Trinity Industries Inc (TRN) 2006 Q4 法說會逐字稿

At this time it is my pleasure to hand over the conference to your moderator, James Perry, Vice President and Treasurer, Trinity Industries. Go ahead please, sir.

Good morning from Dallas, Texas and welcome to the Trinity Industries' fourth 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 will hear today from Tim Wallace, Chairman, President and Chief Executive Officer; Steve Menzies, Senior Vice President and Group President of the Rail Group; and Bill McWhirter, Senior Vice President and Chief Financial Officer. Following that we will 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, March 1. That replay number is 402-220-0428. I would also like to welcome to our call our audio webcast listeners today. A 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 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 that a change in any of which could cause the actual results or outcomes to differ materially from those expressed in the forward-looking statements.

At December 31, 2006 our borrowings at the corporate level were $450 million of convertible subordinated notes, $201.5 million of senior notes, and $1.8 million of other indebtedness. The leasing company's debt included $347.5 million of secured railcar equipment notes, $119.1 million of equipment trust certificates, and $79 million outstanding under our Railcar Leasing warehouse facility. Our total debt to total capital ratio was 46% at December 31, 2006, up from the comparable amount of 37% at December 31, 2005, principally due to financing for current and future lease fleet expansion. Net of cash, our net debt to total capital ratio was 39% at December 31, 2006, up from the comparable amount of 32% at December 31, 2005. At December 31, 2006 our cash position was $311.5 million.

Now here's Tim Wallace.

Good morning everyone. I'm very pleased with our progress. 2006 was another growth year for Trinity. Our revenues increased 19% to an all-time high of $3.2 billion. Our net income was a record $230 million. A majority of our revenues increase was derived from internal expansion initiatives. All of our business segments continued to perform well. We are positioned to continue to benefit from several key market trends.

Our focus on operational excellence and other initiatives designed to extend our backlogs are continuing to pay off. Fortunately each quarter continues to build on the momentum from the previous quarter. We expect 2007 to be another growth year. We're fortunate to have a very experienced, seasoned group of employees. Our people have become very experienced at converting our production lines to accommodate changing market trends. During 2006 we were able to shift production throughout our Company to areas with greatest opportunities for growth and returns. We will continue to do so during 2007.

In our North American Railcar business our 2006 annual shipments increased 10% to approximately 25,240 units. Our target goal is to increase Railcar shipments between 10% and 15% in 2007. During 2006 we increased our margins, launched new production lines in Mexico, and enhanced our production flexibility. Our short-term objectives for our North American Rail business are to complete our current round of line conversions, enhance our profitability through productivity initiatives, and pursue orders that extend our production lines. Steve Menzies will provide more detail.

Our fourth quarter Railcar shipments totaled 6,300 units. This was right in line with our expectations. Our fourth quarter Railcar orders increased our backlog to an all-time high record of approximately 35,930 units. This is in part due to an increase in demand for Railcar servicing the renewable fuels market. Our production flexibility allowed us to pursue a large number of orders for railcars that transport renewable fuel product. Demand for railcar products in North America continuously shifts between various railcar types. Fortunately, the depth of our productline and our production flexibility allow us to pursue orders for railcar types currently in demand.

Trinity's Barge business continues to perform well. We have a very good backlog of orders, and our customers at continuing to visit with us about opportunities for future business. Our Barge backlog extends into 2008. During 2006 we have improved our Barge profitability as we simultaneously expanded our Barge production. We're continuing to search for a variety of ways to increase our Barge production capacity and enhance our flexibility. We expect 2007 to be another growth year for our Barge revenues and profitability. Bill will provide more details during his update.

Our Construction Products businesses are continuing to perform well. Weather conditions in the southwestern part of the United States were construction friendly during the fourth quarter, but turned sour during the early part of this year. Texas weather in particular has been unusually cold and wet during the early weeks of the first quarter of 2007. We are no stranger to bad weather, and we will be aggressive in our actions to recover once the weather improves. Fortunately demand for our Construction Products remained steady. We're continuing to enhance the overall value of our concrete and aggregate businesses by acquiring small concrete and aggregate operations. Our highway products business is expecting steady demand during the construction season.

Our structural wind tower business is continuing to grow. The demand for wind towers is steady. We are in the process of expanding our capacity by converting an idle railcar plant located in Southern Illinois to produce wind tower structures. We will use this facility to serve the Midwest market. We are also looking at a variety of other options to increase our production capacity in this business.

Trinity's leasing company continues to grow while performing a vital strategic role in our business. We're positioned very well to be able to provide a large number of new railcars in a strong lease market. Steve Menzies will provide more details about this in his report.

