Trinity Industries Inc (TRN) 2007 Q2 法說會逐字稿

Welcome to today's teleconference. At this time all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session. Please note that this call may be recorded. I will now turn the program over to James Perry, Vice President and Treasurer of Trinity Industries. Go ahead, please.

Thank you, [Sonia]. Good morning from Dallas, Texas, and welcome to the Trinity Industries second quarter 2007 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'll move to the Q&A session. Also in the room today is Chas MIchel, Vice President, Controller and Chief Accounting Officer.

A replay of this conference call will be available starting one hour after the conference call ends today through midnight on Thursday, August 9th. The replay number is 402-220-0119. I would also like to welcome to our call today our audio web cast listeners. A replay of this broadcast will also be available on our web site 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 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.

At June 30th, 2007, our borrowings at the corporate level were the $450 million of convertible subordinated notes, $201.5 million of senior notes, and $1.5 million of other indebtedness. The leasing company's debt included $341.1 million of secured railcar equipment notes, $75.7 million of equipment trust certificates, and $259.1 million outstanding under our railcar leasing warehouse facility. Our total debt to total capital ratio was 46% on June 30th, 2007, unchanged from our ratio at December 31st, 2006. Net of cash, our net debt to total capital ratio was 41% on June 30th, 2007, up from the comparable amount of 39% at December 31st, 2006. On June 30th, 2007, our cash position was $228.1 million.

You'll hear us talk quite a bit today about TRIP Rail Holdings, LLC, or TRIP, as we will refer to it. TRIP is a leasing company that was formed in the second quarter to purchase approximately $1.4 billion worth of railcars during the next 24 months from Trinity's railcar manufacturing companies and leasing company.

All of these railcars will have firm noncancelable leases in place with independent third parties. TRIP is owned by Trinity and five private investors not related to Trinity or its subsidiaries. Trinity holds a 20$ equity ownership in TRIP.

The new railcars sold from the production lines will be considered external sales. Accordingly, 80% of the profits will be recognized and not deferred while the other 20% will be deferred. Those sold from our lease fleet will be reported as car sales and the profits will be recognized at the 80% level as well. The first transactions occurred in June, when TRIP purchased $93.7 million worth of railcars from our leasing company. We are excited about the additional capacity and flexibility that TRIP provides us to continue the significant growth of our lease originations for both TRIP and our own leasing business while maintaining a healthy balance sheet. Bill will provide further detail as to the financial impact of TRIP on our earnings later in this call.

Now here's Tim Wallace.

Thank you, James, and good morning, everyone. Trinity had a very busy and productive second quarter. I'm very pleased with our accomplishment and optimistic about the future. Our earnings from the second quarter were strong. They reflect the success of many initiatives that we've put in place during the past two years. The new railcar leasing entity that we created during the second quarter will help provide additional financial resources and flexibility for our railcar leasing business. The investment in Texas Asphalt Company that we made during the second quarter is providing new opportunities for our Construction Products Group. Our newly converted wind tower facility in Illinois is enabling us to pursue the growing wind energy market in the Midwest.

Our new tank barge coating facility has resulted in more consistent production for our barge business. These are just a few of the many success stories at Trinity. We will have more detail as our businesses pursue additional initiatives designed to enhance their competitiveness and increase our earnings. I'm very proud of the accomplishment of our employees. Today Trinity has a great deal of positive momentum.

We've been very deliberate during the past two years in perfecting and fine-tuning several specific competencies. One of our emphases has been to improve production flexibility companywide. Production flexibility enables us to meet market demand as it fluctuates between the various types of products we manufacture. We've become very adept at adjusting our production lines in accordance with market shifts. The conversion or Clinton, Illinois, plant to wind tower production reflects this competency.

Another key initiative has been to increase the diversification of our earnings strength. The breadth of our earnings diversification efforts is becoming more apparent as many of our businesses improve their earnings. Our barge group is an excellent example. Our barge group had another fantastic quarter. During the second quarter, our barge company's backlog increased 19% from the first quarter. We were recently notified by Ingram Barge Lines that they are ordering 250 barges for delivery in 2008 as part of their multi-year agreement with us. This order was not included in the backlog at the end of the second quarter.

Our Leasing and Management Services Group also had a great second quarter. Our leasing company is another important part of our earnings diversification strategy, providing the Company a more consistent earnings base. We continue to invest in our future by increasing the size of our lease fleet. We've been focusing during the past few years on developing our financing alternatives so that we had sufficient capital to grow our lease fleet. The formation of TRIP provides us another financing venue, as well as increased marketing flexibility. Steve and Bill will provide more insight into this initiative.

Our Rail Group shipments reached approximately 6,980 units this quarter. This is a 12% increase over the same quarter last year. Our Rail Group has been very successful at improving productivity while steadily increasing railcar shipments during the past four years. This, in part, is due to our broad product line and production flexibility. Demand for railcars in North America continued at a moderate pace during the second quarter similar to the first quarter. The demand for railcars is not as robust this year as it was last year. We are equipped with the necessary skills and abilities to adjust for fluctuating market demand shifts. Our primary objective is to obtain orders that help us minimize our line changeovers and disruptions. We're fortunate to have a backlog that provides us some time to develop efficient production plans.

