Trinity Industries Inc (TRN) 2004 Q3 法說會逐字稿

Good morning. (Caller Instructions)

And at this time, I would now like to turn the program over to your host, Mr. Neil Shoop. Go ahead, please.

Thank you, Kevin. Good morning from Dallas, Texas and welcome to the Trinity Industries Q3 Results Conference Call. I’m Neil Shoop, Treasurer for Trinity. Thank you for being with us today.

With me today are Tim Wallace, Chairman, President and CEO; John Adams, EVP; Jim Ivy, SVP and CFO; Chas Michel, VP 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 Wednesday, November 10th. The replay number is 402-220-1185. I would also like to welcome our audio webcast listeners today. Replay of the 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 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 as to expectations, intentions, and predications 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 could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

Now here’s John Adams. John?

Before I discuss our balance sheet and debt obligations with you, I will briefly discuss a non-GAAP financial ratio we use when we review the financial performance of our Leasing Company.

Besides reviewing our operating profit, we also review EBITDAR, Earnings Before Interest, Taxes, Depreciation, Amortization and Rent expense. We believe this to be a more consistent way to review the performance of Leasing. Other measurements, like operating profit and EBITDA are influenced by the methods used to finance lease assets like short-term debt or leveraged lease debt. EBITDAR allows an apples-to-apples approach, as it looks only at operating profit plus depreciation and rental expense.

We feel it is important to look at our business in a consistent way and the EBITDAR approach is a way to do this. Jim Ivy will discuss the term again when he reviews our numbers. Page 23 of our 10-Q, filed this morning, shows how this number is calculated.

Now to our balance sheet --

* When you review it on page 9 of our press release, you will notice an increase in cash of $108 million. This is part of the proceeds of the $300 million senior note issue we completed in March.

* The increase in receivables and inventory is attributable to the increased demand for our products, which Tim will be reviewing with you shortly.

* The reduction in property, plant, and equipment is attributable to our leveraged lease financing this quarter, which I will discuss in a moment.

* Looking at our debt, bank financing outstanding of $120 million, as of 12-31-03, was refinanced by the senior note issue of $300 million previously mentioned. Therefore, we have no bank indebtedness as of 9-30-04.

* Since our last conference call, we have done a third leveraged lease financing for our Leasing Company and also renewed our Railcar Leasing warehouse facility. The leveraged lease closed this quarter for $180 million and was very well received. The overall rate was slightly under 5.0% on this 22-year debt. This financing is the reason leasing assets decreased from $646 million to $501 million on our balance sheet.

* As I mentioned, our Railcar warehouse leasing facility was also renewed in August for another year. This is a $300 million facility led by CSFB, which continues to work extremely well for us. $47 million was outstanding as of 9-30-04.

Now Tim Wallace will give you his views of our business.

Good morning, everyone.

Issues pertaining to steel continued to be a major challenge for our Company during the third quarter. In situations where we sold products with firm prices and our steel cost increased dramatically, we’ve been caught in a short-term bind. I’ll take a few minutes to provide more detail.

As you know, the worldwide shortage of steel, combined with consolidation in the U.S. steel industry, has put the North American steel producers in the driver’s seat. They currently establish prices, terms, and conditions for selling their products.

Last year we negotiated fixed price purchase agreements with several of our primary steel suppliers. Based on these agreements, we sold a number of products at fixed prices. This has been our standard practice for years.

Unfortunately, when raw materials for steel increased abnormally in cost, a few of our primary steel suppliers informed us that they expected us to pay surcharges. Since we don’t have any options other than to purchase their steel, we were forced to absorb these extra costs.

We also purchased a portion of our steel from secondary steel suppliers. Secondary steel suppliers purchase steel directly from the primary mills and provide further processing for us. These suppliers also increased their prices significantly. This came as an additional unexpected increase in our costs.

During the third quarter, we performed a detailed profitability analysis of the orders in our backlog with fixed prices. Our North American Railcar business has by far the largest fixed price backlog. We assume that our current material costs will be applicable at the time we produce these orders.

As a result of our profitability analysis, and in compliance with GAAP, during the third quarter we reported additional losses on future shipments. If our prices fluctuate prior to the time we produce the fixed price orders in our backlog, we will readjust our calculations.

Since we have a number of fixed price orders in our backlog with low margins, a significant price increase could cause us to have to report additional losses. On the flip side, if we have price reductions, we will increase our earnings. Until we work through our fixed price backlogs, we will be performing this type of adjustments. Jim Ivy will provide more details in his report.