In summary, I am pleased with our fourth quarter results, and I remain very optimistic about the opportunities for our businesses. We continue to have positive momentum moving throughout our Company. At this time I will turn it over to Steve for his comments.

Good morning. Industry demand for railcars in North America remained strong during the fourth quarter of 2006 with orders placed for more than 17,100 railcars. This is a continuation of the strong phase which began in early 2004 and has continued throughout 2005 and 2006.

Total orders for 2006 exceeded 93,800, a significant increase over the 81,000 railcars ordered in 2005. These strong order levels continue to support our view that we're experiencing a market plateau at historically high industry demand levels. We expect railcar demand to remain healthy in most key market segments in which we complete compete.

As we have mentioned previously, railcar demand will shift periodically from cart type to cart type. The North American railcar market is currently driven by demand for tank cars and covered hoppers serving the renewable fuels and agricultural industries. We also see consistent demand for railcars carrying cement and aggregates used in infrastructure projects and commercial construction. Recent order inquiries support continued demand for tank cars, covered hoppers and auto ramps.

Coal car demand has subsided, pending completion of rail capacity expansion projects designed to improve system fluidly. However, we have received a modest number of coal car orders. These orders reflect the need to replace older steel coal cars, as well as keen interest in design innovations in our new coal cars. Long-term we believe broad demand for coal cars will return.

As Tim mentioned, Trinity received slightly more than 10,000 railcar orders during the fourth quarter of 2006. Many of these orders will extend production lines for a variety of railcars. Specifically, we received orders for covered hoppers for agricultural products and cement, coal cars, auto racks and tank cars.

Our customer mix was diverse as agricultural and industrial shippers, railroads, utilities and third-party lessors placed orders with us during the fourth quarter. Current inquiry levels indicate further momentum for orders for a variety of railcars for delivery through 2009.

I would like to make a few comments at this time regarding the renewable fuels business. The growth in ethanol and biodiesel and the significant demand for railcars to transport these products has been a key driver behind the growth of Trinity's railcar backlog, as well as the overall railcar market. We believe that the demand for ethanol, biodiesel and their feedstocks and coal products will be ongoing. Construction schedules for a few biofuels projects have been delayed. In the few instances where construction delays required railcar delivery dates to be changed, it has provided us an additional opportunity to meet customers' current needs.

In summary, the development of biofuel's economics, production technologies, and logistics is in its early stages. However, rail transportation will be central to this industry's growth. We intend to work closely with the leading companies in the renewable fuels industry to ensure our products and services meet the industry's needs.

Our production flexibility is one reason Trinity's North American railcar production backlog increased more than 11% from the third quarter of 2006 to more than approximately 35,930 railcars at the end of the year. We are pleased with our progress to convert production lines at several facilities to respond to the growth in renewable fuels. In fact, we are actually ahead of schedule, providing additional available railcars in a very tight near-term market.

In addition, the expansion of our production at our facilities in Mexico has also progressed well. In 2006 36% of our railcar production came for Mexico. In 2007 we expect over 42% of our total shipments to be from our facilities in Mexico.

These successes are in large part due to our experienced supervisory personnel and established labor force, combined with Trinity's proven railcar designs and production resources. Our production teams are to be commended for their outstanding performance. We expect extended production runs of railcars serving the renewable fuels market, allowing us to realize additional production efficiencies.

Our overall goal is to maximize our returns by optimizing production capabilities and product mix. The increases in our backlog are evidence of our ability to quickly shift our production to meet changing market and customer requirements.

Trinity Industries' Railcar Leasing and Management Services Group continued to grow its railcar fleet during the fourth quarter. Trinity shipped approximately 2,300 new railcars to its leasing company during the fourth quarter. This represents about 37% of Trinity's fourth quarter railcar shipments. In total, we added 7,800 new railcars to our lease fleet during 2006, increasing our end of the year lease fleet from approximately 24,900 in 2005 to 30,550 as of December 31, 2006.

A point of comparison that further illustrates our lease fleet growth, in 2001 our lease fleet totaled 11,800 railcars. The investment in our leasing business helps us develop long-term relationships with the end users of our railcars, as well as to generate a significant, long-term stable earnings stream that reduces our susceptibility to market cycles.

Our committed lease backlog at the end of the fourth quarter increased to approximately 18,400 railcars, or 51% of Trinity's production backlog. This backlog extends into 2008, and has been instrumental in our long-term production planning. Our fleet remains highly utilized at well over 99% at the end of 2006. The average age of the railcars in our lease fleet is 4.6 years, and the average remaining lease term is approximately 6 years.

