Trinity Industries Inc (TRN) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter 2004 Trinity Industries earnings results conference call. Currently, all participants are in a listen-only mode. At this time, I would like to turn the program over to Mr. Neil Shoop. Please go ahead, sir.

Good morning from Dallas, Texas, and welcome to the Trinity Industries 2004 year-end 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, Bill McQuarter, Transitioning VP and CFO, Charles Mitchell, 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 Thursday, March 10th. The replay number is 402-220-1124. I would also like to welcome our audio Web cast listeners today. Replay of this broadcast will also be available on our Website located at www.trin.net.

In a moment, you will hear from John Adams, Tim Wallace, Bill McQuarter, Steve Menzies and Jim Ivy. Following that, we will move to the q and 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 is John Adams.

Thank you, Neil. Good morning and thank you for joining us. As Jim Ivy will discuss our financial results in a moment, I will briefly describe the major changes in our balance sheet and our various debt obligations as of 12-31-04. Our discussion will focus primarily on 12-31-04 as compared to 9-30-04 in order to highlight recent changes and our progress during the last quarter. For a more thorough comparison of 12-31-04 numbers to 12-31-03 numbers, please refer to our 10-K, which will be filed within the next week.

You will recall that we were operating in a different rail environment in 2003 than we are today. Our cash position on 12-31 was higher than normal and an increase over 9-30. Many of our major customers made payments for railcars in late December, which was sooner than expected, for tax and corporate budgeting reasons. In addition, we had fundings under our railcar leasing warehouse facility that added to our corporate cash position.

Receivables were down approximately $50 million at September 30th, while inventory was up slightly.

The $135 million reduction from 12-31-03 in our property, plant and equipment is attributable to the leveraged lease financing we completed during the fourth quarter.

As you know, we have separate debt for our manufacturing businesses and for our leasing business. In Manufacturing/Parent, we have a $300 million, 6.5 percent note that matures in 2014. There were no borrowings under our $250 million bank revolving credit at year-end. The Leasing Company has $170 million in equipment trust certificates and a $300 million railcar leasing warehouse facility which continues to fund our Leasing Company. This warehouse has worked very nicely for us as it provides the financing for this important subsidiary. $43 million was outstanding on this facility at 12-31.

During the fourth quarter, we completed the funding of our third leveraged lease financing. This amounted to $32 million of the $212 million of leveraged leases we financed for the year.

Hopefully, this gives you a better understanding of our balance sheet and debt position. Now, Tim Wallace will give you his views of our business.

Thank you, John. Good morning, everyone. In my report this morning I’ll provide an update on our Railcar group, I’ve asked Bill McQuarter to provide an update on our construction barge and industrial businesses. Steve Menzies will provide a Railcar and Leasing update, followed by Jim Ivy’s financial overview.

Generally speaking, I’m pleased with our progress. During 2004, we had significant growth in our revenues and a few of our businesses experienced operating profit increases.

Steel costs continue to adversely impact the financial performance of our company during the fourth quarter. Recently, the news media has reported that the price of steel has started to decline. News articles such as these are usually referring to the price of sheet steel, the kind used in automobiles and appliances. A large portion of our products are made from steel plate and the prices that we are paying have not been declining. The price of scrap steel has stabilized recently and the surcharges are not nearly as erratic as they were last year at this time.

Our European Railcar business is continuing to operate in the trough of their market. The demand for railcars in Europe is very low and is a highly competitive marketplace. As a result, our backlog of orders for new railcars decreased to approximately 1270 units at the end of the year. Our quarterly shipments are fluctuating from a volume and product mix perspective. During the fourth quarter, we shipped approximately 560 units. This was a 70 percent increase over the third quarter shipments. Our fourth quarter revenues were approximately $55 million and we, basically, broke even. Our first quarter shipments will decrease to the 400 unit level and our revenues will drop back to approximately $34 million.

At this shipment level, our product mix becomes crucial. During the first and second quarters, we expect Europe to lose money. We’re hopeful that we will sell some railcars which will improve our chances of being profitable during the second half of the year. Until the demand increases and stabilizes, our quarterly earnings in Europe will fluctuate from a 4 to 6 cents per share loss to a small profit. We’re currently taking steps to decrease our costs in Europe with another round of downsizing and we’re also in the process of reviewing our strategic options for this business.

In our North American Railcar businesses, our earnings were, once again, mostly affected by material-related issues. The inefficiencies of the Railcar supply chain, combined with cost increases that we could not pass on to customers, had a major effect on our profitability. From March through July of this year, 50 percent of the material deliveries were not made according to our suppliers promises. In the fall we saw the delivery performance improve to 70 percent and, lately, it’s been hovering around 73 percent. This is a significant improvement since the summer, but we’re still plagued with spot shortages.

During the fourth quarter, our North American Railcar shipments increased 20 percent over the third quarter to approximately 5000 units and 70 percent over the fourth quarter of 2003. I’m very pleased with our shipment increases and the fact that we’re improving our shipment consistency.

