Trinity Industries Inc (TRN) 2003 Q2 法說會逐字稿

All sites are now in the conference line in a listen only mode. I would like to turn it over to your host, Mr. Neil Shoop. Go ahead, please.

Thank you Robert. Good morning from Dallas, Texas, and welcome to the Trinity Industries' second quarter results conference call. I am Neil Shoop, Treasurer of Trinity. Thank you for being with us today. With me today are Tim Wallace -- Chairman, President, and Chief Executive Officer -- John Addams, Executive Vice President, Jim Ivy, Senior Vice President and Chief Financial Officer and Chas Mitchell, Controller. A replay of this conference call will be available starting one hour after the call ends today through midnight on Thursday, Aug. 14. The replay number is 402-530-0420.

I would also like to welcome our audio webcast listeners today. Replay of this broadcast will also be available on our Web sites located at www.trin.net. In a moment John Addams, Jim Ivy and Chas Mitchell will have some brief comments. Then Tim Wallace will give his perspective and outlook. Following that we will move to the Q&A session.

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 or forward-looking. Participant are directed to Trinity's form 10-K and other SEC filings for a description of certain of the business issues and risks -- a change in any of which (indiscernible) results or outcomes to differ materially from those expressed in the forward-looking statements.

Now here's John Addams. John?

Good morning. I'm John Addams and we appreciate you joining us today. In our last conference call I discussed our debt and cash flow in some detail. That seemed to be helpful and since there has been some change in improvement I would like to update you. As I discussed, our debt with banks, rating agencies and others, I separate our debt into two categories. One, our leasing company debt and, two, our corporate debt. Our 1-Q which was filed this morning sets out how our net property planning equipment compares to our debt for our leasing corporate manufacturing companies and I will highlight that as well in a minute. When you review our 10Q, you may wish to go to Notes 5 and 7 or you may go to page 6 of our press release.

I will give you a moment for those who choose to go to our press release.

You'll notice at the bottom of page 6 of our release -- item 2 -- is debt. You also see under leasing we have two types of financing. Our permanent financing of 170 million equipment trust certificates and our interim financing or our leased railcar warehouse facility. In February 2002, we issued 170 million in ETCs with a maturity of 215 09. This debt is totally supported by the leasing income from the 5,277 railcars securing this indebtedness. The leased railcars collateralizing this debt support the interest payments plus provides an additional 10 million annual cash to the parent as no principal payments are required until 2005. The other indebtedness of our leasing company is the 200 million committed warehouse or interim railcar lease financing arranged by CSFB.

We had 167.8 million outstanding as of 6/30 and that is the number you see listed on page 6. This financing facility has worked extremely nice for us. We are presently planning to fund this interim facility into the long-term market, most likely doing an off-balance sheet leverage lease sometime this fall. Then we'll renew the (indiscernible) warehouse for another year.

Looking still at number 2 debt on page 6 you'll also see corporate manufacturing. We had no borrowings under our revolving commitment which matures in June of 2005 and the 148.5 million listed as term commitment does not mature until 2007. The cash flow of our non leasing businesses supports this debt. Our corporate principal payments for the long-term commitment are less than 1.5 million each year for 2003, 2004 and 2005.

So when you consider the corporate nonleasing debt, our equity and cash flow, the Company in my opinion is not highly leveraged and can easily service this principal and interest. There are enough unencumbered cars in our leasing company which could be financed in the proceeds used to pay off most of our 148.5 million term debt. That is why I sometimes say that if we chose to do so, we could pay off our debt and we would have none in our corporate or manufacturing company. As you will review the -- as you review the last page of the press release, you'll notice two charts.

One breaks out our net property planning equipment for our corporate manufacturing operations and our leasing fleet. The other chart lists the debt for each. Briefly at June 30 it shows our corporate manufacturing net fixed assets of $395 million in debt of 154 -- that is 395 and 154 in our leasing fleet with net fixed assets of $620 million, and debt of 338. 620 and 338. Comparing our debt with our net fixed assets would indicate that there's not a lot of debt compared to the value of these assets.

As most of you probably know, in late June we issued 60 million in convertible preferred stock. The purchaser was an existing shareholder who has followed us and companies like ours for a number of years. These proceeds and our unused bank facility give us the flexibility to take advantage of certain opportunities that we may wish to consider. Flexibility and liquidity are important to a company like ours and we are fortunate to have them.

