Trinity Industries Inc (TRN) 2004 Q2 法說會逐字稿

Good day, all sites are now on the conference line in a listen-only mode. If anyone should require any assistance during the call today, please press star zero on your touch-tone telephone and an operator will be standing by to help you. At this time I would like to introduce your moderator, Mr. Neil Shoop. Please go ahead.

Thank you, Sarah. Good morning from Dallas,Texas, and welcome to the Trinity Industries second quarter results conference call. I am Neil Shoop, Treasurer for Trinity. 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, Chas Michel, Vice President and Controller, and Steve Menzies, President of Trinity Industries Leasing Company. A replay of this conference call will be available starting one hour after the conference call ends today through midnight on Thursday, August 12. The replay number is (402)351-0812. I would also like to welcome our audio webcast listeners today. A replay of this broadcast will also be available on our website located at www,trin.net In a moment John Adams, Tim Wallace, Steve Menzies, and Jim Ivy will have a few brief comments. 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, intensions, and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10(K) and other SEC filings for a description of certain of the business issues and risks, a change in any of which can cause actual results or outcomes to differ materially those from expressed in the forward-looking statements. Now here's John Adams. John?

Good morning and we appreciate your joining us. This is John Adams and as I have done for the last few conference calls I will give you an overview of our debt and financing flexibility. At our last conference call I mentioned we had completed a ten-year, 300 million financing at 6.5% in March. We are very pleased we did this. It was over subscribed and the interest rates have increased since then. Also in March we renewed our 250 million three-year revolving credit for three years. We have zero outstanding under the revolving credit today. These financings are all at the parent level. Our rail car leasing subsidiary has two types of indebtedness. One recourse and one non-recourse. The recourse is a $170 million equipment trust certificate secured by leased rail cars. Its first principle payment comes in March, 2005. The non-recourse is a 300 million rail car leasing warehouse facility which had 155 million outstanding as of June 30. This facility expires August 24, but CSFB, the agent, has commit to do its renewal.

To summarize we have recourse debt of 300 million at the parent and 170 million in our leasing subsidiary. We have non-recourse debt of 155 million, which we are in the process of funding in long-term market. We expect it to be a financing similar to the one we completed last fall. Our cash position at June 30 was 155 million, so on a net basis one could say we 470 million after deducting our cash from our debt. We are do have some off balance sheet lease financing. The lease income we received is covered interest, principal and operating expenses by a multiple of at least 1.2 times. The debt and equity markets appear to be receptive to our financings as evidenced by the interest indicated in the long-term fundings we have done. Hopeful this brief highlight should give you a better feel for our actual debt, our flexibility and the reception of the Trinity name in the market. Now Tim Wallace who give had his perspective of our business. Tim?

We made progress during the second quarter as our businesses returned to profitability. Before I talk about our business operations I'll provide information pertaining to the issues we face with steel. Steel prices continue to present a significant challenge to our manufacturing businesses. Prices are fluctuating on a month-to-month basis and we are experiencing tight deliveries. Our manufacturing businesses purchased steel from steel mills, processors and various distributors. We purchase a wide variety of steel products ranging from pipe for our fittings business too heavy steel plate for our bridge structures. Because our businesses have different prices and sources for their steel, it's difficult to provide simple across the board formulas for calculating the impact steel price fluctuations have on our business.

In the past we have purchased a large portion of our steel with firm price purchase agreements. Most of our other steel is purchased by negotiating short term transactions in the spot market. Most of our firm price purchase agreements for steel did not address scrap surcharges. Earlier this year when the mills initiated a scrap surcharge, we either negotiated a solution with the mill or paid these extra costs under protest. Unfortunately in a tight steel market we don't have many other options. Today most of the steel prices consist of two key components: The base price and scrap surcharge. Most of the major mills publish monthly scrap surcharge figures that apply to shipments for the following month. We've seen a large fluctuation in the monthly scrap surcharges which has made it very difficult for us to predict futures cost. As an example in the first quarter scrap surcharges increased at a rapid range. In April and May they began to decline. As the scrap surcharges declined several steel mills announced increases in their base prices. The scrap surcharges announced in July which applied to August shipments, soared again.

As you can see this type of erratic pricing environment creates a very complex situation for our manufacturing businesses that have a high steel content. As we progress through the year and our consumption of steel remains strong our firm price purchase agreements are expiring. Unfortunately we have not been able to renew our steel agreements with pricing at levels comparable to what we had in our contracts. In essence our base price is increasing and we have 30 day floating scrap surcharge. A few years ago during the trough in the business cycle, we sold some products at very attractive pricing to preserve our work force. We refer to these orders as base load orders. We successfully preserved our work force and we made some significant efficiency gains. Unfortunately no one in the industry predicted the rapid increase in the price of steel at the time we took these orders. In hindsight our timing was off from a steel cost perspective.

In the second quarter we recorded additional reserves for future contracts that are estimated to generate a loss. Jim Ivy will provide the details in his presentation. At this point it's not realistic to expect steel prices to return to the pricing levels that they were at when several of the steel mills were in bankruptcy. Every steel producer continues to be confronted with rising steel cost of raw materials and spot shortages. With the demand for steel so strong, they fully expect to pass their cost increases onto the capital goods supply chain. We are challenged to pass on price increases on to our customers. We're taking steps to increase our prices on every steel related product we produce and to provide escalation clauses in our sales agreements. Unfortunately it takes time to make these type of adjustments when the markets react as quickly as they have in the steel industry.