Lease rates continue to rise as a result of high fleet utilization, strong levels of new car building and rising new car prices. Our renewal rate, the number of leases renewed as a percentage of expiring leases, has been very high, indicating continued strong demand for existing railcars. Our average fleet lease rate has continued to increase quarter over quarter, reflecting a high number of lease renewals and steadily rising lease rates.

In summary, we are pleased with the overall performance of our Rail business. Our operational flexibility has allowed us to respond effectively to meet the changing demand among various railcar types. We continue to gain operating efficiencies through extended production runs, favorably impacting operating margins. The growth of our leasing business has enabled us to meet the needs of our customers, while enhancing the long-term stability of Trinity. We expect our high level of performance to continue.

I will now turn it over to Bill McWhirter.

Good morning everyone. My comments relate primarily to the fourth quarter of 2006. We will file our Form 10-K this morning. You'll find more details there about our 2006 results.

During my remarks I will provide earnings per share guidance for the first quarter and the full year of 2007. Additionally, I will provide updated guidance with respect to operating margins in our Rail, Inland Barge and Energy Equipment groups.

For the fourth quarter of 2006 we reported earnings of $0.73 per diluted share from continuing operations. This compares with $0.52 per share from continuing operations in the same quarter of 2005. Revenues for the fourth quarter of 2006 increased 15% over the same quarter last year to $835 million. Earnings from continuing operations exceeded the high-end of our expectations by $0.07 per share. The positive results were primarily due to an improved state tax position, and strong performances in our North American Rail operations, Railcar Leasing business and Inland Barge operations.

At this time I will discuss the performance of our individual business segments. First our Rail Group. Revenues for this group increased 9% on a quarter over quarter basis. Rail Group sales to Trinity's Leasing Group were $184 million in the fourth quarter of 2006, with profits of $33 million, or approximately $0.27 per diluted share. This compares with sales to our Leasing Group in the fourth quarter of 2005 of $133 million with profits of $20.5 million or $0.17 per diluted share. These intercompany sales and profits are eliminated in consolidation.

The fourth quarter profit elimination are higher than previously predicted as a result of the mix of cars that went into the fleet, coupled with the reclassification of certain cost items, which accounted for $0.05 of the elimination. Our margin results for the Rail Group were 12.4%. At this time we anticipate margins for the Rail Group of between 12 and 13% for the first quarter.

Our assumptions for margins were based on the following, continued production efficiencies in North America, and no significant supply problems in steel or other basic materials. Our North American Railcar backlog as of December 31, 2006 consisted of approximately 35,930 railcars, with an estimated sales value of $2.9 billion.

The Inland Barge Group's fourth quarter performance was strong, posting revenues of $106 million and an operating profit of $15.5 million. This reflected the strength of the backlog, which as of December 31, 2006 totaled approximately $464 million. This compares with $335 million one year ago. We anticipate Inland Barge revenues of between $100 million and $110 million in the first quarter. Operating profit margins are expected to range between 13 and 14% for the first quarter.

Now moving to the Energy Equipment Group. In 2006 we grew revenues by 43% in this segment. The growth was primarily driven by our wind tower expansion. During the fourth quarter we experienced some production issues and normal growth challenges. The result was operating profits of $9.2 million and margins of 9.5%. We expect this business' first quarter margin to be affected by the weather and the continuing ramp up of the wind tower business. Overall we still expect margins up for the group of between 13 and 15% for 2007.

We finished 2006 with revenues of $138 million in our wind tower business. For 2007 we look for revenues of between $225 million and $250 million. Revenues for the entire segment will be approximately $450 million for 2007, which represents a 34% improvement in revenue over last year.

Our Construction Products Group generated revenues that were up 7% when compared to the same quarter of the previous year. Operating profit was $12 million for the quarter and $61.5 million for the year ended December 31, 2006. Our concrete and aggregate business accounted for 61% of this group's revenue. Our highway products business, which accounted for 31% of the group's revenue, is also performing well.

Our Railcar Leasing and Management Services Group reported revenues of $114.2 million. Because car sales from the fleet are a regular part of the business, and the timing of these sales impacts our quarterly results, we focus on year-over-year results for this segment.

For the year ended December 31, 2006 revenues increased by 49% over the previous year. Additionally, total operating profit increased by $50.7 million due to the additions to fleet, increased lease rate, and car sales from the fleet. Our total investment for 2006 was approximately $530 million in net fleet additions. For 2007 we anticipate between $650 million and $750 million in net fleet additions. It is clear that the investments we're making in the business are providing long-term paybacks, significant growth and diversification of earnings.

