Trinity Industries Inc (TRN) 2002 Q4 法說會逐字稿

Good day, all sites are now on the conference line. This is Jamie, your coordinator. Should you need any assistance during this call, please just press the star zero. At this time I would like to turn the call over to your moderator, Mr. Neil Shoop.

Thank you, Jamie. Good morning from Dallas Texas and welcome to the Trinity Industries fiscal year 2002 results conference call. I'm Neil Shoop, Treasurer for Trinity and thank you for being with us today. With me today are Tim Wallace, Chairman, President and Chief Executive Officer, John Adams, Executive Vice President, Jim Ivy, Senior Vice President and Chief Financial Officer and Chas Michel, Controller.

A replay of this conference call will be available starting one hour after the conference call ends today through midnight on Thursday, March 13th. The replay number is 402-220-1605. I would also like to welcome our audio web cast listeners today. Replay of this broadcast will also be available at our website located at www.trin.net. In a moment John Adams and Jim Ivy will have some brief comments. Then Tim Wallace will give his perspective and outlook. Following that we'll move to the Q&A session.

But before we get started let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and includes statements as to expectations, intentions, and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's form 10-K and other S.E.C. filings for description of certain of the business issues and risk, a change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Now here's John Adams. John.

Good morning, and thanks for joining us. This is John Adams and I will give you an update of our debt and financing needs. This past year was an active and productive year financing for the company. In February, we completed a $170 million equipment trust receipt financing for our leasing company. The purpose of this was to align our debt with our leasing subsidiary, as much of our general corporate debt had been incurred to invest in our leasing portfolio. Then in June, we finalized our J. P. Morgan led $425 million, three year bank five year institutional corporate credit. Later in June we closed our $200 million leasing warehouse or interim facility with Credit Suisse First Boston and Wachovia. Our principal other related debt is our off balance sheet special purpose entity debt of $142 million. This facility was done for our leasing company and is secured by leased rail cars.

The purpose of doing these financings was again to more properly align our debt with our leasing company assets and to provide the company financing flexibility. Approximately 60% of our debt at 12-31-02 was related to our leasing company. If we decided to mortgage or finance our other remaining unencumbered lease cars, this percentage would increase to 80%.

As we look at the remainder of this year, it is our intention to fund long term the previously mentioned $200 million warehouse or interim lease car financing this summer, and then renew this facility for another year. We have been given every indication this will not be a problem. Assuming this, the company's required amortization of debt per the remainder of '03 is $4.3 million, in fiscal year '04, $2.1 million, and in '05, $90 million. This '05 number assumes that the portion of our revolving credit as of 12-31-02 of $43 million will become due and payable at that time. In fact, it is likely we will be borrowing very little of our $275 million revolving credit at 3-31-03.

As you may know, S&P earlier this year downgraded us to double B stable. Moody's has us at BA 1 negative outlook. If Moody's was to downgrade us, that would impact our interest expense $500,000. While hopefully no further downgrades will occur, if they did our interest expense would not increase further per the definition of the loan agreement we have in place.

We did a good job restructuring our debt this past year, which leaves us with a comfortable amortization schedule and a lot of financing flexibility. Hopefully this gives you a better feel for our debt position. Jim Ivy will now review our financials for the quarter, and for the year. Jim.

Thank you, John and good morning everyone. I'll go over a few things affecting comparability of our financial statements with prior periods, starting with the business groups.

In the Rail Group, operating loss in the fourth quarter improved to $10.4 million from $15.9 million in the same quarter last year, excluding the restructuring charges in the prior year related to the Thrall (ph) merger on 43% lower revenues. Comparing the third quarter of this year to the fourth quarter while revenues are flat operating profit declined, primarily due to lower margin cars in the fourth quarter and warranty reserve increases of about $1.5 million.

Sales to the leasing group in 2002 were $120 million, and $250 million in 2001. Profit on those sales was $5.9 million in 2002, and $12.4 million in 2001. In the fourth quarter, sales to the leasing group were $32 million compared to $43 million in the same quarter last year, and profit on those sales was $1.1 million in 2002, compared to $1.7 million in 2001. Both the sales and the profits on these inter company sales are eliminated in consolidation.

Fourth quarter orders represented a 45% market share, as our backlog and the industry backlog grew for the third consecutive quarter. Our orders for the second half of the year were about 6,800, compared to 3,500 in the first half of the year.

In the Construction Products Group, revenues declined in the year, and the quarter, primarily due to exiting certain product lines and geographical markets. The fourth quarter year-over-year revenue decline was also due to an $8 million decline due to worse weather in our market areas in 2002. Fourth quarter operating profit was adversely impacted by the weather, and to a lesser extent by pricing pressures in the highway business.