We have had several people ask us why we don’t consider purchasing a portion of our materials at current process in order to cap our costs. Since a portion of our steel purchases has stair-step price increases occurring over the next few quarters this would be a logical tactic to deploy. Unfortunately, the primary mills have placed limitations on the amount of lower-priced steel we can purchase. As I stated earlier, it’s definitely a seller’s market.

It is also important to note that a large portion of the steel we purchase is in the form of steel plate. News articles usually refer to the price of “sheet steel” rather than plate steel. Lately, the news media has reported that the price of steel has started a modest decline or is flat. In most instances, they’re referring to sheet steel. Steel plate continues to be in short supply and the price has not declined.

Last spring, when we were informed that our steel prices were increasing, we immediately responded by raising our product prices. We also began incorporating escalation clauses into our long-term sales agreement. The effectiveness of our escalation clauses have improved as we have gained more experience using them.

We are not quoting long-term prices for our products without escalation clauses or having rock solid agreements with our suppliers. We’ve learned several hard lessons during the past nine months and we don’t plan on repeating them.

In summary, we have stabilized our steel supply sources, we have either established new pricing arrangements with key suppliers, or we are in the final stages of negotiating new agreements. We don’t expect any new steel pricing surprises from our suppliers unless some unforeseen event occurs.

And finally, I’m pleased to inform you that our third quarter sales contracts met new pricing objectives established earlier this year. They cover our current steel costs and if necessary, include escalation clauses. Jim Ivy will provide more detailed information about the quality of our Railcar backlog, from a pricing point of view.

At this point, I’ll provide a brief operational overview of our non-rail businesses and then conclude with our Rail businesses. Steve Menzies will provide some comments on the rail market and an update on our Leasing Company’s performance.

Our Construction businesses performed well during the third quarter. They improved substantially when compared to the first two quarters. In fact, during the third quarter, this segment reported operating profit that exceeded the first half of the year.

Each of our construction-related businesses also improved its year-over-year performance for the quarter, except for our Bridge Structure business, which was impacted by rising steel prices.

Raw material shortages and price increases, along with rising transportation costs, are affecting our margins in our Concrete business.

Additionally, we are experiencing aggregate shortages in areas where we depend on rail shipments. We continue to work with the railroads to address this problem. Fortunately, demand for concrete and aggregate remains strong in the markets we serve in the southwest.

Our Highway Safety business is performing well. Business volume and margins improved on a year-over-year comparison basis. The improvement is due to the increased sales in our proprietary line of products, coupled with a continued demand for our standard products, at prices which reflect the current steel market conditions.

Our access to steel also helps us generate a portion our sales. Our Pipefitting business is continuing to experience a nice rebound and recognizing the cost benefits of previous plant consolidations. We have a good backlog of orders in this business at decent pricing.

We’re beginning to see some improvement in our Bridge Steel business. Our new prices in this business reflect our current steel costs. We are fortunate that we didn’t get caught with a large fixed price backlog in this business.

As we transition into the fall and the winter, we normally see our sales decrease in our construction-related businesses as a result of weather conditions. While these businesses are currently performing well, we believe the passage of a new highway bill will offer improved results.

During the third quarter, our Industrial Products Group continued to perform better than it did during the same quarter of last year. The steps we took a year ago to address our cost structure in our Industrial Manufacturing businesses are paying off.

Our Propane Tank business normally operates with a short-term backlog, enabling us to price our products based on current steel costs. We converted some of our large storage tank manufacturing capacity to produce wind tower structures and now have a nice backlog of orders for wind towers that also reflect current steel process.

Our Barge Group continued to be affected by steel prices and litigation expenses during the third quarter. Jim Ivy will provide specific financial data on this during his update.

Our Tank Barge business has extended its backlog into the summer of 2005 and we’re continuing to receive inquiries for additional tank barges.

Our Hopper Barge customers tell us they need additional hopper barges, but the order levels have been low. The daily rental rates for hopper barges remain strong, reflecting steady demand for shipments by hopper barge.

I’m very pleased to report we recently sold our first batch of hopper barges at new pricing levels. Our current backlog for hopper barge orders carries us through the first quarter of 2005. We are considering producing a limited number of barges for our Leasing Company. Discovery and pretrial proceedings continue in our barge litigation.

Our European Railcar business shipped approximately 330 units during the third quarter, half of what we shipped in the second quarter. The decrease was in large part due to a two-week shutdown of the production lines in our Romanian plant for maintenance purposes.

Our fourth quarter shipments should be close to the quantity we shipped in the second quarter. During the fourth quarter, we expect to break even. For the year, we expect our European Railcar business to make a small profit. The demand for railcars in Europe is very light and the market is highly competitive.

