Trinity Industries Inc (TRN) 2003 Q4 法說會逐字稿

Good day and welcome to today's year-end 2003 results conference call for Trinity. I would like to turn the program over to your moderator, Mr. Neil Shoop. Go ahead, please.

Thank you, Nate. Good morning from Dallas, Texas, and welcome to the Trinity Industries fiscal year 2003 results conference call. I'm Neil Shoop, Treasure 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 Mitchell, Vice President and Controller.

A replay of this conference call will be available starting one hour after the conference call ends today through midnight on Thursday March 18th. The replay number is 402-220-0116. I would also like to welcome our audio webcast listeners today. Replay of this broadcast will also be available on our website located at www.trin.net.

In a moment, John Adams, Tim Wallace and Jim Ivy will have some brief comments. Following that, we'll 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 and expectations, intentions and predictions of future financial statements. Statements that are not historical facts are forward-looking. Participants 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 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 thank you for joining us. My comments will be brief today.

As I reported to you at our last meeting, we restructured our bank revolving credit agreement this past fall. You may recall that we essentially divided our credit facilities into one, corporate manufacturing and two, leasing. They are as follows: Corporate and manufacturing, we have a $275 million revolving credit led by JP Morgan through June of 2005. At year-end, we had no borrowings. The second facility we have in corporate and manufacturing is a term loan for $123.1 million due June 2007. This amount was outstanding as of 12/31.

Under leasing, we have a 300 million rail car leasing warehouse facility led by CSFD due August of 2004. At year-end 71 million was owing. Then we have 170 million equipment trust certificate due February 2009 with full amount owing.

As it relates to leasing, we closed a 235 million leverage lease facility in late November 2003, which funded our first leasing warehouse facility. This funding was significantly oversubscribed and we were pleased that we were able to accomplish this.

As most of you are probably aware, the debt markets have improved for borrowers during the last several weeks. This is true for both bank credits and longer term debt. Therefore, we will be exploring the possibility of assessing the Capital Markets to pay off our corporate manufacturing indebtedness and to give us some additional financing flexibility for the future.

Now Tim will review our business with you.

Thank you. And good morning, everyone.

I'll first talk about our construction products businesses and nonrail businesses, and then I'll wrap up with our rail group. In our highway construction-related businesses, we're waiting out the passage of the highway spending bill, as well as for the winter weather to calm down.

When our guardrail customers' installation crews take a break during the severe weather periods, it drastically reduces our shipment. This winter's been a very tough one. Each day we are delayed by weather, it tends to build our backlog in this business. Once the weather clears and the construction crews and back to work, our highway safety businesses should have an active construction season. Our focus is on cost control with an emphasis on trying to improve market share on a proprietary highway safety products. Going forward, our revenue and profit is expected to be relatively flat in this business until there is a new transportation bill passed.

In our concrete and aggregate businesses, we're continuing to see a relatively strong consistent demand for our products. Weather remains the most significant factor in this business.

We were lucky to have a relatively calm winter through the end of the fourth quarter. During the fourth quarter, we were pouring concrete 80% of the available workdays. The winter weather since the first of the year in Texas has been cold and wet. Thus far, we have only poured concrete 62% of the workdays this quarter. This compares with 72% of the workdays last year at this time. On non-rainy days with temperatures above 42-45 degrees, our crews are busy pouring concrete across the state of Texas.

Unfortunately, since the first of the year, the good construction days have been sporadic. We have a strong backlog and should have a good season as soon as the weather improves. We expect our construction products group operating profit to be around breakeven to a million dollars the first quarter of 2004. We expect the second quarter to be comparable to last year. On an annual basis, 2004 could be a carbon copy of 2003.

Our barge business is right in the middle of a recovery transition. We are reopening an idle facility and rehiring a number of employees in our other barge facilities. Our backlog stood at 450 units at the end of '03. This compares to 86 units at the end of '02.

We are expecting to ship 475 to 500 barges this year compared to 360 in 2003. The barge fleet owners have some very compelling replacement issues similar to the railcar industry. During 2004, our revenues should increase 30 to 35% in the barge business.

Based on our current estimation for steel cost and litigation expense, we expect our barge business to lose money again in 2004. Our barge management team is actively searching for ways to reduce our costs and I'm optimistic they will be successful. I don't have any further update on our barge litigation. We're filing our 10-K shortly and we will have updated our disclosures in it.

Our industrial products group performed better in the fourth quarter this year than it did last year. We expect that trend to carry into the first quarter of this year. The winter weather and cold temperatures creates a demand for pro-cut pay, and this is a good sign for our propane business.