Moving to our consolidated results. Nonleasing capital expenditures for 2006 came in at $117 million. For 2007 we see nonleasing capital expenditures of between $140 million and $160 million. These figures include $40 million allocated for further expansions of our facilities in Mexico, and $15 million for the startup of our new wind tower plant in Clinton, Illinois.

To give you some prospective on our progress in Mexico, in 2003 we produced approximately 3,200 railcars. In 2006 we produced in excess of 9,000 railcars. Looking forward to 2007 we see production rates in excess of 12,000 railcars.

During the first quarter we will defer approximately $190 million of revenue, and between $24 million and $27 million in operating profits as a result of growing our leasing business. We anticipate earnings from continuing operations for the first quarter to range between $0.61 and $0.66 per diluted share. The winter weather has affected our Construction and Energy Equipment segments for the first quarter.

Overall, our Company guidance for 2007 from continuing operations is for earnings per share of between $3 and $3.15 for the full year on a fully diluted basis. Included in our assumptions for 2007 are normal weather conditions, no unanticipated adverse resolution of legal matters, and the elimination of approximately $105 million in profit for railcars sold to our leasing company, or approximately $0.83 per share.

In our earnings release yesterday we provided a reconciliation of the non-GAAP term, EBITDA. EBITDA from continuing operations for the fourth quarter of 2006 was approximately $130 million, as compared to $90 million in the same quarter last year. EBITDA from the year ended 2006 was $500 million.

As a reminder, our revenue for 2005 is now reported at $2.7 billion, which reflects the removal of the revenues of our European and fittings business that were divested during 2006.

At this time I will turn the presentation back to James for the question and answer session.

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

(OPERATOR INSTRUCTIONS). John Barnes, BB&T.

Bill, I'm going to put you on the spot just here in a little bit. The questions I have getting asked this morning are, but if you take $0.10 gain off the sale of this lease -- these lease cars, and you add $0.05 from the benefit on your income taxes, you've got $0.15. If I back that out, because sales on cars have been more like $0.02 a quarter per share, some are questioning whether or not this was a good number or not.

Can you just help us walk through the math a little bit and understand the timing on these sales of leased assets? I don't mean to put you on the spot, but that is the questions we're getting this morning.

That's fine. Yes, we do think it is a good number for the quarter. Let's start with the car sales and the lease fleet, and begin with the premise that we're in the business of selling railcars. We sell cars from our fleet. We sell cars from our manufacturing line. It is the core business of the Company.

We did have multiple car sales transactions in the quarter. And they do tend to come in a little bit of a lump, but certainly as the size of your lease fleet grows, you should see more sales out of the lease fleet as well.

I think looking a little bit beyond that, keep in mind the deferred profit was higher than we suggested also. And we guided you to about $0.05 on that deferred profit area. I think if you bring those two items into play, we are really right at the appropriate number.

Can you just elaborate a little bit on the tax rate?

Yes. The tax is actually -- it is a good thing. It tells you that a lot of our tax strategies and our tax planning are effective. Obviously, we book a provision throughout the year and we true that provision up as we come to the end of the year. And we were quite pleased to see the benefit pop out for the Company.

Very good. As you look out, can you give us an idea of what the pipeline looks like right now for further fleet car sales? Do we get a big rush at year-end, and then it is going to sell back in to more like what we saw in the second and third quarters, or do you anticipate -- I hear your comment on size of the lease fleet is going to impact you, but do you foresee these level of sales continuing?

I think it is more appropriate that Steve Menzies, the Group President of our Rail Group answer that question.

Car sales are a part of our regular ongoing business. We will sell cars from the fleet on a periodic opportunistic basis. Really, fleet sales allow us to do several things. It allows us to more effectively manage our portfolio, balance diversifications. And at times we strategically link fleet sales with new car orders. This has particular appeal to third-party lessors. And from time to time customers ask to buy the cars that they are leasing from us, because perhaps their capital or tax positions have changed. And we will response for customers appropriately. It is really hard to forecast these things. Again, it will be a regular, ongoing part of our business.

Of the cars you sold, were there anything -- was there a common theme among the cars you sold? Were they some of your older cars, shorter lease terms? Was there anything that had a kind of a common theme to them with the cars you sold during the quarter?

No, not really. And without really wanting into the particulars of transactions with customers, but there's nothing particularly unique. And again, we will continue to look at fleet sales going forward as appropriate.

And with the average age of our fleet being six years, we have (multiple speakers).

We have a very young fleet. 4.6 years, as I mentioned, is our average age. So we don't really have many cars in our fleet that are in the older category. The average age of the North American fleet is somewhere around 17 years of age, so you can see we compare quite favorably.