In the Inland Barge Group, operating profits are down for the year and the fourth quarter compared to the same periods of the prior year due to expenses related to the Barge Corrosion Litigation, which were about $700,000 for the quarter and $3.2 million for the year, and some high margin profitable work in the fourth quarter of 2001, which was not expected to recur. Backlogs are substantially below levels at this same time last year.

In the Industrial Products Group, the decline in revenues year over year is due to lower sales in the head business. Lower profits are due to a $2.2 million reserve established in the second quarter, related to an LPG leasing customer, and in the fourth quarter, due to costs associated with the plant closing and reducing our product offering in the heads business.

In the Leasing and Management Services Group, revenues and operating profit include both the sale of cars from the lease fleet and leasing and management operations. Sales from the lease fleet were $5 million in 2002, and $22.5 million in 2001. Profit on these sales was $1.5 million in 2002 and $2.8 million in 2001. Eliminating these sales from the segment results reveals that Leasing and Management revenues increased over $18 million in 2002, due to increasing the size of the lease fleet, offset by slight declines in utilization and lease rates.

The decline in operating profit is primarily due to the change we have explained in prior calls, and in our form 10-K regarding the impact of a $200 million sale and lease back transaction which moved the interest component of lease payments into operating expense from interest expense. On an apples to apples basis, the operating profit margin in the leasing group for the year declined 7%, of which about 2% was due to pricing and utilization, 2.5% due to increased maintenance expenses and the balance related to growth in the lease fleet and marketing expenses. Utilization of the lease fleet at the end of the fourth quarter was 94.5%, compared to 94.4% last year.

Comparing the fourth quarter to the same period last year, sale of rail cars from the lease fleet were $3.1 million in the fourth quarter of 2002, and $14.7 million in the fourth quarter of 2001. Operating profit on these sales was $500,000 in 2002, and $1.4 million in the fourth quarter of 2001. Eliminating these from the segment results for the fourth quarter shows leasing and management revenues increased approximately $1.6 million while operating profits declined about $200,000 year over year.

In the all other group, reduced revenues are due to curtailing the structural towers business and exiting the mixer truck business in 2001. Reduced net loss in this group is related to exiting the mixer truck business and the special charges that we recorded in the prior year. From a consolidated perspective, we reduced our investment in inventory and accounts receivable by $88 million in 2002, this reduction follows a $157 million reduction in 2001. Our debt has remained fairly level, increasing $12 million year to year, while adding over $100 million in rail cars to our lease fleet.

Our go-live date for the implementation of our new Oracle Financial System id presently April 7, about 32 days from today. This culminates more than a year long project and will be a significant upgrade to our financial systems. There are even still many parts of the project coming together between now and April 7th that could impact the exact go live date, but we are putting a lot of effort into making sure we're ready to go live, including training our people and continuance planning to resolve issues as they arise. We are preparing to file our form 10-K during the week of March 17. Now I'll turn it over to Tim and we'll be available to answer questions later in the call.

During the fourth quarter our leasing companies earnings balanced out the losses we experienced in the Rail Group. Our leasing company continues to provide a nice level of earnings diversification. During the winter months when we have our construction related businesses affected by weather conditions, it's comforting to have a portion of our earnings stabilized by our leasing company.

In the fourth quarter, we shipped approximately 1,440 rail cars in North America. Our shipments increased 25% from the third quarter. Now, this sounds like a significant increase in shipments from a percentage point of view, but still a very reduced rate. As a comparison, during 2000, Trinity [inaudible] shipped an average of 6,700 rail cars per quarter and in 2001 we shipped an average of 4,000 rail cars per quarter. During 2002 our shipments averaged 1,200 units per quarter.

Until we reach the 3,000 to 3,500 units per quarter range, our objectives and our priorities in our rail related businesses remain fairly basic. During 2002, we focused on resizing our operations and on obtaining a base load of business. One of our long term strategic initiatives is to target specific fleet replacement opportunities in the rail car market. As an example, in December we booked 500 car order with the Union Pacific Railroad for some very specialized refrigerated box cars. We jointly worked together to design a car which serves their specific needs. This order allows us to reopen our Oklahoma City facility with a long run of production. It also broadens our portfolio of refrigerated box cars. In October we completed a long production run of the different refrigerated box car design specifically for the BNSF railroad.

During 2002, we did not pursue orders based on market share percentage goals, we were very selective in the business we obtained. We attempted to target orders which enhance our commercial and operational positions. Until the North America demand for rail cars reaches a consistent quarterly order rate in the area of 10,000 units, our quarter to quarter market share percentages will probably fluctuate between 30% to 50%. Once the market demand surpasses this level we expect to maintain a market share ratio consistent with our industry capacity. As Jim mentioned, our market share in the fourth quarter was in the mid 40s.