At this point, I'll share a few observations about our European rail business. The demand for railcars in Europe continues to be in the lower end of the cycle. Long-term, the European rail demand should increase for replacement purposes. The European rail fleet is very old and newer designs tend to obsolete older models. Right now the market is highly competitive and our primary focus is on lowering our cost and improving our performance.

We were in the middle of final phase of a multi-year internal consolidation program. During the past few years, we have reduced our administrative staffing and consolidated manufacturing operations in an effort to reduce our cost. We should begin to see the fruits from our efforts showing up during 2004. We expect our European rail operations to break even or make a little bit of profit this year. This compares to approximately 4 million in operating loss in 2003.

2003 was a turnaround year for our North American rail business. We increased our railcar shipments in North America from 4,800 units in 2002 to 8,300 units in 2003. This was a 73% increase. Our backlog at the end of 2003 was approximately 11,800 units. This is a 60% improvement from the end of 2002.

During 2002 and the first half of 2003, our sales objective was to obtain orders which provide us with a base load of production. Our priority was to preserve our existing workforce until we believed there was sustainable recovery under way.

During the middle of 2003 when our backlog hit 10,000 units, we implemented a plan to expand our production. In June, we transitioned our sales objective from a focus of obtaining primarily base load orders to an objective of pursuing specific orders which allow us to efficiently increase our production.

As I've stated several times, we've not felt the timing has been right for us to focus on market share penetration. When we concentrate on market share growth, we have to be willing to pursue every order aggressively. We did not want to congest our production lines with a variety of orders. Line changeovers at small volumes are very costly when we are training our workforce.

We strive to fill our backlog with products which would allow us to successfully reload our facilities. We became highly focused on obtaining 100% of the orders, which would assist us in an orderly expansion program.

During the past six months, we've been able to initiate price increases on selective orders. Today, our backlog consists of a combination of base load orders, as well as orders I will refer to as transitional orders. Transitional orders have higher prices with margins which reflect the current increased demand levels. In short, our goal has been to obtain higher margin orders, which can be tacked on to our existing production lines, or orders large enough to provide production stability.

During the third quarter, we increased our shipments 47% from 1,500 units to 2,200 units per quarter. And I was very pleased with the profitability at this production level. During the fourth quarter, we increased shipments again to 2,900 units. I'm pleased with the profit level of our rail group that they generated during the fourth quarter.

During the fourth quarter, we had an ideal product mix, which substantially enhanced our profitability. Our performance during the fourth quarter is symbolic of the potential our rail group has to generate profits at relatively low level of shipments. Our product mix, price of steel and the cost we have associated with expanding our production all affect our level of profitability.

During the first quarter of 2004, our shipments will be approximately the same level as they were during the fourth quarter of 2003. Unfortunately, our first quarter product mix is not as good as it was during the fourth quarter and our steel price is higher. Our shipments will be heavily weighted with base load orders taken during 2003.

During the first quarter, we are taking steps to increase our shipments another 1,000 units per quarter. As we prepared to increase our shipments, we are reopening two of our idle facilities. We will have start-up costs associated with this increase. For this reason, we will probably break even during the first quarter in our rail group. This compares to a $10 million loss last year during the first quarter of 2003.

Once we reach our shipment plateau of approximately 4,000 units per quarter, we expect to return to profitability. We expect this to occur during the second quarter of 2004. We expect our second quarter operating profit margins to be similar to our fourth quarter, but the amount of profitability should exceed what we are in during the fourth quarter because of the increased revenue.

As our production stabilizes around 4,000 units per quarter, our product mix improves, we expect to see our rail profitability continue to increase. Our third quarter profitability should be better than our second quarter. I'll wait until later this spring to predict how we think the fourth quarter will look. We still have several hills to climb.

As you can tell, 2004 is a transitional year for us in our North American rail group. As I said earlier, we expect to almost double our shipments from 8,300 to approximately 16,000 units.

We have a three-phased multi-year program for expanding our production back to the levels where we were in the late 90s. It took us two-and-a-half to three years to decrease our production from an annual run rate of 28,000 units to an annualized level of 3,600 units. We hit the bottom of the cycle during the summer of 2002.

It's not realistic to expect us to increase our production faster than our current pace. Each of our expansion phases has a unique set of challenges and we are striving to remain focused on operational excellence.

During the past year, the entire North American railcar supply chain has been rebounding from the trough of the demand cycle. This recovery is industry-wide and is showing its affects on the entire supply chain. It's a day-to-day expediting environment at the operational level of our business.

