FreightCar America Inc (RAIL) 2007 Q3 法說會逐字稿

Ladies and gentlemen, good morning. Welcome to the FreightCar America Inc. third quarter 2007 earnings conference call. At this time all participant lines are in a listen-only mode. There will be an opportunity for 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 p.m. Eastern standard time today until 11:59 p.m. Eastern standard time on November 6, 2007. To access the replay, please dial 1-800-475-6701. The replay passcode is 890142. An audio replay of the call will be available on the Company's website within two days following this earnings call. I'd now like to 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. Before we begin, we would like to remind everyone that the statements made during this conference call relating to the Company's expected future 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 third quarter 2007 and in our annual report on Form 10-K filed with the Securities & 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 non-GAAP financial measures 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 third 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 CEO.

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 third quarter 2007 earnings conference call. I'm going to discuss the highlights of the Company's performance in the third car and Kevin will provide a detailed review of the financial performance.

First, however, I'd like to provide a general industry overview. Industry-wide, 8,121 new cars were ordered in North America in the third quarter of 2007. A decline of 30% sequentially from the second quarter of 2007. Rail car orders for tanks and covered hopper cars led third quarter activity. Tank cars orders continue to dominate the industry accounting for 45% of the cars ordered. Covered hopper car orders were 20% of the total market while aluminum hopper orders were 17% of the total market orders. Industry-wide, there were deliveries of 15,032 new freight cars in the third quarter of 2007, down 7% sequentially from the second quarter of 2007. The industry backlog, therefore, decreased to 67,000 units, of which 75% were the combination of covered hopper cars and tank cars. FreightCar America order activity in the third quarter was 1,262 units down from 2,260 units in the second quarter. Our total backlog of unfulfilled orders was 4,864 units at the end of the third quarter down from 5,588 units at the end of the second quarter.

Regarding our operating performance, total sale of revenues in the third quarter of 2007 were $162.1 million as compared with $395.8 million in the same period in 2006. We achieved net income in the third quarter 2007 of $8.7 million compared to $36.8 million in the same period of 2006. Third quarter net income per share was $0.73 on a diluted basis compared to the net income per share on a fully diluted basis of $2.88 in the third quarter of 2006. Although total year-to-date U.S. coal car loadings through September 30, 2007 were 1.3% below 2006 levels, U.S. coal car loading volumes are improving as loadings in the most recent quarter were up 1.2% from the quarter end June 30, 2007.

As coal stockpiles are beginning to decline and coal prices increases we expect coal production and consumption to continue to normalize in the final quarter of this year. Moreover, demand for export coal is up 11% as compared to 2006 levels. This increased activity should have a positive impact on car loadings into 2008.

In the near time we expect the market for coal cars will remain soft throughout the remainder of this year and into 2008. On an intermediate horizon, however, coal as a primary fuel source for electricity generation remains strong. We expect that coal will continue to provide roughly half of the projected fuel source for total electricity generation during the foreseeable future. During the next six years, approximately 80 coal fired power plants are expected to come on-line, which will require approximately 40,000 coal cars over that time frame. Of these 80 plants, 45 are currently either under construction, near construction, or permitted for construction. The 45 plants currently progressing are expected to add 23,240 megawatts of coal powered capacity requiring approximately 19,000 coal cars. Over the long-term we expect clean coal technology to make coal an increasingly environmentally friendly fuel source. With that outlook we continue to maximize our coal car heritage as we move forward.

As we manage our way to the constraints of the current coal car cycle and the market conditions, we are continuing to position FreightCar America for long-term success as we progress on several strategic growth initiatives. 7% of our deliveries in the third quarter were non-coal cars. As we continue moving forward with our plant to participate in the retail sector with additional car types such as double stack intermodal cars our current 40 foot, stand alone, double stack, intermodal cars are performing well in international service. Our new 40 foot articulated double stack car has successfully completed testing at the TTCI facility in Pueblo, Colorado and is now in revenue service.