During the fourth quarter, the market demand for rail cars in the North America continue to show signs of recovery. The industry order rate for the fourth quarter was around 8,700 units. This follows the third quarter peak of 10,000 units. Even though the industry order level was relatively strong during the fourth quarter the market pricing continued to reflect the fact that the majority of the orders had been in process for several months. Prices are fluctuating on a car type by car type basis, and an order by order basis. This is typical for a market of this type.

When our shipments are below 3,000 units per quarter, our product mix significantly impacts our financial performance. It's very difficult to establish a financial model based purely on historical quarterly data. Our financial results will fluctuate as our product mix changes. As an example during the third quarter approximately 10% of our shipments consisted of the BNSF refrigerated box cars I mentioned earlier. Refrigerated box cars have a higher selling price and it caused our average selling price per car to fluctuate from the third quarter to the fourth quarter by almost 20%. At a low rate of production when we deliver a large portion of rail cars to our lease fleet, it also compounds the confusion. As Jim mentioned earlier, we defer profits when we deliver cars to our leasing company.

In the fourth quarter we delivered approximately 550 cars to our lease fleet or approximately 40% of our shipments. During the first quarter we expect to double that amount. For the entire year of 2003 we expect to deliver between 3,300 and 3,800 cars to our leasing company. During the first quarter of 2003 our shipments will improve to between 1,600 to 1,700 units, but our product mix creates a unique set of circumstances.

In the first quarter, from an earnings point of view we're expecting our rail group's performance to be similar to the fourth quarter of '02. If the industry order level remains between 8,000 to 10,000 units per quarter, we expect to see a significant improvement as we move through the year. With all the geopolitical situations developing, it is very difficult to predict how our customers will react at this time. Fortunately we are highly flexible in our ability to shift between car types within our facilities and we can pursue a variety of options in covering our base load. At the end of the year our backlog for orders in rail cars in North America increased over 50% to approximately 7,400 units. Plus we have an additional 4,000 units with our multiyear agreement with GATX.

In our European Rail Group, the demand for rail wagons in Europe remains at a relatively reduced level. As a result, we have many of the same situations affecting our business in Europe as we do in the U.S. We have base load sales and marketing approach and our product mix affects our financial results.

Our backlog extends into the third quarter with a few of the production lines going into the fourth quarter. During the fourth quarter of 2002, we accelerated the completion of a contract for rail wagons associated with the closing of our facility in England. We shipped approximately 900 units. This compares to a normal quarterly shipment rate of 500 to 600 units per quarter. We're currently the largest producer of rail wagons in Europe.

Our European Rail business generated a small loss during the fourth quarter and we are anticipating we will lose approximately $2 million per quarter during the first half of `03. And we are continuing to review a variety of strategic options for our rail business in Europe.

Our Barge Group is feeling the effects of an industry-wide reduction in the demand for hopper barges. Industry consolidation, which occurred in 2000 and 2001 in the barge industry, caused a significant impact on the demand for hopper barges. The reduction of capital spending by utilities which transport their coal by barge along with an abnormally low grain harvest have also contributed to a reduction in demand. We have temporarily resized our hopper barge operations.

In late 2002 we received a very nice tank barge order for 15 barges from Marathon Ashland Petroleum. Our tank barge backlog runs into the mid summer and we have hopes of maintaining our existing production levels. We continue to believe the age of the fleet will drive long term demand for barges. At this time we're still in the early stages of litigation process in our barge corrosion lawsuit and I really don't have anything further to report.

During the fourth quarter, we suspended our Wind Tower business. We're directing our resources until there appears to be a stronger demand for wind towers. During the winter months our construction related businesses were once again impacted by winter weather situations. We temporarily resized our businesses to reflect a reduced demand, as the winter weather becomes less of an issue we're optimistic we'll have a decent demand for the majority of our construction products businesses.

Our Highway Guard Rail and Safety business were affected the most by winter weather conditions because we ship products into several key northern states. As we move into the spring we're seeing our backlog beginning to improve in this business. On a positive note, President Bush recently signed an appropriations bill in mid February which includes funding for highway construction.

Our concrete and aggregate business in Texas was hampered by weather as well. In January we had a great month and then in February, as the winter storms moved into Texas, they eliminated the positive aspects of January. We have a good backlog of orders in our concrete and aggregate business. On a good construction days during January we're very close to setting daily records for the amount of concrete we were pouring. Fortunately there is still a number of construction projects and process in Texas.

Our Bridge Structural Steel business in Texas has a backlog which extends through 2003 and we're experiencing some nice productivity improvements. Recently we consolidated our executive management oversight for our construction products and industrial products group.

Mark Stiles, our Construction Products Group President and Bill McWhirter, our Executive Vice President of the Construction Products Group will oversee the management responsibilities for both of these groups. Mark and Bill have perfected a process of maximizing performance and we should see some improvements as we move through the year. In conjunction with this move, we freed up Manuel Castro (ph), who has been with our Mexican operations for over 44 years. Manuel has a great deal of manufacturing expertise and he will assist us in enhancing our manufacturing operations throughout Trinity.

