Trinity Industries Inc (TRN) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's teleconference. Currently all sites are on the conference line in a listen-only mode. Please note that this call may be recorded. Right now, I'd like to turn the call over to Mr. James Perry, Vice President and Treasurer, go-ahead sir.

Thank you Cameron and good morning from Dallas Texas and welcome to Trinity Industries second quarter 2006 results conference call. I'm James Perry, Vice President and Treasurer for Trinity, thank you for being with us today. In addition to me, you'll hear today from Tim Wallace, Chairman, President and CEO, Steve Menzies Senior Vice President and Group President of the Rail Group and Bill McWhirter, Senior Vice President and CFO. Following that, we'll move to the Q & A session.

A replay of this conference call will be available starting one hour after the conference call ends today, through midnight on Thursday August 10th. The replay number is 402-220-0117. I would also like to welcome to our call, the audio webcast listeners today. Replay of this broadcast will also be available on our website located at www.trin.net.

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 estimates, expectations, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking.

Participants are directed to Trinity's Form 10K and other SEC filings, for a description of certain of the business issues and risks, the change in any of which, could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

During the second quarter, the Company issued $450 million of convertible subordinated notes with a coupon of 3.875%. The notes have a maturity of 2036 and have a no call provision until 2018. The conversion price was $52.23 and the Treasury side method of accounting is being used, so there is no share dilution until the Company's stock price exceeds that price.

We've used a portion of this cash to re-purchase on the open market, $98.5 million of our 6.5% senior notes and $700,000 of our 7.755% equipment trust certificates. These re-purchased debt instruments have been retired. The remainder of the proceeds will be used for general corporate purposes, including expansion of our rail car leasing business.

During the second quarter, we also issued $355 million of secured rail car equipment notes through Trinity Rail Leasing V, LP. These notes are non-recourse to Trinity Industries and are secured by rail cars in our lease fleet. At June 30th, our borrowings at the corporate level were the $450 million of convertible subordinated notes, $201.5 million of senior notes and $4.2 million of other indebtedness.

The leasing company's debt included $353.9 million of secured rail car equipment notes, $119.1 million of equipment trust certificates and $81.5 million outstanding under our rail car leasing warehouse facility.

Our total debt to total capital ratio was 47.6% at June 30th, up from the comparable amount of 37% at December 31st, 2005, principally due to financing for the current and future lease fleet expansion. Net of cash, or net debt-to-total-capital ratio was 36.4% at June 30th, up from the comparable amount of 31.4% at December 31st, 2005. At June 30th, our cash position was $447.9 million. Now, here's Tim Wallace.

Thank you James, good morning everyone. Our Company's been very busy during the past quarter. I'm very pleased with our accomplishments and optimistic about the future. During the second quarter, the diversity and strength of our portfolio of businesses helped us generate record revenues.

Our backlog of orders continue to grow in both our rail car and barge businesses. We completed two large debt financings during the second quarter; we declared a three for two stock split in the form of a dividend and made great progress in streamlining our portfolio of businesses.

Our second quarter North American rail car shipments totaled 6,233 units. We expect our quarterly shipments to be relatively steady, at a run rate between 6,200 to 6,500 units during the balance of the year. Demand for rail cars in North America continued at a strong pace during the second quarter. We had a great quarter from a sales perspective. Steve Menzies will provide the details in his update.

We are now within a few hundred units of our all time record in respect to our rail car order backlog. We're continuing to receive a steady stream of inquiries to bid on. We still view this current demand for rail cars in North America as a plateau on a demand graph, rather than a short-term spike. We're strategically targeting specific markets and orders.

Our products mix will change during the next year because we have aggressively pursued a specific growth market. We're fortunate to have the broadest product line offering in North America and to be flexible enough to quickly adjust our production lines in accordance with our strategic selling activities. We're currently shifting some of our production lines over to produce a higher percentage of rail cars, which serve the renewable fuels market.

The demand for ethanol cars is very strong right now. We are uniquely positioned to provide these products for multiple production lines. Short term, we will absorb the costs of transitioning our lines. Long-term, we expect our margins to improve because of the strength of this market and the productivity gains we should obtain.

We expect our rail car market share percentages to fluctuate on a quarterly basis. There are certain rail care types that are more attractive to us than others and we pursue those aggressively. We have passed on a few large, low margin orders with restrictive terms. We're currently focused on obtaining orders that extend our production lines, enhance our product mix and relationships with key customers, and allow us to improve our earnings.