Our customers are responding in a variety of ways. Some accepted that steel has become a scarce commodity similar to oil and natural gas and have placed orders to avoid further price increases. Other customers are taking a wait and see approach, while others are agreeing to contracts with escalation clauses. Because most of the products we produce are capital goods, our customers usually have specific business needs for them. In certain situations they can delay their purchases or take drastic steps and cancel a project. Our products are usually part of an infrastructure that plays some type of supportive role in a business or construction project. Many of our products are produced for replacement purposes as an asset approaches the end of its useful life.

Because capital goods are normally depreciable assets, a price increase usually ends up being absorbed as incremental depreciation spread over several years. As an example, a jumbo rail car requires 21.6 tons of steel in the manufacturing process. A cost increase of $130 per ton would increase the price of the rail car by about $2,800, or approximately a 5% increase. This would increase the monthly financial depreciation about $7.77 per month on a 30-year life. As you can see this substantially less than the impact of waiting for prices to go down and having interest rates increase 1% while you wait. At this point I'll provide a brief operational overview of our nonrail businesses and then conclude with our rail businesses. Steve Menzies will comment on the rail market and our leasing companies performance.

During the second quarter our construction businesses improved substantially compared to the first quarter results. Each of our construction related businesses also improved in their year over year performance except for our concrete and aggregate businesses. Which was affected by the extended spring rainy weather. Fortunately in July the weather improved and we are seeing improvement in this business. We've begun to see some spot cement shortages in some of our service areas. These are normal occurrences during this time of the year. We feel that the relationships we have with the cement suppliers will help us through any temporary shortages. We've also experienced aggregate shortages in areas where we depend on rail shipments. We continue to work with the railroads to address this problem. Both these events have caused prices to increase and we have adjusted our prices to cover the cost increases in these areas.

Our highway safety business is performing well. Fortunately we have been able to revise our prices in this business to reflect current steel costs. Our business volume and margins have improved on a year over year comparison basis. Our access to steel is helping generate sales as highway construction crews have geared up for the summer season. Our pipefitting businesses is experiencing a nice rebound. We have a strong backlog of orders in this business at a decent pricing level. Were we have recently booked some new bridge steel business at prices reflecting our current steel cost. We are fortunate we didn't get caught with a large fixed price backlog in this business.

During the second quarter of this year our industrial products group performed better than it did during the first quarter of 2004 and showed a nice year over year comparison. The steps we took a year ago to consolidate this business are paying off. Our propane tank business normally operates with a short backlog and we price our products based on the current cost of our steel. Several of our customers responded by purchasing tanks during the first half of this year to avoid further price increases. The demand for large storage tanks remains relatively low. We are converting some of our large storage tank manufacturing capacity to produce wind tower structures.

During the second quarter our barge group continued to be effected by steel prices and litigation expenses. Jim Ivy will provide specific financial data on this during his update. We continue to take a steady flow of orders in our tank barge business. Our customers have accepted price increases attributed to the new cost for steel in this product. Our backlog extends into the spring of 2005. Our customers are expressing needs for hopper barges but they continue to hesitate to place orders. The price of the steel component in a hopper barge is a large factor in our overall manufacturing cost. Several of our customers are taking a wait and see approach. The industry order level for new hopper barges has been very low since the price of steel has increased. Our barge executives are estimating that the scrap rate for barges is increasing with the high price of scrap steel. This should cause the size of the U.S. inland hopper barge fleet to shrink. We continually monitor the daily rental rates for hopper barges. The a rates continues to rise which indicates a steady demand on the river for these type of barges.

The import export activities related to steel have added new dynamics in the barge transportation industry. As we perform our strategic planning in our barge business this summer we are reviewing the potential of expanding our barge leasing business. Our current backlog for hopper barge orders carries us through the end of the year. Discovery and pretrial proceedings continue in our barge litigation. Our disclosures are in our 10(Q).

Now I will touch on some of the highlights pertaining to our rail car businesses. Our second quarter shipments in Europe amounted to approximately 660 units. Our third quarter shipments should be a little less than half our second quarter's. The fourth quarter should be at a level comparable to the second quarter. The market demand remains relatively low in Europe. Fortunately our European rail business was profitable during the first half of the year. We'll have a break in our production during the third quarter as we perform summer shut down for maintenance purposes. We expect to lose a little money during this time. During the fourth quarter we expect to break even. For the year we expect to ship over 2000 units and make a small profit in Europe.

During the second quarter our earnings for our North American rail car businesses were affected by a combination of learning curves, material shortages and material price increases. We had to idle our work force several times due to spot material shortages. The spring storms in April washed out a major rail bridge between the U.S. and Mexico creating a problem involving our material deliveries into Mexico. Jim Ivy will provide additional data that quantifies our cost in this area. Needless to say this was a very challenging time for our rail car employees.