In 2007, we expect nearly 14% of our deliveries to come from non-coal carrying rail cars. This compares with less than 5% for the full year of 2006. FreightCar America is committed to diversifying our product portfolio to address the market needs and our progress in this area remains on schedule. We continue to explore strategies for revenue diversification including organic opportunities and acquisitions both domestically and internationally. We have targeted India as our first international opportunity and our discussions concerning a possible joint venture in that country. We are also exploring potential opportunities to enter the freight car refurbishment business during our existing -- with our existing manufacturing facilities. We believe that pursuing this area could result in diversification of our revenue base while utilizing existing capacity.

We have significantly increased our focus on cost reduction activities at all levels of the organization, our total employment levels are 27% below June 2007 levels and 52% below September 2006 levels. We continue to identify and eliminate waste in our processes and emphasize a continuous cost improvement culture. In addition, we continue to optimize production mix as 93% of our third quarter deliveries came from our lower cost facilities compared to 78% in the third quarter of 2006 taking full advantage of our lower cost facility reduces our cost structure, which is critical for the Company to sustain profitability at this point in the market cycle. To produce our rail cars with the most competitive cost structure we're continuing to evaluate our manufacturing capabilities.

As you know, the cost structure at our Johnstown, Pennsylvania manufacturing facility is higher than the other locations. We have begun formal discussions with the Union concerning possible labor cost reductions at that facility. We previously informed the Union that the labor costs at facility are uncompetitive. It is unclear whether these discussions known as decisional bargaining will result in an agreement with the Union on labor cost reductions. If no such agreement is reached, then we'll have to consider the possibility of closing the Johnstown facility. We are currently in negotiations with the Union and cannot provide any further details or comments on this issue.

Overall, our strong balance sheet provides us with the ability to fund strategic initiatives from internally generated cash flows as of September 30, 2007, the Company has purchased [50] million of our common stock as part of our previously-announced share repurchase plan. This share repurchase program was consistent with our commitment to enhancing the value of our shareholders and we will continue to explore other shareholder value enhancements in the future.

In summary we continue to drive toward successful implementation of our strategic initiatives focusing on product diversification and rationalization, stringent cost control, capitalizing a potential international and strategic growth opportunities. These initiatives are aimed at ensuring the long-term success of the Company for our shareholders and our customers. Now I'd like to return the call to Kevin to address our third quarter financial results in more detail.

Thank you, Chris. As indicated earlier, our sales revenue for the third quarter of 2007 were $162.1 million and that compares with $395.8 million for the same period in 2006. The decrease in revenue is attributed primarily to lower industry volume as well as lower demand for coal cars. Rail car deliveries totalled 1,921 units in the quarter and that compared to 5,027 units in the same period in 2006.

Our gross margin for the quarter was $19.4 million and that compares to $65.2 million for the third quarter of 2006. The corresponding margin rate was 12% compared with 16.5% generated in the third quarter of 2006. The change in the margin rate was driven primarily by lower volume and related leverage. In addition, we had a more aggressive pricing environment. We continue to leverage our low cost facilities, shipping 93% of our production from these facilities during the quarter. This compares to 78% in the third quarter of 2006, which is a significant, as our conversion cost is much better at these facilities.

As production levels have declined, we have adjusted our production rates and employment levels. As Chris indicated, our employment level is 52% below the third quarter of 2006. We have challenged our entire management team to aggressively pursue cost reduction opportunities across the Company. Also, we are reviewing our manufacturing capabilities with a focus on lowering our cost structure. In addition, we are pursuing process engineering improvements and product design changes to further enhance these efforts. The selling, general, and administrative expenses for third quarter of 2007 were $7.6 million compared to $8.6 million for the same period in 2006. The decrease in SG&A cost for the third quarter reflects our continuous improvement initiatives.

Net interest income for the quarter was $1.7 million. The tax provision for the third quarter was $4.9 million with an effective tax rate of 35.9%. This compares with an effective tax rate of 36.8% in the third quarter of 2006. The change in the effective tax rate is attributed primarily to an increase in the domestic manufacturing deduction. Net income was $8.7 million for the quarter compared to $36.8 million in the third quarter of 2006. Net income was unfavorably impacted by the same factors addressed earlier. Our diluted income per share was $0.73 for the quarter, which compares to net income of $2.88 per diluted share for the same period in 2006.