We've been very successful at improving our performance for this type of focused selling. Bill McWhirter will provide details on our rail car margin projections in his comments. Steve Menzies will provide more information on the rail car market during his comments.

The breadth of Trinity's earnings diversification was apparent in our barge segment. Our barge group had a fantastic quarter. Operating profit for this group reached $10.5 million; this is 94% increase over 2005. Industry demand for barges has been strong. During the second quarter, we received an order for 250 barges from Ingram Barge Lines. Continuing strong demand has prompted our barge management teams to increase their barge production capacity.

At one of our barge plants, we're in the process of installing a new paint facility. This will increase our output. Fortunately, we still have some production flexibility and are continuously searching for ways to improve our products and our output. Our construction products businesses are also an important part of our diversification strategy. We're currently in the middle of this group's seasonal peak. The demand is strong for our concrete and aggregate businesses. This has been the case, despite less than perfect weather conditions in South Texas and a nationwide slow down in housing starts.

Our concrete business can flex between residential, commercial and highway-related businesses. We're continuing to add new, strategic concrete operations in areas where we anticipate steady demand for products. Our highway safety products businesses are benefiting from increased spending, resulting from the Transportation Bill that was signed last summer. We expect demand for highway safety products to improve as federal funds make their way through the construction spending pipeline.

We're very pleased with our structural wind tower business. We have a good backlog of orders and expect this business to continue to make significant contribution to our profits in 2006 and 2007. We're in the process of expanding our abilities by upgrading our operations. We're considering transitioning production capacity from some of our other manufacturing facilities to produce wind towers. Trinity Leasing's company plays a strategic role in Trinity Rail and is also an important component of our strategy of providing consistent earnings base.

Our leasing management and services group had a great second quarter. The demand for rail car leasing remains strong and we're maximizing our opportunities. We're continuing to invest in our future by increasing the size of our lease fleet. Steve Menzies will provide more details in his report. As you can tell, I'm very pleased with the performance of our Company. We're continuing to build on a momentum that has been generated in our businesses.

Overall, I believe the investment in our lease fleet, our recent convertible debt transaction, coupled with our excellent market leadership position in the rail industry, along with expanding performance of our non-rail businesses, will create significant shareholder value.

I'll now turn it over to Steve Menzies to make his comments.

Thank you Tim, good morning. Industry demand for rail cars in North America remains strong, as 18,190 rail cars were ordered during the second quarter of 2006. This is a continuation of the strong pace set early in 2004 that has continued throughout 2005 and into 2006, bringing total orders for the first six months of this year, to 55,000.

As we stated during our last conference call, large rail car orders tend to be sporadic and we did not expect quarterly order levels to continue at the same pace as the first quarter of 2006, when more than 37,000 rail cars were ordered. The more than 55,000 rail cars ordered thus far this year, compares favorably to the 37,000 rail cars ordered in the first half of 2005.

We expect rail car demand to remain strong as a result of solid industry fundamentals such as continued rail car loadings growth and long-term rail car replacement demand. As Tim mentioned, we see strong, long-term rail car demand reflected across multiple key market segments. This supports our view that we are experiencing a market plateau at historically high industry demand levels, as opposed to a short-term market spike.

While overall demand remains strong, rail car demand will shift from time to time, from car type to car type. Our strategy is to offer a broad range of proven products while retaining the flexibility to shift production to meet changing market demand. For example, demand for box cars to serve the paper and automotive industries is currently soft, as is demand for intermodal equipment, as the system absorbs the significant investments made in intermodal equipment over the past few years. We believe demand will return for both car types as the replacement of an aging boxcar fleet will continue and demand for intermodal transportation increases.

Offsetting these market dynamics is the extraordinary demand for tank cars, covered hoppers and to a lesser extent, coal cars, resulting from the expansion of renewable fuels production. It is clear that ethanol production will rapidly surpass the government-mandated level of 7.5 billion gallons. The growth of renewable fuels, particularly ethanol and bio-diesel, has caused a surge in rail car demand.

A significant number of ethanol and bio-diesel plants are currently under construction, undergoing expansion, or in the planning stages. As a result, we believe the demand for rail cars to support the transportation of renewable fuels, including their feedstock's and co-products; will remain strong, at least through 2008. As a result of these market developments, we are shifting a portion of our production in the near-term to respond to this demand.

