particular meeting. As far as the environment and the other aspects of coal generation, I'll let Ed speak on that a little bit.

To try to answer your question a little bit there, certainly there's been an increasing interest in cleaner coal generation, the combined cycle gas generating plant initiative is certainly one of those. But looking forward to the forecasts provided by the Energy Information Administration, coal-fired generation for electricity production is projected to grow from about 50% of current generation today to almost 60% over the next 25 years.

So while all these activities are going to be going on to try to improve the cleanliness of the process, it's pretty clear that we need to grow coal-fired generation considerably to make the power we need to drive this country. So I don't think long-term much has changed in that area.

Last two questions if I could. One, just on the status of the Johnstown plant?

Johnstown plant is part of our manufacturing footprint and our capacity situation and we're looking at that along with every other -- the rest of our manufacturing footprint. I have not made a decision at this point in time what the future is for Johnstown. We're analyzing the situation. I'm getting more familiar with the capacity footprint as a whole.

And last question if I could -- it's just related to the share repurchase program. Obviously almost half of it was completed in the first quarter. It was a little surprising to see the share count really didn't move very much sequentially. Can you maybe address that and some of the other shareholder initiatives that you currently have on the drawing board?

In terms of the share count, Bob, as you know, it's an average share count. So in addition to that we include options in the fully diluted calculations. So that's really why the share count didn't move appreciably in Q1. In terms of other initiatives, we continue to look at all strategic options open to the Company and try to maximize our return to the shareholders based on those options.

Okay, all right. Thanks very much.

Bob Schenosky, Jefferies.

What was the actual share count at the end of the quarter then?

The actual share count at the end of the quarter was 12,597,791; the diluted share count was 12,744,575.

Great, thanks. And then in terms of the other half of that buyback, are you going to pursue that aggressively in the second quarter here, or are you going to take a look at other things?

Well, we're looking at the buyback. We're under a Safe Harbor provision there which allows us to buy back about 10% of the average daily volume so that's the choice we've pursued and we'll continue with that.

Okay. So that will go on during Q2?

Right.

Okay, great. In terms of the 768 cars in new orders, can you break that out between coal and non-coal?

I'll let Ed answer that question.

It's roughly half and half.

Okay. And under the coal, given the competitor in there, have you had to offer fixed-price contracts on the coal cars?

We continue to quote variable pricing. Material continues to be quite volatile and we believe that variable pricing is the way to go to try to protect from that. But we are seeing more and more fixed-pricing in the marketplace.

Okay. Do you know what marketshare you got in the new backlog for coal?

We don't disclose that.

Okay. Because that was something that you did talk about at the end of fourth quarter.

There was obviously a new CO on board, Bob, and we're having talks within our management ranks here about the type of information we want to disclose. And as far as the marketshare numbers at this time, we choose not to disclose that.

Okay, fair enough. In terms of the sales in the first quarter of non-coal, can you break that out by type?

I would prefer not to.

Okay. What about ASPs on that relative to the coal cars?

The ASPs are going to be slightly higher, Bob, to your question, than they are in the coal cars and that's part of the mix issue we talked about trying to address earlier.

Okay. And then Kevin, what should we be using as a tax rate for the balance of the year?

We're thinking in the 37.5% range.

Okay. So it will go back up?

Slightly.

And there's been some questions and I just want to get clarity.

Bob, that's really related to what states we're selling into. So that's why it moves up slightly.

Okay, understood. Is there any plan at any point in time to produce ethanol cars?

On the byproduct, DDG, I would say the covered hoppers; certainly we have our sites set on the covered hopper side. As far as the tank cars, I would they know it is time.

Okay. You've talked or at least previous management talked about a pretty high number for future CapEx, kind of $40 million to $60. What's the current view on that?

We're still looking at strategic alternative. So at this point in time it's in a review phase.

And my last one. Can you give us an update on what's taking place globally for you specifically?

Globally in terms of initiatives within FreightCar America?

Yes.

We have initiatives going on in both India and China that I'm very encouraged. Obviously I need more information and a little more analysis in those areas, but I do think there are opportunities for us there and we have some current activities and other parts of the world that we're encouraged with also. So in general, the international opportunities are very encouraging for me and at the end of the day, we will probably have more to say on that as the year progresses.

As it relates to that, I'm not sure if you have any color on this yet or not, but if China has decided to make the commitment to put the funds into their rail structure as many years as they tried to privatize that, does that change anything that you needed to do within your China growth policy?

No.

Great, thank you for your time.

Jason Feldman, UBS.

Good morning. Most of my questions have been answered, but Kevin, if you could just clarify on the receivables issue, the big spike, you're saying that that's going to come down or would have come down as of the end of April?

Yes.