Very good. Lastly, just as you look at the Construction Products Group, if there was a revenue shortfall versus my expectations. And I know that is a whole other issue. But just -- when do you anticipate -- we hear about the highway dollars, and we know you guys are well-positioned. As you look out into the '07, beyond just the normal construction season, when do you expect that you're going to get that stair step function in Construction Products where those highway dollars begin to really impact your P&L?

We're starting to see some signs of the highway dollars, although I would tell you I think it is still very slow. Obviously, it is a little difficult to see the highway dollars flowing through given the kind of winter weather patterns we've had really throughout the United States, which effects our highway products business.

Very good. All right, guys, nice quarter. Thanks for your time.

Arthur Hatfield, Morgan Keegan.

Just a couple of questions. First of all, your capacity that you're building in Mexico, as you build 12,000 cars in '07, what will you be your total build capacity at the Rail Group in '07?

We said in my part -- this Tim Wallace -- in our part that we plan on increasing our production up to that 10 to 15% above where we are. And then we always size our capacity with the demand in the industry, but then we are always flexible enough to move capacity to lower cost operations when markets tend to fall off -- the submarkets in one way or another. So this capacity question, we don't have a finite number that says our capacity is X or Y. We flex our capacity with the demand in the market that is tied to the broadness of our productline.

That is fair. So with that being said, can you give us a feel for what you expect to build within a range in '07?

Well, in '07 when I said 10 to 15%, if you take those numbers, it would be somewhere between 27,000 up to 29,000.

That's helpful. I think the comment was made, and forgive me, I can't remember who said it, that the industry is at a plateau right now. Can you talk a little bit about that and what you mean by that? Is a plateau going to a higher level or a plateau more in the cycle where expectations longer-term are things will soften a little bit from an industry delivery standpoint?

Yes, I will comment on that. We had mentioned, and I have said for years now on the conference call, that we have seen the railcar market in the U.S. with a demand that will be plateauing at higher levels because of the replacement factors that are out there in the market and the age of the fleet. And we do fairly extensive analysis, and other people do analysis, and when we took about a plateau we're really comparing it against what happened back in the '98, '99 time period which was a quick spike in demand and then it fell off into a deep trough.

When we use the term plateau, we're referring to a demand that is fairly consistent at higher levels for a number of the years, rather than a quick spike up and then a deep trough, like we experienced before. If you go to some of the industry analysts that are out there right now, and you look at some of the numbers, Steve, what are the numbers they are projecting?

We see a general range over the next few years between 60,000 and 70,000 railcar deliveries. And again that is from several independent companies that monitor railcar markets.

You had mentioned, Steve -- I believe it was you -- about you are seeing some delays in some of these biofuel plant projects. Can you talk a little bit about that? And is that a concern in that -- do you have a specific orders related to new railcars related to those projects, and what kind of risks there could be to cancellation?

We have seen some delays in ethanol plant construction. And in some instances those delays have caused customers to ask us to delay delivery of their railcars. That has actually been fortuitous for us in that we have been able to produce other railcars in those production slots to meet a very strong demand in other areas for tank cars and covered hoppers.

Cancellation of construction projects, we have not seen any significant issues there. And once again, our orders are non-cancellable and we would, in the event of something like that happened, we would have to deal with that on a one off basis. Certainly nothing broader.

That's helpful. Just two more quick ones. You had mentioned the weather issues in the Construction Group in Q1. Is that simply a situation where those revenue dollars just get pushed out as the weather gets better?

Absolutely. The projects are still there. The projects will occur. They are just delayed in pushed out a bit.

Finally, Bill, in your guidance can you give us a feel for what kind of sales numbers of cars out of the lease fleet that are in that guidance?

We're really not going to dive into that level of detail. I think we have provided pretty good guidance on nd operating margins in three of the major segments, and then total guidance for the Company. But I'm not going to break out car sales looking forward.

Alex Blanton, Ingalls & Snyder.

First, can we just review what the quarterly earnings are that add to the $2.72, because they seemed to changed from what you reported earlier.

I'm sorry, when you say they have changed?

How do we get to $2.72?

We're talking about just continuing operations now.

Continuing ops, right.

Continuing ops. Yes, we had $0.73 on the quarter. We were sitting at $2.70. And due to rounding that took us to $2.72.

Sitting at $2.70 meaning what?

We were sitting at $2.70 -- I'm sorry -- sitting at $2 even at the end of the third quarter.

$2 even. And so -- yes, but that is different than the figure I had. So I'm just wondering where I --?

I would really point you to -- our K has been -- or will be filed this morning. And page 73 of our K has an excellent reconciliation of the year EPS.

The quarters. Because the First Call numbers are somewhat different than --.