Until demand increases, our quarterly earnings will fluctuate from small losses to small profits. This has proven true during the last few quarters with the quarterly results generally tied to the size and the mix of our backlog. We expect the financial result of the first quarter of 2005 to be comparable to the third quarter of 2004, because of volume and mix issues.

Our North American Railcar businesses’ earnings were mostly affected by material-related issues during the third quarter. Earlier, I mentioned the affects of steel price increases. We also experienced across the board price increases in the basic materials we use to manufacture railcars. This is representative of inflationary increases most manufacturers are experiencing in their basic raw materials and supplies.

It seems like every vendor is trying to get on the bandwagon of increasing prices. Our sourcing personnel are challenged to contain miscellaneous price increases. In addition, we continue to have spot material shortage and a small amount of defective materials. The bottlenecks in the railcar supply chain are causing a significant portion of our inefficiencies.

We chart material delivery performance on a monthly basis. From March through July of this year, 50% of our material deliveries were not made according to suppliers’ promises. In August, we saw a slight improvement, with 60% of our materials delivered as promised. In September, the quality of deliveries improved to 70%. We are hopeful this trend will continue.

The demand for railcars in North America during the third quarter remained strong. Steve Menzies will provide information pertaining to industry order levels. We set a goal to increase our production by targeting tack-on type orders.

Our market share improved during the third quarter and we received a variety of orders that extended our production lines. With our current backlog, we should be able to minimize our line changeovers and other situations that complicate our production.

We were very successful in restarting a railcar manufacturing plant in Texas. We shipped the first car from the plant in May. At this time, we’re producing 50 units per week in this facility. We continue to believe there will be a long-term demand for railcars in North America, driven by replacement factors.

According to global researcher’s latest statistics, there are approximately 800,000 railcars in North American fleets over the age of 20. We expect the market demand to remain relatively strong for several years, rather than a short-term spike in demand.

The strength of the third quarter order level reinforces the fact that a full-fledged recovery is under way. We expect to ship between 14,000 and 15,000 railcars this year, which represents a 68 to 80% increase over shipments in 2003.

Here are a few key statistics pertaining to orders and shipments during the third quarter --

* Our backlog of orders for railcars in North America increased 13% to more than 19,800 units over the second quarter.

* Our shipments increased approximately 30% over the second quarter to approximately 4,150 units.

* Our quarterly revenue in North America Railcar Group increased over the second quarter by $70 million.

* 13% of our shipments were to customers of our Leasing Company.

As a comparison, during the third quarter of 2002 we shipped approximately 1,200 units. During the third quarter of 2003, we shipped 88% more, or 2,200 units. As I stated earlier, during the third quarter of 2004 we shipped 4,150 units.

On a forward-looking basis, we expect our shipments during the fourth quarter to be in the range of 4,000 to 4,500 units. We expect to continue to increase our production to a range between 5,000 and 5,500 units per quarter, between the first quarter and the middle of the next summer.

As you can see, we have a tremendous ability to increase our production levels. It is difficult for us to make an exact shipment predication because of the supply chain issues.

Since our Railcar Group is confronted with a variety of challenges, I recently visited with our Board and we felt it would be in Trinity’s best interest for me to become more directly involved in the railcar business. As a result, we eliminated the position of CEO of our Rail Group.

At this point, I’ll turn it over to Steve Menzies for his comments.

Good morning. As Tim indicated, demand for railcars in North America remained strong in the third quarter.

Continuing the solid recovery that we believe began earlier this year, orders for 2005 YTD have totaled over 58,000, including the 20,700-plus railcars ordered during the third quarter. This level of orders in the largest three consecutive quarters of industry railcar orders since 1998.

During the third quarter Trinity received over 6,400 railcar orders or approximately 31% of the North American industry orders. Given what we continue to see in current order inquiries from railroads, shippers, and third party leasing companies, we believe 2004 railcar orders reflect strong, broad-based demands and will support production plans through 2005.

Beyond the sheer volume of new railcar orders, we find the diversity among railcar types and customers to be reassuring that a broad-based railcar market recovery is underway. Orders received during the third quarter came from railroads, shippers, and third party leasing companies.

We have seen significant demand for many different car types such as covered hoppers, which are used to carry agricultural, mineral and cement products, from customers upgrading their railcar fleets to current design and capacities.

During the third quarter, Trinity received orders for over 2,500 covered hopper cars and YTD we have received over 50% of the orders placed for covered hoppers. We received orders for boxcars and coal cars as demand continues to remain high for these car types as well.