In summary I'm very pleased with the progress we're making as a company but I'm not pleased we're losing money at the net income level. In a cyclical business, it is easy to become so involved in the day to day businesses that you begin to think the current cycles will last forever. We strive to see beyond our current cycles as we continuously prepare ourselves to be more competitive.

From a balance sheet point of View, we freed up close to $90 million worth of inventory and receivables during 2002 and we remain highly focused on continuing to improve in this area. During 2002 we developed a new financing template. Our leasing business has immediate access to funds through the leasing warehouse, which John mentioned earlier. During 2003 we expect to complete the next phase of our rail car financing by pursuing a variety of options for long term financing. Our three year revolver provides us instant access to capital at the corporate level.

From a cash flow point of view, our leasing company is currently generating cash flow in excess of Trinity's total interest expense. Our construction products businesses are approaching the best phase of their seasons where they begin to generate peak earnings and cash flow. The majority of our propane gas customers in our industrial products business are finishing a cold harsh winter, which usually creates a series of opportunities for us.

And last but not least, during the past 2 quarters, the North American rail car industry seems to be showing some early signs of recovery. From an earnings point of view our first quarter should be our worst quarter. As it looks today, we will lose 5 to 10 cents more per share than we did in the fourth quarter. We should be at a break-even level during the second quarter and profitable during the third quarter. There's still too much uncertainty with the threat of war and the condition of the general economy for us to project a precise figure for the year. At this point, I'll turn it back over to Neil for questions. Thank you.

Thanks, Tim. Now our operator will prepare us for the Q&A session. Jamie.

At this time if you would like to register to ask a question, please press the star 1 on your touch tone phone. To withdraw a question that has already been asked, press the pound key. Once again if you would like to register to ask a question please press the star 1 on your touch tone phone. We are going to go ahead and take the first question from Simon Walburg (ph) from Sampson Partners.

Thank you very much for taking the call. This is the second quarter in a row where you've really had no comment on the litigation front. And you know, as a shareholder, I'd like to now start getting a little bit of idea where you're at on this and what the time frame is and what your expectations are and when this is going to play out? Because we keep hearing that there's nothing new, but you know, at some point we've got to get a time line of where things are and what's going to be happening. Thank you.

Sure. This is Tim Wallace. I'll answer that question. I appreciate your concern and your question on this. What we did is, when we had the lawsuit, original lawsuit filed against us last May for commercial reasons, we did what I would refer to fast-forwarding this process. We felt like we needed to get out with our customers and talk to them. We felt like we wanted to be just -- address this issue as best we could from a commercial reason. So we openly discussed this with all of our customers. We created this website where information was available and everything. But in fact, the lawsuit itself really didn't start moving until the November, December time period. And we're still in the early stages of the lawsuit. We have an attorney assigned to it full-time that we outsourced this to that's a litigation attorney. And we've reviewed this at the year end with our auditors, and there really hasn't been anything that has changed, because the legal process takes such a long time. They're saying that they think this will be something in the fall to next winter, and probably on into '04, as to when this legal situation really begins to surface. We haven't even taken any depositions yet as an example. It is still mainly just posturing in the court rooms between the two attorneys. So there's really not a -- and we don't have a practice of reporting on day-to-day activities. But there's really not a whole lot of things happening other than just legal posturing.

And how much is this going to cost you over the next 18 months to continue? It sounds like this is going to be dragged out into potentially almost '05. How much is this going to end up costing you guys?

We're estimating it will probably cost us in litigation between $3 and $6 million.

Thank you.

We'll move on and take the next question from Alex Blanton from Ingalls & Snyder. Your mic is open.

Thank you. I just wanted to clear up something on the first quarter results from last year. From the earnings release it looks as if you had a profit of 7 cents before charges. Is that correct?

First quarter of last year?

Yes.

You're talking about March quarter?

I'm talking 2001, yes.

Of 2001.

I'm looking for the comparison between the two years. And it looks as if you had a 7 cent profit in the year-ago quarter before charges.

That sounds about right.

Okay, well, I guess we got to dig out the information on that.

Well, it's in the release. You had $1.23 loss after charges of $1.30. So --

The first quarter is in the release?

No, you didn't state the 7 cents. You stated what the --

That was the fourth quarter, wasn't it? Hold on, our -- that's the fourth quarter of '01, that you're looking at.

Yes.

Was in the release.

Well, it didn't say 7 cents. It said charges of $1.30, and results of $1.23 loss. My question is, at the time you reported a 4 cent loss rather than a 7 cent profit. And what's been restated in the meantime?