We also see strong demand for rail cars carrying cement and aggregates, consistent with current infrastructure spending. Full car demand has slowed, while Powder River basin rail capacity expansion projects are completed and the rail system can handle additional coal cars. In the near term, replacing steel coal cars in both the East and West represents key opportunities. Replacement demand for auto [inaudible]racks, pressure tank cars and covered hoppers will also drive rail car demand, in the near term and long term.

During the second quarter of 2006, Trinity received slightly more than 10,000 rail car orders. All orders that we report are without contingencies. We continue to focus our sales efforts on orders that meet our pricing requirements including long-term purchased materials commitments, escalation in surcharge protection, and those that extend our existing production lines.

We received orders during the second quarter that will extend production lines for a variety of rail cars. Specifically, we received orders for covered hoppers for agricultural products, resins and cement, full cars, rail cars for scrap steel, boxcars, tank cars and intermodal flat cars.

Our customer mix was diverse as agricultural and industrial shippers, utilities, railroads and third-party lessors, placed orders with us during the second quarter. Current inquiry levels indicate further momentum for orders for a variety of rail cars, continuing throughout 2007 and into 2008, supporting our production and sales strategies.

Industry-wide, production backlog at the end of the second quarter declined only slightly, to approximately 86,800 from 88,100 rail cars at the end of the first quarter 2006. This indicates that industry order levels are keeping pace with industry production. We continue to believe tight supplies of rail car castings and wheels are a constraint for further increases in production much beyond current levels.

Trinity's North American rail car production backlog increased 14.8% from the first quarter 2006, to 29,320 rail cars at the end of the second quarter of 2006. We are in fact, quickly converting several production lines to meet surging demand for rail cars serving the renewable fuels market. Our production flexibility and proven product designs allows us to match resources to meet shifting market demand, as I described previously.

Our goal is to maximize the returns of our portfolio by optimizing production capabilities and product mix. The strong increase in our backlog, despite a slight industry decline, is evidence of our ability to adapt our production and market focus to be responsive to our customer's' requirements. These competencies are enabling us to capture market share.

Trinity Industries Rail Car Leasing and Management Services Group continued to grow its rail car fleet during the second quarter, taking delivery of approximately 1,500 new rail cars. This represents about 24% of Trinity's North American second quarter shipments. Our operating lease fleet now includes a diversified portfolio of more than 27,200 rail cars, as compared to approximately 22,300 rail cars that were in our fleet on June 30th, 2005. In addition, we manage approximately 60,000 rail cars that are part of our customers' fleets.

The investment in our leasing business helps us to develop solid, long-term relationships with the end-users of our rail cars, as well as significant long-term stable earnings stream, which reduces our susceptibility to market cycles. Our committed lease backlog at the end of the second quarter increased to approximately 13,000 rail cars, or 44.5% of Trinity's North American production backlog. This backlog extends into 2008 and has been instrumental in our production planning.

Our fleet utilization increased slightly, to 99.6% at the end of the second quarter of 2006. The average age of the rail cars in our lease fleet is 4.9 years; our average remaining lease term is more than six years. These rates continue to rise as a result of high fleet utilization, strong levels of new car building and rising new car prices. Our renewal rates, the number of leases renewed as a percentage of expiring leases has been higher than normal, indicating strong demand for existing rail cars. Our average fleet lease rate has continued to increase quarter-over-quarter, reflecting the high number of lease renewals and rising lease rates.

I'll now turn it over to Bill McWhirter.

Thank you Steve and good morning everyone. My comments relate primarily to the second quarter of 2006. We will file our Form 10Q this morning; you'll find more details there for the second quarter results. During my remarks, I will provide earnings per share guidance for the third quarter and full year. Additionally, I will provide updated guidance with respect to operating margins in our rail and Inland Barge groups.

During the second quarter of 2006, we completed a three for two stock spilt. Accordingly, all earnings per share numbers discussed in my presentation are split-adjusted.

For the second quarter of 2006, we reported earnings of $1.08 per share. When you remove the gain in earnings of $0.29 per share associated with the divestiture of the Fittings business, the result is $0.79 earnings per share from continuing operations. This compares with $0.27 per share from continuing operations in the same quarter of 2005, and $0.44 per share in the first quarter of 2006.