Demand for intermodel flat cars also remains strong, as TTX continues it’s significant capital investment program and intermodel volumes grow at double-digit rates. In addition, we received a large order for 1,500 intermodel platforms from a class one railroad, allowing us to improve our penetration in the intermodel market, capturing approximately 30% of third quarter intermodel orders. And we received additional orders for auto racks.

Tank Car orders are on pace to significantly surpass order levels from 2003. Increased tank car demand is reflective of general economic activity in the chemical sector and replacement of older, smaller tank cars.

As you can see from the diversity of car types ordered and variety of customers placing orders, the railcar market recovery appears to be well underway.

Trinity Industries Leasing Company continues to grow its railcar fleet, taking delivery of approximately 530 new railcars, representing 13% of the Trinity Rail’s third quarter shipments. Our operating lease fleet has grown over 19,700 railcars, from 17,700 railcars a year ago.

Our committed lease backlog, as of September 30, is approximately 2,300 railcars or 11.7% of Trinity Rails total production backlog, reflecting the positive response we are receiving from industrial shippers and railroads for our leasing services.

We believe TILC, Trinity Industries Leasing Company, is uniquely positioned to respond to the demand to replace older railcars as shippers seek to benefit from the trend towards larger, more efficient railcars. Our fleet utilization increased to 98.5% at the end of the third quarter, reflecting the strong overall demand for railcars.

For the growing demand for new railcars at higher prices and lease rates and high utilization of existing lease fleets, these rates and terms have strengthened.

I’ll now turn it over to Jim Ivy.

Thank you, Steve, and good morning, everyone.

I’ll make a few comments about our results and a few forward-looking statements about the situation with our backlog. As John mentioned, we have filed our Form 10-Q for the quarter this morning and you’ll find more details there.

Revenues for the third quarter of 2004 grew 56% over the third quarter of 2003, as sales volume increased again in every business segment. Earnings per diluted share was at break-even, compared to $0.02 for the same quarter last year.

As Tim mentioned, steel and material cost increases continue to be a major issue for us. On a consolidated basis, continuing steel cost increases, over costs anticipated at the beginning of the year, negatively impacted earnings by approximately $19.5 million in the third quarter.

We expect steel cost increases over costs anticipated at the beginning of the year to impact the fourth quarter by approximately $16 million, bringing the total impact on 2004 earnings to approximately $54 million.

I’ll discuss the impact on individual business segments as I discuss each segment.

First, our Rail Group --

* North American railcar revenues grew 101% during the third quarter of 2004, compared to the third quarter of 2003.

* Shipments of new railcars grew to 4,150 cars, compared to approximately 2,200 in the third quarter of last year and approximately 3,200 in the second quarter of 2004.

* Rail Group sales to the Leasing and Management Services Group were $34.3 million in the third quarter of 2004 with profits of $2.0 million, compared to sales in the third quarter of 2003 of $63.6 million with profits of $4.9 million. These intercompany sales and profits are eliminated in consolidation.

* European rail revenues were down in the third quarter due to a plant shutdown for maintenance, and component revenues were flat, year-over-year.

* Steel cost increases for the third quarter in the Rail Group totaled approximately $17 million, more than we expected at the beginning of the year, bringing the YTD impact to $24 million. The third quarter figure includes contract losses of $4.6 million related to railcars to be delivered in the fourth quarter of 2004 and during 2005.

* We expect steel cost increases during the fourth quarter to total $13 million more for the Rail Group than we anticipated at the beginning of the year.

Let me spend a few moments discussing our backlog and our escalation clauses.

Of the 19,800 railcars in our North American backlog, approximately 71% of the units and 66% of the revenues are subject to escalation clauses intended to pass on steel cost increases. Some escalation clauses are more effective than others, however, depending on several factors, including how steel mills and vendors pass on cost increases to us.

Throughout the year, we’ve been fine-tuning these escalation clauses to pass on to our customers as much of our materials cost increase as possible. At the beginning of the year, none of our contracts included escalation clauses. Each quarter, as we deliver railcars on older orders and add new orders with escalation clauses, our exposure to fixed sales price contracts diminishes.

Around 25% of the railcar deliveries expected in the fourth quarter are under contracts with escalation clauses. Most of these contracts were negotiated individually with various customers earlier in the year when steel pricing first began increasing rapidly.

Our Rail Group estimates that escalation clauses impacting billings in the fourth quarter will range from 100% effective to 50% effective in passing through material cost increases. On an overall basis, for the fourth quarter, effectiveness is expected to be around 66%.

We expect our effectiveness percentage to improve in each subsequent quarter. In the first quarter of 2005, for example, we expect effectiveness to be 75% and in the second quarter 84%. Again, changing prices of specific materials may impact these percentages up or down. We will report our escalation clause effectiveness on a quarterly basis.