During the second quarter the demand for rail cars in North America continued to improve. Steve Menzies will provide information pertaining to the industry order levels. It is important to note effective with our conference call today we will include auto rigs as a part of our figure when we issue quarterly updates pertaining to shipments and backlogs. During the first quarter of 2004 we started shipping our first group of auto rigs since our merger withdrawl. Because the auto rigs are the superstructure installed on top of an existing rail car we previously did not include them in our rail car backlog and shipments totals. We believe it will be less confusing to include auto rigs in the figures as they are manufactured on a rail car production line.

As I've stated before we are not pursuing rail car orders in North America based on market share percentage goals. Our market share will fluctuate on a quarter to quarter basis. During the second quarter our market share was unusually low. We have been in the process of increasing our prices and modifying our sales quotes to reflect the impact that steel pricing is having on our business. The North American rail market is slowly adjusting to the dramatic changes that the steel supply chain is creating. From a sales point of view, our short term focus is allowing to on obtaining orders that allow us to tack on to existing production lines and reload our facilities. During the second quarter we received some orders that facilitated our production needs. We are trying to minimize line changeovers and other situations that complicate our efforts to increase our production.

This year we are reopening two of our rail car facilities in Texas which were previously idle. We were fortunate that the BNSF railroad recently decide to do move delivery forward from 2006 to 2005, 1500 rail cars and a large grain car order we received in the first quarter. The current production run of grain cars in this facility extends until September of 2005, allowing us to efficiently retrain our work force. Some of our customers who ship products by rail are beginning to voice concerns about the availability of rail cars. Articles have been written recently describing the railroad bottlenecks that shippers are experiencing. Usually these situations stimulate an additional demand for rail cars. We continue to believe there is a long-term demand growing for rail cars in North America due to replacement needs and other factors. As a result we are not overreacting by increasing our current production at a rate that outpaces the market demand or the supply chain's ability to support our production increases. We expect to ship between 13,300 and 14,500 rail cars this year which represents a 60% to 75% increase over our shipments in 2003. It is very difficult for us to make an exact shipping prediction until supply chain issues decrease. At this production level, we estimate we are approximately 50% of the way to what we consider will be our ultimate shipment levels for our North American rail car operations.

At the end of the second quarter our backlog of orders for rail cars in North America was comparable to where it was at the end of the first quarter at 17,500 units. Our shipments for the second quarter increased approximately 380 units over the first quarter, to 3180 units. In the second quarter 26% of our shipments were to customers of our leasing company. We expect our shipments during the third quarter to be between 3,500 and 4,000 units. Approximately 15% of our shipments in the third quarter will be to customers of our leasing company. We expect our shipments in the fourth quarter to be between 3800 and 4500 units.

I'm pleased to announce that on July 2, Tony ANDERKIDES joined Trinity as President of our tank car business unit. Tony was previously President of GATX Terminals, their bulk liquid storage business. Tony was with GATX for 25 years and left the company in 2001 when GATX sold their terminals business. Tony has an extensive customer relationship network as well as operational expertise. At this point I will turn it over to Steve Menzies.

Thank you, Tim, good morning. During the second quarter of 2004, North American rail car industry continued its recovery with orders for rail cars and auto rigs totaling in excess of 20,000, the highest quarterly total since the third quarter of 1998. The second quarter's order activity toward year to date orders totaled over 38,400. The strengthening general economy, increased freight traffic on North American railroads and replacement of the aging railroad car fleet each contributed to strong rail car demand. Rail car demand during the first half of 2004 was disbursed among a broad array of car types. At the end of the second quarter of 2004, the industry had a backlog of 52,100 rail cars and auto rigs, highest total since first quarter 1999.

During the second quarter Trinity Rail received orders for approximately 3400 rail cars and auto rigs. We received orders for covered hoppers, intermodal flats, coal cars, boxcars and tank cars. Orders received were for rail cars for which are we are currently in production consistent with our strategy to focus on tack on orders providing extended production efficiencies and continuity. We also received additional orders for auto rigs, continuing our production run for this equipment type. Our total rail car and auto rig order backlog remained at approximately 17,500 units, and 33% of the industry backlog.

Our leasing and management services groups revenues and operating profit increased year over year as a result of fleet growth, sustained high utilization and fleet sales. Industrywide, lease fleet utilization has improved reflecting strong rail car demand and as new rail car prices increase these rates will continue to strengthen. Trinity Industries leasing company added approximately 830 new rail cars to its fleet. Fleet additions which included tank and freight cars, were all placed on lease with customers. At the end of the quarter, our owned and leased fleet has grown to over 19,200 rail cars. Our lease portfolio is well diversified by car type, industries served and customer concentration. As part of our continued review of our portfolio we sold a group of over 550 rail cars during the second quarter. The average age of our fleet is slightly over five years and the average remaining term of our lease portfolio is over six years. Fleet utilization remains strong at 98.2%, compared to 98.3% at the end of the first quarter. Our committed lease backlog is approximately 1300 rail cars, or 7.8% of Trinity Rail's production backlog. Thank you. I will now turn it over to Jim Ivy.