Our Construction Product businesses were impacted in the second quarter by the heavy rainfall in the Southwest. This was particularly true for our concrete and aggregate business. Fortunately, during the past few weeks, the weather has improved slightly and demand is strong. During the second quarter, our concrete and aggregates business sold its Houston operations and acquired a group of concrete and aggregate and asphalt companies in east Texas. These moves are showing good early results. We will continue to search for additional concrete, aggregate and asphalt operations in areas where we anticipate steady demand.

Our highway products business has been relatively steady during its busy season. If the weather cooperates, we expect the balance of the construction season to be in line with normal seasonal activity.

Yesterday we completed the acquisition of a small highway products company in Mississippi called Central Fabricators. This is a nice geographical expansion for us. The company generates approximately $26 million in revenue.

We remain very optimistic about our structural wind tower businesses. Today the wind energy business is emerging as a very nice growth industry for us. We are uniquely positioned to serve the wind energy markets in the Southwest and Midwest portion of the country. The demand for wind towers continues to be strong. Our structural towers business to continuing to explore additional ways to expand their wind tower manufacturing capacity. We're currently constructing a new facility in Mexico to expand our capacity. We expect to bring it on line in the second quarter of 2008.

Our new wind tower facility in Clinton, Illinois, began shipping towers last month to Midwest wind farms. Our current backlog of orders is very close to $800 million. In the short term, our top line revenue will grow at a pace faster than our margins as we train our work force. We're in the early stages of implementing lean manufacturing into this business. Long term, we expect to see margin improvement similar to what we have experienced in our other businesses as we become more efficient. We expect to have margins in the mid teens when our production has leveled out. At this point, it's hard for us to precisely estimate where our revenues will peak in this business.

There have been several new wind farms announced in the geographical regions we serve. Revenues for this business grew 58% during the second quarter over the same quarter in 2006. Our second quarter revenues reached $53 million. We expect our 2007 revenues to be $225 million to $250 million, or 60% to 80% above last year. We're very optimistic about the future of wind energy and the demand for our structural towers.

As you can tell, I'm very pleased with the performance of our company. We're continuing to benefit from the investments we made during the past few years and we are continuing to make additional investments that should benefit us in the future. Trinity has a nice momentum.

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

Thank you, Tim. Good morning. Trinity Rail continued to perform well during the second quarter of 2007. Railcar production levels increased and operating profits continued to expand. Trinity Rail delivered approximately 6,980 railcars during the second quarter, a 12% increase in deliveries over the second quarter of 2006. Our operating profit improved 24% as compared to the first quarter of 2007. We expect to maintain our production momentum with railcar deliveries in the second half of 2007 to average between 7,200 and 7,500 railcars each quarter.

With regard to the railcar market, industry orders for railcars during the second quarter kept pace with first quarter demand. Approximately 11,500 orders were placed. This compares with a quarterly average of approximately 17,000 railcars ordered during the previous 12 months. The total industry backlog stands at just more than 75,000 railcars. Recent order inquiry levels indicate third quarter orders could be in line with first and second quarter demand.

As you know, railcar demand shifts periodically from car type to car type and fluctuates from quarter to quarter. Order levels in the second quarter reflected continued soft demand in the select markets, such as intermodal, coal and boxcars, moderate demand for covered hoppers, and more normal demand for tank cars. Current orders continue to be driven in part by the renewable fuels, basic chemical and agricultural industries, which principally use tank cars and covered hoppers to transport their products. The need to replace smaller less efficient railcars has also boosted demand for these car types. We believe the replacement cycle for the aging North American railcar fleet is in its early stages and will serve as the basis for sustainable long-term railcar demand for all railcar types.

In the next 12 to 18 months, however, we expect railcar demand to continue at the current moderate levels. This is a result of a slowing economy and a reduction in railcar loadings, while the rail network absorbs the significant number of new cars placed in service during the last few years.

During the second quarter of 2007, Trinity Rail received approximately 3,080 railcar orders. Many of these orders extend current production lines for a variety of railcars. Specifically, we received orders from railroads, industrial shippers, and third party lessors for covered hoppers, coal cars, flat cars, auto racks and tank cars. Our first half 2007 order levels of 11,570, or 50% of the total railcar market, are consistent with our trailing 12-month share of industry orders of 48%. We believe this figure is a more reliable benchmark for our order performance than quarterly totals, which tend to fluctuate.

At the end of the second quarter, Trinity Rail's railcar order backlog was 33,880 railcars compared to 37,790 at the end of the first quarter 2007. Our current backlog is 16% greater than our backlog at the end of the second quarter of 2006.