The price increases we have experienced have not only created some contract clauses, but have eroded margins in our backlog. Our North American backlog, as of September 30, 2004, has an estimated sales value of approximately $1.3 billion. Of the $1.3 billion in revenues, $850 million is subject to escalation and $45 million [correction: $450 million - see Q&A for explanation] is not subject to escalation.

Because the older contracts without escalation will generally ship earlier, the gross profits margins to be realized are lower in the fourth quarter of 2004 and will increase with each succeeding quarter. By the end of June 2005, we will only have approximately 450 railcars - or approximately $55 million in revenue - yet to be delivered that are not subject to escalation.

The orders we received during the third quarter of 2004 have an estimated gross profit margin of approximately double that of the overall backlog. These estimates are based on current steel costs. They include improved pricing and are also subject to escalation.

The point of what I’ve been saying regarding margin in the backlog contracts with escalation clauses and the effectiveness of the escalation clauses is that these factors are all moving in the right direction.

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 profit followed revenues and was also impacted by efficiencies resulting from the increased volumes.

Our Inland Barge Group was adversely affected by steel cost increases of $2.5 million and barge litigation costs of $1.0 million. The total estimated impact of steel price increases that occurred during 2004 on barge profitability is approximately $20 million, of which $4.1 million was recorded in the fourth quarter of 2003.

Approximately $3.0 million of the expected steel cost increases will be recognized in the fourth quarter of 2004, resulting in lower margins on those contracts.

Revenues in the Leasing and Management Services Group in the third quarter of 2004 were up $6.6 million due to growth in the size of the lease fleet and improved utilization of the fleet, as Steve mentioned.

Because the sale and leaseback transactions already mentioned and discussed effects the comparability of our leasing operations at the operating profit line, we have added a comparative disclosure to our Form 10-Q, which presents a non-GAAP measure called EBITDAR that John mentioned.

EBITDAR can be calculated by adding back depreciation and railcar lease expense to operating profit. EBITDAR represents the result of leasing and management operations on a consistent basis for the railcars leased out to third parties, whether the cars are owned or off balance sheet.

On a consolidated basis, SG&A expenses have increased in total amount, but have declined to 7.7% of revenues from 10.8% of revenues in the third quarter of 2003.

Interest expense is up in connection with the $300 million bond offering in March and this quarter we had interest income of $8.1 million. Which was earned in prior periods in connection with a deposit with a steel supplier but was not recognized as income until collected, because the supplier was operating under Chapter 11 equivalent court protection.

Investment and working capital grew, primarily due to increasing sales and production volumes as well as increased steel and material costs.

While the inventory and accounts receivable both totals are up as you would expect when top line revenues are growing, the turnover rates are improved for accounts receivable and slightly deteriorated for inventory due in part to the inventory cost increases.

Steel and material cost availability will continue to be issues. Including the estimate of steel cost increases affecting the fourth quarter that I mentioned previously of $16 million, our expectation for fourth quarter EPS is a range of from a $0.10 loss to a $0.05 profit per share.

While we’re not providing guidance regarding any period in 2005, the first quarter, which is seasonally a down quarter for the Construction Products Group, is expected to have about $125 million of North American railcar revenues that are not subject to escalation. So exposure to cost increases, which cannot be passed through, continues into that quarter.

In the second quarter of 2005, North American railcar revenues not subject to escalation drops to an estimated $30 million.

That concludes my remarks and I’ll turn it back over to Neil for Q&A.

Thanks, Jim. Now our operator will prepare us for the Q&A session. Kevin?

(Caller Instructions) Wendy Caplan, Wachovia Securities.

Thank you, a couple questions. Your comments about the escalation clause effectiveness number that you’ve given us for the quarter, can you walk through for us some sense of how you get these numbers, how you came up with them?

Yes. Well Wendy, let me explain that. As I’ve said, the early escalation clauses were negotiated individually with each customer and we have come up with a variety of results in how the formulas work.

But they’re typically either based on some published index or some internally developed index and some may be based only on steel surcharges, which is the way the steel cost increases were originally passed through to us. Others may include base cost increases and still some others may include cost increases or changes beyond just the materials cost.

So there is a wide variety of how the costs are calculated or how the escalation price is calculated. But if you take the one where only if published steel surcharges from a specific steel mill are passed through, then other material costs that are eventually impacted by steel costs are not passed through.

So, for each dollar of total cost increase, we may only get a 50% increase in sales price and that’s what 50% effectiveness would mean. So, as I mentioned, in the fourth quarter the effectiveness ranges on our individual contracts from 100% to 50%, based on our current estimates. But overall, it’s 66% and improves every quarter thereafter.