Revenues for the second quarter 2006 increased 23% over the same quarter last year, to a record $883 million. Earnings from continuing operations exceeded our expectations, primarily due to strong performances in our North American rail operation, rail components business and Inland Barge operation. The sale of certain real estate accounted for $0.09 per share earnings in this quarter.

At this time, I will discuss the performance of our individual business segments. The Inland Barge group's second quarter performance was consistent with the high end of our guidance, posting revenues of $90 million and operating profit of $10.5. This reflected the strength of the backlog, which as of June 30, 2006, was approximately $487 million. This compares with $253 million one year ago.

We anticipate Inland Barge revenues at between $90 and $100 million for the third quarter, growing to $100 to $110 million in the fourth. Operating profit margins are expected to range between 10 and 12% for the remainder of the year.

Now moving to the Energy Equipment Group. We are very pleased with this group's second quarter performance. On a quarter-over-quarter basis, revenues increased approximately 54% to $84 million and operating profits improved by $4.7 million, bringing the quarterly profit to $11.9 million. Our current backlog for structural wind towers continues to be strong. Recent production improvements have raised our wind tower run rate to $130 million for the full year of 2006. As a reminder, revenues from the Wind Towers Group were $67 million in 2005.

Our Construction Products Group, which plays a key part in our earnings diversification strategy, generated revenues, which were up 13%, when compared to the same quarter of the previous year. Operating profits slightly decreased as margins tightened, due to less favorable weather conditions. Our concrete and aggregate business accounted for 55% of this Groups' revenues.

Our Highway Products Business, which accounted for 37% of the Group's revenues, is performing well. Revenues from this unit's proprietary line of products continue to be strong.

Our Rail Car Leasing and Management Services Group reported revenues of $71.8 million. Because car sales from the fleet are a regular part of the business and timing of these sales affects a quarter's results, we tend to focus on year-over-year results from this segment. For the six months ended June 30, 2006, the revenues increased by 27% over the previous year. For the first six months, total operating profit increased by $15.2 million due to the additions to fleet and increased lease rates. We plan to invest between $500 and $550 million in net fleet additions during 2006, to support orders already placed by our customers. These are not speculative additions but firm commitments.

It is clear that the investments we are making in this business are providing long-term paybacks. In our Rail Group, revenues increased 15% on a quarter-over-quarter basis. Rail Group Sales for Trinity's Leasing Group were $119 million in the second quarter of 2006, with profits of $12.2 million, or approximately $0.10 per dilutive share. This compares with sales to our leasing group in the second quarter of 2005 of $107 million, with profits of $11.6 million, or $0.10 per dilutive share. These inner-company sales and profits are eliminated in consolidation.

Our European Rail Business incurred a loss of approximately $3 million for the second quarter. Earlier this week we announced the pending sale of this business. Our European transaction is very close to being finalized. The operating results for this business will be classified as "discontinued operations" in the third quarter.

Our margin results for the Rail segment were 10.5%. When you remove the effect of the European operation, the North American operations achieved an operating margin of 11.7%. At this time, we anticipate margins for the Rail Group, excluding the results of Europe, of between 9.5 and 10.5 for the next two quarters.

Our Rail margins will be slightly impacted in the third and fourth quarters due to two factors. We will make strategic line changes to address the demand for rail cars, which serve the renewable fuels market. And we will produce certain cars during the last six months that are the result of a contract entered into during significantly less-favorable market conditions. Our assumptions for margins are based on the following; continued production efficiency in North America, no significant supply problems in steel or other basic materials. Our North American Rail Car backlog as of June 30, 2006, consisted of 29,320 rail cars, with an estimated sales value of $2.2 billion.

Moving to our consolidated results. Non-leasing capital expenditures are currently projected to be approximately $120 million for 2006. From an accounting perspective, our third and fourth quarter results will be impacted by our commitment to invest in our lease fleet. During these quarters, we will defer approximately $18 to $20 million per quarter, in operating profit, in order to achieve long-term profits in our leasing business. Accordingly, we anticipate earnings from continued operations for the third quarter, to range between $0.57 and $0.62 per share. Overall guidance for 2006 has improved. The new guidance for continuing operation is for earnings per share of between $2.35 and $2.45 for the full year, on a fully diluted basis.

Included in our assumptions for 2006 are, the deferral of approximately $69 million in profit on rail car sales from our Rail Group to our Leasing Group, or roughly $0.54 per dilutive diluted share. The completion of the European divestiture, continuing to achieve production efficiencies in North America, no significant supply problems in steel or components, normal weather conditions, and no unanticipated adverse resolution of legal matters.