During 2004, we spent a significant amount of resources to restart our production lines. We trained approximately 1200 new employees as we worked through a large number of material-related issues. At this point, our production lines are running at a fairly consistent pace. At the beginning of 2003, we were shipping around 35 units per day and by the end of the year, we were shipping over 85 units per day.

During 2005, we expect to ship between 5000 and 5500 units per quarter. Our Rail group’s revenue for the first quarter of 2005 should be slightly better than the fourth quarter of 2004 and we should make a small profit.

The demand for railcars in North America during the fourth quarter remained relatively strong. Steve Menzies will provide information pertaining to industry order levels.

From a sales point of view, we have recently seen some hesitancy on the part of our freight car customers to place orders for equipment. Our tank car customers are placing a more steady stream of orders. We continue to focus on selling railcars that extend our existing production lines without requiring change-over, rather than focusing on an overall industry market share percentage.

After our material issues stabilize, our line change-overs will become the key factors which affect our productivity. We will experience the majority of our line change-overs during the third and fourth quarters of this year. We plan to bring on additional production lines as specific products warrant the start-up expense.

At this point, I’ll turn it over to Bill McQuarter for his comments.

Thank you Tim and good morning everyone. I will be discussing our construction products, industrial products and inland barge groups. Our Construction products groups performed below expectations during the fourth quarter, primarily as a result of poor weather conditions in Texas. Historically, winter weather causes the fourth and first quarters to be down periods of the business. This year’s weather was unusually severe. During the fourth quarter, we experienced record rainfall in Texas resulting in a 24 percent decrease in the number of available workdays as compared with the same quarter of the previous year.

However, despite these challenges, the group reported an increased operating profit of approximately 8 percent on a year-over-year basis. This increase was primarily driven by the strong performance of our Highway Safety and Fittings businesses.

Our Concrete business continues to see raw material shortages and price increases, along with rising transportation costs. Fortunately, demand for concrete aggregates remains strong in the markets we serve and we are confident that the performance of this business will improve as spring approaches.

Our Highway Safety business is performing well. Revenue and margins improved on a year-over-year comparison basis. The improvement is due, in part, to an approximate 20 percent increase in the sales of our proprietary line of highway safety products, which includes in-terminals, crash cushions and cable protection systems. Continued strong demand for our standard products and prices that reflect current steel costs also contributed to this business’s sold performance.

Our Pipe Fittings business continues to experience a nice rebound and is realizing cost benefits of previous plant consolidations. We have a good backlog of orders in this business at respectful pricing levels. We returned to profitability in our Bridge Girder business during the fourth quarter and our current backlog now reflects the market in regard to steel costs.

While these businesses are currently performing well, we believe the passage of the new Federal highway bill will generate improved results.

Our Construction Product group remains a key part of our earnings diversification.

Turning our attention now to the Industrial Products group, we are pleased with our results for both the fourth quarter and the year-over-year basis. On a year-over-year basis, revenues improved by approximately 15 percent and operating profit improved by 82 percent. This business enjoys a mature marketplace and continues to benefit from cost saving improvements we implemented during late 2003 and early 2004. The backlog for this business is relatively short as most customers do not make long-term product purchases.

Our Inland Barge group finished the fourth quarter with the effects of steel pricing issues prevalent in the operating results. On the Tank Barge side of the business, we continue to enjoy a strong backlog with only a few open spots remaining for 2005 deliveries. Our Hopper Barge customers continue to need additional units, but the order levels have been low as the selling price of a barge has dramatically increased due to rising steel costs. All of the economic drivers remain strong for future demand of replacement hopper barges. The latest data for barge demand and river rates strongly support customer needs for new equipment at current pricing levels. We have idled one hopper barge production facility and our current backlog should carry us midway into the second quarter of 2005. We continue to give consideration to producing a limited number of barges for our Leasing Company.

As for barge litigation, discovery and pre-trial proceedings are continuing to move in the court system. Litigation expenses continue to erode the performance of this group. Jim Ivy will provide specific financial information during his update.

At this time, I’ll turn the presentation over to Steve Menzies, President of Trinity Industries Leasing Company.

Thank you, Bill. Good morning. Demand for railcars in North America remains strong in the fourth quarter, continuing the solid recovery that began earlier in 2004. More than 12,000 railcars were ordered industry-wide during the fourth quarter, bringing total orders for 2004 to approximately 72,000. This is the largest level of annual industry railcars since 1998.

During the fourth quarter, Trinity received more than 4600 railcar orders, or approximately 37 percent of all North American industry orders. Based upon current order inquiries, first quarter 2005 order activity and the tight supply of available railcars, we believe 2005 railcar orders will support our production plans into 2006.

In addition to the volume of new railcar orders, the diversity among car types and customers indicates a broad base railcar market recovery. Our fourth quarter orders included a variety of railcars, including covered hoppers used for grains, feed, cement, mill products and plastic resins, railcars for scrap metal and finished steel coils, auto racks, coal cars and tank cars.

All the orders Trinity received during the quarter were for car types currently in production. This is consistent with our strategy of pursuing new business that can be tacked on to current production runs, thus avoiding costly change-overs.