As you can see from our fourth quarter earnings release, the U.S. steel industry is presenting some unique challenges. The price of scrap steel has skyrocketed and the entire steel industry is trying to pass these costs on to their customers. Needless to say, supply issues have compounded the complexity associated with our recovery, and their price increases have added an unexpected layer of additional cost on our company. The added complexity that the supply industry is causing reinforces our need to have a structured program for expanding our railcar production.

We entered the first phase of our expansion program when we increased our production last year in our existing facilities. We're currently entering into the second phase of our expansion program as we reopen some of our U.S. facilities. We have a different set of challenges associated with reopening facilities.

During 2004, we planned to break ground on our second railcar manufacturing facility in Mexico. Several years ago, we developed plans for a new state-of-the-art manufacturing facility in Sabenas, Mexico. We initially constructed a coatings portion of this facility, and we put the manufacturing portion of the facility on hold until the market improved. We expect to ship railcars out of Sabenas in late 2005.

Once we begin manufacturing at our new Mexican facility, we will enter into the third phase of our production expansion. We have a totally different set of challenges associated with training a new workforce in Mexico. Fortunately, we have a very experienced team of people focused on this project.

For your information, we shipped 3,250 railcars out of Mexico in 2003. This was a 40% -- this was 40% of our shipments. We expect to ship approximately 30% of our railcars out of Mexico during 2004. We're very pleased with the progress we're making in Mexico.

Since we've had the Sabenas project on our radar screen, we initiated a specific sales program designed to establish a base load of business for this facility. We pursued a very large order. I'm very pleased to announce that we recently received a 6,000 car order from the Burlington Northern Sante Fe Railroad for grain cars. We will use this order to see the restart of our U.S. factories, and later, we will transfer the order to Mexico.

This is a multi-year production order. This order confirms our belief that a significant recovery is underway. We produced a similar order for the BNSF during the 90s. We also started the last 6,000 car order in the U.S., and then we eventually transferred it to Mexico. We love large orders like this. Over time, we can become very efficient with long production runs.

I'll spend a few moments providing some information about our leasing company. Our leasing company had a good quarter during the fourth quarter. Our revenues grew 41 million, compared to 33 million during the fourth quarter of 2002. This increase resulted from sales from our leased fleet, additions to our leased fleet and improved fleet utilization.

Our owned and leased railcar fleet has grown from approximately 15,000 railcars at the end of 2002 to 18,600 at the end of 2003. During the fourth quarter, our leasing company took delivery of approximately $65 million worth of assets or 37% of our rail group's fourth quarter shipments.

Our year-over-year total revenues grew approximately 34% to 154 million in 2003, compared to 115 million in 2002. This increase predominantly was due to railcar sales out of our fleet, fleet additions and improved fleet utilization. Our operating profit in 2003 improved to 41 million, compared to 31.3 million in 2002.

As our production backlog has grown during the last few quarters, our leasing company has been able to reduce their order levels. Our fleet utilization improved to 98.1% at the end of 2003, compared to 94.5% at the end of 2002. The average age of our fleet is 5.2 years with a remaining lease term of 6.37 years.

I'm very excited about the long-term potential we have for our North American rail business. We're currently experiencing a nice recovery in this business, and barring some unforeseen situation, we're expecting a continuation of this growth to occur during the next several years. We see 2004 as the year we will transition our business back to profitability. If economy and demand continues to grow for our products, we see 2005 as a year we will increase our profitability. If the rail recovery continues into 2006, we expect 2006 to be the year in which we maximize our earnings.

We see our North American rail recovery driven primarily by improvements in economy, as well as replacement needs for our equipment. The North American railcar fleet is old. 53% of the North American fleet is 21 years or older. There are currently approximately 1.6 million railcars in the North American fleet. The average age of the railcars are 19.3 years old. The normal retirement age of a railcar is usually between 25 to 35 years.

It is interesting to note in round numbers that there were approximately 670,000 railcars built between 30 and 40 years ago, and approximately 535,000 constructed between 20 to 30 years ago. During the 20 to 30-year time period, the industry hit bottom in 1983 at 5,600 units. If we total units shipped between 20 to 40 years ago, it's over 1.2 million railcars. This equates to an average annual build rate for the 20-year period of 60,000 units. That's an average of 60,000 railcars built for two decades.

During 2002, the railcar manufacturing industry hit bottom again when there were close to 18,000 railcars shipped. During 2003, we saw it begin to rebound with 32,000 units shipped.

I do not expect the industry demand to match the replace cycle that it did during the 20-year period I mentioned above, but I'm convinced the industry will return to more normal historical levels. We will do very well when the industry demand reaches 50,000 units. It's interesting to note that we own a significant portion of the industry's capacity to increase shipments above the 50 to 55,000 units level.