In our earnings release yesterday, we provided a reconciliation of the non-GAAP term EBITDA. EBITDA from continuing operations for the second quarter of 2006 was approximately $142 million, as compared to $67 million in the same quarter last year.

At this time, I'll turn the presentation back to James for the Question and Answer session.

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

Ladies and gentlemen, at this time if you would like to ask a question, please press the star and one, on your touch-tone phone. Should you wish to remove your question from the queue, press the pound key. Once again, at this time to ask a question press star and one. We will pause one moment to allow questions to cue. [OPERATOR INSTRUCTIONS].

Looks like our first question comes from Wendy Caplan, from Wachovia Securities. Go ahead ma'am.

Thanks very much. Couple of things, we've been hearing a little bit about some fixed rate contracts that some of your competitors may have been signing. Can you talk about, what you've seen in the marketplace and whether that's something Trinity would be signing?

Okay, we don't really talk about specific orders on our conference calls or even selectively. So, we will say that, from time to time there are fixed rate orders that people do sign for various reasons. And, we really don't have any comment. I mean if our competitors are signing up something, I think it's just best to ask them.

Okay Tim thanks. The ethanol-driven business --, Steve can you talk a little bit about how much it accounted for, in terms of deliveries the second quarter. And given the line changeovers, what you're anticipating in terms of -- however, you can -- I mean I assume it's going to be more going forward over the balance of the year. Can you kind of give us some sense of that, please?

Sure Wendy. Trinity produces several car types that serve the renewable fuels market. And we've been producing these cars since 2002, so the cars that we're producing are not necessarily new cars for us; we've been producing these cars for quite some time.

Our products are currently viewed, we feel, as the premiere products in the industry as we are way down the experience curve and at a high level of productivity with our product lines and products performance. We are shifting more of our production lines to serve this market. Demand is significant, as I talked about additional production facilities that are under construction, as well as those that are planned.

Our hopper cars deliver the corn to the ethanol facilities; our tank cars deliver ethanol from the facilities and bio-diesel. Our jumbo covered hoppers carry distiller's dried grain, a high grade feed byproduct of ethanol, or co-product of ethanol production from those facilities. And we're seeing more and more of the facilities are coal fired instead of gas fired, which also supports demand for coal cars. We are seeing a demand for ethanol move into our tank barge business as well, which puts us in the unique position to be able to serve that industry.

I guess my question, Steve, I know you've been making those cars for a long time but is there -- from a mix perspective, will it increase going forward as a percentage of the total? Do you expect?

Well our mix --our backlog changes from year to year, , the mix in our backlog changes. I think the key to our success is to have a broad portfolio of proven products and the flexibility to be able to shift our production to the hot markets, if you will. And certainly, renewable fuels is an important market today. Other markets will come back and we'll be prepared to address those as those car types become greater in demand.

Okay and finally, the superb margin that we saw in the Lease Fleet, can you address whether it's -- should we look at this as a one quarter event? I'm not sure I understand what you were suggesting. Or is this, you know, 33% kind of level sustainable for the balance of the year?

Bill you want to address that?

Sure, Wendy, in the quarter we had car sales, and you'll have this detail in the Q, we had car sales from the Fleet of $18 million that provided a profit of $3 million, so that drove the margin up a bit. And that's why I tend to focus on year-over-year because, when you look at the year, our car sales are very close, year-over-year, both from a revenue perspective and a profit perspective.

So, the year-over-year margin still shows improvement and I think that that's a margin improvement that we'll see going forward.

Thank you.

Our next question comes from [Kevin Maczka] from DB&T Capital Markets, go ahead please.

Gentlemen, good morning.

Good morning.

A question on your orders and deliveries in the quarter. It looks like deliveries were running about 32% of the industry total, but orders were more like 55, which I think is quite a high number, if I look back historically. So, my question is, you had a big hopper and tank car competitor with their tank facility down for most of the quarter, the big spike in orders, you think that's more attributable to taking that share from them, or is this more, an example of you taking share across the board? Because you did comment on, being strong demand kind of across your portfolio.

Okay I'll address that. I don't really think there was any effect, our competitors having production lines down in the short time period in the quarter. A lot of the orders that we're booking are not short-term deliveries.