The industry-wide backlog at the end of the year was approximately 59,000 railcars. Backlog has remained basically stable during the past two quarters, reflecting continued solid order levels, increased industry production and improvement in the supply industry’s ability to meet this increased demand. Trinity’s railcar production backlog of 19,400 railcars is approximately 33 percent of the industry’s total backlog and is basically the same as our backlog at the end of the third quarter of 2004.

Trinity Industries Leasing Company continued to grow its railcar fleet taking delivery of approximately 750 new railcars during the fourth quarter. This represents about 15 percent of Trinity’s North American fourth quarter shipments. For the year 2004, we added 2600 new railcars to the leased fleet, approximately 17 percent of Trinity’s North American shipments. Our operating leased fleet has grown to more than 20,000 railcars, from 17,700 railcars a year ago.

Our committed leased backlog at the end of 2004 was approximately 3100 railcars, or 16 percent of Trinity’s North American production backlog reflecting the positive response we are receiving from industrial shippers and railroads for our leasing services.

We believe our Leasing business is well positioned to respond to a growing trend, that of replacing older railcars with larger, more efficient railcars.

Our fleet utilization increased to 99 percent at the end of 2004, compared to 98.1 percent at the end of 2003, reflecting the strong overall demand for railcars.

Our average remaining lease term is almost six years, consistent with industry-wide high utilization of railcar fleets and a strong level of new car building. Average new car lease rates and renewal lease rates continue to rise.

I’ll now turn it over to Jim Ivy.

Thanks, Steve, and good morning, everyone. My comments will relate primarily to the fourth quarter of 2004. We expect to file our Form 10-K within the next week and you’ll find more details there summarizing the full year.

During my remarks I will be providing guidance regarding Rail group operating profit margins for 2005 by quarter and earnings per share guidance for the first quarter and the full year.

Revenues for the fourth quarter of 2004 grew 51 percent over the last quarter of 2003 as sales volume increased in every group except Leasing. The Leasing group’s revenues, taken at face value, are somewhat misleading, however. Last year’s fourth quarter revenues for this group were positively impacted by an $8.5 million sale of railcars from the leased fleet which did not recur this year.

An 8 cent per share loss was recorded in the fourth quarter of 2004, compared to a 4 cent per cent loss for the same quarter last year. This is in line with the guidance we gave during our last conference call, which was that fourth quarter results would range from a loss of 10 cents per share to a profit of 5 cents per share. The impact of steel and material cost increases that occurred, primarily, earlier in the year was approximately $17 million in the fourth quarter. We estimate the total impact of steel and material cost increases on our cost of sales for 2004 to be approximately $146 million. Of that amount, we were able to recover approximately $89 million from customers, leaving a net decline in operating profit of approximately $57 million.

In our Rail group, North American Railcar revenues grew 69 percent during the fourth quarter of 2004, compared to the fourth quarter of 2003. North American shipments of new railcars grew to approximately 5000 cars, compared to 2900 in the fourth quarter of last year and approximately 4150 in the third quarter of 2004.

Rail group sales to the Leasing and Management Services group were $54.7 million in the fourth quarter of 2004 with profits of $5.3 million, compared to sales in the fourth quarter of 2003 of $64.6 million with profits of $3.3 million. These inter-company sales and profits are eliminated in consolidation.

Our European rail revenues were up 55 percent in the fourth quarter of 2004, compared to the fourth quarter of 2003. The fourth quarter revenues were more than double those of the third quarter, not unexpected since our European plant had scheduled to shut down for maintenance in August.

Component revenues were flat year-over-year at approximately $28.5 million for the quarter. The impact of steel cost increases for the fourth quarter in the Rail group was approximately $15 million, bringing the year-to-date impact on the Rail group to approximately $40 million. About 23 percent of the railcar deliveries in the fourth quarter were under contracts with escalation clauses. On an overall basis for the fourth quarter, escalation clause effectiveness was around 70 percent, a few points better than we had anticipated.

As I mentioned in more detail during our conference call last quarter, the effectiveness of our escalation clauses, in respect to passing on cost increases, is expected to improve in 2005. During the course of 2004, we continually fine-tuned our escalation clauses to enhance protection against steel price increases.

I’m going to give you some statistics regarding our backlog at December 31, 2004, to give you some perspective on the impact of steel and material cost increases and our exposure to future cost increases.

Our North American backlog, as of December 31, 2004, consists of approximately of 19,400 railcars with an estimated sales value of approximately $1.3 billion. All but about 8 percent of that amount is scheduled for delivery during 2005. Of the $1.3 billion in backlog revenues, we believe $1.2 billion, or 94 percent, is not exposed to additional significant margin deterioration related to future steel and material cost increases. This is because approximately 77 percent of the backlog revenue dollars is subject to contracts with escalation clauses and an estimated 17 percent is either related to contracts with locked in steel costs or the steel necessary for those contracts has already been purchased and delivered.

Although we don’t expect additional significant margin deterioration in our backlog as it is delivered in 2005, overall margins will still be impacted as a result of the steel and material cost increases that occurred in 2004.