At this point, I'll turn it over to Jim Ivy for some additional financial highlights.

Thank you, Tim. And good morning.

I'll make a few comments regarding the comparison of our fourth quarter results to the fourth quarter of last year. We do plan to file our Form 10-K for 2003 tomorrow morning, and you'll find more details there.

Our results for the fourth quarter of 2003 improved 21cents per share over results for the fourth quarter of 2002, or a loss of 4 cents per share in the fourth quarter of 2003, compared to a loss of 25 cents last year. This improvement is in spite of recording an after tax loss provision in the fourth quarter of 2003 of 4.5 million or 10 cents per share related to the steel price increases Tim discussed. I will come back to this issue.

Other expenses improved in the 2003 fourth quarter over the prior year primarily due to gains on sale of assets at about $1.3 million lower interest expense. Incremental costs related to implementation of a new financial system that we have discussed previously and included NSNA expense in the fourth quarter was $2.7 million.

Moving to the rail group, I would remind you that in addition to North American railcar sales, this segment includes the parts and components business in North America and our European railcar business. Sales growth of $80 million from 161 million in the fourth quarter of 2002 to 241 million in the fourth quarter of 2003 is a little misleading, as North American sales increased approximately 107 million and European sales declined 28 million.

European results were flat so the change in operating profit in the rail group is due to North American operations. The rail group did record an after tax revision related to steel price increases of 1.6 million in the fourth quarter of 2003.

Sales to the leasing company were 64.6 million in the fourth quarter of 2003 with profits of 3.3 million, while the sales to the leasing company in the fourth quarter of 2002 were 30.6 million with profits of 1.1 million. The estimated pre-tax impact of steel price increases subsequent to December 31st, 2003 on fixed price contracts we will complete in 2004 in the barge group is 4.2 million, and we recorded this in the fourth quarter of 2003. Barge corrosion litigations in the barge group in the fourth quarter of 2003 were 1.5 million, an increase of $900,000 over the same period last year.

In the industrial products group, profitability improved primarily due to margins and sales mix in our propane tank and hedge businesses. In 2003, we did record a $900,000 pre-tax write-down with accruing value of our LPG assets in Brazil based on a discounted cash flow analysis and estimated market values.

The revenues and the leasing group in the fourth quarter of 2003 include 8.5 million of railcar sales from the lease fleet, with profits of $600,000, while 2002 included fleet sales of 3.1 million with profits of 1.3 million. On an apples-to-apples basis, leasing revenues were 118 million in 2003 and 109 million in 2002, reflecting growth in the size of our fleet.

The unfavorable change in operating profit from 2002 to 2003 in the all other group is primarily the cost of maintaining idle or nonoperating facilities and costs relating to our equipment division included in this group.

On a consolidated basis, cash provided by operations in 2003 of 114.9 million was helped by a $50 million tax refund. Our December 31st, 2003 balance sheet shows that we have had some growth in inventory and receivables, both of which are in the rail group and related to the recovering rail market, and to a lesser extent, some inventory buildup in anticipation of steel price increases.

Let me get back to steel pricing. You may have seen the article on steel pricing in the Wall Street Journal Monday. Prices have risen rapidly since December 31st, 2003, primarily due to the demand from China. This has been compounded by the weaker U.S. dollar making imports more expensive than the current domestic prices.

Of the steel Trinity expects to buy in 2004, about 160 million, in terms of steel costs, relates to products on fixed sales price contracts. Of this amount, approximately 75% is presently covered by some type of supply agreement. We have various sources of steel and various arrangements with different vendors.

Our barge group has been most affected by the steel price increases. We have taken a number of actions to deal with future increases, such as increasing inventory purchases in December of 2003, adding escalation clauses to new sales contracts and raising prices. Based on today's prices, we are still projecting a profitable year in 2004. Future steel price increases could result in reduced margins or on lower sales volumes than expected.

Another side to the scrap price increases is that there is a substantial off-setting affect to the owners of our steel products in that the scrap value of their asset has increased. This increase in scrap value would offset or partially offset price increases in the cost of replacement products, and could encourage owners to accelerate scrapping, for example, older railcars and barges, which inturn, helps drive replacement demand. We also believe that a price point, not very much higher than the current spot prices, imports will become more feasible.

Tim referred to his expectations for our businesses going forward. I will say that on a consolidated basis, our estimates for the first quarter of 2004, based on the factors Tim mentioned, are for first quarter per share results to improve on a year-over-year basis by 7 to15 cents per share, to a loss of 17 to 25 cents in the first quarter. The second quarter of 2004 is expected to return to profitability with earnings per share comparable to the prior year or slightly better.