Hopefully, this gives you a better feel for our debt, leveraged, and financing flexibility. Now Jim Ivy will review our finances.

Good morning, everyone. I'll discuss some details to help you understand the comparison of our second quarter results to the second quarter of last year. As John mentioned we filed our 10Q for the second quarter this morning and you'll find more details there.

Net income per share for the second quarter of 2003 was 8 cents -- better than the top end of the range mentioned in our conference call last quarter. In the second quarter of last year we had a net loss of 13 cents per share. As mentioned in our press release we had a 4 cents per share gain on the sale of the plant this year and last year's results for the quarter included a 6 cents per share charge related to an uncollectible receivable and early retirement of debt.

The rail growth this quarter increased revenues by 15 million and reduced operating loss by 6.7 million or 52 percent compared to last year. In North America a 56 percent increase in unit shift drove the improvement for the quarter. In the second quarter of this year, 45.9 million in revenues and 3.7 million in operating profit for this segment were produced by sales to our own leasing subsidiary. In the year ago quarter, sales to our leasing group were 37 million and related operating profit was 1.4 million.

The revenues and profits from these intercompany sales are eliminated in consolidation.

Our North American railcar backlog grew for the fifth straight quarter to 10,600 units or a growth of 240 percent from June 30, 2002. In our European railcar business, both volumes and total revenue dollars increased, resulting in an operating profit improvement of about $1 million.

Year-over-year revenues and operating profit for the quarter in the construction products group declined due to reduced demand in the highway and fitting businesses partially offset by strong demand and better weather than last year in the concrete and aggregates business.

The inland barge group revenues were down year-over-year due to the low (indiscernible) we mentioned last quarter. Operating profits were basically flat due to reduced overhead costs. Litigation expenses in the (indiscernible) approximately $800,000 compared to 900,000 in the second quarter of last year. Recent orders have grown the (indiscernible) 82 percent since the beginning of the quarter. While revenues in the industrial products group declined due to reduced volume of tankheads primarily resulting from the sale last December of a plant which manufactured custom heads, operating and profits improved to a 2.2 million due to a 2.2 million write-off in the prior quarter and due to a side improvement in margins in the U.S. LPG business.

In our railcar leasing and management services group, leasing revenues and operating profits grew year-over-year with the growth in the size of the fleet and a 3 percent increase in utilization of the fleet compared to last year. Utilization was 96 percent at the end of the quarter. At June 30, 2003, we had approximately 16,200 railcars in our railcar and lease fleet, compared to approximately 14,100 at the same time last year.

Leasing group also had sales of railcars from the lease fleet this quarter of 25.4 million compared to only 300,000 last year. Operating profit including recognition of the manufacturing profit on the four transactions we completed this quarter was 3.1 million compared to only 100,000 last year. In the all other group, year-over-year losses increased by 1.2 million, primarily due to expenses associated with maintaining closed facilities.

On a consolidated basis SE&A (ph) expenses down slightly even though it includes approximately 2.6 million of incremental cost related to outsourcing, accounting, and financed processing activities and implementation of a new Oracle financial system which went live on April 6th.

Looking at our balance sheet, debt is increased $3 million since December 31st, 2002. And our cash position has increased just over $50 million due to an issuance of convertible preferred stock in June. Our investment in inventory and receivables has decreased 30.5 million compared to the same time last year but has increased 46.3 million since December, primarily due to seasonal increases in the construction businesses and a buildup in the rail group in connection with increasing shipments in the third quarter.

Now I will turn it over to our corporate controller -- Chas Mitchell. I've asked Chas to briefly describe our process for preparation of our financial statements in form 10-Q. Chas.

Thank you, Jim. In addition to our normal monthly procedures that included management reporting of variances from plan and other matters each quarter in Trinity performed a detailed review of its operating results and financial position. This process starts at each business unit and several corporate share service departments where quarterly financial reporting packages are viewed with the chief financial officer, the corporate controller, the internal audit group and our external auditors -- Ernst & Young. Reports from each of our group presidents are also reviewed. Representation letters establishing clear responsibility for the adequacy of disclosure are obtained from each business unit controller, business unit president and group president.