Earnings before interest, taxes, depreciation, and amortization or EBITDA, was $12.9 million for the quarter. With respect to cash flow, we generated net cash flow from operations of $22.2 million in the quarter compared to cash generated from operations of $42.4 million in the same period in 2006. The change in net cash provided by operating activities was primarily attributed to lower net income. Net cash used in the investment activities was $1 million. Net cash used in financing activities was $21.3 million related primarily to stock repurchase program.

We have demonstrated a track record of enhancing shareholder value with our investments in low cost manufacturing facilities and our stock repurchase program. We have repurchased 1,048,300 shares of stock, which completes our goal of $50 million in share repurchases. We continue to evaluate other strategic initiatives and opportunities, and we maintain our focus on maximizing returns for our shareholders. The weighted average total number of basic and diluted shares outstanding in the quarter was $11,918,890 and $11,955,827 respectfully.

In summary, the management team continues to focus on cost control, execution of our diversification initiatives, and pursuing other opportunities that will further enhance shareholder value. With that, I'd like to turn the call back over to Chris.

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

Certainly. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Michael Gallo of C.L. King.

Hi, good morning.

Morning, Michael.

Couple of questions. Looking at the ASPs, if I did this right, it looks like they were up significantly in the third quarter from the second quarter. What drove that? Was that just a mix issue? Any commentary on the ASPs?

It's just primarily mix, Mike. It's related to some of the international business.

So the internationals. Could you just remind us on the international business what kind of ASPs you're typically getting.

It's probably about to 15 to 20% differential.

Going forward, would you expect to continue to see the same mix of international business based on what your current backlog looks like or would you expect it to look more like what we saw in the first half of the year?

I think we'll see the going forward will resemble what the third quarter was like.

Okay. Second question I have, is I was wondering if you could give us any update on where things stand with TXU with the previous order there, now that they have completed their going private transaction.

Well, we had an agreement, a supply agreement with TXU. I personally visited TXU early this year. They are expecting us to deliver on that supply agreement in terms of the quantities of cars that are going to be required. I would say that's in flux. I would like to turn it over to Ed to see if there's any, maybe some more granularity around this issue, Ed.

TXU has indicated a need for cars as we move into next year. We expect to supply them those needs under the supply agreement, of course, not to the level as they had projected with the power plants originally projected but a significant agreement for cars as we moved into next year.

My recollection is as of right now there's nothing in the backlog for TXU. Is that still the case?

That's correct.

Great. Then finally, wondering if there's any more color or commentary you can give us on a potential JV in in India? How big an opportunity you think that is? Maybe perhaps it's too early for any further commentary. Just kind of a sense of what you're thinking there. What you see as some of the opportunities in that market?

Well, I personally -- this is Chris Ragot here. I personally visited that market here about a month ago, spent several days there talking to ministry officials getting to know our joint venture partners, and understanding a little bit more about the marketplace firsthand. I would say that in general, the expectations there, or the opportunities I should say, are there for us to move forward on. But I would say at this time we are currently going through the process of finalizing our joint venture agreement. I'm not prepared at this time to go through any further details. Opportunities are good, and I think we're positioned with our partners to take advantage of that in the future.

Okay. Thanks a lot.

Thank you.

Okay, thank you. And the next question comes from the line of Brannon Cook, JPMorgan. Please go ahead.

Good morning.

Good morning, Brannon.

You guys did a nice job of managing cost in this slower demand environment. I guess could you give a little bit more color on what you're doing there. You talked about the employee reductions. I guess, in terms of your facilities and where you're set up right now, I guess both in the second and third quarter, you built almost all your cars at lower cost facilities. Could you talk about what you're doing there in terms of trying to streamline things and give a bit more color?

Well, in general, cost control and cost-cutting activities are in constant review at this organization right now. We're reacting to market conditions in a very prudent focus and realistic approach. Times are slow. We're making tough decisions. We're doing what we need to do in this particular market. I would say that in general, we're just managing our business very effectively right now and watching it very, very closely.

Okay. Nice job on that front. So you mentioned in negotiations on the Johnstown facility. Any guidelines you can give us in terms of timing on how long you could be in negotiations or what to expect there?

Decisional bargaining is taking place as we speak. As far as the timing is concerned, we're looking forward for additional meetings that will occur this week and next and then we'll go from there.