Thanks, Steve, and good morning, everyone. We have filed our 10(Q) for the second quarter this morning and you will find more details there. Revenues for the second quarter of 2004 grew 50% over the second quarter of 2003, as sales volume increased in every business segment. Net income of 3.6 million for the second quarter of 2004 was basically flat compared to 3.5 million in the same quarter last year. Earnings per diluted share was 6 cents compared to 8 cents last year, due to the dilutive effect of preferred stock issued last year and the impact of stock options. In the rail group in the second quarter of 2004 compared to the second quarter of 2003, North American rail car revenues grew 114%. European rail revenues grew 29%. And component sales grew 19%. For a total revenue growth in the rail group of 118.9 million, or an increase from 154.7 million in the second quarter of 2003, to 273.6 million in the second quarter of 2004.

Steel cost increases, material availability, start up costs associated with reopening plants, and some unanticipated temporary shutdowns reduced operating profits in the rail group by 7.7 million this quarter. The 7.7 breaks down as follows: Late delivery of materials at some of our plants, floods affecting our Moncova, Mexico plant and a power outage at our casting operation in Pittsburgh resulted in an estimated $4 million in additional costs during the quarter. Start up costs at the two plants we are bringing back on line this year were $1 million. And net material cost increases reduced operating profits 2.7 million. By net material costs I am referring to the fact that some of the material cost increases have been passed on to customers. For the second half of 2004 based on prices currently expected to be in effect, the net material cost increase is estimated to be $11 million.

Of the 17,500 rail cars in our North American backlog approximately 47%, or 8,150 units, have escalation clauses. At the beginning of the year there were no contracts in the backlog with escalation clauses. Each quarter as we deliver rail cars on older orders and add new orders with escalation clauses our exposure to fixed sales price contracts diminishes. With monthly changes in steel prices and short supply of steel escalation clauses in sales contracts are the best hedge since as you probably know there are no financial instruments available currently to hedge steel cost.

Rail group sales to the leasing and management services group were 48.5 million in the second quarter of 2004, with profits of 3.4 million, compared to sales to the leasing group in the second quarter of 2003 of 45.9 million with profits of 3.7 million. These intercompany sales and profits are eliminated in consolidation. In our construction products group this quarter revenues were up year over year due to volume and pricing in our fittings and highway safety businesses and recent acquisitions in the concrete business. Operating profits were down primarily due to very wet weather conditions in our concrete and aggregates market area and steel cost increases in the bridge girder business.

In our inlands barge group revenues were up 40% on increased deliveries of both tank and hopper barges. The barge group was adversely affected by steel cost increases and as a result recorded an additional contract loss reserve of 4.5 million for barges to be delivered in the third and fourth quarters of 2004. We also recorded barge litigation costs of 2.1 million. The total estimated impact of steel price increases during 2004 on barge profitability is approximately $20 million, of which 4.1 million was recorded in the fourth quarter of 2003. Of the $20 million approximately 13 million has been recorded as contract loss reserves and contract revenues that will be recognized in the second half of 2004 will absorb the remainder, resulting in lower margins on those contracts. About 30% of the dollar volume of the barge group backlog is covered by escalation clauses. No orders were taken this quarter for hopper barges but we received orders for 27 tank barges valued at approximately $52 million this quarter.

In the industrial product groups sales volume of LPG tanks and heads for tank cars improved both revenue and operating profit compared to last year. Revenues in leasing and management services group in the second quarter of 2004 were up 17.4 million including a $6.5 million increase in rental and management fee revenue due to growth in the size of the fleet, and improved utilization of the fleet as Steve mentioned. The remaining $10.9 million increase was due to sales of rail cars from the lease fleet which were 36.3 million in the second quarter of 2004 compared to 25.4 million in the second quarter of 2003. Profits on these sales were 4.6 million in the second quarter of 2004 and 3.1 million in the prior year.

On a consolidated basis SG&A expenses have increased in total amount but have declined to 7.8 percent of revenue from 9.5 percent of revenue in the second quarter of 2003. Interest expense is up in connection with the $300 million bond offering in March of 2004. And other income includes gains on sale of idle plants amounting to 2.4 million in the second quarter of 2004 and 3 million in the same quarter last year as we continued to dispose of idle facilities. Investment in working capital grew primarily due to the increasing sales and production volumes as well as increased steel and material costs. While the inventory and accounts receivable totals are up as would you expect when top line revenues are growing, the turnover rates are improved compared to last quarter and to the fourth quarter of last year.

Steel and materials cost and availability will continue to be issues for Trinity. Excluding these uncertainties our expectation for the third quarter earnings per share is a range of 0 to 15 cents and expectations for the fourth quarter on the construction products group is affected by bad weather is a range of from a small loss to ten cents per share. That concludes my remarks and now I will turn it back over to Neil to begin the Q&A. Neil?

Thank, Jim. Our operator will prepare us for the Q&A session. Sarah.

[OPERATOR INSTRUCTIONS] Our first question comes from the site of Alex Blanton with Ingalls & Snyder.

Just a clarification. In the press release it says you had a provision for an after-tax loss of 7.9 million for increases in steel costs and so on on certain rail and barge contracts. What was that that for the second quarter?

Well, the press release for the second quarter, we have an after-tax loss provision of 3.1.

3.1. And the rest was in the first quarter?

Yes.