This practice was implemented at Trinity about two years before the CEO CFO certificates were required by the SEC. Our disclosure committee which is comprised of various financial executives, internal legal professionals and others review the drafts of our financial reports and press release. This committee reviews supporting information and documentation covering litigation, environmental issues commitments and contingencies in compliance with SEC and other reporting requirements.

The draft reports and the committee's findings are reviewed with management, legal counsel, Ernst & Young and our audit committee at the Board of Directors prior to issuance. Management's discussion and analysis based on information received from the business unit reviews, legal counsel and all other available information. A SAS 71 review financial information is performed by Ernst & Young and they report their results to management and the audit committee prior to the release of financial information. Jim previously mentioned our financial system implementation project. Let me share some additional information with you about the project.

One year ago, we announced that we had signed a managed service contract to implement a new financial system and outsource certain accounting and processing activities. During the second quarter we culminated a year-long (indiscernible) as we went live on our new Oracle financial system and outsourced certain of our accounting and processing activities.

Just to give you an idea of the magnitude of this project we spent over 26,000 hours testing and validating the new system, over 7,000 hours training our people, and produced 114 interfaces to our 24 Legacy systems. This new system has already given us a quicker and better access to our financial information and we expect it to bring real value to us as we go forward.

I will now turn it over to Tim Wallace who will conclude our presentation.

Thank you, Chas, and good morning. I'm pleased that our second-quarter results were better than we had expected. We were fortunate to have completed some asset sales right at the end of the quarter. Our construction products group regained its position as our best provider of operating profit. During the second-quarter, our concrete and aggregate businesses experienced strong demand for their products. Our backlog was at record level at the end of June.

Our highway safety products businesses are affected by general hesitation in state spending on highway related projects. Our proprietary crash cushions and end treatments are continuing to sell well while demand for our standard guardrail products have decreased with a reduction in state spending. Our industrial products group generated a small profit during the second quarter. The U.S. (indiscernible) gas industry is showing some signs of improvement. We have a nice backlog for the large propane storage containers. During the second-quarter, our barge group continued to book some additional business. We see this as a confirmation of the acceptance of the quality of products we produce in our barge group.

We now have a baseload of orders for our hyper barge business through 2004.

Our tank barge business has a full order book extending their production for a year. I'm very pleased with the way our barge business rebounded as quickly as it did. Our barge legal proceedings continued to be in their early discovery and pretrial stages. Thus far, we have participated in a total of 4 depositions.

One trial is set for the fall of 2004, while the other has been set for the winter of 2005. At this time it is premature for me to make any additional comments.

Now I will provide some comments pertaining to our railcar businesses. During the second-quarter the North American railcar industry continued to improve. The industry order levels for the second-quarter were approaching 17,000 units. The industry order level -- the industry has ordered approximately 47,000 railcars over the past twelve months. The second-quarter order levels marks the highest quarterly order total since since the fourth quarter of 1998.

For the second straight quarter the largest percentage of orders placed for railcars was for railcars used to transport intermodal container equipment. Intermodal cars were 40 percent of the second-quarter industry orders. We received some nice large orders which enabled us to increase our production and extend our backlogs on several of our production lines.

During the third and fourth quarters we were increasing our production levels to a point we believe is sustainable. Sustainability remains a key word for us as we assess the railcar industry order levels. We're trying to avoid short-term production spikes. At the end of the second quarter, our backlog of railcars in North America improved 28 percent over the first quarter to approximately 10,600 units. This figure does not include the additional 4,000 units in our multiyear agreement with GATX.

In North America we shipped approximately 1500 railcars during the second-quarter. Finally, over 50 percent of our shipments or approximately 800 units were delivered to the Lease Fleet customers. We had a nice mix of car types which were delivered to our Lease Fleet. Our leasing and management segment performed real well during the second-quarter. Our Fleet utilization increased to 96 percent at the end of the second-quarter.

During the third quarter, we expect to increase our total shipments in North America by approximately 50 percent to arrange between 2200 and 2400 units. We expect 45 to 50 percent of our third-quarter shipments or approximately 1000 to 1100 units to go into our Lease Fleet customers.

In the third quarter, from an earnings point of view, we're expecting our rail segment to be very close to break even. This is very encouraging to us to reach a break even point with our quarterly shipments and a 22 to 2400 unit level. Our railcar employees have remained very focused on lowering our breakeven threshold. I see the third-quarter as the turning point for our North American rail business.