So that was just a temporary timing issue, shouldn't read anything into that?

Right, it was actually one customer, primarily one customer, and they had just slightly different terms and conditions than some of the rest of the customers. It's just a matter of a couple of days into April, and they made their payments.

Got it. In terms of the new car types, is there any kind of change in the planning? My understanding is the basic intermodal car goes out in the market ready to sell whenever somebody wants to buy it, and they articulate it as still being tested. Is that accurate?

Yes. We are in the process of -- we've just recently completed a prototype articulated car and it will be tested during the next several months, and we're looking to be able to offer that car in the second half of the year.

For the non-articulated, that you said had been performing well in service. So it's just a question of whenever there are intermodal orders out there, you are competing for those now, right?

That's correct. That car is performing and it is ready for sale whenever we have interest.

What is your outlook for that market? Based on what Greenbrier has been saying, it's been at least a little weak recently, but over the next year or two how do you see that market relative to say coal or some of the other car types?

I personally myself -- I'll let Ed add to this -- but I personally see that improving over time. Exactly when I'm still not there on that, but I do see improvements in the 2008-2009 period. Ed?

That's true. If you'd look at the recent forecasts by Economic Planning, they're looking for that market to improve in sort of a step function here over the next several years. So I think we're optimistic on that marketplace. And for covered hopper in terms of timing, you've talked about kind of having that line ready for the beginning of next year, is that still the plan?

I'm revealing the new product development plan on that car type and I would say I would have more to add the next time we talk. I feel confident 2008; just don't know when at this point.

Okay. So sometime in the year?

Yes.

Okay. Thank you very much.

Alan (inaudible), (inaudible) Capital.

Good morning, thanks for taking my question. I was following up on the first caller's question on production given the backlog level. Could you give us some sense of fixed versus variable cost and how you would expect the gross margin to look on a going forward basis as production levels come down?

Our fixed cost as a percent of cost of goods sold is roughly about 15 to 20%, in that range, actually closer to 15. So we expect as we continue to load low-cost facilities that our margin would come down based on a reduction in volume, but should not go below let's say the low teens.

Okay. So when will it be back to sort of the single digit margins prior to this recent cycle?

I think if you look at our history that will indicate to you how margin has performed. I think 2004 was a year that was a different year in a sense that there were contracts in non fixed-price. There were also some other issues related to union negotiations. So that kind of year was a little bit odd year. But as you look back you'll see that margin performance has been in the low teens, even in years that were different volume. And we think that we can maintain that going forward as we look to load our low-cost facilities.

Thank you.

Barry Haimes, Sage Asset Management.

I had a question on the delivery schedule. I certainly understand that the second half is a little uncertain, but I would suspect you've got a production plan for the second quarter. Could you give us some sense of that? And then the second question was the non-coal car types that you delivered in the first quarter, I think you said it was 22%, could you give us a feel for what types of cars those were? Thanks.

I'll answer the second part of that question. The car types were a mix of flatcars and various other types of steel hopper cars.

In terms of our production plans going forward, we'll adjust our production rates and for our current levels of order activity and we'll look to take as much cost out of the factories as possible during this time.

Thanks.

[Clara Kain], [Metro] Capital.

I just wanted to know, my question is what is the composition of the backlog in types of cars? You mentioned that the new orders are about half and half, is the total backlog about the same?

Clare, we prefer not to get into the details regarding the composition of our backlog at this time.

All right, thank you.

Nathan Weiss, Weiss, Harrington and Assoc.

A couple of questions for you. The first was ultimately what margins do you think can be achieved in non-coal cars and is there a ramp-up period where the margins will actually be lower than the longer-term margins?

I think longer-term -- or actually when you look at non-coal, our margin rates will probably be similar to what our industry competitors are, and those are I think in the 10 to 12% range depending on where you are in the cycle. So we would envision having those margins on a longer-term. Obviously there may be some drag in terms of margin performance as we ramp up, but ramping up of those products really doesn't take a significant period of time. So roughly 10 to 12 I think is a good margin for non-coal.

Okay. And if you look at your capacity now that you have mix shifts and working on your cost rationalization, what do you think your ultimate car capacity will be going forward, like if we get to the end of the year?

That's difficult to say because it's a function of the line rates as well as shift capacity. And as we review our manufacturing footprint we'll get a better handle on that. But again, it's difficult to give you a precise number because we believe we have plenty of capacity and we demonstrated that last year.

Let me just return to your earlier question for a moment. You're talking to us about margin rates. We look at the business through return on invested capital. So we won't enter any market unless we can generate sufficient returns on our invested capital.