Okay. Continuing along that line, you said that the rail group had an impact of 7.7 million in total from these unusual cost items, including materials. And if I add that back to the 900,000 in profits that you indicated you would have had a 3.1% margin on sales for rail in the quarter and you would also have an increase of 14.7 million from last year's loss. Which is about 12% incremental change in the profit on the incremental sales year over year. These don't look very impressive and include in the amount that we added back in start up costs. So why are the margins at this point even adjusting for these items not better?

Alex, the lead time on the backlog means that you are running off making deliveries on sales contracts that were taken in a more competitive time.

Also, Alex, it's Tim, the numbers that we recorded in those financials are losses. We also had additional margins that were affected that weren't losses that were in our steel that we didn't report that number. Which was related to steel. You follow what I'm saying, Jim. He's picking out, if we have a contract that we are seeing on a go forward basis or during this time period here's the amount of loss that we are having on that contract but we've got a lot of our orders that are in our business where the prices have increased on the steel and it's just lowered our margins. So you really can't take the one number of the recorded loss and assume that the rest of our contracts that we have that we didn't report a loss should have decent margins with the steel price increases.

So the amount that you gave, 7.7 million and not the total impact of cost increases.

You're right.

For materials.

You're right.

Is what you're saying?

Jim, explain that to him.

There are other increases to year over year. I think the main thing is the time when the sales were put on the backlog. The 2.7 million in steel cost increases I was referring to in the rail group is a net number of -- that was not past on to customers, so just the impact on the operating profit.

Okay. Let's go on to something else. I'm a little confused about the industry numbers you gave. First let me ask you, did you say that the current shipments expected for this year of 13.3 to 14.5 is 50% of the way to the next peak, is that was meant?

Yes, those are not industry numbers, Alex.

I know, those are your numbers.

Though were our numbers.

Let's get to the industry later.

Yes.

So this is what you said.

This year we will ship between 13.3 and 14.5, and we are saying at that level we are about 50% of where we ultimately think we will be after we finish our multiphase expansion program.

Okay. Now you gave some numbers for the industry for orders, rail car orders, 20,000 in the quarter?

Yes.

And 38,400 year to date.

Yes.

So you only got 3400 of those.

Yes.

Which is 17%.

Yes.

In the second quarter.

That's what, why I said our market share for this quarter was unusually low.

Why was that?

Well, a large portion of it is because we are in the process as I said of increasing our prices, putting escalation clauses in our contracts and it also depends on the car type. There was a large portion of the orders that were placed where intermodal equipment. We have one line running with intermodal equipment on it. We don't have multiple lines and our lines with intermodal is currently book at I think at the end of the quarter it was booked out to booked out to February of next year. Since that we booked it out through August of this year so we have over a year's backlog on that line. We received a real nice order recently from Burlington Northern Santa Fe of 1500 intermodal cars and so when the orders were placed for all of the intermodal equipment our line was at February, a lot of our composition had space available competition. It's kind of flip flopping the situation where we booked a lot of orders in the last 12 months and had a large backlog. Our competitors had some and they had space available. So you kind of end up with who's got the space available. And on intermodal business we just, we didn't book a lot of business in the second quarter.

Well, who is getting intermodal? Who are the competitors? Who is getting the other 83% of the orders for the quarter?

I recollect the two primary intermodal companies that are building -- there's three companies building intermodal equipment and that's Trinity, Green Briar and National Steel Corp. and National Steel Corp and Green Briar received orders from GTX for intermodal. We received a real nice intermodal order I guess about the 2nd week of July from the Burlington Northern railroad that what it provides us with is 1500 of the same car type for about a six or seven-month period of time. As I said in my talks, that's really what we are shooting for. We are trying to get consistency right now as we bring our lines up with one or two different types of car types.

But you have 33% of the industry backlog. Is that where you expect to be at the next peak, 33% share?

No.

Where do you expect to be?

Well, I would assume, and you're talking when the market is peaking and our production is there?

Yes.

I would assume that we would be somewhere between the mid-forties to mid 50s.

Okay. Listen, I'll get back in the queue and maybe come back to this later if there's time.

Okay.

Our next question comes from Sean McDaniel with ASM Research.

I got on the call late so I'm not sure if this has already been answered. But given the current earnings of the company what's available now on the term loan?

Let me go over that. I covered it at the start. This is John Adams.

Thanks, John.

We did the 300 million financing in March and that is outstanding. We reworked our revolving credit for 250 million. There's nothing outstanding. And at the time that we did the 300 million we paid off our other term loan which is probably the one you're referring to.

Okay. Next question, on the backlog side of things I think there's, I got a little confused here, you're talking about the auto rigs. Is the 17,000, it looks like based on the current backlog quarter to quarter backlog was flat, effectively.

You're right. We were about, we shipped about as many cars as we sold. And so quarter to quarter the backlog was flat.

Okay.

And previously we had reported, we didn't report -- in the first quarter we only shipped less than 20 auto racks, I think, is what the number was. And so we felt like it was better just to start including the auto racks in our shipments now since we are starting up. This is a product that Trinity the previously did not produce until we made our merger withdrawal.

Given how the industry looks and how much, how things, it seems like Green Briar and everybody is making money hand over fist in the industry. How much better does it have to get industry-wide before Trinity turns the corner and starts to make money?