The primary issue we see which could affect our ability to increase our production is related to the current casting shortage. The North American railcar manufacturing industry continues to be constrained by the casting industries ability to produce underframe castings. During the second-quarter our production was reduced approximately 250 units by this shortage situation. We are receiving assurances by our suppliers that they will be able to support our production volume increases.

In May 2002, we entered into a long-term supply agreement for truck castings, tapered roller bearings and railroad wheels with the Amsted rail group. The Amsted rail group is a leading provider of rail undercarriage components for the North American market. This agreement provides us supply assurances. The Amsted rail group continues to add capacity to its domestic and international network of foundries in order to satisfy requirements. We are confident that this relationship will play a major role in helping us meet our needs for these critical railcar components well into the future.

During the fourth quarter we expect to increase our railcar deliveries another 25 to 35 percent to the 3,000 unit level. We're optimistic we can maintain this level into the first quarter of '04.

In our European rail business our backlog for rail wagons has remained relatively steady. At the end of the second-quarter our backlog was slightly above 2250 units. We are shipping approximately 600 units a quarter. At this level we're generating a positive cash flow and losing between a half-million dollars and $250,000 per quarter. Our European rail group has made great progress in consolidating our manufacturing operations.

During the latter part of July and the month of August, the pace of new orders historically slows down as the European business community takes time off for summer vacations. Fortunately, our backlog for orders extends into 2004. We are continuing to search variety of strategic options to improve our European rail business.

From an overall earnings point of view, our first quarter should be our worst quarter for 2003. Our second-quarter could be our best one in 2003 because of the extra asset sales. We expect to be slightly profitable during the third and fourth quarters. The fourth quarter is always subject to weather conditions in our construction-related businesses. We presently expect improvements in our rail businesses to offset seasonal decline in the construction of products segment.

We're very optimistic with the prospects of continuing to improve our balance sheet by completing another large railcar sale leaseback transaction. At this point I will turn it over to Neil for questions.

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

At this time if you would like to register for a question press the star then 1 on your touchtone phone. To withdraw from the queue at any time press the pound key. (CALLER INSTRUCTIONS) Our first question comes from the site of Alex Blanton from Ingalls & Snyder.

Hi Tim -- I have some questions on your backlog of orders. You said backlog in the second quarter was up 28 (ph) percent was it about 8300 then? In the first quarter? Was that the number?

I don't understand -- what was your question.

The backlog of the end of the first quarter -- what was it.

Backlog at the end of the first quarter? About 8300.

What I figured. So it was up about 2300. And how many did you say you shipped in the quarter?

We shipped 1500.

1500.

Yes.

So your orders must have been up. What were your orders for the quarter?

Our orders were over 3800.

Over 3800.

Yes -- over 3800.

How much (indiscernible) Lease Fleet in the quarter?

In the first or second quarter? About half of our production went in the (MULTIPLE SPEAKERS)

And those cars aren't in the backlog - right?

No. Our lease -- when we -- we stated this before. When we get orders for leases from customers, we put those orders in our backlog. Those are considered orders.

I see, so (MULTIPLE SPEAKERS)

As an example. Right now if we are leasing some cars this week or selling some cars this week, then those cars will end up going into our backlog. If we don't put into our backlog are cars that are stock cars, that may go into our lease.

I guess what I am getting at is how many of the cars shipped came out of backlog?

Well all the cars that we shipped came out of backlog. What you have is you got deletions from backlog and additions to backlog.

But still your shipments are low, compared to the orders you are getting. (indiscernible)

That's why our backlog went up.

Is that because of the casting constraints? Even in the fourth quarter you are saying 3000 cars but you just got orders for 3800. So your production is lagging way behind the orders. Is that because of delivery times being way out there or because you can't get the castings and other materials you want or what's causing that?

We have several production lines that are set up and when we receive an order for railcars, we either increase the production on that production line by adding additional shift or adding output or we tack it on the end of the production line. And a lot of the orders that we receive in the second-quarter, we either increase -- we're either going to increase our production or we tacked it onto the end of it. Some of our orders that we have for cars and a few of our plants run for a year. And that's where we excel as once we get long backlogs of repetitive work in our shops like we have right now than we're able to work on productivity issues.