During our first quarter conference call, I mentioned the conversion of our Saginaw, Texas, and Oklahoma City production lines to tank car production. These conversions were in response to increased demand for these railcar types. We completed the conversions ahead of schedule and the plants are operating at highly efficient levels. This contributed in part to our operating profit improvement during the second quarter. The speed with which these lines became productive reflects our focus during the past few years on fine-tuning our operating flexibility and production processes.

This is also reflected in the success we're having with new production lines at our facilities in Mexico. During 2007 we will increase our Mexico output by 35% to 40%, producing more than 12,000 railcars in our facilities there. We credit our experienced production personnel and established labor force with bringing these production lines up and running and operating at high efficiency levels. Our ability to shift production to meet changing market demand, combined with Trinity's broad product line, proven railcar design and production resources, will contribute to maintaining the strength of our railcar order backlog.

Railcar Leasing and Management Services Group continued to grow its railcar fleet during the second quarter. Trinity's rail businesses shipped approximately 3,400 new railcars to our leasing company during the second quarter, all subject to firm noncancelable leases with independent third parties. This represents about 48% of Trinity Rail's second quarter railcar shipments. This increases the size of our lease fleet to more than 34,600 railcars compared to more than 27,200 at the end of the second quarter 2006. We expect our lease fleet to continue to grow at a strong pace throughout 2007 and 2008. We expect to ship approximately 35% of our total third quarter shipments and 17% of our total fourth quarter shipments to our leasing company. I would like to emphasize again the railcar shipments to our leasing company are only reported when a firm noncancelable lease is in place with an independent third party.

Overall demand for railcar leasing services continues to rise. We see a long-term trend for railroads and industrial producers to use their capital resources to acquire income-producing assets, which our core to their business, while relying on leasing for operating assets such as railcars. The investment in our leasing business provides several benefits. It helps us develop long-term relationships with the end users of our railcars and provides an important distribution channel for our railcar businesses. Additionally, it generates a significant long-term stable earnings stream that mitigates fluctuations in Trinity Industries' overall revenues. We continue, of course, to sell railcars to a wide variety of customers, including other leasing companies, railroads, utilities and industrial producers.

Our leased fleet remains highly utilized at well over 99% at the end of the second quarter. The average age of the railcars in our lease fleet is 4.2 years and their average remaining lease term is approximately 5.5 years. Renewal lease rate increases continue to rise as the result of high fleet utilization, strong levels of new car building and higher new car prices. We expect the increase in renewal rates to decelerate during the near term, however.

As James explained, Trinity has purchased 20% of the equity in newly formed TRIP Holdings. As part of the agreement, TRIP Holdings will purchase approximately $1.4 billion in railcars with leases originated by Trinity Rail. The agreement also specifies that Trinity Leasing will provide portfolio management services for these railcars and leases. The purchases will be funded by capital contributions from TRIP Holdings and third-party debt. The first transactions occurred in June, when TRIP Holdings purchased $93.7 million of railcars from Trinity Leasing. The sales to TRIP Holdings were, and will continue to be, for railcars subject to firm noncancelable lease agreements with independent third parties.

TRIP Holdings benefits Trinity Rail by providing an additional financing venue for leasing transactions originated and managed by Trinity Leasing. TRIP Holdings therefore complements the sizable credit facilities already in place to grow our leasing business. Bill will discuss further with you the effects of our investment in TRIP Holdings on our leasing backlog and profitability.

In summary, our operating flexibility, innovative railcar designs and broad product line have enabled us to meet shipping demand among various railcar types, resulting in our strong railcar order backlog. We continue to gain significant operating efficiencies through extended production runs and our employees' ongoing commitment to reducing costs while increasing our production levels. We have now developed considerable financial resources to meet the growing leasing needs of our customers. The growth of our leasing business has enabled us to effectively manage our production plants while enhancing Trinity's long-term stability.

Our overall goal remains to maximize our returns by optimizing production capabilities and product mix while continuing to drive production efficiencies and pursuing further cost reductions. I am pleased with the overall performance of Trinity Rail and the focus of our employees to achieve our goal.

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 2007. We will file our Form 10-Q this morning. You will find more details there about the second quarter results. During my remarks, I will provide earnings per share guidance for the third 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 second quarter 2007, we reported earnings of $0.85 per diluted share from continuing operations. This compares with $0.81 per share from continuing operations in the same quarter of 2006. Revenues for the second quarter of 2007 increased 5% to $893 billion over the same quarter last year. Earnings from continuing operations exceeded the high end of our expectations by $0.12 per share. These positive results were primarily due to the following -- our initial railcar sales to TRIP Holdings provided $0.09 per diluted share coupled with excellent operational performance in our Rail and Inland Barge businesses.

Moving to our Rail Group, revenue for this group increased 12% on a quarter-over-quarter basis. Rail Group sales to Trinity's Leasing and Management Services Group were $283 million in the second quarter of 2007, with profits of $50.3 million, or approximately $0.41 per diluted share. This compares with sales to our leasing group in the second quarter of 2006 of $119 million with profits of $12.2 million, or $0.10 per diluted share. These intercompany sales and profits are eliminated in consolidation.

