Trinity Industries Inc (TRN) 2007 Q3 法說會逐字稿

I'm here.

Good day. All sites are now on the conference line in a listen-only mode. Later, you will have an opportunity to ask questions during our Q&A session. And please note that this call may be recorded.

I would now turn the program over to our host Mr. James Perry, Vice President and Treasurer of Trinity.

Thank you, [Tasha]. Good morning from Dallas, Texas, and welcome to the Trinity Industries third 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, November 8th. 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 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.

On September 30th, 2007, our borrowings at the corporate level were the $450 million of convertible subordinated notes, $201.5 million of senior notes, and $2.9 million of other indebtedness. The leasing company's debt included $337.6 million of secured railcar equipment notes, $75.7 million of equipment trust certificates, and $337 million outstanding under our railcar leasing warehouse facility.

Our total debt to total capital ratio was 46% on September 30th, 2007, unchanged from our ratio at December 31st, 2006. Net of cash, our net debt to total capital ratio was 42% on September 30th, 2007, up from the comparable amount of 39% at December 31st, 2006. On September 30th, 2007, our cash position was $222.4 million.

During the third quarter, Trinity announced that our leasing subsidiary, Trinity Industries Leasing Company, increased its nonrecourse warehouse facility from $375 to $400 million, and extended the availability period of the facility to August 2009. The facility provide TILC with more favorable terms, including pricing and [event rate] than the previous facility.

Additionally, we were pleased to announced just last week that we have increased our corporate revolving credit facility from $350 million to $425 million. We also extended the maturity to five years.

We are pleased with the confidence that our banking partners have given us with both of these facilities. The expansion and extension of these facilities demonstrates Trinity's ability to execute transactions in the capital markets to support our strategic growth.

Now, here's Tim Wallace.

Thank you, James, and good morning, everyone.

I'm very pleased with our third quarter results. We accomplished two significant milestones this quarter in respect to revenues and net income. We surpassed $1 billion in revenue, and net income reached $87 million, both record amounts.

Our strong results reflect the success of many of the initiatives that we have put in place during the past few years. We're continuing to invest in resources to improve and grow our businesses. We're placing special emphasis on growing our leasing business, our structural wind tower business, enhancing our manufacturing flexibility, and lowering our costs. Our businesses are also exploring lean manufacturing practices designed to enhance productivity.

Trinity's inland barge group had a fantastic quarter. The increase in operating profit in our barge business is directly related to productivity benefits associated with long production runs and pricing improvements.

During the third quarter, our barge company's backlog increased 14% from the second quarter. We're continuing to explore a number of strategic initiatives to grow our barge business.

Our railcar leasing and management services group also had a great quarter. Our leasing company is an important part of our earnings diversification strategy, providing the Company with earnings growth. Our leasing company's strong financial performance reflects the benefits associated with an aggressive portfolio growth plan.

We will continue to invest in our future by increasing the size of our lease fleet. The formation of TRIP Holdings has provided us additional financial resources and increased our market flexibility.

During the third quarter, our rail group shipments were the third highest quarterly shipments in Trinity's history. I'm very pleased with the rail group's performance.

Our rail business has focused on productivity improvements associated with long production runs. They are also perfecting their ability to quickly ship production from product line to product line to accommodate customer needs and changing market environment.

Our rail group has the broadest product offering in the industry. As a result, our railcar businesses can pursue a variety of orders as market demand shifts. Demand for railcars in North America continued at a moderate pace during the third quarter. Steve will provide more details during his update.

Fortunately, we are equipped with the skills and abilities necessary to adapt to changing market demand. Our sizeable backlog provides us the ability to develop efficient product plans that will optimize our resources.

Rainfall in the Southwest slightly impacted our concrete and aggregate businesses during the first part of the third quarter. Our construction products group earnings improved from the second quarter, but were slightly lower than comparable quarter last year. Fortunately, the weather improved toward the end of the quarter. Demand for the concrete and aggregate remains consistent in the markets we serve.

During the third quarter, our concrete and aggregate business sold its operations in the Rio Grande Valley region of South Texas. This was a good strategic move for us. We will continue to search for additional concrete, aggregate and asphalt operations in areas where we anticipate steady demand and profit margins comparable to other locations.

Our highway guardrail 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.

During the third quarter, we completed the integration of a small highway guardrail company in Mississippi. This acquisition expands our market coverage in the South.

We remain very optimistic about our structural wind tower business. The merging wind energy business is providing growth opportunities for our energy equipment group. We are uniquely positioned to serve the wind energy markets in the Southwest and Midwest portion of the United States. Demand for wind towers in these areas continues to be strong.

We are in the middle of constructing a new facility in Mexico that will expand our capacity. This facility should come online in the second quarter of 2008.

Our wind tower business continues to explore additional expansion opportunities. Our structural wind tower backlog of orders is very close to $750 million. We continue to expect our top-line revenue to grow at a faster pace than our margins as we train our wind tower workforce.

We are seeing some positive results from the implementation of lean manufacturing in this business. Long-term, we expect to see margins grow in this business as they have in our other businesses, as production lines become more efficient.

At this point, it's too early to precisely estimate where revenues for this business will peak. We're very optimistic about the future of wind energy and the demand for structural towers.

We have developed a preliminary outlook for Trinity for 2008. Our 2008 outlook reflects a combination of factors effecting our businesses. Some of our businesses continue to have growth opportunities while we expect other businesses to have moderate demand levels tied to a slowing U.S. economy.

We also expect some fluctuating demand levels in a few of the markets we compete in. As the U.S. economic growth has moderated, industry demand for railcars in North America has decreased from the robust levels of the previous two years. We expect moderate demand for railcars during 2008, driven in large part by fleet replacement needs.