I would also point out that we have obligations to deliver 1000 unspecified car types in 2006 and 2007 that are not reflected in our backlog. These cars are under terms that could cause the price escalation to be out of sync with the changes in cost and could result in margin growth or deterioration.

Based on anticipated steel and material costs for 2005, we presently expect operating margins for the Rail group to improve each quarter during 2005 from around one percent in the first quarter to 3.5 to 4 percent in the second quarter, 4.5 to 5 percent in the third quarter and 5.5 to 6 percent in the fourth quarter. These projections take into account the losses early in the year in Europe that Tim mentioned. This improvement in margins will occur as we continue to reduce the unprotected fixed-price contracts in our backlog and deliver against contracts with better pricing.

Included in our assumptions for 2005 are an improving rail market in Europe later in the year, achieving production efficiencies in North America, and no significant supply problems in steel or components.

In our Construction Products group, this quarter revenues were up year-over-year primarily due to volume and pricing in our Fittings and Highway Safety business with recent acquisitions in the Concrete business. Operating profit and margins declined due to 24 percent fewer good weather days in our market area for Concrete and Aggregates in the fourth quarter of 2004, compared to the same quarter of 2003.

As expected, going into the quarter, the Inland Barge group’s fourth quarter was adversely affected by approximately $2.9 million in steel cost increases that had occurred earlier in the year. The total estimated impact of steel price increases on our 2004 Inland Barge group earnings is approximately $15 million. Barge litigation expenses were $1 million in the fourth quarter and $5.1 million for the year. Substantially, all of the Barge backlog at December 31, 2004, is covered by escalation clauses or locked in steel costs so there is little exposure in the Barge group to negative P&L effects of future steel cost increases associated with the backlog.

On a consolidated basis, SG&A expenses have declined to 7.2 percent of revenues from 9.5 percent of revenues in the fourth quarter of 2003. Interest expense is up in connection with the $300 million bond offering in March of 2004. Our investment and working capital grew primarily due to increasing sales and production volumes, as well as increased steel and material costs.

Earnings per share for the first quarter of 2005, and the first quarter is generally a down quarter for the Construction Products group due to weather, is expected to be in a range of a 10 cent loss to a 5 cent profit or, in other words, a similar quarter to the fourth quarter of 2004.

Our expectation for the year of 2005 is an earnings per share of between 85 cents and $1.05 per share. Included in our assumptions, on a consolidated basis for 2005, are the improving rail market in Europe later in the year, achieving production efficiencies in North America, no significant supply problems in steel or it’s components, deferral of profit of about $26 million on sales from the Rail group to the Leasing and Management Services group and improving orders in our Barge business and no unanticipated adverse resolution of legal matters.

That concludes my remarks and now I’ll turn it back over to Neil to begin the question and answer session.

Thanks, Jim. Now our operator will prepare us for the q and a session. Josh?

Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press *1 on your touch-tone phone. If you need operator assistance, please press the # key at any time. Again, to register your line for a question, please press *1 on your telephone. We’ll go first to the line of Alex Blanton with Ingalls and Snyder. Go ahead, please.

A question on the order rate, did you say that the year was 72,000 for the industry, but the fourth quarter was 12,000?

Yes.

Could you comment on the decline in the quarterly rate because that would indicate that you were down from an average of 20,000 per quarter for the first three quarters to 12,000 in the fourth quarter?

I think that fourth quarter is normally a slower quarter in our business. A lot of our customers are doing their budgeting during that fourth quarter. They are looking out with their Boards and internally within their Company of what their plans are for the next year. The fourth quarter, historically, is a slower quarter than the others, but your calculation is correct as far as - - it’s down from the average.

You’re about two months into this quarter, is there an indication that the order rate has improved sequentially from the fourth quarter?

No. This quarter, as I said in my comments, we’re seeing a little bit of hesitancy on the freight car purchaser because the freight car backlog has been so far out. The tank car purchasers are buying at a fairly steady stream. This can change because the freight car customers are usually the large quantity buyers that can come out with some significant orders. When you have a backlog as large as it is in this industry that stretches out with most production lines to the fourth quarter or into 2006, there’s not a real sense of urgency on the freight car purchaser of saying “I need to get out there and place orders for cars in the first quarter of 2006”. As we go through the year, I think you’ll see the order level continue to increase. The first quarter won’t be as robust as the first quarter was last year.

The freight car includes intermodal and what else?

We call the freight car everything that’s dry and we look at tank cars as everything that is transported that is a liquid-type commodity.

Freight includes coal and wheat?

Yes.

Great. Second question is, on the backlog, you have 19,000, out of the industry, 59,000, could you break down the rest of the backlog by your competitors, the major competitors?

That information is not available in the industry. That’s not public information.

Okay. Who would the main competitors be, could you remind us?

In various car types, we have various competitors. There are five other railcar manufacturers. There is Johnstown America, or Freight Car America they’re called now. They specialize a lot in coal cars. ARI, which specializes in covered hoppers and various tank cars. Then, you have Greenbrier that specializes in intermodal and boxcars, and you have Union Tank Car, specializing in tank cars. National Steel Car, which is the Canadian manufacturer, that specializes in a variety of freight cars.