Well, we are trying to let you understand the complexity associated with the steel situation in that it impacts our products. We currently are shipping -- this last quarter, we shipped 22 different product models. And we have a number of different agreements with various customers. And so it's a little more complex than us just having three or four lines set up running. So we are looking at -- we are halfway towards where our ultimate goal will be and I'm going to be very disappointed if we reach our ultimate goal and you don't see a significant difference in the amount of money that we are making as a company. That's what we are all shooting for.

Right.

At this point. And we have to be very cautious in not increasing our production at a level that outpaces the market and the supply chains ability to provide steel to us and the components. So we are making progress. As I said this year versus last year we are exist 60 to 75% increased but we still have a ways to go.

It look like on the consensus side for the full year consensus is about a dime or so for full year earnings. Based on where you are year to date and guidance for Q3, Q4, does it seem to be to for you to make the consensus number? It doesn't seem possible, you are still going to miss consensus, can you talk about that a little bit?

Well, if you are looking at consensus this morning before we gave our own guidance and told you the $11 million impact on steel prices on the second half of the year that was not formerly anticipated.

I will wait for the updated guidance. Thank you.

Thank you. Next, we'll go to the site of Mike Peasley with BDNT Capital Markets.

Good morning, Tim and Jim.

Good morning.

Can you ask you a bigger picture question. If you're looking today as you stand today with your facilities, you just opened two, you've got six running, and given where you are at this point in the cycle how would you say that compares to the last cycle when you were ramping back up? It seems like you may be lagging a little bit behind in getting your capacity up to speed? Is that a fair statement?

Yes, I think that's a fair statement. I think the last time we had a facility in Pennsylvania that was a heavily union need facility and one in Ohio that had large work forces that we could recall and we were ratchet those facilities up in three or four months, three or four months fairly quick, compared to what our game plane is now. That's why we have it as a multiphased program. At the same time we see thus as, we are looking at this more longer term at what we're doing and we have, I keep saying we've got only so much steel that we can be supplied with and components that we can be supplied with. And there is still at a lot of hot spots out there. We are probably the only car builder that's at the 50% point. A lot of the others are, have pretty well maxed out or close to maxed out of where they are. Comparing other car builds to where we are at 50% is not really a good comparison because we have different objectives.

Then you mentioned early on, I think maybe Jim mentioned it, that there's a bit of a learning curve? I'm assuming you're talking about your work force and you mentioned your last cycle of the unionized force that you are able to recall. I'm getting a sense as you ramp up you are bringing on employees that may or may not have been in the rail industry prior and there's some training lag and expense that goes along with that?

Yes. We had one of our best start ups ever in our Fort Worth facilities, the two facilities that where we've recalled the employees and everything. We've got good backlogs. I think it's also important to take into consideration at the last ramp up, the increase really started in the early 90s where the industry as well as us, we started increasing our production from the low point in the mid 80s where we gradually grew through the late 80s into the early 90s into the mid 90s. And the spike hit in the late 90s. So it was really probably a seven or eight year increase. When we fell off the cliff this time, the industry, it went from the 60, 70,000 car, down to 17,000 cars. During that, prior to that time we made the decision to go ahead and rationalize our facilities and we were in a program of saying, let's move to some lower cost facilities. We also are having a little bit of a learning curve now associated with how to cope with escalations of materials. When you look at the scrap surcharge, in March it was one level then all of a sudden in April, May it's at another level. And June, July it's at another level. If you think of the logistics that a company like Trinity has to go through we have to price our inventory, which fluctuates quite a bit depending on what the scrap surcharge rate is and then as we're shipping cars. So in a sense we feel a little bit fortunate that we've had enough time to get some of our administrative processes in order. When you begin presenting customers with invoices for escalation you've got to be very organized. Your system has to be fine tuned. You can't just send them an invoice and say , here, the new price of the product. So we are trying to work out our contracts, get a good arrangements. We are sensitive to the fact that the assets we sell have to be financed, that there's got to be good coordination between our company and our suppliers. So there's some complexity associated with that.

That's good feedback. Let me run with that just for a second. You are at 47% of your backlog is protected now with escalators. As you look out -- I see your deliveries are ramping up here. As orders come in where do you see the break point where all of your backlog is protected? Is it the end of Q4? Is it the end of Q3?

I think you'll see as we go into Q5 -- or into '05, first quarter and second quarter, we will still have orders that have some fixed price agreements but they will start to play out through the first and second quarter of '05. Jim, do you have a different perspective on that?

No, that's correct. The shipments without escalation will diminish. There's a very small number that goes all the way through 4Q '05, in the backlog there's 150 units that don't have escalation in the fourth quarter of '05. So by then it will all be gone, it will be substantially gone by the end of the second quarter.

That's our rail car. In our barge business we have a little bit different situation because 2004, our game plan is, we won't have any more barges in our -- once we finish our shipments in 2004 going into 2005 -- that don't have new pricing and escalation included. And so we are really working hard on that to, we've been successful in the tank barge side now we are working on the covered hopper side, or the hopper barge side.

Just to skip back quickly, you sold a plant, you sold a few plants over the last year or so. You've got six open now. Can you talk a little bit about where you see the ideal plant structure being this cycle? I think last cycle is like 20 plants. Can you see and envision a time where you can reach your peak production of 28 to 30,000 units with 15 plants what are your thoughts there.