Okay. Does the decisional bargaining, does that typically last months, or is it pretty open ended.

I would say open ended. But at the same time we have to give it time. We have to go in this with a lot of effort, and we have to basically measure this as we move along. I think it really requires how both parties react to one another. I'm hopeful that we'll have some good discussions this week and next week and we'll know a lot more here in the month of November.

Okay. In your comments you talked about the pricing pressures in the third quarter, which isn't surprising given the soft coal car orders. Have you noticed a material change in pricing in the third quarter versus earlier in the year, adjusting for mix?

Our pricing is pretty stable but I'll let Ed do a little more commentary on that.

I would say that, if anything, I think things stabilized in the third quarter both in terms of inquiry levels, and we've actually seen a little bit of improvement in inquiry levels and activity. So I would say the quarter was fairly stable.

Okay. And the final question on share buyback, you talked about acquisitions and buybacks as being priorities. How do we think about that mix of those two going forward? You've completed your buyback here. Would it be reasonable to expect you to get involved again by the end of the year?

We're evaluating that opportunity, but as of yet we don't have any plans.

Okay. So just waiting -- I guess look towards potential Board meeting to evaluate that?

Well, we'll continue to evaluate the potential for a share buyback. That will be ongoing. It's not an issue in terms of a quarter. So we'll measure that against other investment opportunities that we have.

Okay. Final question. What was your share count at the end of the quarter?

I believe we said it was 11 million--.

Just under 12 million.

11,918,890. That's the weighted average common shares outstanding. The diluted shares were 11,955,827.

That was the average share count for the quarter. Did you have it at the quarter end after the buyback completion?

I don't have that.

Okay.

Thank you.

Okay, thank you. And the next question comes from the line of Robert LaGaipa of CIBC World Markets.

Thank you, good morning.

Good morning, Robert.

A few questions. I wanted to circle back to the mix question earlier in terms of pricing. How did that mix change relative to the last few quarters. If I look at what the mix of coal cars were, obviously it was about 90% in the first quarter, 100% in the second, third quarter 93%. How much was sent internationally in the second quarter and the first quarter versus the third?

I would say that the percentage was up marginally in the third quarter. I don't have exact percentages with me.

Okay. I'm just trying to reconcile that with the large jump, again, with the average price. The average price I think in the second quarter per car was roughly $73,000, a little bit north of 84,000 in the third quarter. If there's just a marginal jump, that wouldn't fully account for the large increase in average price.

You also had a shift a little bit in mix as well in our normal coal car production. So two factors accounted for the change in average selling price. One is the shift in our normal mix and the second was the international business that we ship during the quarter.

Okay. Some more auto floods is what you're saying?

Right.

Okay. Second question is, as we look forward into the fourth quarter, what kind of mix are you expecting? Again, looking at the numbers in terms of the overall coal cars in the first three cars quarters and your expectation for the 14% non-coal for the year, that would imply a lot more non-coal rail cars being shipped in the fourth quarter. One, is that correct? And two, what does that mean for your margins?

From the margin perspective, it shouldn't affect us very much. We've, as you saw this quarter we generated roughly 12.5% on that kind of level. So I would think that the international business doesn't -- or non-coal car business, what we have in our backlog now doesn't affect our margin.

Okay.

As we go forward and take different car types in, the margin may change but at this point with our backlog, we understand what the margin looks like going out. It doesn't appear to be any material difference.

So with the line change-overs and things like that you think you're in good shape to maintain this level of margin at least until the fourth quarter?

Well, we'll have to see what happens in the fourth quarter. Production levels may be a little bit lower than what they are now. That could affect margin performance.

I guess the other question related to that, just a backlog. What's the mix of the backlog currently, the 4930?

You mean in terms of coal cars versus non-coal cars?

Right.

I think it's about 95% coal.

Okay. And then I guess, I wanted to find out a little about the pricing also. You mentioned the pricing is fairly stable so far this year. What is it versus last year? I think last quarter you mentioned it was down on a net basis maybe 3 to 4%. Is this a similar number currently?

The pricing is, if you compare to the peak levels that we experienced, it's probably down in the single digits.