I think you're looking at the wrong quarter. We haven't restated anything about the quarter.

Okay. I'll take that offline then. Secondly, just wanted to get a little bit more information about the fourth quarter rail car business in terms of the -- you mentioned the shipments were 1,440. But what were the orders? Out of the second half orders of 6,800, how much was in the fourth quarter?

Excuse me? I'm trying to understand what your question is. Our backlog was at 7,400.

Yes, you stated that.

And our backlog before was at 4,800. So if you look at it from that point of view, the order quantity in the fourth quarter is about 4,000 cars.

4,000.

Somewhere around 4,000 cars, yeah.

That means it was up from 2,800 in the third.

Yeah.

Yeah, okay. So that's a nice --

Yes, 28, 27 -- 28, 2,900 up to 4,000.

Okay. And just so we can get some idea of where the industry's going for the year, what were the industry orders for all of 2002?

The industry orders for all of 2002, I think, were in the --

28,500.

28,000 to 29,000 range.

And the shipments do you know that?

The shipments for 2001 were --

2002.

2002, yeah, were 34,000, I think.

17,700.

Shipments were down. I was looking at 2001. 17,000.

Okay. So currently, we're running well ahead of that at an annual rate.

Yeah.

In terms of orders, you're talking 8,000 to 10,000 per quarter.

Yeah, there's been some -- we've had two good, strong quarters of orders that have come out. And I think a lot of the smart buyers have been placing orders.

Okay. Finally, it wasn't clear to me exactly what product lines you had exited in construction products. You mentioned mixing trucks as one.

Well, that was -- that was one in the all other, and we exited that one a year and a half ago, two years ago.

Okay.

And in the construction products, we had exited at one time -- we had a pile -- a sheet piling business that we exited and then we also had a business where we bought pipe and sold it as culvert pipe and we exited that business.

Yeah, I'm speaking about the same things that impacted the year-over-year comparison in construction products. Businesses that you exited during the year that affected the year-over-year comparison.

Well, we had some -- we exited some -- we had some aggregate plants that we closed down that were not performing well in that particular area. We had -- it was this pipe business that I'm talking about, we exited that business, that had accounted for about $17 million I think of revenue the previous year. And so it was mainly some aggregate plants that were in Louisiana that we were not satisfied with, and the elimination of this pipe business. We used to buy remnant pipes from one of the mills and then kind of sell that with our products, they used it for culverts and things.

In total, how much of the sales decline were from these items?

In total the sales decline from those items were probably around $25 to $30 million.

Or most of the decline?

In revenue area.

So that accounts for the entire year-over-year decline, then?

It accounts for a good portion of it. And we had some other small products that were minor products. We used to build some axle housings and some other things that we exited as well. What we've done is, we've reviewed all of our products and if they're not giving us the return that we need, and we don't think they have the future potential then we would exit them.

Okay. And finally just quickly, the charges for this year's fourth quarter, you mentioned that $64 million was included in operating profit. But what segments? Was it all in rail? You haven't broken that out in the release at all. By segment.

Well, there were no charges this quarter. You're talking about last year, in 2001?

That's really what I'm talking about, 2001, yes.

Yeah, and of the $64 million, $50 million were in rail, and that was primarily restructuring related to the Thrall merger and the decline in the market, about $13 million was in corporate and other related to other write-downs.

Okay. So the $50 was the only part that in the operating segments?

Well, no. There was about $900,000 that was in construction products.

Okay.

This is in the Q isn't it, or in the K?

It is in the 10-K right.

It will be in our current 10-K that we'll issue in a week or so, Alex.

It might have been helpful to have it in the press release so people could see what the comparison was year-over-year but thanks a lot.

We’ll move on and take the net question from Matthew Kellahar (ph) from Morgan Stanley. Your mic is open.

What was t he pension liability and expense for '02 and what do you project it to be for '03?

The under funded situation increased about $74 million during the year. The expense for the year was about $12 million. We're expecting an increase of about $3 million next year.

Next year being the year we're in.

Yeah, being 2003. The under funded situation is $74 million, about a third of that was changing to more conservative actuary assumptions in line with reduced interest rates. We reduced the discount rate and also reduced the return on assets. And the balance of that was, most of the balance of that was market losses in our pension assets.

Great, thank you.

You bet.

All right. We'll move on an take the next question from Stephen Simmons (ph) of Phlipin (ph). Your mic is open.

Thanks. The tax receivable of $50 million, when do you expect that payment to be?

Steven, I hate to say it but I expect it in the next week.

Okay. Is there anything behind that that's coming as well?

Yes. There -- we expect to, on top of the refund we've already filed for, to finalize some other calculations, and expect that to produce some level of additional refund.

But not as large as $50 million?

Beg your pardon?

Not as big as the $50 million?

No, nothing approaching that.