But we do expect our market share percentages to fluctuate from quarter to quarter as certain rail car types are more attractive to us than others. I mentioned that in my talk. And we always retain the right to pass on orders, if our production lines are not set up. And so there'll be times where there's orders out there that, we don't have production lines set up that we don't take. And then, there's other times when, the terms and the pricing isn't in line with what we were hoping to obtain and we'll pass on there.

And then there's times when we have production lines set up that we really, are aggressively pursuing something, to tack on behind that. And so, we're constantly looking at the demand that's flowing through our order inquiry system. We assess which orders are going to provide the most short-term and long-term benefits to us. And then we go after aggressively, those that we feel will add strategic value and then, we don't pursue the ones that we think are there. And we don't obviously, disclose this for competitive reasons.

The important thing is just what Steve said is, we've got a broad portfolio and we have the flexibility, with our operations, to be able to pick and choose which we think are beneficial products for us. So I don't think you can think that, the market share that we had this quarter, would go into the future on a quarter-by-quarter basis in that area.

We're not driven by trying to obtain some market share percentage number. That's always good for the ego, it makes everybody feel good, but when we don't have a production line set up and it'll cost us a lot to set it up, we're comfortable with the fact of passing on that particular business.

Okay great and switching over to some of the transactions you did in the quarter. You had the big sale of the European Rail and the Fittings Group. My first part is, are there other businesses in your portfolio that you're looking to do the same thing with? And then the second part is, given your cash position and the convert you did, you didn't talk a lot about using any of that cash for acquisitions. So, I'd just like to get your view on consolidation in general.

Okay, we're very comfortable with the businesses that are in our portfolio. We have a strategic review with our Board this fall, which is an annual event that we do, where we look at our various businesses that we have. We don't really have any plans right now to do any other transactions that will affect our portfolio, nothing's on the horizon.

There's always something that comes by, with a company looking at -- divesting of another business that we might be interested in, or a company that fits and so we like to have some capital that is available for that. If somebody happens to approach us on one of our businesses and they want it more than we do, we always consider that and look at the long-term returns that we have.

I feel this summer we've been able, as I said to streamline our portfolio and get it to where we can now focus our resources on the markets that we have strong leadership positions in. And I think you'll see some improved results continue to happen over the next two to three years in this particular area. And, our cash position was something that was beneficial, Bill you want to talk on that a little bit?

Yeah, the cash position obviously, is primarily derived from the convert transaction. We publicly stated our intent to invest in our lease fleet and these funds represent very attractive financing, which we can deploy short term to achieve significant savings and interest expense.

Longer term we view these funds as a method to take advantage of opportunities that may present themselves in the future. And as a point of clarification, you noted that Europe and Fittings in the quarter --the Fittings transaction is completed and second quarter, the Europe transaction is still pending a closing, it would be a third quarter event.

Okay thanks. And just one more if I could on the Rail business margins, the guidance that you gave there for the back half looks to be a little lower than what you just reported for the second quarter. And you gave two reasons, the changeovers for ethanol and the finishing-up of what I assume is a lower-margin contract.

So, my question is, how long will that ethanol changeover take? Will that be finished in the second half and will that pressure margins into '07? And on the contract, is that a contract that's just starting and will be completed in the second half? Or, were you working that contract in the second quarter as well?

To answer both of those questions, the changeovers will take approximately -- go through the first and second quarter of '07. So, we're giving guidance in third and fourth quarter, we'll come back with more guidance in first and second quarter of next year as we do typically. And our fourth quarter guidance when we have a little crystal picture of what's going to happen.

And then from the contract perspective, the contract was entered into several years ago it was a multi-year contract. There is one more year remaining on the contract so it runs through 2007.

Okay gentlemen thanks for the time.

Thank you.

Our next question comes from the site of Alex Blanton, from Ingalls & Snyder go ahead please.

Good morning, just to follow up on that last question, this low margin contract, did you say it will start this quarter?

The low margin contract was entered into years ago and it's a multi-year contract. In the third and fourth quarter, we will build a greater percentage of those cars than we did in the first and second quarter, thus pressuring our margin.

A greater percentage okay and so, it'll run through '07, this greater percentage?

The contract continues through '07, but the contract is for a limited number of cars, which will be a smaller percentage of our total production in '07.

Okay so it won't have as big an impact in '07.

That's correct.

Okay. Now, looking at the discontinued ops. Here, you're going to have another adjustment in your earnings history when you discontinue the Rail operation in this quarter, correct?