I guess what I am getting at is you take the 3000 cars in the quarter -- you got a backlog high enough to maintain that for a year without any new orders. You really going up -- (indiscernible)

Well it depends on -- as I said we're increasing our production in the third quarter to the 2200 to 2400 range and the fourth quarter to the 3000 range. At that level. And certain lines extend for a longer period of time than other lines so it's a the matter of trying to balance out the various production lines that we have.

I want to go on with this but I'll get back in queue.

Harden (indiscernible)

My question is, again, related to some additional information on the backlog. How much in backlog -- the current backlog -- is expected to be shipped in the next year?

The current backlog that's expected to be shipped in '04? I don't have that information right at hand but you can easily say if we are doing 2200 and 3000 and we don't book any extra business this year, then half of it would go this year.

I guess over the next twelve months it would be expectation is that all means all -- at least all the backlog?

If we assume we didn't get any orders I think that we would consume our backlog in the next year.

And obviously that is not your expectation?

No.

And I have a question related to -- I guess your comments that -- I guess I want to understand better the sale of cars out of your Lease Fleet in the quarter. Could Jim Ivy -- could you please repeat the amount of operating income reported in the leasing segment related to that sale.

Yes let me say something (indiscernible). It's in the queue, it's in the MD&A section, but this is a normal progression of one of our product development strategies and the profit on the sale contributed 3.1 million before tax, and to illustrate the recurring nature of this type of sale we've had profit from sales of cars to the Lease Fleet of 14 million in 1999, 14.3 million in 2000, 2.8 million in 2001, and 1.5 million last year. So you see the sale out of the Lease Fleet tend to correspond with how robust the market itself is and it's just a normal transaction.

It was about 25 million of sales for the quarter.

To tack on to what Jim is saying -- this is Tim -- we have been in the leasing business since the late '70s and the average age of our Lease Fleet is in the 5- to 6-year-old range and so we continuously are selling cars out of our Fleet and adding new cars in. It's just part of the business model that we have for our leasing company. And the cars that we sold this last quarter we had targeted a new product development and we built up an inventory of cars and then went out to the leasing market customers and sold those cars and in addition to we had some other cars that sold out of our Lease Fleet.

Is there an expectation of additional sales from the Lease Fleet in the rest of the year?

Yes. I think you can assume that on a quarter by quarter basis, some quarters will have some sales, some quarters we won't have any sales. And it's really the timing of the demand with the -- for the leasing companies that we're selling the cars to as well as the leases themselves.

I guess what I'm trying to get at is given your expectation of like profitability in the third quarter and fourth quarter does that include any expected sales from the Lease Fleet?

No. We do not.

Tom Albert (ph) from BBT.

Good morning. I just wanted to clarify a few numbers and comments a little bit more. When you talked about you expect to be slightly profitable in Q3 and Q4 overall, can you quantify what that means? Does that mean like maybe 5 to 10 cents a share or when you look at your earnings power over $4 a couple of years out, does that mean 20 cents a share? I know it is difficult when you're at the bottom bouncing up but could you give a little more sense there?

I think you got a good picture of the difficultiness of it and with new lines coming on and our production increasing and our well business and the weather factors it's a little bit difficult for us to project but I think you're in the low single digit range.

Okay and then I guess to quantify a little bit more on what you shipped -- you said something about 1500. Was that referring to the first-quarter or second-quarter?

1500 was our shipments for the second-quarter. We're talking about North American units.

Yes, right, okay. And what was the approximate first-quarter shipment level?

First-quarter was 1700.

Right and then we got the projections in both quarters then 45 to 50 percent, approximately, was delivered to the leasing business it sounds like. Is that also accurate?

(indiscernible) (MULTIPLE SPEAKERS)

And then you talked about the cost to maintain idle facilities. Can you refresh our memory? How many idle facilities you have at this point in time?

We have in the neighborhood of 25 idle plants -- most of which are permanently closed. The cost was about 2.4 million for the six months to maintain those facilities. We expect the cost to decline as we continue to dispose of the facilities. Proceeds from sales facilities for the six months just ended was 6.1 million.

At its peak, what was the number of idle plants and facilities if it's 25 now?