Can you go through the cash flow components just for the entire year, net income plus depreciation, plus working capital? I'm trying to get a cash flow from operations number with the reduction in inventories that you had and then try to strip out CAPEX.

Okay. Well, you see the net income there, depreciation is about $90 million, deferred income taxes $56 million. Various changes in working capital getting the total adjustments down to $100 -- down to $139 million so that the net cash provided from operating activities is about $120 million.

Okay. And your CAPEX excluding leases was?

CAPEX, excluding what the leasing subsidiary took, was about $37 million.

Okay. One other question. You mentioned that the shipment rate's going to rise in the first quarter and that, you know, if orders maintain at the level that they've been in the last couple, three quarters, I guess I wonder how long can you stay at the same production rate as far as maybe you're running two shifts and at some point you have got to make a decision, do you go with a third shift or possibly open up another line or open up one of the plants [inaudible], but how long can you stay at this level of production, if orders continue? And I guess what's driving that interest is, the order rate of 45% market share in the fourth quarter, I know you've mentioned that in the past, you've tried to be selective with your orders from a base load standpoint. Are you seeing something that makes you feel, I guess, comfortable that your base load is finally solid enough that there are orders out there that have good enough margin to go ahead and get that to where you might have to increase production going forward?

Yeah, that's a good question. And we don't really like being in the 1,300 to less than 2,000 car shipment range. But we've been very cautious. We've been trying to go after some larger orders. I mentioned the Union Pacific order we received for 500 cars. Yesterday we were notified that we received a 500 box car order. And that's a good example. That order will be one that we will add another line in our Mexico operation to support it. But we really didn't want to add another line in that Mexico operation, unless we had a long enough time period, because it gets expensive to train people. And a lot of the costs that we've been going through are retaining people and getting them back in place. We're looking with the Union Pacific, they're talking about maybe a tack-on order that would potentially triple the size of the order that they have for these box cars if they like them. And so that, with opening our Oklahoma facility, Oklahoma City facility, we really didn't want to open that facility back up until we got a long order of business. And 500 cars in that order was long enough. And then if we got tack-ons on the end of it it just extends it on out. We are hopeful that we can have that facility with a two or three-year backlog with these type of orders that we're talking about receiving. So it really all is a function of us being able to work arrangements with the various purchasers that are out there, and making the decision on facility by facility. We're currently running our facility in Georgia that we obtained when we merged with Thrall, we are running our facilities in Texas and we're running our facility in Mexico, and then we have other facilities that are idled. The executive management of our rail group has a strategic plan that they are working that says if they get certain orders, when’s the next line they open and which facility do they open and how much ahead of lead time do they have to have. So it's a fairly complex situation but it's definitely a positive problem to have rather than what we were facing a year ago.

Thank God. Okay, thanks, guys.

We'll move on and take the next question from Michelle Paige (ph) of Global Investment. Your mic is open.

Hi, my question is for 2002 you spent around $250 million in CAPEX, and obviously some of that is for your leasing fleet. How much CAPEX are you expect are for 2003 and how much will that increase your debt by?

Yeah, I'll answer you on the CAPEX. We're expecting somewhere, I would say, close to $200 million, somewhere between $140, $165 million something in that range in additions to the lease fleet. And something comparable to the non-leasing additions this year are on the lower range of that.

Michelle, this is John. I'll respond to the debt question. Jim mentioned to you earlier about the refund that we have coming in. In addition to that, we have some other financing, primarily the funding of the warehouse financing. So if you work through that I really don't see our debt level at the end of '03 being much if any higher than it was at the end of '02.

When you say refund, that's a tax refund?

The one that Jim referred to earlier in the call, yes, ma'am, approaching $50 million, I think a little less than that.

Thank you.

Next question from Bruce Bauman (ph) from Franklin Advisory.

Good morning. On the 142 review, can you just run us through how that went and what the parameters are for possible future write-off of the goodwill?

We did our discounted cash flow calculations that showed that no write-down was required based on all the current market conditions and very -- what we viewed as very conservative assumptions.

Do the assumptions include a timing of a recovery?

The calculations we did were not -- were conservative and showed a gradual recovery, much slower than what we would actually expect. And that was with the intention of being conservative.

Okay. And can you share with us what the conservative assumption was for recovery?

No, I'd prefer not to, because they were so conservative, and not really an indication of what kind of projection we would actually make.

What kind of projections would you actually make, then?

We don't -- we don't disclose those projections.

Okay. Somewhere in between. Okay. And as you define free cash flow, this -- I guess the key difference is, is how much CAPEX is related to increasing the lease fleet. Would that be correct?

Yes, it's how you want to define cash flow. And let me say that the number I mentioned a while ago, on the CAPEX to the lease fleet, could go up to $195 million or so this year. But in deciding how you would want to calculate free cash flow, you might consider proceeds from the sale of the lease fleet to reduce that number.