And Jim, do weight this relative to a particular customer’s willingness to pay up for the cars and if so, how do you -- maybe you can give us some quantitative sense of how many of your customers are currently paying up or agreeing to these increases?

Well, so far through the third quarter we have not billed any contracts with escalation. So I mentioned we have 25% that we expect to bill, of our shipments in the fourth quarter, would be subject to escalation clause.

So we’ll have a much better perspective of how our customers are reacting to the escalation and how we’re billing and collecting it at the end of the fourth quarter, because that’s the first quarter that will really be a live issue.

Wendy, this is Tim. We have some customers that we started billing some escalation through and it’s been 100% pass-through and they’ve accepted it and we don’t seem to have a whole lot of kickback coming.

One of the things that happened to us early on is we may have negotiated a contract that just said “subject to escalation” and we received an order. And it’s a matter of then fine-tuning what do you mean by “subject to escalation” as we got into the production of the car.

Now we’re very specific. We had our attorneys and our salespeople working hand in hand on this to get very specific and the orders we received in the third quarter all were defined as to what type escalation it was. And on some orders we get firm prices from or suppliers that we think are rock solid and there’s really not a need for an escalation, unless there’s a surcharge on top of it. So that’s why there’s just a variety of them.

Wendy, while you’re there, let me correct something I said earlier. I think I said $45 million and I meant $450 million of our $1.3 million backlog is not subject to escalation.

Okay. Thank you, Jim. And Steve, could you comment on the overall rail plant utilization rates and can you give us some more color in terms of the top line, whether there was any pricing in this or whether it was all volume?

Well, I think when we look at the railcar market, we like to look at it by different car types. But I think, generally, industry backlogs across the board extend well into 2005 and into the latter part of 2005. So I think that bodes well for pricing power.

Just looking at some car types, some generic car types that we’ve been producing over the last 12 months, we’ve seen in car prices average increase to somewhere around 15% or so. So we have had some pricing traction from the third quarter of ‘03 to the third quarter of ‘04 contributing to the top line growth, in addition to the volumes.

Steve, can you give us some sense of whether your competitors in the industry are followed suit or whether they’ve gotten the jump on you in order to this pricing?

I think, since we all buy steel from pretty much the same places, that we’re all dealing with the same issues and I’ve seen, in competitive situations, that our competitors are looking for escalation clauses and others are looking to increase their prices. So, with these types of volumes, we’re certainly looking to see price increases in our business, as well as we’re seeing those price increases from competitors too.

And finally, Steve, the plant utilization rates, what you’re seeing overall?

What do you mean by plant utilization rates?

I mean, given the capacity that you have in the plant, at what level are you currently operating.

Okay. Our capacity right now, as we’ve stated in the last conference call, we expect when we get to peak production capacity, to be somewhere between 25,000 and 30,000 units a year. This year we’re producing 14,000 to 15,000 units. So it kind of shows where we think we will ultimately be.

But when you’re looking at our current facilities, we have some facilities that are idle and we have new construction that we’re in the process of bringing on. So it’s a little bit misleading for me to say we’re at 50% capacity. It’s what we would look at as our ultimate plan. As the supply industry can support our growth, we’ll continue to increase our production.

Okay and Tim, I have one last question. I think, in your comments, when you were talking about Barge, you mentioned something about strategically moving barges into the lease fleet. Can you talk about that?

Yes. We monitor the day rates on the river for barges and the day rates are what is the rate that the people pay when they’re using a barge on a daily basis and it’s been high for over 8 or 9 months and this is a good sign.

I think, with the rail rates having moved up and the other transportation expenses moving up, that the barge rates are moving up and there’s been some hesitation on the hopper barge buyers part to buy hopper barges. And we’re thinking it makes some strategic sense for you to put some hopper barges into our lease fleet.

And have you done that yet or it’s a plan?

We’re in the planning stages of doing this. John and some of them are working on financing and we’re presenting this as a budget plan to our Board for next year.

Okay. Thanks very much.

Stephen McBoyle, Lord Abbett.

Yes, thank you, maybe first just to follow-up on the capacity question of Wendy’s. I think in the past you, Tim, alluded to kind of phase one/phase two in terms of capacity build-out. Could you just refresh me in terms of where we are in terms of phase two?

Yes. Our phase two is restarting some of our idle facilities and as I mentioned, we have a facility that is in Texas that we started shipping cars in May and we’re currently shipping 50 cars a week out of that facility. So we’ve been very successful. We have another facility we’re doing the same thing with and we have a third facility that is targeted.