Yes, you had a bit of a restatement associated with discontinued ops, and so that is why I would really point you to page 73 and it will walk you through the disc ops.

Page 73 of the K.

73 of the K.

Okay, will do. Thank you. Now on the matter of the production flexibility, did you say that you are producing tank cars in -- I think you said that -- producing tank cars in facilities that had not previously produced them in order to meet the demand for renewable fuels?

We did not say that, but that is a fact that we are -- have shifted some production to shops that had produced tank cars previously.

Oh, they had.

In years gone by. But they had been producing other types of cars prior to that.

So they had produced tank cars. It surprised me because (multiple speakers).

One of the facilities had. And then we've got one that we're in the process of converting now that this will be the first time that they have.

How long does that take to convert, because tank cars are quite a bit different than the other types, and so --?

That's right it --.

You have to have special facilities (multiple speakers).

As Steve said, our conversion that we did earlier in the fall, that brought us into the winter, we were ahead of schedule on that. And we converted that one faster. I think it was about a two or three-month conversion. But the actual line changeover was I think much shorter than that. I think it was, what, two or three weeks, something like that.

About a month.

About a month. Then the one that we're in the process -- another one we're in the process now is about the same kind of timing that we have. One of the facilities that we're converting now produced -- in fact, produced bridge steel at one time and then tank cars prior to that, and it converted back.

Really in our facilities we try to have a high level of flexibility between a lot of our different products that we have, so we can convert not only between our railcar products -- like we said, we're doing a railcar plan into wind tower. So it gets fairly complicated to try to track all the history that our various plants have been capable of producing. That is one of our -- I think something that differentiates Trinity from a lot of other companies is this internal synergy that we (technical difficulty) create by product lines.

Yes, it is quite good that you can do that, because it wasn't that easy in the past. You had -- these tank cars require some special facilities.

That's right. They still require special facilities and training.

Finally, the matter of this order plateau that you have talked about, and you say you have estimates from several different industry consultants, or are they market researchers, or who exactly is making these forecasts that are --?

James, why don't you answer that one. You --.

This is James. You know, there is two sources that we cite most often in our presentations. And then we consolidate these in our 10-K. Global Insight and Economic Planning Associates are the two that we average in our 10-K.

Global Insight is an economic forecasting firm?

They are both independent firms that forecast different economic trends.

Who is the other one?

The first one is Global Insight, the second is Economic Planning Associates.

Economic planning associates. Because what strikes me about this is it is never happened before. I am just wondering why you have confidence that this time orders are going to state at a high level?

When you are saying what never happened before?

You have been in the business since 1989, I believe.

No, we have been in the business since '69.

Yes, '69 I think. I was off by 20 years. But during that period the railcar industry has been very cyclical. It has gone up and down. It has gone to very low levels. I think one year there were 6,000 cars produced in total. That is the year that you bought Pullman. And it has been as high as it is now. But it doesn't stay at one level for very long. I was just wondering why you think that will happen this time.

I think you've got a good point. It is a cyclical industry. But if you look over a 20 year period, and I think the 20 year period is the '60s through the '80s, there was an average in time period of 60,000 cars build over that 20 year period. And you had some peaks and valleys that is in there, but we key a lot of what we have on our information internally, off of replacement drivers, and the age of the fleet, and the specific car types that are being replaced.

Then what you had with the renewable fuels is not replacement, it is additive to the fleet. We felt in our planning back in the 2001, 2002 time period, we felt there was a pent-up demand. The replacement figures were there. And that is why I use this term plateauing for quite a while. That is what our whole strategy was built upon.

Rather than build our production extremely fast with people coming into our production lines in our shops, we went through a multiphase program, if you remember. We had a three-phase program. And we are just nearing the end of the third phase, which was this expansion in Mexico of our business. And we have tried to be very methodical in the way we have trained our workforce (technical difficulty) prepared for this demand was here.

At the same time, the strategy of increasing our lease fleet was tied to this. So a lot of our strategy was tied to our anticipation that there would be a steady demand and increase. And now with the backlog that we have of 35,000 cars, it gives us some time to continue to enhance more productivity elements and shift some of our production around. We have been very fortunate to have participated in the market the way we have, and for the market to work in our favor like it has.

I think it is good that you're preparing to be flexible, because as I said, the industry volume has never stayed at one level for very long. And I think when you got in the business in 1969 it was at a high level and then it went down over a period of years to 6,000 and then it went back up. But it has never plateaued. I just wonder why you think that it will this time? I still haven't got the answer to that.

Well --.

I know that you said that there are -- you can analyze the average age of each kind of car type and so on in the fleet, but people have been doing that for the last 15 or so years I have followed this company. I have seen those forecasts based on those kinds of numbers have never been right.