Uh-huh. So what was free cash flow for 2002?

Well, it's a negative number for 2002. What -- the way we have defined it, we actually consider it EBITDA after dividends and CAPEX, and plus lease car sales proceeds. It was a negative $72 million.

Okay. And -- the backlog numbers, that you gave us before, how much -- I think you said that there were 7,400 units in back log at the end of the year.

Yes.

How much of that is orders from the leasing unit?

I think our leasing unit's about -- and I'm pulling a number out of the air. I think it's about 60% in that range. Because we're planning on doing about 3,700 cars or so this year in leasing. So --

Okay. And what was the --

Is that a good number? 40%. Our leasing, it's more like 40%.

Okay.

And one of the things that's happened recently is, the financial leasing companies that are conventional leasing companies have kind of come back into the market. And our lease rate for the past six weeks has been down substantially. The 500 cars yesterday that we sold, those were sell cars. And we've -- we've been kind of -- as long as we get orders from leasing companies, then we just assume them, take the orders, and we go on down the road. Because we're looking at base load production and keeping our production facilities going.

Okay.

And one thing's important to mention is all of our leases that we talk about are firm orders. They have leases attached to them. We're not talking about orders where a leasing company issues an order to a manufacturing company, and then doesn't have a customer for a lease on it. We don't play those kind of games.

Okay. And the -- there was an earlier question about the pension liability. I think you said the current balance is $74 million under funded. Net under funded.

Yeah.

Is that the number that comes onto the balance sheet or is that the actual under funded number? Or is it the same?

That's the actual under funded number, comparing the assets in the trust to the projected benefit obligation.

Okay. And what's the number that's actually on the balance sheet net?

Net, it's about $9 million.

Okay, thank you.

You bet.

We'll move on and take the next question from Bill Baldwin (ph) of Baldwin Anthony Securities. Your mic is open.

Good morning. Just a couple of items here. Tim, what do you see in the way of demand, and rates, for your cars in the lease fleet? Has there been any change, noticeable change in that business in the last three or four months?

It's been flat for the last three or four months. And that's particularly -- as I said earlier, the financial leasing companies, and when I talk about them I'm talking about GATX and CIT and TTX and companies like this, are -- have been more active in the leasing business for current leases. So -- and ours has been relatively flat.

With the pickup that you're seeing in the orders out there for manufactured cars, would you expect simultaneously to see, or you know, a pickup in demand for your leasing, you know, for cars within your lease fleet also? Would you look for those rates to begin to firm up at the same time you see a pickup in the business?

Absolutely. In talking with the executives at the railroads which I frequently talk to, they're seeing pretty good first quarter activity. And a lot of times, if they're busy, the car utilization goes up, then that kind of plays a role on the lease fleet assets that are out there. And it's really a car type by car type basis, depending on what's happening in the particular market for that particular car. [inaudible] equipment is going to be different than grain equipment right now as an example.

Do you have any feel at all, Tim, as to, you know, over the past couple of years with this production way below scrappy, do you have any feel at all by car type what the surplus situation is looking like now, versus a couple of years ago, a year ago? I mean, do you feel like we're making progress and getting it whittled down, or do you think we need a good economic recovery to get it to where we need to see it?

It never hurts to get a decent economic recovery. The longer on rail cars and barges that people delay purchasing, the older the equipment gets. And I kind of go back to the man I used to work for, my father, the way he used to look at it with railroad cars, he said think of it like a coat hanger. The more you twist and twist and twist, sooner or later it becomes brittle and breaks. And rail cars running up and down the tracks are going through quite a bit of stress over a period of time, they go and go and go and sooner with age they become a little more brittle. And the fleet, I didn't go through the age statistics again, but there's a, you know, 800,000- 900,000 cars that are in excess of 21 years old, 100,000 cars in excess of 35 years old. So that demand is moving towards us. And it's just a matter of all the various companies that are involved, where their capital spending programs are. And at what point they turn the valve on and begin spending money and in a tight economy, capital spending is a real easy valve to turn down. And you just kind of wait and see. And -- but long term I think the demand will be there. The need will be there. It's just a matter of how long it takes to get turned into a requirement.

Couple of more quick questions here Tim. On this order again of rail car surpluses, do you have any feel for what scrappage is, the actual scrappage of rail cars say over the past year or so and secondly, would these higher -- we've seen a pretty good pickup here in the last four, five months in steel strap cost. And what scrap steel sells for. Is that any kind of inducement for these owners of these old rail cars to go ahead and scrap them?

Yeah. I think as the scrap rates move up, then both barges and rail cars get scrapped more. Because it's a good way to -- the older cars usually are not on the books of whoever owns them and it's a good way for them to convert some cash in that way. I think it just depends on the philosophy of the company and what their current position is in the particular marketplace. I think -- what was your other question?