We still shave some other idle facilities in our portfolio and we’re looking at options there for car capabilities. It’s tied to the supply industry as well as the overall demand. As the demand moves up, we can bring on additional capacity.

And then the phase three was plans that we have for a third facility to come out of the ground in Mexico. We’ve already built the paint facility for that facility and we’re currently shipping cars out of that facility in Mexico and now it’s a matter of moving back downstream into the production process and building the infrastructure there for that. That was our phase three.

And just to that latter point, that’s not occurring currently, in terms of moving downstream, in Mexico?

No, no. We’re in the process, like I said. We are shipping painted cars out of that facility. We have constructions plans completed and we’re in the final stages of negotiating a construction contract in Mexico.

Okay, great, and then just on the idle facilities. Are there certain locations that are likely to come up online here in the next 12 months, or is that --?

Yes. We have a location that we will be meeting on, in the next week, that we’re targeting that we could shift some production around and add another line or two to an existing facility and then bring on a line or two at this other facility. So we have enormous amount of flexibility with the facilities that we have and in the communities.

I’m not talking about our northeastern facilities that were the heavily unionized facilities. We’ve taken those facilities out. These are more of the southeastern and southwestern part of the United States.

Okay and then, on the effectiveness ratio, just to clarify again. I’m trying to get a better impression as to whether the mechanism on the escalation clauses is, at the end of the day, based on a spot price or a lagging price.

And again, what I’m trying to get at is what is the likely scenario of underlying plate steel prices were to decline meaningfully, that there would be a readjustment in terms of the contracts that you’ve currently booked as loss contracts, on a GAAP basis, that may actually readjust?

On the contracts we have a loss reserve recorded on it. I wouldn’t expect that to occur. However, because all these escalation clauses are different, it is possible that we have some price declines and because the cost declines in the way that the price index effects the escalation price, the price could continue to go up for a while.

So, you can get some movement in each direction, depending on when the individual escalation clause becomes effective and when the material is purchased and how the vendors price the materials.

So just to clarify, there’s not a scenario where the underlying internal index perhaps that you’re using is based on a 3-month lagging underlying steel plate price? And so, if the steel price is reduced meaningfully, you actually benefit as you deliver those cars under those escalation clauses?

Yes. We are using either the current prices or future increase prices, if we’re aware of them. But in some cases, we’re projecting costs beyond the point that we actually know. Absent a better estimate of if those costs did go down, we would reap the benefit of it and it would generally improve the profitability of the particular contract as those units are delivered.

Okay and somewhere in the prepared remarks you made a comment that gross margins would be double that of current gross margins. I just wanted to ensure that I understood. That was related to orders in what period?

Orders received in the third quarter.

So orders received in the third quarter. The underlying gross margins are double that of current?

Yes, of the composite backlog margin.

Composite backlog margins. Okay. Thank you.

Manish Somaiya, JP Morgan.

Good morning, everyone - a couple of questions, first for Jim. The materials shortages in the second quarter cost you about $6.6 million. Was there any such impact in the third quarter?

No. We had probably a few spot shortages, but none that our people actually assigned inefficient cost to. So the $6.6 million that we disclosed in the second quarter 10-Q is still the number we have in the third quarter.

Okay and then just kind of going back to the impact of steel costs for the full year, I think a previous estimate was $37 million and I think I missed the full year number that you gave for ‘04.

Well, for 04, I said on a consolidated basis $54 million total.

$54 million, okay, thank you.

Which includes the fourth quarter impact,

Okay, fantastic. In terms of the fourth quarter guidance that you gave, a loss of $0.10 to a profit of 05, does it have any onetime related income or expenses that we should be aware of? Obviously in the third quarter we had $8.0 million of benefit in the other income line.

No. There are no onetime issues that are included in that guidance.

Okay and going to Tim for a second, just kind of going back to the comments you made about some of the changes in the Railcar Group, taking on the managerial responsibilities for the Rail Car Group. I mean, Tim, do you feel like you’re taking on too much, at this point?

No I don’t feel like that. I feel like it allows me to get kind of back to my roots. I know that business very well. I understand the people that are involved and we’ve been able to make several decisions in the last couple of weeks that were streamlined, quick type decisions that we could go ahead and go forward.

So, I think that we’re seeing some positive results. Our Board was highly supportive of this move and I think all the way around it’s an example of just kind of flattening our organization and letting the people in our Company do what they do best.

And finally, for industry deliveries, I think you guys talked about Company deliveries. Can you give us a sense for industry deliveries for ‘04 and ’05 for the North American railcar market?

Are you saying projected industry deliveries of what we think are projected?