I don't think we have a peak because we are continuously acquiring companies and selling facilities and it's almost like our railcar Fleet.

How many of the approximately 25 are related to the railcar business and then is there a predominant business line thereafter that represents the idle plants?

No I don't have a break down. We kind of lose track of the -- once we move them into the non operating category, but just because of the nature of the business you assume that most of those are probably more than half of them were railcar.

Okay and you've got what 4 main railcar plants today -- is that correct?

We have, yes, that's a good number.

Okay I think that's it.

Alex Blanton from Ingalls & Snyder.

To take up this question again and related to earnings, you just earned 4 cents in the quarter before the gain, but in the -- which is low single digit you have said you'd have low single digit earnings in the fourth quarter, but your railcar shipments you're anticipating will be about double what they were in the second quarter. I am surprised that you don't get more benefits from that because you said earlier that construction products have regained their position as best profit provider but, historically, Tim, it hasn't been. The railcar business has been the best provider very cyclical but over a cycle by far the best profit provider. But what you're telling us about the second -- the fourth-quarter earnings prospects if that is the case, you're not getting a lot of benefits from doubling the shipments of railcar's quarter over quarter second and fourth. Why is that? And why isn't railcar's still your best potential profit provider?

Well railcar is still our best potential profit provider in the mix of portfolio of businesses and if you look at it over the last five to seven years, it would be. What I was really referring to was more of a shorter term view on a quarter to quarter basis than vacillating between our leasing company and construction products while the railcars have been in a slump. Now as you increase the production of railcar lines, doubling the production one would think well, you doubled production you ought to double or triple profit. And there's learning curves associated with increasing production and bringing your production up.

That's why I said we're cautious about creating a spike situation because you have the learning curves. At the same time we plan on our railcar business being profitable by the fourth-quarter and the profits that we make in the fourth-quarter we're anticipating will cover some of the shortfalls that we historically have in the construction products business in the fourth-quarter if you end up with unseasonably wet weather and it's very difficult for us to predict the earnings of our construction products group during the winter months.

Our backlog right now is very strong in several parts of our construction product and so we're being a little bit cautiously conservative in the way that we try to establish expectations for the fourth-quarter.

Let me just ask something about the breakdown of the railcar sales. When we say railcar shipments are going to double, let's assume the price per car is the same for both quarters, what part of the railcar segment doesn't double? To me there's a part in there that's parts and services and so on which won't double, I am trying to get what the revenue in the fourth-quarter would be if the railcar shipments doubled?

Well you end up with product mix being a factor on this.

When you assume, you say you assume that your cost are the same?

No assume that the mix is the same, the price per car is same. You're talking units doubling.

What part of that segment is not affected by that? In terms of the revenue? What percentage of it?

Well you probably will end up having the revenues double from the second-quarter to the fourth-quarter.

But all that revenue is not railcar shipments per se. Some of it is service and parts, is it not?

Some of it is parts. That's right.

How much?

In that mix, I don't think you're going to end up having the parts doubling. You're (MULTIPLE SPEAKERS) you're probably ending up having maybe 10 to 11 12 million of it be parts.

Only 10 to 12 million is parts?

Yes you are going to be looking at the railcar business on your scenario would run from 150 million to 300 million if (MULTIPLE SPEAKERS) (indiscernible) revenue.

And so, like -- 144 million was cars divided by 1500. That's $96,000 a car?

6000 are you talking about revenue.

Yes.

No, I think you've got -- you say 6,000 or 60?

No you got 155 million in revenue. If I subtract 10 million for parts -- that is 145 divided by the number of cars you shipped 1500, right?

Alex, you're leaving out all the European units (indiscernible)

European parts okay, what I'm getting at. What part doubles (indiscernible) take all that out so we can see what the revenue (indiscernible)

Alex I don't think we got the details here nor are we prepared to disclose that type of level of.

(indiscernible) 300 million because you can't -- the European part is in there and that is not going to double.

That's right.

So you won't disclose how much that is?

How much what is? The European part -- I am trying to get at what the revenues would be in the quarter (ph). The European part is running probably 40 million a quarter.

Okay so we have to take that out too. Okay I can do that -- one other thing, on the suppliers, the casting shortage and Amsted and so on, are they your principal supplier right now? And what are these parts, exactly, that are in short supply?