Two other quick questions, if I could. I guess, the first question related to that is just orders so far here in the fourth quarter, you mentioned that the inquiries have picked up. I think Adam mentioned that. Have you received any increased orders? What's the order picture look like right now? What's your visibility on orders so far for both this quarter and into next quarter?

Typically we don't comment on order activity in the quarter on the call.

And the tax rate for fourth quarter of next year?

I would say the tax rate is going to be roughly what the year-to-date tax rate is, about 36.5, or something like that.

Terrific. Thanks very much.

Thank you.

Okay. Thank you. The next question comes from the line of Jason Feldman of UBS. Please go ahead.

With SG&A, going forward I was a little bit surprised it was actually down sequentially. If I remember last quarter you had a couple of senior hires in HR and legal, right?

That's correct.

Is the kind of current SG&A run rate on the dollar amount reasonable going forward? Do you think there's more reason to cut? Or because the timing of various hires, is there room to go up there?

We're evaluating what we're looking at in terms of SG&A. As Chris indicated earlier we have a cost reduction initiatives in every area of the business. So I would say that where we're at with the SG&A level, it's probably going to stay at that level or come down a little bit in the near term.

Okay. And there's still a portion of that that's going to be variable with volume, right, on the sales marketing side?

A little bit.

Okay. In terms of optimizing the production mix, I understand you can't talk much about Johnstown. But again, if I recall last quarter I think it was 100% of your production was at the low cost facilities. So implying that you're doing more work there now? How do we think about that mix at least in the fourth quarter? I know further than that you may not have much visibility.

We will continue to optimize low cost facilities in the quarter, in the fourth quarter.

On market share, it looks like from the data that your market share of coal cars declined somewhat in the quarter. Is this just the usual lumpiness or some of your competitors getting particularly aggressive on pricing? You also said the pricing environment was stabilizing.

Ed why don't you start with that and I'll follow through.

I think it's a combination of things. Our competitors have become a little more aggressive on both the pricing and the leasing front. And the thing is a little bit lumpy. I think it's a combination of events.

Jason, I would add that I'm also please with the way our sales and marketing organization has reacted to the market conditions. We've adjusted that here in the second half of this year. I would say generally I'm pleased with the progress we're making here.

Okay. I mean, I also acknowledge -- understand that you don't have -- an in-house leasing company to sometimes change how those numbers look. Okay. Then the last question is you mentioned a little bit more specifically in terms of domestic strategic alternatives this time, the refurbishment initiative. Any sort of timeframe on when we could hear something more about that?

You'll be hearing something more on that here in the fourth -- well, we'll be making announcements in the marketplace here in the fourth quarter.

Thank you very much.

Thank you.

Okay, thank you. The next question comes from the line of Bob Schenosky of Jefferies.

Good morning.

Good morning, Bob.

Just a couple of questions. First, I may have missed this, Kevin. What was the number of cars that you shipped internationally in the quarter?

We said there were about 10%.

10%. Okay. And can you offer a sense of the percent of backlog to be shipped in the fourth quarter versus what would be '08?

The backlog, we typically don't do that, Bob. We typically don't give forward-looking information. But the -- I think our order activity that we announced for '08 was about 3,000 units, maybe a little bit less than that.

Okay.

It might be less than that, Bob. It might be closer to 2500.

Okay. Okay. And then any color on -- any more detail you can offer on TXU in terms of next year and anything on NFC as well.

Ed, do you want me to comment on that?

No, I don't think we can comment any further on those potential orders.

Okay. And then a final question, then, in terms of the rebound for coal car demand, as we get into the back half of '08, '09, '010. Do you see it as the key to this as new utility construction or are there customers that you can identify that are still cars short at this point?

I think -- this is Ed Whalen again. I think it's a combination of things. There's new capacity coming on-line. There's still a lot of replacement activity that's going on. There's still some degree of change-out of steel for aluminum cars. So there's a lot of moving parts in the increasing in demand, but certainly also driven by the projected growth in coal production.

Do you have a sense of where the market is in terms of replacement demand?

Where in what respect?

In terms of reducing the age of the fleet that exists today?

Well, actually it hasn't made much progress of that if you look at the average age. It's hung in there right around 20. We haven't really made a lot of progress in reducing the average age of the fleet at this time. There's still about almost 125,000 steel cars left in the system. So there's still a lot of steel cars left.