Our strategy has been centered around with our investment in Mexico in the low-cost facilities that we have, that when the market dip down and goes through (technical difficulty) we are very prepared to compete in that market, as well as in the upside market, so the flexibility thing is very crucial to --.

Definitely.

If it doesn't plateau, which it has been plateauing for the last couple of years, but if it doesn't continue, then we are fine because we're prepared to shift our production and make the adjustments as necessary. And nobody looking to the future is ever going to be 100 cents on the dollar as far as being able to estimate it. We're accustomed to competing in a very dynamic market.

(OPERATOR INSTRUCTIONS). [Frank Fisk], Pilot Advisors.

Most of my questions have been answered, but just generally, could you maybe talk about just hopper cars and demand there, and how much -- because I guess hopper cars are a -- they are made for the biofuel and the ethanol products. But also there's a lot of chemical and flour and cement. If you lookout in the next year or two are you seeing in terms of hopper cars?

Hopper cars are a generic category that refer to a railcar that has hoppers that the material is stored in. You can have a two hopper car, a three hopper car, or a four hopper car. And it will transport everything from cement to flour to other items. When you're talking about hoppers you're really talking about a pretty wide range category. Steve, you might want to carry him through some of the markets and what is happening.

As Tim mentioned, our family of covered hopper cars ranges in various sizes and capabilities. Some even operate under pressure. So we can handle very finely divided commodities such as flour and starch. We handle commodities such as cement. We handle commodities such as roofing granules. Then there is your whole array of grains and harvested products.

And then distillers dried grain what has been the coproduct of ethanol production, has been a real growth segment in the largest covered hopper car. Distillers dried grain is high-protein food supplement -- feed supplement for poultry, swine and cattle that really has been replacing some of the corn that is being consumed for ethanol production. So this is a global growth market. And we've had a unique car that we introduced into that market five years ago. And that has been a real beneficial new product introduction for us. Covered hopper cars are a strength of ours, and we have the broadest productline to offer to our customers.

I guess as you look out it seems like distillers dried grain, that is probably robust, as we look out. I know you're producing a lot of the cement cars right now, I think. Anything -- I'm just trying to -- if you could look forward a year or so do you think a lot of these type of hopper cars will stay strong just in general?

I do. And also keep in mind that not only is distillers dried grain the coproduct of ethanol production, but the feedstock for ethanol and for biodiesel are soybeans and corn. Crop yields are up. More crops are being planted. Yields are being improved from enhanced fertilizers and seeds. And I think there's a whole replacement demand for the covered hopper fleet that serves the agricultural industry. There is still an opportunity to to increase the efficiency and productivity of covered hopper cars serving that. As we see growth in plantings, as well as replacement of older cars, that is another point on our productline for covered hoppers.

I just missed the number that -- in the Railcar Leasing segment what was the sales, the internal sales -- the fleet sales?

During what time period?

For Q4 '06 and even Q4 '05.

2,300 in the fourth quarter and 7,800 for the calendar year 2006.

Just then last year, fourth quarter '05, do you know what that number was?

Does somebody have that? James, you got that?

1,700.

(OPERATOR INSTRUCTIONS). Bob Fetch, Lord Abbett.

In regards to the outlook for increased production in railcars, 10 to 15%, will we be able to increase our sales expectation a similar amount, or well the value of the average car, depending on the mix and so forth that you're likely to produce, will that change in any meaningful way?

Who wants to answer? I don't know that we have analyzed that from a revenue standpoint. I think that is what you're asking is the revenue change in the mix for '07?

I think the way I would look at it is we did give you the backlog, and we put a dollar value on the backlog at $2.9 billion. That dollar value doesn't represent a significantly different price than the dollar value we gave to at the last quarter.

Because it seems as if, just on the railcar alone would get you neither to or beyond your expectation for the year in terms of your earnings outlook relative to what you generated in '06, which seems to leave a lot of upside if you have fully corrected some of the production growth issues -- I don't know if you can elaborate on them -- that you had as well in this period as well as increased volume in the Energy Equipment, as well as in the Barge area for '07.

I would caution you that we made a couple of disclosures today, one of which was that the net fleet additions as we look forward to '07 would be in $650 million to $750 million range, which is an increase from $530 million this year. And then we also disclosed that we would be eliminating approximately $105 million in profit on those cars sold to our lease fleet. So obviously that has a near-term impact on earnings, but we gain the long-term earnings stream off of our leasing business.

Understood. Can you talk about the growth issue in the period? Was that related to getting the new plant ready in Illinois for wind, or was that other issues?

Your question is particularly in the Energy Equipment Group and the margin compression, is that right?