Our margin results for the Rail Group were 16.1%. At this time, we anticipate margins for the Rail Group of between 14% and 15% for the third quarter. Our assumptions for margins are based on the following -- continued production efficiencies and no significant supply problems with steel or other basic materials. The Rail Group backlog as of June 30th, 2007, consisted of 33,880 railcars with an estimated sales value of $2.8 billion.

Now I'll turn to our Inland Barge Group. The Inland Barge Group's second quarter performance was once again very strong, boasting revenues of $120 million and operating profit of $6.6 million, which included the $15 million charge for the proposed barge settlement. The results of the barge group continue to reflect a high level of operational excellence. This group's backlog as of June 30th, 2007, totaled approximately $677 million. This compares with $487 million one year ago. We anticipate Inland Barge revenues of between $120 million and $130 million in the third quarter. Operating profit margins are expected to range between 14% and 16% during the quarter.

Now moving to the Energy Equipment Group. During the second quarter, this group's wind tower business continued to experience some production issues and growth challenges typical of fast-growing operations. The result was operating profits for the Energy Equipment Groups of $11.7 million and operating profit margin of 11.8%, which represents a 70-basis-point improvement from the first quarter of this year. Overall, we expect margins for the group to continue to increase for 2007. However, we're no longer guiding the margin as a result of the unpredictable nature of expansion costs associated with the rapid growth.

Revenues for the group will total approximately $450 million for 2007, which represents a 34% improvement in revenue over last year. We have expanded our 10-Q disclosures in this segment to include revenue from the wind tower business.

Revenues for our Construction Products Group were up 5% when compared to the same quarter of the previous year. Operating profit was $15.8 million for the quarter, represented a decline of $4.3 million from the same quarter the previous year. The profit decline is primarily related to the poor weather conditions we experienced in the second quarter.

Our Railcar Leasing and Management Services Group reported revenues of $162.5 million compared with $71.8 million in the same quarter the previous year. Operating profit was $39.5 million with $11.7 million resulting from car sales. The second quarter reflects the initial quarter in which we had completed transactions with the new company, TRIP Holdings. As we discussed earlier, TRIP Holdings is a new company, which Trinity, through one of its subsidiaries, owns 20%. In addition, we have management duties and administrative obligations.

During the next 24 months, the new company is anticipated to acquire $1.4 billion in railcars from Trinity. TRIP Holdings has provisions to expand beyond the 1.4 billion. TRIP Holdings will be supplied with some railcars from our existing fleet, but the vast majority will come directly from our production lines. All railcars being purchased by TRIP Holdings will have firm leases in place with independent third parties. This new company allows Trinity to continue its core competency of lease originations while maintaining a participation in the upside of the leasing economic benefits.

For 2007, we now anticipate between $525 and $575 million net fleet additions to our own fleet. These figures represent a reduction from our previous guidance of $750 million to $850 million in net fleet additions. As a form of clarity, net fleet additions are the fair market value of cars added to our fleet less the proceeds of cars sold from the fleet. Our railcar backlog of $2.8 billion has approximately 65%, or 1.8 billion, dedicated to our leasing company and TRIP Holdings. As a result of the TRIP transaction, we currently estimate that approximately $800 million of the backlog will be purchased by TRIP Holdings. The result is our backlog dedicated to our Leasing Group has declined to approximately 37% of the total Trinity Rail backlog as compared to 61% last quarter.

Moving to our consolidated results. For 2007, we expect [non leasing] capital expenditures of between $170 million and $190 million. During the third, we will defer approximately $270 million in revenue and between $40 million and $44 million in operating profits as we grow our leasing business and sell cars to TRIP Holdings. This represents between $0.33 and $0.36 per diluted share.

Also during the third quarter, we anticipate a second funding of cars to TRIP Holdings from our existing lease fleet of approximately $65 million, which will provide approximately $0.07 of income per diluted share. We anticipate earnings from continuing operations for the third quarter to range between $0.92 and $0.97 per diluted share.

Our previous guidance for 2007 has improved. The new guidance is for earnings per share between $3.35 and $3.45 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, the elimination of between $133 and $139 million in profit for railcars sold to our leasing company and TRIP Holdings, or approximately $1.08 to $1.13 per diluted share. In addition, we are projecting the funding of approximately $525 million to TRIP Holdings from both the existing fleet and directly from our new car production line.

In our earnings release yesterday, we provided a reconciliation of the non GAAP [current] EBITDA. EBITDA from continuing operations for the second quarter of 2007 was approximately $153 million as compared to $144 million in the same quarter last year.

At this time, I will 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.

(OPERATOR INSTRUCTIONS) We'll take our first question from John Barnes from BB&T Capital Markets. Go ahead, please.

Hey, good morning, guys. Congratulations on the quarter. Hey, a couple of questions here. In terms of the railcar orders, can you give us an idea -- you know, when you rattled off how many orders you have you year to date, all the car types, it seems to me like you're getting some orders that are smaller in nature. I mean, can you look at a year ago and look at now and just kind of give us an idea average size of an order coming in? Has there been a material change in that and should we expect these smaller orders to trickle in or do you expect anything material out there on the order front?