The parts that are in short supply are the underframe on the railcars, they're called bollsters and side frames, and they're what's -- the wheels in the carbody -- the wheels are underneath those and the carbody is supported by the castings.

Now you know there's a company called Atchkison (ph) (indiscernible) Casting in Kansas leading supplier of undercarriages for locomotives which is very difficult to make. Have you been in touch with them about trying to solve the shortage?

Yes.

What do they say?

The key is Amsted holds all the licensing and patents and everything that are specified on the equipment that we're using. Take locomotive castings and apply them on freight car castings.

No I am saying they do castings but you're saying Amsted has the molds and they won't give them up?

Well, yes, that's their proprietary products.

They own them, though, you don't?

We don't. (indiscernible)

So you'd have to do that all over again to (indiscernible)

You'd have to get Amsted to license somebody else and that's what they've done, Amsted's gone on an international basis and they've licensed other foundries before and make some of their products.

In other countries -- cheap, low-cost regions.

Yes.

Okay. Thank you.

Bill Baldwin of Baldwin Anthony.

Good morning.

Morning.

Tim, can you kind of give us a breakdown or indication on your orders that you been getting here the last several quarters I guess most recent quarter kinda what car types have been, the categories of cars that you're getting your orders in? I know you have some good luck with Union Pacific on your refrigerator boxcar designs -- beyond that, can you kinda indicate where you're seeing the orders.

Yes we put in some intermodal lines and so we booked some doublestack equipment and we've booked some intermodal equipment, we've booked some hopper cars, we booked some regular conventional boxcars -- quite a number of those, we booked tank cars, we booked refrigerator boxcars, so that's pretty much is the variety of type cars. We booked some coal cars. We have a wide spectrum of equipment we're currently producing.

Is it pretty evenly divided between those types, Tim, or is it skewed, I mean are some car types -- obviously, refrigerator's a large percentage. When you take away refrigerator, are the rest of them evenly skewed between one another?

We sold a large number of conventional boxcars. We have two lines set up, running two shifts a day so you've got four shifts that will be producing conventional boxcars and we're producing those out of our Mexico operation. And those lines are just now kind of charging. When you look at the increases that we will have in the next quarter to two, our boxcar lines will be coming on pretty strong. And those lines run for almost a year at that level. So we're really enthused with the opportunity there.

Okay, okay, good. You know, the reason I talk about that, historically, when you look at the railcar industry and the railcar orders as you always indicated watch the underlying commodities on railcar loadings and when you look at those they don't give you a lot of encouragement that there's a lot of activity going on out there but like you say orders the last four quarters have been 47,000 cars. Does that imply, Tim, I note the numbers are fuzzy here but does that kind of imply the surplus that was created in the late '90s has been pretty well worked off and we're now seeing placement demand and scrappage come into play here?

Since a large number of the cars that have been purchased in the last two quarters have been intermodal equipment, that's really expansion with a little bit of replacement. Primarily it's expansion serving the intermodal community. TTX last year was in a position where they ran out of cars and didn't have cars available for the railroads in the fall and early winter and they're trying to resolve that situation with intermodal. The demand is tough (ph).

(indiscernible) fleet.

Yes. So the boxcar business is a combination of some expansion marketshare expansion by the railroads where they're going after the trucking companies. In fact, there was an article in the Wall Street Journal about two weeks ago that described the competitive arena between the railroads and the trucking companies and how the railroads have targeted certain areas of freight that they're trying to take back and so we look at that as expansion and it also has some replacement.

There are really three reasons why our customers buy railroad equipment from us. It's either productivity gains that we can add to their equipment through new design enhancements. Its expansion on their part of their business in one way or the other or replacement. And we felt for quite a while the replacement demand would drive a large share of the demand and we've been fairly surprised over the last six to nine months that expansion has played a fairly significant role.

And that's particularly in intermodal and in the boxcar area where probably competitive advantages accrue into the rails of -- vis a vis truckers in those commodity items there.

Would you say again?

It looks like the rails are expanding in particular categories like boxcars and intermodal because they got a competitive advantage vis a vis perhaps the truckers on those you know to transport those commodities that relate to those two types of cars.

That's right, that's what the Wall Street Journal article was about.