Okay. Thank you very much, Tim.

Your next question comes from the line of Wendy Caplan with Wachovia Securities. Go ahead, please.

Jim, you talked about your expectation for rail operating margin on a sequential basis in 2005. Obviously, these are colored, as you mentioned, by the European losses. If we were to X out Europe as a part of this, can you give us some sense of where those margins would be on just a North American basis? Are they up 50 basis points, 100, how should we think about that?

Wendy, I don’t have that broken down by quarter, or don’t have that readily available, I do have it broken down by quarter, but they would, obviously, be a little bit higher. Tim mentioned the quarters ranging from a 4 to 6 cent loss per share in Europe. That relates to each penny is somewhere around $700,000 before tax, so you could adjust it that way. For the year, the numbers are closer to a break even on the earnings per share of the company.

Break even for Europe, just to clarify?

Yes.

Jim, the margin in the backlog, I’m not sure, is that significantly better than what we saw in the quarter overall?

I understand, when you say you saw in the quarter overall, what time period are you talking about?

I’m talking about the fourth quarter that you reported? Is the margin that you reported in the fourth quarter, would that margin for Rail be lower - - Rail, specifically, I’m talking about - - would that be lower than the average margin in the backlog?

Yes. The margin in the backlog is higher. How it rolls out is into those operating profit margins that I gave you by quarter.

Okay. Last quarter you were very diligent in terms of giving us, by quarter, the escalation clause effectiveness that you referred to in your comments and said that Q4, 2004 was at 70 versus 66, which was the expectation. How should we be thinking about the next two quarters in terms of the escalation clause effectiveness?

I think what you saw, I predicted something like 66 percent effectiveness for fourth quarter deliveries. As I mentioned, it turned out to be 70 percent. I think you would see that trend if you’re only looking at effectiveness. The focus, now, as we get closer to when those cars are delivered and we can lock in the steel cost, really, my focus is more on how much of the total backlog is covered in one way or another, not just by the escalation clauses. That’s what I mentioned right now in the total backlog is that we feel that it’s like 94 percent that’s covered compared to 77 percent that has escalation clauses.

Okay. Thanks very much. I appreciate it.

Our next question comes from Sean McDaniel with SNM Research. Please go ahead.

Good morning. I have a handful of questions. First, do you have a fourth quarter depreciation amortization number (technical difficulty) –

Sean, you are cutting out a little bit.

Is that better?

Yes.

Do you have a fourth quarter D&A number at this point? And also, cash interest paid?

What was the question besides depreciation?

The interest paid, what your cash interest paid was for the fourth quarter?

Depreciation was about $21 million for the quarter. Interest expense was about $10.7 million.

Great. Next question, percentage of Rail units with escalators, you gave it in dollar terms. Jim, do you have that in units? I think it was 71 percent exiting the third quarter.

77 percent have escalation clauses. It’s very close to the same as the units.

Okay. Does the guidance that you provided a few minutes ago in your comments, Jim, include steel? I know in your fourth quarter guidance for the negative 10 to plus 5 included steel. Does the first quarter in full-year 2005 guidance include steel?

Yes.

Finally, maybe if you could just take a minute here, I don’t know if the easiest way to do this is for me to just ask you to reconcile the $17 million from the fourth quarter, the steel inflation. I know, coming out of last quarter, Jim, you had said that you were expecting the pre-tax impact on full-year 2004 earnings from steel to be about $54 million and it looks like the release said you put out $57 million of impact, which is a $3 million difference overage from steel inflation in the fourth quarter. On the third quarter call you said fourth quarter steel impact in the fourth quarter was going to be $16 million and it was actually $17 million. It looks like there is about a $3 million increase, or above expectation steel inflation in Q4 and, yet, the reported difference is only $1 million.

It’s tough for us to understand, the analyst community to understand, when there’s that disparity there and it looks like in the press release you say that the increases in prices we pay for steel and other basic materials. I don’t know if there’s something else you’re including. Is there something else that accounts for the $2 million or can you help us there?

If you want to call me back, indirectly, I’ll make sure you’re not getting tangled up in the numbers. You have the right number, there’s about $3 million change in what our expectations were for the fourth quarter. That was, basically, between the Barge and Rail group, most of it in the Rail group. I went through those numbers. No, there’s no difference between - - when I say the steel, I’m talking about steel and material cost increases.

Okay.

Let me just add that the $3 million increase, approximately, for the quarter is the very smallest increase we’ve had all year long from one quarter to the next. I take that as a good sign that steel costs are leveling out and we have a much better way to predict the impact of it going forward. On top of that, you have the escalation clauses.

What percentage of your railcar deliveries in Q4 had steel escalators in them?

23 percent.

23 you said?

Yes.

So it’s about the same percentage of the deliveries in the third quarter as well then, correct?

No, there were no deliveries in the third quarter with escalation.

I see.

This is our first quarter to really get into shipping under contracts with escalation.

Okay. Great. I’ll hop back into the queue.

Your next question comes from Stephen McBoyle with Lord Abbott.