That concludes my remarks, and now I'll turn it back over to Neil Shoop.

Thanks, Jim.

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

Nate?

Thank you, Mr. Shoop.

At this time, if you would like to ask a question, you may press star and 1 on your touchtone phone. If you are listening on speakerphone, please pick up the handset before you press star and 1, and if your question is answered or you would like to withdraw your question at any time, you may press the pound sign.

Once again, please press star and 1 on your touchtone phone if you wish to ask a question, and we will pause for a second while participants register.

Our first question will come from John [Fifes] [inaudible]. Go ahead, please.

Hi. Good morning.

Could you elaborate a little bit more on the Capital Markets transaction? Just give me an idea of what you are talking about, the bond deal and that type of thing.

John, this is John Adams.

As I mentioned to you, you obviously understand the changes that have occurred in the market. And we think that we ought to explore the possibility of looking at the capital markets, and that's really all I can say right now.

Okay. Another question for you is the - what percentage of the total business is under fixed price contracts where you wouldn't have the ability to pass on steel prices, higher steel prices?

Jim, you want to handle that?

Yes. Basically, the backlog we have right now, which is about close to 800 million in the rail group and 160 million in the barge group is on fixed priced contracts. Now, those -- the steel price increases were not totally unexpected, and so we have dealt with that when -- as we did deal with it when the prices -- our contracts were accepted. But that backlog is basically a fixed price.

Okay. And then the thing that you mentioned about accelerating, are you seeing more of these owners have older railcars starting to do that with increasing their scrappage rates?

There's really not any facts out there. But a lot of people have been talking about that. They have been talking about the economics for their products are greatly enhanced with the scrap price. And scrap moved up as fast as it has so we'll just see what happens on a go forward basis.

All right. But the -- if that were to happen, the margins on that incremental business would be pretty healthy, wouldn't they?

I don't understand your question.

All right. Well, if they are accelerating the scrap rates, then they're buying, let's say, a new railcar from you, okay? So I'm just assuming that that new business that results from the increase in the scrap rates would carry a better margin than the existing business that's under fixed price contracts.

Yes. Any orders that we sell on a go forward basis in our entire business, we're tying to some type of scrap price index.

Okay. All right. Thanks.

The next question comes from Sean McDaniels, Blackbird Research. Go ahead.

Yes. Good morning, guys.

I guess -- I hopped on the call late and I'm not sure if I'm asking what's already been answered, but maybe you can just give us what percentage of your current backlog has escalator clauses built into it on the steel side.

Very little of our current backlog that I just mentioned, the 800 in rail and the 160 in barge, has any escalation clause at this point. As Tim said on a go forward basis, we are putting escalation clauses in the contracts.

Okay. Does the Burlington Northern contract you put out, you announced this morning, does that have an escalator in it?

Yes. That has some escalation features.

Like a full-feature or just a partial clause.

It's a complicated escalation. It's based on different indexes, published indexes, and has different components to it.

Okay. One other quick question, can you just give us an update on the Mexican steel contracts? How is that progressing? Anything new, as far as the company, you're sort of involved with in that?

Are you referring to the deposit?

Yes.

Yeah. Things are going well there. We are recovering that deposit as planned, and probably with the increased volume, faster than we were.

Okay. I heard something -- did that company encounter some financial problems and actually get liquidated or something in the process or something? Is there something going on there with that, or is that just something that --

That steel mill is operating under court protection, but it has been for several years.

Okay. Great. Thank you, guys.

The next question comes from Tom Albrecht, BB&T. Go ahead.

Hey, guys. Good morning. I wanted to ask you just a variety of questions, Tim and Jim and others.

Of the 11,800 units in the rail are backlogged, how many of those right now are scheduled for the leasing business?

That's about 10%.

No. I think it's a little bit more, Jim. The numbers I have are about 15%.

Okay. At the end of the year. Right.

Yeah. That's the number at the end of the year was 15%. I checked that one this morning.

Okay. It sounds like from your comments, you've answered this question. But one of the questions I had wanted to ask was what's the biggest culprit right now, the casting shortage or steel? Sound like steel, but where's castings kind of fit into the list of villains right now?

Both the casting business is a challenge on getting the components and getting them on a timely basis to the facility where we need them. Steel has its challenges associated with it from a pricing standpoint as well as a delivery standpoint as well as -- we've had some steel that we received that the chemistry on the steel was not acceptable and we rejected it. So they both have their unique characteristics, which are causing challenges.