Sure. A year ago at this time, we were seeing large quantities [and] individual orders are related to the renewable fuels market. That market has taken a bit of a breather, so we don't see those large numbers. This quarter, we did see a large number for an individual coal car order. We saw a large number for an individual intermodal car order. Beyond that, orders have probably been a little smaller in nature compared to what we saw a year ago, but that's going to shift from time to time and from car type to car type.

And again, we see generally moderate levels right now. Some big orders -- smaller orders. Going forward, we would expect probably the same mix, and as different car types become in greater demand, the size of those orders may shift with them. So really hard to give you a forecast of that, but this quarter we probably saw smaller quantities in the individual orders that we received.

Okay. In terms of cars sold out of your existing lease fleet to TRIP, I guess James indicated it was a 93 -- 93.7, I guess, is what it was. Can you give us an idea of how many cars we're talking about? I'm really trying to get a grasp on how much lost lease revenue did that result in as I'm looking at modeling leasing going forward?

Yes, John, I think -- we won't disclose the cars, but I think the best methodology is that you're talking about [sales] just shy of 100 million and our press release disclosed PB&E of about $1.7 [million] so a fairly small percentage of the overall fleet.

And in terms of lost revenue on lease?

Well, I think your best bet is that it's a pro rata portion of that total.

Okay, that works. In terms of the legal settlement -- you know, the $0.12 -- are you done now? That looked like the last remaining barge thing. I went back and looked at the K. I mean, is that the last legal issue, I guess the Waxler issue?

Yes, that is the only pending issue at this time associated with the barge matter. And as we said, it's a pending settlement agreement; it is not a settlement at this time.

But are you -- is that number pretty firm at this point?

It's the appropriate number to book at this point in time, I think, is the way to say that.

Okay, very good. And then lastly, back on railcars for just a second, I guess one of the large leasing companies announced earnings and made some comments concerning an overcapacity situation on the tank cars. I mean, it sounds like you guys have ramped up two more facilities and that's cranking out the cars at a pretty good clip. You know, just your comments on the overcapacity situation -- do you think this is just a blip on the horizon right now and the market just needs to absorb these and then it's right back to more robust demand or do you think this is going to be a persistent issue and you may have to look at, you know, shifting some of that production back over to another car type?

Yes, John -- and thank you. I'll be happy to answer your question. I just want to clarify my comment and answer your first question about orders. My comment was relative to the entire industry and not specific to Trinity, so I just wanted to be clear about that.

Yes, I mean, first of all with respect to renewable fuels, it's a dynamic market. We saw large orders for those cars. The ability to produce cars and put them into service has outstripped the ability of that industry to construct facilities so there's a little bit of imbalance between supply and demand for those railcars serving that market. We're certainly very bullish on the long-term opportunities in renewable fuels, particularly when you look at the legislation that circulated in Washington to increase the renewable fuel standard even further. So we think that will pick up again.

And it's also important to note that the railcars that are going into the renewable fuels market have application to other markets as well. Those cars are capable of carrying other commodities so these are not single-use railcars that are being built for that industry. So the phenomenon that you're seeing right and the imbalance between supply and demand for those railcars we think is short term in nature and we will get back into a better balance in the near term.

Okay. All right, lastly -- last question. On the barge side, in terms of the Ingram order, can you remind us again of the initial size of that order? How many barges for Ingram and now in the backlog and how many kind of remain out there as options?

Yes, the order that we received was a multi year order commitment that we have with them to build barges for them and then to take barges from us -- and it varies from year to year on their needs for barge -- barges. These are primary replacement barges and so they had the flexibility of establishing what their requirement and then each -- I think it's between the second and third quarter each year, they will firm up what they are and then we will disclose what that amount is, so it's hard to project what their numbers may end up being eventually and their overall demand.

All right, but how many -- so 250 are now added in for delivery in '08. How many did you -- how many are you producing for them in '07?

Yes, we did 250 in '07. We're doing 250 in '07 so it's a duplicate of the order that they gave us.

Very good. All right, thanks, guys. Again, nice quarter.

Thank you.

Our next question comes from Brannon Cook from JPMorgan. Go ahead, please.

Good morning. Wanted to focus a little bit more on rail margins. Obviously very strong performance there. It looks like you guys did a great job of maximizing your production efficiencies and your production runs. I guess you're -- looking out to the back half here, should we expect a similar level of mixed car types? Is there anything different in terms of how you're going to manage that production run?

Yes, Brannon, I think for the back half, we guided to 14% to 15% margin in the third quarter, and really that margin reduction from the 16.1 is primarily based on our look at the backlog and at the cars that will be built during the period and the particular pricing associated with those cars, so it's not reflective of less performance by our production people. In fact, they're doing quite well.