Okay. Thank you very much.

Bob.

Okay, thank you. And the next question comes from [Dave Liebenthal] of Alexander and James. Go ahead.

Hi guys. I apologize. I think this may have been answered, but I have got an open door policy in my office and it's killing me today. With regards to your end users, I was wondering if you could give any insight into what percentage of orders and deliveries are going to leasing cars? And if you can do that for the quarter and year-to-date, that would be very helpful.

We prefer not to talk about that.

Good enough. Thought I'd ask.

Thank you, Dave.

Thank you. The next question comes from the line of Steve Barger of KeyBanc Capital Markets.

Good morning.

Good morning, Steve.

I'd like to approach the margin question from maybe a different angle. You said the mix should be decent in the next quarter. We know that orders are declining. If production falls into the 1500 range plus or minus, where would you expect operating margins to come in?

Well, I think that question is probably, Steve, we'd think we'd see some lower margin activity, might get into the high single digits if we got to that level and it's going to depend on the mix of BethGon's versus auto floods, how much international business we ship. Those levels that you're characterizing to me you might see single digits.

Gross or operating?

Gross margins.

Single gross if it got down to that level. Okay. I understand you're in negotiations on that (inaudible) JV and you can't talk much about it. Just to round out how we're thinking about the implications of it. If you announced a deal tomorrow, how long would it be before it would materially impact earnings? Is that two quarters? Four quarters?

Well, I think the first thing that's important to us, Steve, is once we get this agreement signed by both parties we're anticipating near future, then we really have to do some market analysis and gather the voice of the customer particularly to India in understanding the market conditions there. We plan on doing that and building some prototypes and getting those in place and getting more customer feedback and acceptance in 2008. Then really dependent on how the type of feedback we receive from our customers and from Ministry officials and from the joint partner, then that will depend on when we feel we can go into full scale production. But there is work to be done and I'm not prepared at this time to give you a clear time line because I just don't have one.

Sure. But it's fair to say probably that it would be close to two half of '08 before you saw any material orders?

Latter half of '08 going into '09.

Are there any other markets that you can do similar studies in concurrently? I think I had read some reports that Russia was constrained for coal cars.

We're looking at opportunities on an international basis right now. Generally around the globe. I'm really happy with our direct sales capabilities but I'm also happy to report that we're looking at other opportunities.

Okay. But India is most pressing in your mind?

India is most pressing because we've got the most activity there and we've got a good partner we're working with. But I would say that you'll probably be hearing in '08 additional opportunities on an international basis coming from us.

Okay. Good. There was a coal fired power plant that was canceled in Kansas and they specifically called out emission concerns. Have other utility customers of yours commented on that? Have you seen a change in tone as to how they are thinking about their longer term planning, given what could be a tougher environment for coal fired power plants?

Ed, do you want to address that?

I think generally in the press there's been quite a it of discussion about the number of plants that are on the drawing board and there have been some reductions in the projections on that basis. I think what's really going on is that there's more emphasis on clean, coal burning technology that's progressing faster than I think we might have expected. I think that's the direction it's going in. The bottom line is that if we're going to generate power, we're going to have to burn coal. It's just a matter of burning it in a cleaner fashion.

I totally agree with that thesis. I'm concerned about timing given the build-out phase for a coal fired power plant versus the political climate that we're seeing right now. I'm wondering if your utility customers are talking to you about changing the way they are viewing near-term projects that might still be in the permitting phase?

Well, I think they are trying to move those projects forward as best they can. I don't know what else you can say about it at this point.

But they don't view this Kansas news as a setback.

Well, I think that, I wouldn't call it a setback. I think it's a reality of life right now in the business and what they are focused on is continuing to move their projects forward in the most environmentally prudent way possible.

Okay. And then just one last question. Any domestic acquisition acquisition pipeline? Can you give us an update? Is there anything out there that you might be interested in looking at or are most of the opportunities that you're seeing international vis-a-vis the JVs right now.

We're working on domestic opportunities. In the last call, if you remember I talked about a wide spectrum of opportunities in front of us. We've narrowed that down to a handful of opportunities, really, on domestic front and we're working those through.