Right you look at the hopper cars you look at tank cars you look at coal cars Tim -- do you still feel like there's a surplus of those cars out there legacy leftover from the pretty high production levels of the late '90s or do you think that surplus has been worked down now and we can start seeing replacement demand kicking in more regularly as we go out through (indiscernible) 2004?

We see replacement demand will drive that -- those particular markets.

Do you think it's already begun or do you think it's still ahead of us a little bit.

I think it's started and it's still ahead of us (indiscernible). If you look at the covered hoppers that we have been producing, those have not been replacement covered hoppers -- the ones that we sold out of our lease (indiscernible) and we've been producing those cars for about a year. Those particular cars are expansion. It is serving a (indiscernible) market in the (indiscernible) market. The coal cars are a combination of replacement and expansion depending on which utilities are using Eastern coal and which utilities using Western coal.

The coal cars have a large replacement demand in the probably '05 time period through the 2010 or 2012 time period there will be a significant number replaced. We're seeing some demand developing for autoracks that they're talking now from a replacement point of view and we're looking at probably '04 being a year that we will produce our autoracks. That was one of the key reasons that we acquired (indiscernible) was the designs that they had in Autoranks and we're doing some work right now and talking to customers in that area.

Right, okay, okay. And, lastly, just from I guess an information standpoint, in your second quarter, how much of your production, Tim, roughly would have been out of Mexico out of your Mexican operation?

I'd say 50 percent is a good number.

50 percent? Okay. Good job with the new car designs.

Thank you. Operator -- one more question.

Mike Beasley from BB&T.

Good morning guys. Wanted to follow-up on the car type discussion. I know, because your business mix changes, the level of profitability changes, etc., how would you describe your optimum business mix on the rail side in terms of cars?

Well what we really look at is having lines set up long runs (indiscernible) gain productivity on a particular line. The boxcar lines that we have whether it be refrigerated boxcars or conventional boxcars, both have long production runs. And that's more important to us than any other element that is involved with railcar mix.

Okay. Can, then, you have 4 or so plants running right now various production lines? You look out the Q2 you got -- you're expecting to ramp up production Q2, 2400 Q3 I mean Q4 and into Q1 about 3000 units. Where is it in the demand cycle or is it even necessary to open new plants or how much capacity do you have in those current with the new plants that are running?

We have additional plants that are idle, that we can reopen and we have plans that we're working on for another plant if we wanted to do a greenfield plant. So we have a lot of option and we're just cautiously monitoring the demand levels and trying to work deals with customers that -- where we could package opening up new lines or new facilities with orders, rather than speculating and going back to -- if you build it, they will come. We're really more interested in trying to make some deals that would tie with either new designs, strategic relationships we have with customers -- very similar to what we do with Union Pacific Railroad -- to open up additional capacity.

We're trying to avoid as best we can spikes.

Uh-huh.

They're awful costly and it's frustrating for the employee level to hire in and work for a short period of time and then be laid off and it just doesn't add a lot of value to our Company or the communities we work in to increase a line unless we have sustainability.

Okay and then on the barge side some housekeeping. How many hopper and barge or hopper and tank barges did you ship in Q2?

How many hopper and tank barges? We're shipping tank barges -- we're shipping about one tank barge a week. And hopper barges we're shipping about 7 or 8, 6, 7, to 8 a week and that's kind of at the level that we currently are and where we would go from here. That's what was reflected in our production. We started off slow in the second quarter because we didn't have much of the backlog. And we have our hopper, our barge business is very similar in philosophy with our production lines as our railcar business, the same type of comments that I made earlier that talks about avoiding spikes and avoiding recalling people and then relaying the same people off or trying to balance out our production line.

Both railcars and barges have a significant replacement demand that will drive this industry we believe for a number of years and it's just a matter of getting to the point to where that demand is there and then we will increase our production accordingly. Meanwhile we're really working on our cost, getting our teams of people working together well and internal synergies within our Company.

Good and then finally you mentioned your barge backlog was up 82 percent in Q2. What was that by unit basis?

What was it up to?

Yes.

About 350 (indiscernible).

Right, great. Thanks for your time.

This concludes today's conference call. Remember a replay of this call will be available starting one-hour after this call ends today through midnight Thursday, August 14. The access number is 402-530-0420. Also this replay will be available on our website located at www.PRIN.net. We look forward to visiting with you.