Okay. And then what's your CapEx for 2004, and then how much of that will be for leasing and how much will be for your nonleasing subsidiaries?

For 2004, an estimate would be in the range of 260 million or so with about -- slightly over 200 in the leasing company.

I was thinking that was going to begin to come down now as demand from the outside is growing. Why would leasing stay so high?

Well, you do have the demand decreasing over for the year.

But also, that would probably come down from a 40% of our shipments to something like 20%.

Yeah. That's right. The percentagewise coming down.

Okay. Historically, as outside demand picks up, the leasing CapEx begun to come down. Are we still a year away from that, even just focusing on the raw dollars, not the percentage of shipments?

Well, it really depends on our particular customers and what their needs are for financing the equipment that they're acquiring. And sometimes a customer wants to lease, sometimes they want to purchase. And we have to be available to move with them in this area. It also -- the independent leasing companies on how active they are in the market and aggressive. So there's several things that affect this.

And then, Tim, where are the two plants you're going to open up, and they will be operational at the beginning of Q2 or just some time in Q2?

The two plants I'm referring to are in the Dallas/Ft. Worth Metro Plex and they will be, one will be opening up this first quarter, I think shipments in the late first quarter, early second quarter, and the other one will have shipments in the late, mid to late second quarter to first and third quarter.

Okay. And what special -- what car lines will they focus on?

Well, one of the plants will put this quarter that we get received from the Burlington Northern, and that's one of the things that's good about it is it's going to allow us to load that facility up. And the other one will produce cars that are similar to what it produced before when we idled it three years ago, which are a covered hopper-type car.

Would the covered hopper one be the one that would be kind of late Q2, early Q3?

Well, they're both covered hoppers.

Okay.

One is one -- they just serve different markets. One serves the grain market, one serves the cement and flour market. And the one that serves the cement and flour market, which are two different markets, but there's two car types this plant produces, it's the first plant that will come onstream, and then the second plant that will be producing the Burlington Northern cars will come onstream during the summer.

You know, Tim, as I strategically look at Trinity today, I might be off on the numbers slightly, but I believe at the peak in '99, you had about 18 plants, I think through all, brought on board about 4, so sort of on a pro forma basis, you had close to 22 plants at peak. At the trough, you were only operating 4 plants. Now it's soon to be 6. I've sensed from the way you're trying to manage your assets that there's no way in the world you're going back to 20. That maybe 10, 12 might be the optimal amount.

Could you just kind of share with us your thoughts on overall asset utilization, where that might be the next two years?

Yes. That's why we have this phased-in program, is we've identified as several plants that are here in the states that have been mothballed, that have expertise in certain products, and as the demand for those particular products increase, then we would open those facilities that are most suitable to produce those products. And several of the facilities that we were operating in the last peak, we've taken totally out of existence. And these were mostly the facilities that were in the northeastern part of the country, and most of the facilities that we have in the southeastern or southwestern part of the country have been idled and they have particular car-type expertise. So it depends on the types of cars.

And then Mexican operation, we plan on putting our cars down there that we think give us a good strategic position with another -- several lines in Mexico.

Okay. And that's in '05, if I heard correctly?

That's right.

Okay. I know I'm kind of jumping around here. But there's -- you guys always have plenty of ask about.

Should we start, Jim, to use a higher share count to account for the dilution on the convertible? [inaudible] I mean, isn't that fully in the money? Refresh my memory on that.

Well, no. The way we account for those, it'll be a while. We'll have to recover more before that actually goes in the earnings per share. For the time being, you should just deduct the dividends from the earnings available for [inaudible].

Okay. Refresh my memory what the strike price is on that, and then what amount of time would we want to start counting that?

Okay. I think it would go into the calculation somewhere around 29 cents per share on a quarterly basis, but the strike price is 22.46. If those shares were converted, it'd be about 2 million 7 shares.

And I guess the thing I'm still a little confused by. I've only got one other company with a convertible so they're counting it now. You're not counting it, just why, again? I mean, even though you're 7 points in the money?

Because it's not in the money issue on earnings per share.

Okay.

It's the -- the dividends are more dilutive if you substract them from the earnings than if you assume conversion.

Oh, okay. That makes sense.

So you do whichever is most diluted.

Okay. All right. And then -- let's see here. CapEx. I guess, too, I want to sort of understand, on a backlog 800 million in rail, barge, 160. How would your customers respond if you just slapped a surcharge on them? I'm surprised that more of the contracts don't have escalator clauses.

Well, I think that you can answer that question yourself. If you have a fixed price agreement with somebody and you slap surcharges on them. We have talked with a lot of our customers about our situation, and we're having ongoing dialogues is all I can say in that area.