Is that is what that commentary was solely related to, or if not, if you can elaborate further.

Yes, it is primarily associated with some production issues, as well as just the general challenges of growing a business as significantly as we are. As we talked about, we really had a business that moved from $60 something million to $138 million this year, and is ramping up towards $225 million to $250 million. So the compounded growth rates in the business had just been very strong. And you just had a little weakness within the quarter, but we have still guided to a 13 to 15% margin for the year.

You're expecting a very strong recovery there on significantly higher sales obviously?

Expecting to recover in that 13 to 15%.

If you could just detail at all the nature of the production issues to give us some higher understanding or conviction in terms of recovery?

Anytime, and you saw this happen to us in our railcar business, but anytime you're ramping up a production facility. And Alex was talking about it a little while ago. When you're converting a group of workers and training workers to hire -- and hiring workers to build products that they're not familiar with you have learning curves that are associated with that.

Our wind tower business is a new business to Trinity in the last decade. And so the facilities that we're currently building wind tower structures in have been going through a growth over the last couple years, like what Bill was saying. And you have a whole host of issues that are associated with that, that I think companies commonly just refer to as growing pains. And a lot of times your revenue moves at a faster pace than your earnings moves. But then after you get the experience curve -- you saw this happen in our railcar business, our revenues ramped up a couple of years at a fairly fast pace and our earnings blabbed it. But then all of a sudden the productivity initiatives kicked in when the people get consistent. We strive to have high volume repetitive type production atmospheres, and just takes us a while sometimes to get there.

So would it be safe to say you essentially had more man-hours per product delivered or were they yield or quality issues?

You just have a whole host of issues that occurs in that. We don't really go into to describing all the details of what is going down with the troops. We just kind of try to say that we felt like we had some issues we were dealing with. And then now we have overcome those, and we think things are going to be improving.

But it is also important to keep in mind we are making a projection and estimating what we're going to be able to do with a new facility that is going to have some new work, have some replacement workers and some new workers, and so it is still a number. As we go through this year we will try to give updates. And our next conference call is not going to be as long as this one was between the last one, since it will be the first quarter and it will be in late April or early May time period. We will give you an update at that time on how the productivity issues in all of our businesses are working towards the numbers that we have projected. If we've got a different number, then we'll just have to project a different number.

Good. In regards to the new plant of that $225 million, $250 million in expected sales, how much is going to be coming out of the Illinois plant in your estimation?

We haven't disclosed the amount coming out of the Illinois, but we do see that plant coming on towards the summertime of '07.

That is when it will be starting. And then it really won't gain its whole revenue potential stream until six or eight months later. And so it is really -- that plant is really going to end up being an '08 producer for us.

That will for the most part be incremental beyond the '07 expected sales runrate there?

Yes. And then like I said in my part of this speech, we have other initiatives that were taking place in other facilities internally. And then I think Bill even mentioned that we will look at external acquisitions that might help us in that business if we target that wind tower business as a growth opportunity for us.

Then lastly, what is the level of your Barge backlog? And having studied a number of the barge -- tank barge companies recently, the outlook is for the industry -- in a difficult situation growing their fleet at all with the retirements that are occurring, and still some single holes being replaced, and limits on production. Can you give us a view on your backlog? And also as indicated you're looking into some options in terms of increasing your production rate there?

The backlog at December 31 was $464 million. That is up from $335 million one year ago. We are projecting a runrate on our revenues of between $100 million and $110 million. So that would suggest a backlog of just over four quarters.

As I said in mine, we still have customers that are talking with us about additional orders. And that market is still a very steady market with a continuous number of inquiries coming into us for additional barges. And our people have been very successful at enhancing our overall productivity.

We have launched a new paint facility in our tank barge operation that has enhanced our ability to paint year-round instead of having to slow down painting during the wet weather season. And that has been helpful. They have a large number of other initiatives that are in place that they're trying to work on, additional productivity improvements. And they have been successful so far. We've got a great management team, and we're very strong in that particular area of our business.

Those productivity initiatives will not only enhance potential volume rates but also margins further?

Yes. And in fact, if you looked back at the fourth quarter of '05 we had a runrate, we were doing a little over $82 million in revenues. So move that $82 million to $106 million, almost a 30% gain in revenue within the group.

Thank you.

We have time for one more question, if there is any more questions on the line.

(OPERATOR INSTRUCTIONS).

Okay, Colin, we thank you very much. And we will let this concludes today's conference call. Remember, a replay of this call will be available starting one hour after this call ends today through midnight, Thursday, March 1. That access number is 402-220-0428. 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. Thank you for joining us this morning.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.