First, I just want to ensure that I heard clearly the operating margin guidance by quarter for the Rail group, could you just go through that again?

Sure. I said that the expectations for the first quarter were around one percent, moving to a range of 3.5 to 4 percent in the second quarter, a range of 4.5 to 5 percent in the third quarter and a range of 5.5 to 6 percent in the fourth quarter.

Great. Can we just back up, obviously, in the quarter itself there wasn’t a material surprise on the steel cost issue and, obviously, you over-executed in terms of passing on a higher percentage in terms of the escalation clause. The other component, obviously, is the base load pricing that you’re seeing and I’m just wondering if you could talk to what level of pricing is in the backlog today kind of relative to what you have seen in the prior year, maybe prior to past cycles where you’re obviously seeing higher order rates, 97, 98? To what extent - - I don’t know how you would quantify this - - but to what extent, as we look beyond 2005, obviously the 2005 guidance is very helpful - - but as you look even beyond that into 2006, what the “normalized” margin level ought to be just given the dynamics in the marketplace today and, obviously, the base pricing that you’re seeing today?

That’s a pretty involved question. This is Tim Wallace. I’ll try to address a portion of it. I want to ask you a question first. When you said the base prices, when you said base load prices or the base prices, we use the term base load there, kind of the first type orders that we use to start up a line, and I don’t think you’re referring to that, are you?

Yes -- no. Absolutely, that’s correct, just general overall pricing within backlog.

I think the way we look at it is if you go back to the last peak in the production, it was 1998, 1999 time period when the industry peaked in production, and you look at the number of years from that peak until the trough, and the trough of the market was somewhere in the early 80’s, so you had a large number of years, 15, 16 years, that you had for price recovery to improve as fast as it could to get up to the margin levels that the industry experienced in the last peak. The trough that we experienced, this market bottomed out in the 2002 time period, I think it was the summer of 2002 about when it hit it’s bottom, and to have the expectation by now that we could already be back up to peak pricing is a little bit unrealistic with, not only the timing, but the impact that steel has had.

The key issue that we are monitoring on each car type is are the prices holding firm and can we increase a little bit each time the backlog grows or the order level is a little stronger and be able to pass through the full amount of the steel cost. We’re looking at this as stages. The first stage was that we did get price to hold firm and the second stage was we did get some price increasing movement to get steel costs absorbed. The next question is, is the demand going to be strong enough that it would support additional margin or price increases on top of that.

Right now, what the industry is dealing with is escalation. Last year, when we initially talked about escalation, we talked about our escalation and that it was a challenge for us to figure out something to escalate from. The industry has used a number of different indexes and we found that some indexes lag other indexes and that’s been a challenge. I think, right now, the customers for railcars are receiving some escalation cost that were above what their expectations were and some of them are hesitating to say, “Well, we’ll try to see what has leveled out”. When they first look at the marketplace, they’re looking at it and saying, “Well, it looks like steel cost is going to come down, so maybe we ought to hesitate”. That’s why it’s important for people to realize that steel plate, which is used in railcars, there’s been a consolidation of that industry and the pricing of steel plate has not decreased. The cost that the railcar manufacturers have has leveled out, or may increase just a little bit in that particular area. We have to end up having some movement on pricing to expand the margin as we go forward.

The key issue now is escalation and will escalation hold in the marketplace. We’re holding firm on our long-term bids for escalation. Some of the industry is not holding firm. They’re willing to take risks and gamble that in the third and fourth quarter and into 2006 that steel pricing will stay flat or it will go down. As you can see, from our financial statements, we got burned pretty severely and so we’re holding our space that we have at firm prices with escalation clauses in there. We’re now at a point where we’re identifying the items that we think could escalate and the items that won’t, and we’ve got a pretty good escalation formula. We’re monitoring this very close to see if the rest of the industry will hold firm on the escalation. Once that occurs, then you can get some more price moving, moving forward. You asked me a simple question, but it’s a very long and involved answer.

I appreciate that. The one thing that I do find interesting, though, is just the comments with regard to some of your competitors taking on additional risks, that being, obviously, pricing business without escalation clauses included. Certainly, at this point in the cycle, you wouldn’t think you would see that dynamic. When did that actually begin, just from a price competitiveness?

Several of the customers that have been out purchasing railcars in the last two months, the first part of this year, have come out with some statements and said that they’re not going to buy railcars with an escalation because they’ve seen the size of the escalation occur. When you have steel that increased 100 percent over an eight or nine month period like this, and a large portion of a railcar is steel, it becomes a pretty significant figure. When you’re marketing and selling, you have to make that decision, are you going to hold firm to what you’re doing.

Our position, thus far, is we’re not going to take that risk. Others have taken the risk and we’ve lost some business this quarter as a result of it. We still feel that we’ve got a backlog, we have a little space available on some of our production lines in the fourth quarter and we’re going to hold firm on that because we can’t get the steel mills right now to give us a firm price and you don’t know what scrap surcharges are going to do. When you read the papers that talk about iron ore going up as aggressively as it has in the last 30 days, one may think that steel pricing could move up.

Thank you. Could you just generally talk to any capacity additions in the industry of late on the part of your competitors?