Okay. Additionally, I just wanted to follow up on your comments on the orders in the second quarter. You guys talked about -- historically talked about orders being lumpy from quarter to quarter and have been comfortable with where your market share has been, but I guess your market share of industry-wide orders is a bit softer in the second quarter versus first quarter levels. Should we look for that to go up in looking to the third quarter to be more in line with where things had been for the full first half?

Well, we've always said that the order level is lumpy and it depends on the capital purchases of our customers and the timing of when they release their orders. We monitor the inquiry levels. And when Steve was talking earlier about thinking the third quarter might kind of resemble the second quarter, a lot of that was based off of his view of the inquiry level that we have. Since we've got such a broad product range, we see the full spectrum of demand for railcars. And it's really hard for us to predict the size of a particular quarter from quarter to quarter because that ties back to an individual company's release of their capital purchase, and a lot of the capital purchasing decisions are either finance decisions or based on what their specific needs are.

Brannon, I also think -- and what we've tried to frame for you -- is that we consider the railcar market to be in the midst of a multi-year plateau rather than a short-term spike followed by a deep trough. And I think third-party railcar market research firms substantiate that with their forecast of production levels in the 50,000 to 60,000 car range over the next three to five years. Again, that's a guided range by independent third parties. So that's what we mean by a multi-year plateau as opposed to the peak and spike -- the spike and trough that we've experienced at the turn of the century.

Okay. That's helpful. And just to clarify, you guys had talked about, from an industry wide basis, being comfortable with total industry orders tracking in the back part of the year where they had been in the first part of the year based on just kind of what you're seeing from inquiries.

Based upon current inquiries, thus far that's what we see happening.

Okay. Thanks. And then just a question on barge -- continue to have strong momentum there. I guess could you talk a little bit about your production capacity there? Where it stands, what you're doing to increase that the looking forward?

Well, our production capacity on our barge is something that our management people are heavily focused on in our barge business. And through productivity initiatives and other capital expenditures that we have in place, they're constantly looking as to how they can squeeze more products out of the existing facilities that we have. And they've been extremely successful at doing this over the past couple of years and their game plan is to continue to try to do this. So they've increased their volume with the same amount of space that we've had for square footage, and you end up with productivity improvements that come out of that, as well.

Okay, thank you.

Our next question comes from Wendy Caplan from Wachovia. Go ahead, please. I'm sorry, one moment.

Hello?

Go ahead, Wendy.

Okay, thanks. My question is more on the margin. When we were back in -- three months ago, when you talked about second quarter results, you suggested that the rail margin would be in the 12.5% to 13.5% range. It came in at 16.1, which from my records is the best ever. Now you're saying 14 to 15 for the second half. First, can you talk about was it simply better production runs? Longer production runs? Or is there something that we're missing in terms of why you so greatly exceeded your forecasts? And should we assume that you're being conservative going into the second half of the year?

Wendy, first let's address the margin of 16.1 in the second quarter. I think from our perspective, obviously things are going very, very well from an operational view. We did earlier tell you that we had some significant changeovers moving in our tank car business and those changeovers have gone far better than we ever suspected, as well as we were really blessed with some good orders that went through the business during the second quarter. As we said, as you look to the third quarter, the slight reduction in margin -- and I think it is just a slight reduction in margin -- is really just representative of the orders that we're facing. As a general reminder, we do have that one fixed contract that is out there. The third and fourth quarter are when we will fulfill that contract.

Yes, and we have a few more changeovers, I think, in the second half -- the back half of the year than we do in the first half with line changeovers, but our people are doing a masterful job of being able to switch between products in our rail group.

Clearly, the margin reflects that. I guess the same question for barge. You know, it also had kind of a record-setting margins well above what you had expected. Same question, are you being conservative relative to the second half?

Wendy, I don't think we're being conservative. Once again, I think we're looking at the product mix that our businesses are facing in any one particular period of time. The barge group's second quarter was outstanding. Their operational performance and their efficiencies at all of their facilities was just simply outstanding.

Okay. And can you translate the backlog for us into -- because I know you leave -- there are some holes in it for additional orders. Can you kind of give us a feel for how long the rail and barge backlogs extend on a months basis?

Yes, we'll tell you on the barge backlog, it's relatively consecutive, so I think on the barge backlog, there are some holes, but not very big holes. On the rail backlog, the rail backlog does have orders that go into '08 and a few of the orders that go into '09.

Okay. And I'm sorry, barge goes into?

Barge is primarily into '08. Pretty heavy.

'08. Okay. Thank you very much.

Our next question comes from Art Hatfield from Morgan Keegan. Go ahead, please.

Good morning, guys. Got a few questions here -- some clarification. I don't know if you mentioned, but in the second quarter orders of 3,000 some-odd cars, did you give us a breakdown between the number of those cars that were from third-party and those that were from your own leasing company?

No. We don't report those figures.