I mean, it would seem to me, given the fact that the order book improved throughout '03, including the second half of the year, that a lot of the more recent orders should have had that in effect, or are you saying you think you priced that aggressively enough as you anticipated steel to go up?

Yes. On some of our orders, our people have been trying to price that into their products as best they can and it's like a moving target. It's hard to guesstimate how much it can go in there. And on our longer contracts that we have, we do have some escalation clauses in them, in the longer ones.

So there's kind of a mixture.

Okay.

Tom, can we move on to let someone else ask a question? We can come back to you.

That 'll be fine. Thank you.

Thank you.

Before our next question, I'd like to remind our participants, if you'd like to ask a question, please press star and 1 on the touchtone phone.

We have one question from Steven [McRoyal], Lord Abbot. Go ahead.

Yes. First, can you just give us the production and order number for the quarter?

When you say production, you're talking shipments for the quarter?

Actual production versus shipment.

No. We don't sort out production versus shipments. We report shipments and we shipped 2,900 railcars for the quarter.

And orders for the quarter?

The orders in the quarter I think were what?

3,500.

3,500.

And to the extent that a shipment rate of 4,000 in the second quarter at similar margins to the quarter you just posted, is there a way to look at pro forma what the margin would have looked like absence the steel issue?

That's a very complex question, what the margins would have looked like, because some of the cars we're shipping are aluminum cars that we're shipping. Different cars have different contents of steel in them. Some have steel plates, some have steel sheet that's in there. So there's different steel products that are in there. I just don't know that there's a way that you could establish a model for that.

Fair enough. With respect to the favorable product mix this quarter, do you talk to which car types those were and what the mix would look like next quarter?

Well, each quarter we have a different type of mix, and I gave the numbers on what I would call transitional cars. The orders that are versus base load cars and the percentage, and the orders that are in the first part of the year have a higher percentage of base load content orders than the orders as we go through the year, they become more of what I was referring to these transitional cars that they had in that particular area.

So we had certain car types in the fourth quarter that we completed the line on, and then we're switching the car types over to another facility and we did some line changeovers. And then as those other car types come up in other facilities, we have different margins.

So as we are bringing on, as I said earlier, when we have car types that a particular facility has an expertise in, and we've made a decision to open a facility because we want greater volume, we are shutting down a line one place that we may have running like, as an example, the cement car that I mentioned and the flour car, and we're relocating them out of a plant where we've been producing them to other plants, so you end up with the margin at the start-up being different than it was when the production line came down.

So it's a relatively complex answer to what may appear to be a simple question when you have multiple lines. I think we're looking at somewhere between 11 and 12 production lines running.

Okay. And to the extent -- well, the nice announcement in Burlington, I recognize you can't speak this to the customers, but can you just give us a sense as to the activity level in the marketplace that you're seeing with respect to large orders?

Yes. We have, as I said earlier, we target certain types of orders that we're pursuing, and we currently have targeted some additional orders that are, I think, relatively nice in size, but at the same time, in our tank car business where we have a tank car line set up, a 100 to 150 order in our tank car business is different than a 500 to 750 or 1,000 car order in our freight car business because our tank cars don't require as much of a changeover as you do when you're going from freight car to freight car. But there are some nice sizable orders out there that we're pursuing.

And last question, to the extent that 2006 represented maximum earnings, you're at a 50,000 shipment level, can you give us a sense as to what sort of operating profitability in the rail group you envision seeing?

I think probably the best thing is to look at some of the history that we've had in the prior years when we were shipping railcars at a relatively high volume. And you can get a feel for where we stand on that.

We really don't have a lot of the numbers here in front of us and we're not projecting out what '06 can be because it also plays a role on where will our highway safety business and our concrete business and our barge business be at that time, but I'm really feeling good about the teams of people and the organizational structure moods that we've made in the last six months to a year, and we have a lot of highly focused people on improving our company and a number of different ways. And we don't look to make any more major organizational changes at the group president level. These people have solidified their groups. And I think you'll see, as markets improve, the seasoning and capability of our people will also enhance the profitability of our company.

So having said that, specifically within rail, I guess at a 50,000 level, you've certainly historically done operating margin levels of --

Yeah. We did it in the 10% range.

Double digit. Is there anything --

It's where we were when we were -- the last time the market was in the 55 of 60,000 car unit.

And recognizing the head wind issue with respect to steal, is steal enough that structurally -- that is a completely different expectation this time around?

Well, I think the steel provides a sense of uncertainty as to what will take place, and if you chart the graph of scrap steel price over 3 or 4 decades, you can see it spiked up a few times, and then it tends to level back down. The big question now is what impact will China have on the price of steel in the next 2 to 3 years. That's anybody's guess.