Well, I was just going to say, do we have any numbers on scrappage?

We're digging into those databases right now to try to establish some. But there's not a centralized database that records scrappage. We have a fairly sizable research program going on, trying to identify what's been removed from the tracks, and understanding how come and why. And we're probably four, five months away from having that data where it can help our marketing people make some better decisions.

And last question, Tim, with the increase in some of the steel cost, is that affecting the plate market? Are you seeing an increase in your cost of steel here?

The plate market is different than the sheet steel market.

Right.

And the plate market itself, we've got firm prices in the plate market. The sheet steel is constantly, depending on where the automotive business is and the appliance business, it kind of moves up and down. And there's a movement now as you know to increase pricing. And that plays a role in our highway guardrail product. It plays -- and it last year impacted us and it plays a role in our propane tanks a little bit and other things like that. So we try to stay on top of that as best we can.

Have you been able to get pricing relief where you need to to offset the higher cost?

No. You never seem to get pricing where you -- where you feel like you think you need it to be in that area. But what you do is, you tackle your cost as best you can, and then you work the pricing wherever it's reasonable on a spot basis in various markets.

Thank you, Tim.

Okay.

All right, the next question is going to be from Fritz Von Carr (ph) with Sage Asset Management.

Barry Hames (ph) from Sage. I'll give you one question at a time. One is, can you give us a sense for how many rail cars on a quarterly basis you've got to run through the plant to hit break-even, and given that you've got some amount of backlog set for the first three quarters, can you tell yet whether any of those three quarters will be profitable?

Yeah. Right now, we're probably running around -- we need about 2,500 cars. It would be a pretty good, somewhere between 2,500 and 3,000 cars is kind of the magic number. It also depends on the car mix and it talks about when you are talking about break-even, when you putting cars into the lease fleet and you defer that income, you might have made money but we end up deferring the income and it comes back later. The product mix plays a role but generally I'd shoot for the 2,500 to 3,000 cars, maybe 2,200, 2,300 depending on the mix of the cars.

And do you see hitting that rate in the first three quarters? Either of the first three?

What we're really targeting at, is we are targeting the third quarter as kind of beings the transition quarter for us, if the order level can maintain, if we get our employees trained and we get some of these longer orders starting to kick in, the one -- the two-500 car orders I mentioned in this, they start really, the third quarter is when they'll start coming on and so as the third quarter goes to the fourth quarter, these longer runs are the things that we really work hard to try to get.

Got it. Okay. My second question relates to, the pension fund. Could you just give us the actual numbers on the discount rate, what was it, and what did you move it to? And on the return assumption, and then finally if you could tell us what the actual return was on the pension fund assets for '02.

Well, we lowered the discount rate to 6.75%. And the return on long term rate of return down to 8.75%.

What were they before?

Last year, they were 7.5% on the discount rate and 9% on the rate of return.

Okay. And then what was the actual return '02?

I don't have the percent calculated. The actual return on the assets was about a $26 million loss.

Okay. Great. And then my final question was, the -- what was the lease fleet utilization rate in '02 compared to '01?

I think it's basically about the same. It's in the mid -- mid '90s, 94%, 95%, that kind of stays right in there in that range. It's improved a little bit. The important thing on the lease fleet is getting the renewals that you have come up and our renewal rates, we have been getting nice renewals on the leases that has kind of kept us at that level.

Great, thanks a lot.

All right. We'll take the next question from Matthew Kellahar again with Morgan Stanley.

Jamie, this is Neil Shoop, can we take one more question we're about out of time.

Let me thank you for letting me have a quick second question. How many plants have you closed in the year and are there any ongoing liabilities relative to the pensions for the union people that were in those plants?

Well, I can't give you the total number that we closed of plants in the year. If I was going to pull a number out of the air, and it gets me confused from year to year, and operation to operation. But it was probably five or six different facilities that we closed. As far as pension liabilities, I think when we're talking pension and Jim's talking pension, that's kind of an all-in number except for maybe some smaller little pensions that they may have.

Yes, because of the plant closures, there are a number of inactive employees with vested benefits in the plan. But the calculation of their liability is included with the numbers I was giving you.

So there's no ongoing health care coverage for those?

No, we don't provide retiree health care.

Or close down shop type health care unless they pick up the COBRA.

Okay, thank you very much.

You bet.

Thank you, and this concludes today's conference call. Remember, a replay of this call will be available starting one hour from now, and ends midnight Thursday, March 13th. The access number for that replay is 402-220-1605. Also the replay will be available on our website located at www.trin.net. We’ll look forward to visiting you with you again on our next call. Thank you for joining us this morning.

This concludes today's teleconference. We thank you for your participation you may hang up and any point and have a great day.