I think the only capacity increase that I can think of is Freight Car America announced that they have made a deal with Norfolk Southern to take over one of their facilities and build some freight cars in that. That was in Roanoke. Union Tank Car announced a long-term project of increasing their capacity to build tank cars in a big facility that they were putting in Louisiana.

Great. Thank you very much.

Your next question comes from Adam Salimer (ph) with BB&T Capital Markets. Please go ahead.

Good morning. Most of my questions have been answered. The remaining one I have has to do with the “All Other” portion of your revenues. That line item jumped pretty significantly year-over-year in Q4. Can you just give us a sense of why that happened and which components of that item were responsible for that increase?

Some of those sales are inter-company type sales. They are separated into captive insurance company, a captive freight company and so the revenues there are, obviously, driven by the volumes of the other business. We also had a re-start-up of the Wintar (ph) business, which is included in that grouping. Those are the primary reasons for the increases.

I guess this is a follow-up, what accounted for the operating loss in the segment?

In the “All Other” group?

Yes, sir.

The loss is primarily due to the non-operating plants or facilities. We have about 13 plants that are, primarily, permanently closed. You’ve noticed that from quarter-to-quarter we sell off some real estate so we’re working our way out of that, but the losses are primarily related to maintaining those facilities.

Okay. That’s all I have. Thanks a lot.

Your next question will be a follow-up from Wendy Caplan with Wachovia Securities.

Tim, can we remember back when you bought Thrall and your thoughts about broadening your product offerings and consolidating the industry in some fashion. As we stand here at a point when the next peak is closer than it was when you bought Thrall, can you talk about the profitability that you’ve been able to realize and how you’re thinking about the contribution from Thrall today, that would be helpful?

Thrall brought quite a bit of expertise to our company in a number of different areas with the people that we acquired in addition to the facilities. Right now, we have a facility in Georgia that was a Thrall facility that we’re shipping a large number - - we have three production lines running in it and it’s running up at full-speed. It’s one of our larger freight car facilities. I was down there three weeks ago and the plant is performing very well. We’re getting good customer acceptance on our products. We have somewhere in the 1000 to 1200 employee range, somewhere in that number, I can’t remember. We’ve probably hired 700 or 800 of them in the last year and a half. That facility was idle.

One of the things that we did do in our merger with Thrall is we took out some capacity that Thrall has and then we kind of redirected some of that capacity that they had to our operations in Mexico. We’ve gotten quite a bit of benefit from that.

We also have some nice product lines. We have our Auto-Rack line running that was Thrall’s premiere product and we just started our Auto-Rack line up last summer and it has now been running about six months. We’re getting good efficiencies off of that. That car has a nice margin and has a nice market position. We’ll wait and see what happens in the Automotive business. There are people who are still kicking the tires in that particular area.

We have another facility of Thralls that is in Georgia that would be another facility that we’ll bring on once we get a little bit stronger feeling that the demand is there. I toured that same facility about three weeks ago and there’s a readily available work force there. We can increase our production in that facility.

All in all, I think the Thrall merger with Trinity has been a good strategic move. It has not provided yet the anticipated payback that we expected. Primarily, a lot of that is due to what happened in the steel cost increase that we’ve had on our various products as well as trying to growing our businesses as a rapid a pace as we have with the problems that are associated with the supply industry. Financially, it hasn’t been a barn burner for us, but from a strategic and human resource and facilities point of view, it has fit in very well with our company.

Thank you. That was helpful.

Next, we’ll take a follow-up from Sean McDaniel with SNM Research. Please go ahead.

I just want to clarify the lease fleet. Did I hear earlier that you had sold part of the lease fleet in the fourth quarter? Could you just clarify or give us a number?

No. What you heard was in the prior year in the fourth quarter we had sale of cars from the lease fleet. That caused the operating revenues for the Leasing group to look like they were greater in the prior year fourth quarter than in this fourth quarter when, actually, from the pure Leasing and Management Services revenues we had an increase year-over-year of about $4.5 million.

Okay. There were no sales from Leasing in the fourth quarter?

Not in the fourth quarter.

Okay. Great. Thank you all.

The next question is a follow-up from Stephen McBoyle with Lord Abbott. Please go ahead.

Perhaps you can help me with this. Did you say that your delivery expectations are 5 to 5500 per quarter next year each quarter?

This year, 2005.

So that would infer, obviously, 20,000 to 22,000 cars and, I think, the industry is 52,000 cars expected delivery. Is that appropriate?

I don’t know what the industry expectation is for delivery right off the top of my head. There are several people - - if you look at the global insights, I think they’re more bullish in thinking that it’s going to be somewhere in the 55,000 to 60,000 range.

In terms of deliveries?

Yes.

Okay. Let me ask the question this way, I guess what I was trying to get to was that, at least in my math, would have inferred a 40 percent share of that which will be delivered in 2005, yet in the fourth quarter your percentage of orders received relative to the industry would represent a lower percent of share. I was just trying to get an appreciation as to do you anticipate gaining shares through 2005, and I guess I’ll ask the question that way?