Okay. Well, we'll keep pondering on that point. Thank you.

You have a follow-up question from Tom Albrecht, BB&T. Go ahead.

Hey, guys. Just want to make sure I understand you. You're forecasting a loss in the first quarter, and yet I heard, basically, the construction products breakeven to maybe call it a million bucks of operating profit, rail around breakeven.

Industrial products, I don't know if I heard a forecast, but the descriptions were decent. Leasing has been what it is, and barge will lose money, but I didn't hear an amount, I don't believe. Why would you have such a large loss if at least three or four of the businesses are pretty close to breakeven?

Well, Tom, if you just compare the fourth quarter to the first quarter, where the first quarter rail was 7 million operating profit and it's going to be breakeven, and another bad weather quarter for the construction products group, I think you can see how you get there.

Okay. So did you give a forecast for barge, and then just besides losing money?

No. We didn't do a forecast for that group.

Okay.

It's difficult with the steel situation on barge.

Sure.

We did as best with his could.

I hear what you're saying.

I don't understand, too, I've already gotten a couple calls this morning from others, and this charge that you took here, we're all sort of trying to figure out why that's broken out as a charge. I mean, isn't that life? I mean, steel prices go up, steel prices go down. Why would you separate something from the first part of '04, bring it into '03 and call it a charge? I think we're all kind of struggling with the wording or categorization of that.

I think that's a very good question and I think we're -- this is Tim. We're -- one of the areas that we rely on greatly is Jim's expertise with years and years in the accounting world and everything, that he keeps us sharpened.

And, Jim, why don't you articulate this to them like you have us.

Well, Tom, it's contract accounting. And on, basically, three products, the increase in steel prices that we experienced -- have experienced in '04 put these contracts into a loss position. So we record the loss when we know it and those contracts -- those estimates went into '03.

Okay. Could we see additional types of charges as the year goes on if steel keeps going up?

Well, yes. Those particular contracts will be delivered in '04, but any increase in steel price or reduction in steel price from what we're anticipating right now would result in a change in the margins on those contracts.

And basically, as I understand it, if we have a contract and we have knowledge that that contract goes into a loss in another quarter, we take the loss during the quarter when we're reporting our earnings that we know it.

Yes.

And since we had not released our earnings or released a 10-K, then we were forced to take it in the third quarter -- I mean, the fourth quarter instead of taking it in the first quarter. It seems as though it doesn't make a lot of sense from just a layman's point of view, and I agree with you, but that's one of the accounting standards that we respect and live by.

So, in other words, the loss in the first quarter would be even greater if we hadn't seen this hit the fourth quarter, is what you are saying, Jim?

Yeah. If you had waited and spread it out over the contract, you would have recorded the loss as you delivered and over and through about August on the barge contracts, for example.

Okay. And then do you have an SG&A and COGS number? You're fine on the K but I mean --

Yeah. That'll be in the K that we file tomorrow.

Well, I need to finish my model today. I got a lot of people calling. So can I get some sort of a number?

Yeah. Give me a call back.

All right. And then lastly, do you expect Europe to be profitable, Tim, in '04? I know it had a $4 million loss last year, still in transition, as you described it?

Yes. We had a 4 million loss in '02, a 4 million loss, more or less, in '03, and we expect to break even or make a little bit of money this year.

It's interesting to note a statistic about Europe. We acquired the Romanian facility in the middle of 1999. There were over 3,000 employees in that facility, and they were shipping about a car to maybe a car and a quarter a day, one per day. And today, in that same facility, we have around 2,000 employees. So we went from 3 -- more than 3 down to 2. And we're shipping between 8 and10 cars a day.

So we've made -- we've climbed some pretty steep hills there, and then we have also consolidated into that facility the two other facilities that we received from [inaudible]. So through the consolidation efforts and the retraining efforts of the employees, we've had a lot of employees that have been traveling over there, we trained them with their best practices. I'm really proud of the accomplishments that our people have made in that area, and we see that we are kind of through the tunnel now and on the other side of the mountain, so to speak, with the big steep hill that we had to climb in our European operations.

Okay, good. Thanks for the explanation.

Okay.

Okay, Nate, I think we're about out of time.

That was our last question.

Okay. Thank you.

This concludes today's conference call. Remember, a replay of the call will be available starting one hour after the call ends through midnight, Thursday, March 18th. The access number is 402-220-0116. Also the replay will be available on our website located at www.trin.net.

We look forward to visiting with you again on our next conference call, and thank you for joining us this morning.