Sure. Okay, and last question. When you look at coal demand, most of the Street has been somewhat negative on railcars given that production nationally isn't growing very substantially. But if you look in the data obviously Central Ap is falling and [PIB] is rising. So one would expect that the average distance or ton mile demand for coal should still remain pretty robust. How do you look at the market or how do your customers look at the market and what do you see looking out over the next two, three, four years?

We see continued production coming out of the West and therefore it should remain healthy in terms of our business.

Would you care to venture a guess of what kind of growth rate you could see in either ton mileage or converting into a car basis over the next few years?

Nathan, I'll let Ed talk about that a little bit, but we all know that approximately two-thirds of the coal shipments are delivered by rail and our capacity aluminum cars, the ones that we manufacture really for efficiency and long distance hauls is really a premium. So the coal markets remain -- the long-term prospects for coal are very good as Ed has already mentioned. I'll let Ed add some color to your question.

In the terms of the growth and the production of coal, coal production is growing in the 1% plus range and that's expected to continue. In the West for example, production of coal is forecast to grow from about 600 million tons to about 1 million tons by 2030 in a fairly straight line type of a projection. So I think the outlook continues to be good for coal production itself.

Great. Thank you.

Tim Mulvihll, Stark Investments.

All my questions have answered. Thank you.

Baker Earlson, Fox Point Capital.

Good morning. I jumped on a little late, so apologies if this has already been addressed. Could you just talk a little bit about -- your accounts receivable were up quite a bit in the quarter compared to historical standards. Could you just talk a little bit about what's going on there?

Sure. It was actually one customer and it's just the terms and conditions related to timing of payment. So actually the payment was made on time in April. Had to do with when it shipped and what the T's and C's were. So there's no real issue there. We don't expect that to reoccur.

Great, thank you.

Zach [Sternberg], Robotti & Co.

I just wanted to follow up on the longer-term outlook of coal demand. The green scenario, when I do the math it looks like when you clean up the current fleet of coal plants which are necessary to improving our green scenario, but it actually kills the efficiency of plants and actually would therefore require more coal to produce the same amount of electricity as currently being produced by those plants which would bode very well for coal demand. Could you comment on that math?

I think that analysis is true because it's taking quite a bit of energy to perform the cleaning process. So I think there will be some loss of efficiency and require additional energy to do that and will ultimately require more coal to be produced and burned.

And Zach, obviously for all of us the good news is there's a lot of focus on new technologies that's allowing us to burn cleaner. And I do see that stepping up here in the near-term.

And one more follow-up question. I was actually just in India and at GE we were talking about the IGCC and learning a little bit about that. And I'm kind of curious, it seems it's very important who your local partner is in India and I was just curious, I haven't seen that anywhere. I don't know if it's been released, if it has I apologize. But could you add any more on your activities in Indiana and maybe if you have a local partner?

We'll be prepared to comment at some point in the future, but we're really not ready to comment on that right now.

But it's safe to say that we are looking at that and we have some activities going on there, we're just not at a point where we want to give out any additional details. But I would imagine later this year we will want to talk more about that.

And with those activities do you see the opportunities -- of course they have a lot of coal in the North and a lot of people in the South sort of bringing coal down on rail to plants that are being -- that's sort of the area?

It's the same concept we have here in the U.S. In order for those economies to grow they need power, they have huge coal reserves and they need to move that coal from the mines to the generating stations. It's a real growth opportunity for the coal car business and that's why we're interested there.

Yes, I know. It sounds good because they have 10% electricity deficits and can't even get consistent electricity delivered. Thank you very, very much. I appreciate it.

Adam Comora, EnTrust Capital.

Just a couple of quick housekeeping ones. The first is I think you gave us an average share count in the first quarter to a previous question. Do you have what it is after all the stock that you bought back?

It's going to be in that same vicinity, it's around I think -- let me get back to you on that -- the actual quarter end.

Okay. My second question is also another follow up. It sounded to me, if I understood your answer that we were going to continue at the current production levels and then in the second quarter as we did in the first quarter, and then in the back half of the year just sort of manufacture to the orders that come in. Is that an accurate portrayal?

We've adjusted the production to current level of order intake as well as current level of delivery schedule.

Okay. I'm not exactly clear then. So if we get 1,000 cars of new orders in the second quarter that's what we're going to produce to, we're not going to be working off backlog anymore?

No, we're working off the backlog now. What we're doing is we're producing to the delivery schedule. So if we got a 1,000 car order in the second quarter we'd produce it in the second quarter. As indicated before, we have sufficient capacity to do that. But if I understand your question correctly, you're asking us if we're adjusting production to the demand rate and the answer is yes.

Absolutely.

Okay. And that 6,000 cars that's left in backlog, is all that set to be delivered in '07 or does some of that carry over into '08? Is that all slated to be delivered this year?

The vast majority of it.

Yes.