Okay. Secondly, a couple of discrepancies, or maybe just a clarification on long-term demand. It was said, I think in prepared remarks, that you expect the kind of excess cars that have come into the market recently to be worked through the system over the next 12 to 18 months, and then, I think in response to one of John's questions, that you thought it would be very quickly. Did I hear you right in your prepared remarks that it would be 12 to 18 months and you really wouldn't expect to see a real pickup in order activity four or six quarters out?

I think when you're looking at the entire railcar market, that we are looking at 12 to 18 months before we see a broad-based improvement in demand. In that consideration is the capital improvement projects in the coal market that have yet to improve system fluidity and allow for more cars to go into that system. We are seeing a slowing in exports -- or import of finished goods from Asia, which drives intermodal loadings and demand for intermodal cars. That's, in large part, economic related. And then yes, in certain markets, as I mentioned in the renewable fuels area, we do have some imbalance between supply and demand as a result of a timing issue between the construction of those facilities to produce ethanol and biodiesel and the cars that have gone into the system.

I think those cars will be absorbed over a shorter period of time, but overall, we think that we're probably at a demand level that we'll see for a 12 to 18-month period.

Are you seeing any kind of more aggressive pricing from your competitors in both the manufacturing and/or leasing space?

Yes, it's a highly competitive market right now and all of our competition is confronted with the same things that we are, and that is trying to keep their lines up and running. And so you have good competition taking place.

And then finally, I've got some questions about TRIP. And I'm kind of confused here. I must not be as smart as everybody else, but I'm trying to understand what the real reasoning here is. You talk about increased financial flexibility, increased marketing flexibility and some capacity. You also -- I heard the comment that it's a new leasing company. It's not in the sense that all the activities that are handled by a leasing company are going to still be handled by Trinity Leasing. Is that correct?

Trinity Leasing will originate these transactions and manage the lease portfolio for TRIP.

Okay. Did you mention, or will you mention, in your 10-Q what your equity or financial contribution to this entity will be?

Yes, our 10-Q will be filed today and Note 5 in our 10-Q will give you a rather robust disclosure of our equity content in the new company.

Will it give any comments about who your partners are in this?

Does not name the partners.

Can you talk -- mention kind of what kind of entities they are? Are they just financial investors or are they industrial companies or existing customers of yours?

They're financial investors.

Okay.

And it's important to note that TRIP really supports our commercial strategy to develop close relationships with the shippers, who are really the end user of our products, and it gives us quite a bit of flexibility there. We can continue growing our own leasing operations while simultaneously improving the Company's overall cash flow with this. It really comes down to flexibility and capacity to continue to add leasing originations.

But you couldn't have done that through your existing leasing company or -- I'm kind of not understanding how this new entity creates that flexibility other than from the standpoint that you didn't want to get as highly levered in your leasing business and/or you were concerned about the mix of business that you were delivering to yourselves and you would ultimately radically increase the amount of eliminations that you'd have to deal with on an annual basis?

There's probably two drivers. One is a portfolio management driver, where we need to maintain certain diversification and managed concentrations. With a leased fleet the size of ours, you can reach concentration levels fairly quickly, so this provides us an outlet to effectively manage our portfolio diversification.

From a financial standpoint, this allows us to really extend our balance sheet capacity without impairing the balance sheet of Trinity Industries, so we're really leveraging our capabilities beyond the individual balance sheet capacity of Trinity.

And from a commercial standpoint, if a customer comes to us and they have a large demand for railcars and they want to lease the cars, it allows us to go ahead and continue to build that relationship with this customer on a leasing basis. And then we get the benefits when we put the cars into the TRIP that we don't have to defer the -- except for 20% of the profit. And so we get the immediate benefits of the earnings capability there. So it just gives us an enormous amount of flexibility to control more of our own destiny.

Okay. Just one last question on this. If Trinity Leasing is the one out originating lease contracts, how is it determined -- or who determines whether or not this car is owned by Trinity Leasing or by TRIP?

As the manager of the Company, we would make that determination. Obviously the Company itself has parameters for the car types that you bring into the transaction, so you live within the concentration risk as defined by the contract, and as a manager, we have an obligation obviously to do our best at running that business.

And there are pricing and return guidelines that we need to conform to to satisfy the return requirements of the investors (inaudible).

I apologize. This is a tough question, but it kind of came up with that answer. If you have that much control over Trinity, why -- have the auditors brought up the issue that why shouldn't you be consolidating that entity?

Obviously we've gone through our auditors on consolidation issues on the entity. Again, I'll point you to Note 5 in our Q, which will come out today. It has a discussion regarding the consolidation issue and the accounting associated with FIN 46R.

Okay. Thank you. That's all I've got. Thanks.

(OPERATOR INSTRUCTIONS) Our next question comes from John Barnes from BB&T Capital Markets. Go ahead, please.

Hi, couple of follow-ups real quick. Given the, I guess, the adjustments you've made for lower state income taxes, could you give us a little bit of guidance as to what you expect on the tax rate on a go-forward basis for the balance of the year?

Yes, John, I still see the tax rate kind of in the 38, 39 zone for the year. Obviously it will move around a little bit with state taxes because we participate in so many different states, but somewhere in that range.