That's correct.

So that, the first two quarters will change again. And also, 2005 will change again, correct?

That is correct.

Just for now, can you give us the third and fourth quarter of 2005 on the current basis? We can calculate, in the first quarter from your earnings release, but can't calculate the third and fourth quarter.

Yeah, I don't think at this time it'd be appropriate to put those numbers out.

You don't?

As we close the European transaction, we've got to work through.

Oh, right.

The tax aspect associated with those losses, to get to a net--

No, but I mean, right now with the European operation in there, what are those numbers?

Are you talking about third and fourth for '06?

No, for '05.

He's asking if we could pull those numbers out. I don't think we've done that analysis yet.

We have not done that analysis.

We have the first and second quarter of ‘05, continued ops, what is the third and fourth quarter for '05, continued ops. Right now, with European in there?

No, no.

You don't have that?

No, that number's not been disclosed yet.

So, we don't know what you earned last year?

We know what we've earned last year and the European operation.

Yeah, I know but what I mean is, on the current basis. We don't know what your earnings were in the third and fourth quarter last year.

Why don't we do this, why don't you give me a call back a little later on this afternoon and we can walk through the particulars and I can take you through the difficulties of? [inaudible] that number.

Okay. When you get all through and the European's operation been sold and discontinued, can we get the history so we have something to compare to?

Yeah, you'll absolutely have the history as we re-state the segment.

Okay, you're going to restate everything.

Yeah, and we'll provide details. Just like-- and when you see our 10Q this time you'll see a pretty robust disclosure of the Fittings Group divestitures. And the European disclosers will mirror those disclosures.

Okay, so when you get all through then you're going to update us on the past.

We will, yes.

So we can see what it looks like and re-do our spreadsheets and --.

Absolutely.

Okay fine. Now, just looking at the incremental margins, they were very large. For example, looking at the Company as a whole and the operating margin, incremental margin year-over-year, for the three months was 39%. I mean, $0.39 of every additional sales dollar went down to operating profit and they were 43% for the six months.

And then looking at the rail car business by itself, in the three months it was 56% incremental margin. And for the six months, it was 50%. So these are enormous numbers, enormous improvement. Could you give us an idea of where that came from and some of it, there's was no doubt, price? It had to be price. Because you can't really get efficiencies up that much in one year on an operating basis; price and also, cost, how much from each, start up costs going away and so on?

Alex this is Tim, I'll have a comment maybe Bill will add something to it. But I think it's a combination of the production lines being up and we're through most of our learning curves in a lot of our products.

Especially in the rail part of our business and our barge business. We got off of-- during '05, we had a whole lot of lingering steel issues that came through from '04. And we've been able to negotiate contracts with all of our key suppliers in that particular area.

And then, we have had in a lot of our businesses, and that's why we try to break it down like Bill did on business-by-business. Being a multi-industry company, you have to go into each business and look at the specifics of them. And that's one of the reasons we go by segment-by-segment and give you the details. It's a combination of price increases, productivity improvements, firm pricing on materials that we have acquired. And then, you end up having a certain amount of our volume covering some fixed overhead.

Yeah, well that's right. How much of it was price? Do you have a sense of that? Can I mean can you get a sense of that?

No, that's kind of too general a question for a multi-industry company to answer over all their various businesses. And, each of our businesses, depending on the market dynamics that they're in, gets pricing movement. And we don't charge or follow, or track, one pricing movement at the corporate level, for our company. That's all done business-unit by business-unit and for competitive reasons we don't disclose that at that level.

All right thank you.

Our next question comes from Fritz Von Carp, from Sage Asset Management, go ahead please.

Yeah, good morning gentlemen I was wondering, could you give me more color on the construction group? The operating profit was about flat there, I think. Could you help me understand the year-on-year comparison?

In the Construction Group we had weather conditions in the second quarter. Particularly in the southern part of Texas that, caused us to lose about 13 days, as compared with the same quarter in the previous year. So, while our overall revenues were up because we have more stores, in essence, and our highway safety business did very well. The business was squeezed from a margin perspective because of those weather conditions.

Got you perfect, thank you.

At this time we have no more questions queued.

Great thank you Cameron.

This does conclude today's conference call. Remember, a replay of this call will be available starting one hour after this call ends today, through midnight Thursday August 10th. The access number is 402-220-0117. 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.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect at any time.