Okay. I also was just curious -- we've been hearing or at least railroads have been talking about increasing velocity and not accepting new cars. Have you heard about cars not being able to be placed on tracks, is that something that's impacting the order rates?

That was an issue at the end of last year, but at this point both Western roads are accepting new coal trains into their system so I don't believe that is currently an issue. The railroads have been improving their velocity steadily now for the last several years and you've seen the result of that in their operating performance and that is not new information.

Right, okay. So if there aren't a lot of cars that aren't able to be put on tracks what's holding back order rates because it sounded like you didn't think things were going to pick up for the rest of the year?

Well remember, the order rates for coal are driven by specific plant requirements, either upgrades or additions of capacity and that type of thing, not necessarily general economic conditions. So those events need to take place and those orders have to be placed before we're going to see additional coal car orders.

Okay. And my last question is the strategic initiatives you guys are looking at to enhance shareholder value. Does that include acquisitions, new capital investments overseas or are you guys contemplating something different in terms of using the cash on the balance sheet for something else -- either special dividends, accelerated repurchases -- what exactly should we think about?

The use of cash going forward, we formulated a growth and strategy committee in our organization; it's made up of two board members, they're independent, I'm part of that committee and right now we're exploring the opportunities in front of us in putting together a long-term strategic game plan. So there are definitely more initiatives going on in terms of studying the initiatives going forward strategically at this point in time.

Okay. But you guys have not hired a financial adviser to enhance shareholder value through some financial engineering, that sort of thing?

We've had a financial adviser on for a while and we've been through those discussions and we'll continue to have those discussions.

Okay. So is there a time frame that we should expect to see a plan come out of this or is this --?

I'm not committing to a timeline at this point. It's safe to say that we've put together a committee, the growth and strategy committee and we're engaged and we're moving forward and we're having very good dialogue at this point in time. The analysis is being done and there is very good interaction between the Board and the management and we'll just pursue it one step at a time.

Okay, thanks a lot.

John Barnes, BB&T Capital Markets.

Good afternoon, guys. Real quick, on your discussions on both the intermodal cars and the covered hoppers, can you give us an idea what level of order activity do you need in those car types to make these commercially viable where you can generate kind of industry margins on that business? Is it just a few hundred units or do you need multi thousand unit orders?

Well, certainly we'd start out with a few hundred units but we're looking to probably accomplish a 10% marketshare or something like that over time.

Okay. And given that I guess you've got one competitor that's also in the market with a prototype of an intermodal car. I cover Greenbrier so I talk to those guys all the time about what the market looks like and, given that they don't have a lot of visibility into the marketplace right now, is one of the larger marketshare guys out there. I'm just curious, can this market support three or four major players in the intermodal marketplace?

First off, this market represents about 40% of the traffic that the rails haul and it's projected to grow at roughly 5 to 6% over the next -- over the foreseeable future here. So it's a very sizable market. EPA, economic planning is forecasting that somewhere between 7 and 10,000 platforms per year are going to be ordered over the next five-year period. So it's a fairly good sized marketplace. So we think there's room for us and we believe we have an innovated design that's going to differentiate ourselves from our competitors.

All right. Lastly, as you go through your process of trying to look at your manufacturing footprint and determine capacity levels and that type of thing, what kind of visibility do you feel like you have into the market right now in terms of orders materializing and that type of thing? I know you're playing a fine line of not cutting too deep to cut into the muscle of the organization and at the same time trying to take out what excess is there until the orders materialize. Do you have a couple of weeks of visibility into the business, do you think you have six months of visibility into the business and where the orders are coming from and how do you want that fine line?

(inaudible) at this time in the business cycle and we think a six-month delivery schedule going forward is appropriate. We should start seeing the backlog for 2008 materialize later this year in the second half and you have to remember, as you already know if you follow this space, we have a cost-effective business model so we'll do the things that we need to do to handle our needs in 2007 and we're very optimistic about the future of our organization and the coal business in general.

But as you look at this capacity, when you talk about looking at your footprint, are you talking about idling facilities or are you just talking about going to fewer shifts, fewer days of production? I'm trying to gauge when you say looking at the footprint house significant of a ramp down in capacity are we talking?

I think, John, the way I would answer you is that we will do, as I think Chris indicated -- we'll do what's necessary. But the footprint analysis just takes our -- looks at our current cost structure in each one of our facilities and then we'll address whether we need to take days out or shifts or potentially rationalizing a facility as we go through. To the extent that how much time we have to look at that, as you can see, our backlog is significant through the rest of the year, so that will provide us an opportunity to do that in a rational manner.

Very good. Thanks for your time, guys.

Speakers, I'll turn it back to you for any closing at this time.

Thank you, everyone, for joining us on the call today and I look forward to the next conference phone call.

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