Okay. And then going back to your comment on some prior questions, just in terms of pricing on railcars, your indication that it's a pretty competitive market -- I mean, I just want to understand from the -- and I ask this question of all of you guys during earnings season -- can you kind of elaborate a little bit in terms of what's changed on the pricing dynamics, if anything, in the balance of this year? Are you still -- you know, is anybody asking for bids on, you know, with no [escalators] on raw materials and are you finding any of your competitors being irrational one way or the other?

I think Tim summarized it. It's a competitive market and certainly buyers see opportunities to try to (inaudible) terms favorable to them. And we need to balance our interests with meeting the demands of our customers. So it's a highly competitive market and we're going to have to face good stiff competition to continue to have a strong order backlog.

This is something that we're very accustomed to in our company and all of our products go through this routinely.

And then lastly, wind energy. Just given how much success you've had there, I've been a little bit surprised that we haven't seen new entrants -- new larger entrants into that market. I guess I have two questions. Number one, is there something preventing more entrants into that market that gives you a longer term competitive advantage? And then secondly, given how regional in nature that product is, are there some small competitors out there in regional markets that you're currently not serving that maybe it makes more sense to acquire your way into, say, California versus building your way in?

We're always looking at our geographical expansion and the alternatives of acquiring versus internal growth on all of our businesses, and that definitely applies to this one, and there are some niche players that are in that market. The thing that you have to realize, these wind tower structures are heavy weld-fabricated rolled sections. The thickness of these things are inch and a half to inch and three quarters and they're 14 feet in diameter and it takes very specialized equipment. And so for somebody that wants to enter into it, they've got to have a long-term vision that they'll have a place for this equipment to go.

And one of the things that we have a benefit of is the flexibility that we have is we can use this type of equipment in other parts of our business, and we know how to install, train and get up the learning curve very fast. So we know the things that we know and we're trying to focus on what we can control and what we can do well, and other companies just have to make their own strategic decisions whether they enter into this market or not.

Okay. All right, very good. Thanks for your time.

And we'll take a question from Paul Bodnar from Longbow Research. Go ahead, please.

Yes, congratulations on the great quarter there. Real quick on the TRIP transaction, you have the 1.4 billion you guys are planning on sending over there. Now, is that all coming from cars manufactured by your rail group or does that also include sales from the current lease fleet?

It's both. It includes sales from the current lease fleet and cars off the assembly line.

Okay. And then also to kind of follow up on the previous question on the barge group, what do you see as far as next year? Like what kind of -- I don't know, run rate or what kind of capacity can that get to -- the business -- as far as on a quarterly or annual basis and how far do you plan on building that out?

Well, as I said earlier, our barge people are constantly looking for ways to enhance their productivity and expand their capacity without having to go out and invest in new infrastructure of facilities and buildings because of the cyclical nature of this business. And they continue to impress us and we're going to reinforce their strategic investments in capital the best that we can because this business is -- the demand has been good and we will continue to grow as aggressively as we can. It's hard to say what that number is going to be. We've got a nice backlog going into next year, but I do know that there's still quite a bit of conversation about additional orders and capacity [they can get]. They're very aggressive at pursuing opportunities.

Do you think there is incremental capacity out there they can kind of (inaudible) current levels? For sure?

What was the question?

I guess in incremental capacities still available out there, as far as [now doing] a whole greenfield expansion or something along those lines.

I think to give you just a small view on that, I think we guided to the third quarter revenues between 120 and 130, and if you look at where we've come, second quarter of last year, 90; first quarter of this year, 108; second quarter, 120. So obviously there's forward movement by these guys.

Yeah, [that's what I meant]. Beyond that, though, I was kind of curious.

Well, we're not going to limit them in their ways of thinking of things they can do. They're very creative and we have and we continue to challenge them to figure out how they can do more with the facilities and operations they have, and they're -- I must say that we're entering into our strategic planning process and they're constantly amazing me.

Okay. And then kind of also I guess similar to [the thing] in the energy equipment with wind towers. I mean, you mentioned expansion next year I think kind of to be done Q2, if that was right from my memory. What kind of additions or how much additional capacity would you get from that, looking at next year, as well, I guess?

You're right, it is Q2 of 2008 when our Mexican facility will come on line. We are not providing any disclosures at this time as to the additional capacity and/or revenue run rate.

Okay. Will that primarily, I assume, supply the Southwest? Southwestern United States?

Primarily, yes.

Would that also be able to get to California or --?

It could. Our wind tower people are a whole lot like what I was describing our barge people, is they're searching for different ways that they can access the markets through a number of different variety of alternatives, and so we're not limiting them.

Okay. Well, thanks a lot, guys.

Sonia, we'll have time for one more question if there are anymore.

There are no more questions in the queue.

Okay, thank you very much. This does conclude today's conference call. Remember a replay of this call will be available starting one hour after the call ends today through midnight Thursday, August 9th. The access number is 402-220-0119. Also this replay will be available on our web site 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.