As I said earlier, we don’t - - for ego purposes, you always look at market share and you see where you are and all of that. For financial purposes and strategic planning in our Company, we look at our production lines and we’re really interested, as we’ve been increasing our production at the level that we’re at, and we will go to another phase of increasing our production. We’re just finishing our second phase of internal expansion now with the facilities that we have. We have a new facility that we’re breaking ground on in Mexico that we’ll bring on during 2006 and we’ll load that facility up with work. Once we reach that facility and, maybe, another couple of facilities that we have here in the States, we’ll be at where our capacity is. Once we get our workforce up and trained and we have all of our lines running, then we’ll really focus on our overall market share.

It’s a discipline timing of when does it make sense to focus on market share. There are a couple of car types that are out there right now that were purchased last year that we don’t have production lines on, so we really didn’t even really bid on. In those markets, we had zero market share. We’re interested in keeping our lines loaded and getting this workforce trained and then not having a lot of change-overs. As I said earlier, change-overs are with a new workforce until they get into the competitive routine of the current production they’re running and they become very costly.

Okay. Last question, with regards to the 2005 earnings guidance, can you just break out your - - obviously, you did a nice job on the Rail group expectations for the year - - are you in a position to break out the other segments?

No. I think one of the reasons that we’ve got as broad a range as you have on that is that we still have a lot of businesses that don’t have backlogs, that don’t normally have backlogs like our Highway Safety business and our Concrete and Aggregate. They have backlogs, I don’t want to say they don’t have backlogs, but they don’t have backlogs that extend through the whole year. Some of them are weather sensitive in that particular area. We have to have a range now that we thought would be helpful and it’s a broad range. In our next conference call, we’ll try to fine tune that with the order levels that we’ve received between now and then. It’s very hard to give specifics on our businesses right now for the year.

Maybe, then just qualitatively, what are the meaningful assumptions that drive the 20 cent differential from high to low?

You’ve got the European situation that we’re confronted with, you’ve got the situation of the Barge business getting its orders. Right now, the Barge business, as Bill had said, its got one of our lines running in tank barges fairly strong, our Hopper Barge line isn’t as strong, but we’re seeing good strong signs out there on the river that should help it, and that will be a big variable in the situation. You also have problems with the supply industry that can affect the Railcar business. You also have this point that we talked about earlier, we have some fourth quarter railcar slots that we’re going to be selling and its what kind of selling price that we will get on those spots. Will they be high-priced or medium-priced or lower-priced and we’ll know that as we go through the year. Then, whether there are other types of impacts that could happen in scrap or steel or something like that, that comes in unexpected that, in some of our businesses, we can’t pass through. Then, you’ve got weather that’s related in the fourth quarter of the next year, as well as this year, in our Construction businesses.

A number of moving parts. Thank you very much.

This is Neil Shoop. We’re going to have to conclude.

We’ll take one more question.

The next question will be a follow-up from Wendy Caplan with Wachovia Securities. Please go ahead.

I’ll be quick. I just have three quick questions. One, you mentioned the weather, can you give those of us who don’t spend a lot of time down there, some indication as to how you would describe Q1? Second, how fast does the business pickup once the Federal highway bill is signed? Third, just to confirm, Steve, I think you spoke to covered hoppers, auto-racks, coal cars, tank cars and coil cars, would those be the five car types we’d be looking to pick up in terms of orders?

Bill, why don’t you handle the first two questions that she asked.

Sure. Wendy, with regard to weather, we typically look at the first quarter to be similar to a normalized fourth quarter. As we stated earlier, the fourth quarter of 2004 was abnormally wet. In fact, in Texas we had 11 inches of rain where we would normally have 5 inches of rain. We budget around a first quarter similar to a normalized fourth quarter.

With regard to the highway bill - -

How’s it doing now? How have we been doing?

Current, January and February have been wet, wetter than we anticipate, but the Construction business is primarily based on the month of March in the first quarter. The month of March is kind of the breakout month. We’re just a few days into the month of March so I think it’s a little early to make a guess on March.

With regard to the highway bill, I think once the highway bill is passed we’re probably looking at late 2006 effects and really nice 2007 effects. In the Highway Safety business, our products tend to be the last products that go onto the job, so it’s a year to two out. But that highway bill is a nice six-year bill so it carries that business for quite some time.

This is Tim. In our Highway Safety business right now, we’re continuing to get good margins without a highway bill.

Yes. As I mentioned earlier, on the Highway Safety business we’ve really focused on our proprietary line of products and we’ve had nice growth in the proprietary line of products. Those products tend to have a nice margin.

Just to be reminded, covered hoppers is a broad category. There are a number of different types of covered hopper cars, but, yes, in addition to covered hoppers, cars for the steel and metals industry, auto-racks, coal cars and tank cars, we’re also in current production in intermodal equipment as well as box cars, too. Generally, those are the orders that we’re looking to obtain and tack on to our current production.

Thank you.

Thank you, operator. This concludes today’s conference call. Remember, a replay of this call will be available starting one hour after the call ends today through midnight Thursday, March 10th. The access number, again, is 402-220-1124. 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.