Okay.

They take time, they take dialogue and just take some negotiation along the way.

Sure. But you are seeing some progress domestically.

We are moving on that front. Like I said, we had a lot in front of us about four months ago. We've narrowed that down to a handful.

Excellent. Thanks.

Thank you.

Okay. Thank you. The next question comes from the line of [Nathan Weis] of [Weis, Harrington & Associates].

You mentioned earlier roughly 23 megawatts expected of coal power capacity would require 19,000 coal cars. Can you provide any insight into where you get those calculations or what type of ton miles you're looking at, and give us help calculating future demand on a similar basis?

Ed, do you want to address that?

What we try to do, is we look at the average coal haul, and how much coal it's going to take to fire the plant. That's the way we make that calculation. It's based on averages.

Okay. Do you think those averages, the 19,000 cars per 23 megawatt, is that fairly representative of the type of projects we'll be seeing over the next six, eight, ten-year periods that we can use similar ratios--?

Well, what we've done is we've looked at the specific projects on the drawing board and where they are located. And based on that, we've looked at -- and we've looked at typical turnaround times and computed roughly speaking how many coal cars we think it's going to take to service those facilities. I think the answer to your question is yes.

Okay. Great. Thank you.

You're welcome.

Okay. Thank you. And the next question comes from the line of [Jim Schwartz] of [Harvey Partners]. Please go ahead.

Hey, guys.

How are you doing?

Hey, Kevin. How are you? You used to talk about your market share and coal car deliveries. Just curious what that is now, if that's been expanding, kind of where we are. Are we still at the 80% range?

I think it fluctuates a little bit this year from quarter to quarter. But in general the market is probably a little more competitive this year, but we feel we're back on track. But we're measuring that on a quarterly basis right now.

Okay. Okay. And then the previous question, two questions ago, about fixed price versus pass through. Kevin, you feel like if the market does move towards total fixed price environment, that we shouldn't go back to the mid 5% gross gross margin in '02? It should be more high single digits is where we should model?

Yes, I think that we adjusted our cost structure for one thing as you know. That should help us in terms of generating a little bit higher margins than we have in the past. And also I think some of the material cost coming down as well as the volume in the industry is also bringing some of it down. So I think the higher single digits probably would be representative of how we would perform.

Then the Norfolk Southern order that's in backlog. Is that a multi-year delivery schedule?

Our anticipation there is that we'll deliver those cars in '08.

Is that roughly half of the backlog that you guys gave today?

Yes, I think that order is as we announced in June. I think it's 1900 units.

1900, okay. I thought it was better. Okay. Okay. Thanks, guys.

You, too.

Okay. Thank you. And our final question comes from the line of [Peter Chrysler] of GLT Partners.

Hi, guys, it's actually Rick Showbin. My question is with regard to just -- well, actually I have two questions, but the first one is with regard to the average replacement per year on an ongoing basis, meaning we have something like 250,000 of these coal railcars. How many per year on average get replaced that we look at?

Generally we projected in the area of 8,000 a year being replaced, purely on a replacement basis.

And then with regard to the eastern coal cars and replacements for your hybrid cars, how many cars is the total market that's available for replacement there?

We estimate that number to be in the area of 50,000 to 60,000 units.

Okay. And then I guess my last question is if you look at the 23 gigawatts of new generation and assume, for example, Wisconsin Energy has their plants in advanced construction, I mean, how many megawatts do you look at that are currently being built now. And then of the ones that are being built now, how many have already placed orders with you guys? Like, what's the order cycle look like for a company that's building a coal plant?

Well, essentially for right now there are relatively few of those cars have been ordered for those power plants that are being built in the future.

So if we look at plants coming on line in I'll just make up a number 2010, when do they want to start placing their orders, is it 2008 or is it 2009.

Well, probably be late 2008 or into 2009 sometime. Not more than a year in advance. A lot depends on the railcar backlogs.

Fair enough. Fair enough. Okay. Thank you very much, guys.

You're welcome.

Thank you, Rick.

Okay, thank you. And back to you, gentlemen, for closing comments.

Thank you. I want to thank everyone in your participation in today's call and we look forward to participation on future calls. Thank you and have a good day.

Okay, thank you. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.