We look at it more as production lines than we do plants. The number of lines in the type and product and the volume we are able to see off of each line. And in our multiphased program that we have, the phase II that we are in now is rejuvinating some of our idle facilities. We've done that with two. We are doing it weigh third one now as we speak. In Georgia where we are standing to bring one of the other facilities up with some products that we are looking at building. We also have a approved Capex had that's underway for a second large facility in Mexico and there's multiple phases to that expansion. This last quarter in that facility we started painting rail cars and we are starting at the back of the facility and moving forward. So we are now shipping cars out of our third facility in Mexico where we are painting the cars. We are breaking ground and putting in production lines in front of that where we will ultimately produce additional. So you will see more cars in the, when we get to our ultimate production level coming out of our Mexican operations as well.

Just going to continue to jump around a little here so bear with me. Market share I understand you pointed out some of the thing that you're up against. Market share is not the name of the game for you right now. But as you see it today, I mean can you talk about some of the quote activity in other car times other than intermodal? I know intermodal has strong.

Why don't you tell us a little bit about what we booked in the second quarter and how it helped us and what we are looking at on a go forward basis.

We continue to see a broad market recovery among a number of different car types much beyond just intermodal. For example our second quarter orders encompass nine different car types with no one car type more than a fourth of those orders. Those orders constituted production across 60% of our lines extending backlogs several months beyond where those backlogs exist today. Our production backlogs out of the various lines extend anywhere from a minimum of six months to 12 months with several additional production lines commit to long-term building programs for several years. We see continued order inquiry activity again broad-based among a variety of car types, covered hoppers, coal cars, specialty covered hopper cars, boxcars and tank cars. So we see again that the recovery is broad and sustained going into the third and fourth quarters as well.

Then just to get back to capacity again real quickly, you are doing your best to solicit the right types of orders to add on to make opening plans as efficient as possible. And you're taking a very measured approach. I think we can all appreciate that. But as things are ramping up so quickly do you feel like, I mean you're behind the curve to where you can miss some of the up sides as we move into '05?

No, I don't think so. We've got new product development that is targeting cars that we think will be high replacement cars and we are introducing those products into the marketplace. We are still very well aligned with a lot of the customers that all the customers that are out there in the marketplace. And this business, if you miss an order and they are back out and they have needs for the order, a lot of time if you have did delivery space you get the orders. If you have a product that's performing well, you get advantages. Price always place a role in the product. So by having a low market share for a period of time like we've had is not going to take us out of the game by any means. We have large capacity to be able to produce high volumes, so a lot of times when somebody wants a large number of products, if with only have one line set up like we did in the intermodal and they want to purchase -- TTX has purchased a lot of equipment last year last year and this year and they made some very good purchases at prices. When we looked at the orders that we just missed we were upset that we missed some of them. We didn't participate with TTX but then we were pleased when we sign right on with the Burlington Northern with one car for that 1500.

Let me ask one more and I'm going to turn it over, I apologize for taking so much of your time. But, Jim and John, this one is kind of for you. What are your cap ex plans? What's the goal for this year, '04, both leasing and nonleasing, number one? Do you have any preliminary thoughts on 2005? And then to tie on to that, how do you foresee your capital structure as you move towards the peak? You obviously have a lot of debt. Some of that is leasing and that's more complex. But it seems like we are moving into this peak more levered than we have been in past peaks. What's your thought on the ideal capitalization?

Ideal capitalization I will cover that and Jim might speak to the cap ex number, both leasing and nonleasing. We are slightly more leveraged particularly if you look at some debt that we've recently done. If you take debt to cap I would think that you won't see us get any higher than 40% and you'll probably see us anywhere from the low 30s to mid 30s. Obviously we anticipate making some money going into '05 and that is improving '05 and into '06 I think that is something that Tim and Jim had talked about on a couple of conference calls that we see more profitability in the latter part of '05 and '06 and that would help decrease the leverage because we will be able to retain that. With the recent financing that we've done we certainly don't anticipate in the revolver not being used at all any needs to lesser up either the parent or the leasing company except the non-recourse that we've been doing.

Yeah, Mike, let me answer on the cap ex. The lease fleet additions to the quarter were about 77 million, compared to 112 in the second quarter of last year. Nonleasing cap ex was 13 million compared to 8.6 last year. For the next six months leasing cap ex is estimated to be about 100 million manufacturing or other cap ex is expected to be around 30 million.

I think it's important, this is Tim, for us also to address what we've done with our capital structure and our financing because the last cycle we were financing Trinity on the overnight market. There were multiple banks out there. They didn't require any type of -- we had little or not covenants. We didn't have any covenants or anything. It was just accessing money on the overnight market. Our leasing company was being financed primarily from the cash-flow of the company. And when three or four years ago when John came on board and Jim was here and then we hired Steve Menzies, we set about this objective to separate our leasing company as best we could, to get our leasing company to where from a financing standpoint where it had it's own lines of credit, it's warehouse has served us very well. The terming out of the warehouse has been a very smooth process. So the leasing company has their own financing. The manufacturing company now has the -- our other businesses whether it be our concrete or construction products businesses that seem to provide a steady cash-flow for us and a nice base. The barge business is -- up until the point where we got caught with steel has always provided a good cash-flow. And then our rail car business is the especially the freight car side of our rail car is the cyclical portion. The tank car side of our rail car business is nearly not as cyclical as the freight car side.