Yes.

Steve, do you have that projected, what -- again, I think Global Insights have a projection.

Yes. First of all, industry shipments YTD are 32,500. We think the industry will produce another 10,000 or 11,000 cars in the fourth quarter on top of that. So in and around 45,000 units delivered in 2004 and Global Insights and some of our analysis would indicate the mid-50,000 range, mid-50’s for 2005.

And what was the prior peak, in terms of deliveries?

The prime peak of what?

Prior peak.

The prior peak.

The prior peak, yes. In delivery it must have been, like ‘98, somewhere around 78,000 or somewhere in there, I’m thinking.

‘98 and ‘99 each were around 75,000 units.

Okay, great. Thank you so much.

David Andrews, PIMCO.

Yes, thank you, good morning. My question was trying to better understand the guidance for fourth quarter and if heard you correctly, also, for first quarter ’05 relative to the expected improvement in the escalation effectiveness.

I would have thought, as the effectiveness begins to pick up in the fourth quarter, we might see some improvement. Yet we’re projecting a worse outcome in Q4 versus Q3 and if I heard you correctly that Q1 ‘05 would be close to break-even like Q3 ‘04 and yet the effectiveness is supposed to be going up pretty dramatically in the first quarter.

Can you kind of talk through what else is going on there, either in the other businesses, that are offsetting some of the improvement you’re expecting, or am I just misunderstanding entirely?

Well, the effectiveness only applies to the contracts that have escalation clauses. As I mentioned, in the first quarter of 2005 we still have $125 million in revenue that is not subject to escalation at all, so the effectiveness on that is zero. So we’re still exposed to price increases for the deliveries that we’re going to make during that quarter.

As I mentioned, of the backlog, the $1.3 billion in backlog, we’ve got $450 million in revenues that will be shipped mostly in the fourth quarter, first quarter in a declining rate thereafter, till we’re rid of it. But we still have that exposure that is not subject to escalation clauses.

Yes, this is Tim. And then the January/February/March quarter, the first quarter, is always the roughest quarter, as Jim said, in the seasonal businesses that we have, the construction type businesses and so it’s real hard for us to project.

One year we had a very dry first quarter and we performed very well. The market demand for our construction products remains very strong and very high. It’s just a matter of the crews being able to get out and perform the work.

Our barge business, as we talked about, has a hopper barge issue where we’ve had to raise the price of the hopper barges substantially and we just booked our first order on that, which gave us a tack-on. If we get some other customers that follow suit, then that should help us in that particular portion of the business.

And the same thing in our industrial businesses - once the winter months are intact, then our LP Gas propane tank business slows down a little bit during that time period. So our rail business and then also our rail business in Europe we have a little bit of a dip and then mix issue. So the first quarter, I think, tends to be a little bit right now on the downside.

But on the positive side, I think you’ll see our North American rail business beginning to gather steam and starting to change dramatically, during the first quarter and moving into the second quarter. And then the second quarter comes on and our construction businesses come back alive and we think our barge business will have established its current production plan at that time.

So, second to third quarters this next year should be good quarters.

Okay and that was sort of the genesis of my question and I take the point that you still have exposure to non-escalation contracts. But I thought, since you were getting a pretty strong increase in what is, contracts that do have exposure, that we might start to see some more improvement in the first quarter. But it sounds like the losses are just so large still on those exposed contracts that it still is a big drag on where you are (multiple speakers) --

Well, we have a large number of contracts that are fixed prices and the numbers that Jim talked about, they’re not at loss but they’re at very low margins or close to break-even and we just got to get those out of the pipeline. And those will be flushing out of the pipeline over the first and second quarter.

The good news is our salespeople and our business units, they all understand, our business leaders understand. In fact, our business leaders are the ones that are doing the pricing of the products and they’re keeping their eyes very close to the marketplace and talking with customers. And it’s just a matter of getting the pipeline of these fixed price orders flushed out.

I’m just trying to calibrate so we can have good expectations in terms of when we will actually see improvements in (multiple speakers) --

I think you’ll see that we’ll be a little bit sloppy in the fourth quarter to the first quarter and then things will start to straighten out much better in the second and third quarter, as we go through next year.

That’s helpful. Thank you very much.

Okay.

At this time I’d like to turn the program back over to our host for any closing comments.

Thanks, Kevin. This concludes today’s conference call.

Remember, a replay of this call will be available starting one hour after this call ends today, through Midnight, Wednesday, November the 10th. The access number is 402-220-1185. Also, this 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.

And once again, this does conclude today’s teleconference. You may disconnect your lines at this time. We thank you for your participation and have a great day. . 14