We'll take our next question from Gary Yaslan with Impala Asset Management.

How are you? Tim, could you put this cycle we are heading through or are in whatever early stages we are in, mid stages, compared to last peak? You talked about if I come up in round numbers come up 28,000 unit produced, I'm talking about doubling what you talked about of the production numbers. I guess that's similar to what you did in the late 90s. On the one hand you didn't have the steel issues back then. On the other hand you seem to be becoming a more efficient company facilities wise and what not. You made a little over, I believe a 10% operating margin in the rail business back then. Can you talk to some of the differences between the then and the now and going forward?

Yes. I think from a marketing standpoint and, Steve, you can jump in there if you want to add something to it. But the industry was building in the early to mid 90s at a fairly strong pace. And then once the western railroads and the eastern railroads went and they their mergers, it created a pretty good bottleneck. And there was quite a bit of over reaction at that time. You also had some new entrances into the leasing business with some of the financial institutions that came in and all of these things coupled together created a spike up in the demand. It was building through the early to mid 90s and then during the late 90s was kind of the peak in the crest. The economy went through everything it went through and we had a recession in the country. The rail business led the recession. The rail car demand kind of led the recession into the trough like it did. What you really haven't had is you haven't had the big replacement issues that are driving the fleet. The fleet continues to grow older. You talk to anybody in the railroads and they are going to talk and just shake their heads and say, you know, we have a very old fleet and long-term we are going to have to do something about it. From today from the shippers point of view you can't hardly talk to somebody that ships by rail cars that isn't shaking their head in one way or another saying, it's a different world of getting things shipped. The steel traffic has impacted a lot of the -- I went to a steel conference in New York a couple weeks ago, or at the 1st of July. All of the executives in the steel business, their frustration is they can't get their steel moved on cars, they can't get their raw materials in as efficiently as they want. I think there is quite a bit of demand in the industry for products being shipped. I think replacement over the next decade begins to drive this with a bigger -- as a bigger issue. We have had, I guess since I'm in my 30th year with the company, and I still have the access to my father who was in the industry for 50 years, we've tried to look at it from a longer term perspective and as long our board participates in this with us and the people I surrounds myself with, we look at it from a long-term point of view, we say the last peak we had facilities that had capabilities with older designs in some of the companies we had acquired which was Pullman, Grabel Steel Car, or the freight car. But they were all heavily union and the contracts that we had were not the best type contracts to have in that position. We made a decision as a company to say, let's try to establish a lower cost model. That's when in the mid 90s we moved into Mexico, we currently have a facility in Mexico that has four, five production lines running. We have a large number of people there and our customers have become acceptable and see our rail cars out of Mexico is equivalent quality to any of the rail cars we produce way in our system. It took us sometime on that. We think this cycle, the real difference in this cycle is going to be the merged company between Trinity and THRAWL and the design and benefits that we get, the efficiency benefits that we'll get longer term, the lower cost approach that we have, and the methodical increase that we are going through, the steps that we are going through up front to insure that when we are at a peak that we are maximizing the full potential of the shareholder value. We spend a lot of money on our acquisition of THRAWL and bringing the company's together and we are still seeing see that there's still opportunities to maximize the shareholder value of the company but we will we will have to be at the peak production. I hope that helps you.

It does and I just want to make sure. What I'm going to take away from that, Tim, is at the same product level as the last peak on a run rate basis, you should make more money.

We should make more money but we've do the to work through this steel cost thing. We've got to work with our customers and getting them to understand that the price of steel in all of our products is at a point where it didn't just spike up. Some people look at steel thinking, steel may be a spike and it's going to come back down. Some people used to look at oil like that. We are sitting here with a barrel of oil now at 40 something, you know, 44, 43, 44. Two years ago, three years ago when the price of oil was in the teens or low double digits, who would have thought it would be at this level. But who is now sitting around saying they think it's going to go back down. Steel has a lot of that same type of characteristics. It's going to take a little time to work it through to people understanding that prices have to increase and they are going to have to stay up there.

Fair enough. Okay. Thank you.

Sharon, we are out of time. We are going to have to conclude. You want to have one more question.

All right. Next we'll go to the site of Aaron Aaronsberg with Vanguard.

With the increase in debt and increase of cash, is that going to be used for the wrap that up, is going to effect to vitality of the company.

I said when we went public with the 300 million we were growing to repay indebtedness that was a little over 160 million. And then the other was for general corporate purposes, to make cap ex for strategic manufacturing facilities and to fund working capital growth that we thought we were going to have.

So we shouldn't expect cash to stay as high, then? I wouldn't anticipate that the cash position we had at June 30, 155, will remain that high. Okay. Thank you.

Long-term.

Long-term.

Long-term.

Okay. Thanks. Thanks everybody. Thanks, Sarah. That concludes today's conference call. Remember, a replay of this call will be available starting one hour after this call ends through midnight, Thursday, August 12. Again, the access number is (402)351-0812. 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 with thank you for joining us this morning.