Increasing oil prices and the value of the U.S. dollar will affect the markets served by the rail industries, but predicting the precise impact is difficult. We are very experienced in operating in markets with transitioning demand levels. In these type of markets, prices also tend to fluctuate. Our focus on cost control enhances our ability to compete in tight markets.

Our rail group has the broadest product offering in the industry, which allows us to pursue a wide variety of orders. During the past few years, we have been preparing for a moderate market by investing resources to enhance our manufacturing flexibility and expand our production in Mexico.

We are adept at shifting with demand between railcar types. It is important to note that when we shift manufacturing between production lines, we do not expect to maintain margin levels at comparable to steady production runs.

One of our overall goals has been to position Trinity for success during moderate railcar market demands. To achieve this, we have focused on expanding the depth and strength of our portfolio of businesses.

We have invested resources to position our businesses as high quality, low cost providers of goods and services. We have enhanced our operational excellence and focused on growing several of businesses.

We expect our inland barge group, our wind tower business, our construction products businesses, and our railcar leasing businesses to have relatively steady demand during 2008. This will help offset the decrease in the rail manufacturing areas of our company.

Bill McWhirter will reconfirm our preliminary outlook for 2008 that we provided in our press release. We will update our 2000 outlook during our year-end conference call.

In summary, I remain very pleased with the performance of our company. We continue to benefit from the investments we've made during the past few years, and we continue to make additional investments that should benefit us in the future. Trinity currently has a great deal of positive momentum and a strong balance sheet that allows us to capitalize on opportunities.

I will now turn it over to Steve Menzies for his report.

Thank you, Tim, and good morning.

Overall, TrinityRail continued to perform well during the third quarter of 2007. Rail car production levels increased as TrinityRail delivered approximately 7,070 railcars during the third quarter, an 8% increase in deliveries over the third quarter of 2006. We expect to maintain our production momentum with railcar deliveries between 7,100 and 7,300 railcars in the fourth quarter.

While our production volumes remained stable, operating margins are likely to decline in the fourth quarter. This is a result of two primary factors -- scheduled production line changeovers that will create some short-term inefficiencies and greater competitive pressures in a period of moderating market demand that are impacting pricing for new orders.

With regard to the railcar market, industry orders for railcars during the third quarter were moderate. Approximately 8,100 were placed during the third quarter, and year-to-date industry orders totaled approximately 31,000. This quarter's order level compares with a quarterly average of 12,000 railcars ordered during the previous four quarters.

The total industry backlog stood at approximately 67,700 railcars at the end of the third quarter. TrinityRail's order backlog constitutes 46% of the industry total.

Recent order inquiry levels indicate fourth quarter orders could be in line with first and second quarter demand, which approximated 11,000 railcar orders each quarter. As you know, railcar demand shifts periodically from car type to car type and fluctuates from quarter to quarter.

Order levels in the third quarter reflected continued weak demand in select markets, such as intermodal and box cars, with moderate demand for coal cars. More than 60% of the total railcar orders year-to-date have been for covered hoppers and tank cars driven by growth and renewable fuels, improved grain export shipments and chemical car loadings growth. 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 will serve as the basis for sustainable long-term railcar demand. The average age of the North American railcar fleet currently stands at 19.5 years, with more than 690,000 railcars, or 44% of the fleet, exceeding 25 years of age, providing fleet replacement opportunities.

During 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, an overall reduction of railcar loadings, and a capacity-constrained rail system unable to accommodate significant numbers of new railcars without system capacity expansion.

Long-term forecasts indicate significant investment is needed to meet traffic growth for the rail system to stay competitive with other modes of freight transport. Capacity issues could be partially mitigated, however, if shippers choose to replace existing 263,000-pound gross rail capacity railcars with larger, more efficient 286,000-pound cars. By so doing, the rail system could increase carrying capacity without increasing the number of railcars in operation.

We have received several orders from customers upgrading to larger, more efficient railcars, and we will be targeted fleet upgrade opportunities in our sales efforts.

During the third quarter of 2007, TrinityRail received approximately 4,500 railcar orders. Many of these orders extend current production lines for a variety of railcars. Specifically, we received orders from railroads, industrial shippers, and utilities for covered hoppers, coal cars, mill gondolas, auto racks, and tank cars.

Our third quarter 2007 order level of 4,500, or 55% of the total railcar market, is consistent with our trailing 12-month share of industry orders of 55%. We continue to aggressively pursue additional orders which will extend existing production lines.

Our operating flexibility gives us a competitive advantage to secure certain railcar orders and the ability to deliver railcars when our customers require them, often on very short notice.

At the end of the third quarter, TrinityRail's railcar backlog was approximately 31,300 railcars, compared to 33,880 at the end of the second quarter 2007, and 32,200 at the end of the third quarter of 2006.

Our ability to shift production to meet changing market demand, combined with Trinity's broad product line, proven railcar designs, and production resources, all contribute to our strong railcar backlog. The strength of our order backlog is important for effective production planning and positions us to pursue opportunities for greater operating efficiencies.

While I mentioned demand for coal cars was moderate, we continue to be very encouraged by the marketplace's reaction to the introduction of our proprietary new coal car design, the RDL. This car features faster unloading and improved operating reliability.

We have received orders for the RDL, and customer interest is high. We believe our consistent investment in new product development, resulting in new railcar designs such as the RDL, will continue to lead to other new innovations spurring future railcar sales.

We are pleased with the results with investments we have made in our production facilities and the resulting operating efficiencies. Our people continue to implement process improvements and achieve cost reductions, evidenced in our year-over-year operating margin improvements.

We credit our experienced production personnel and established labor force with operating at high efficiency levels. Our stable and experienced labor force also gives us the ability to maximize our operating flexibility while minimizing the costs associated with production line changeovers.

We are particularly pleased with the expanded capacity and production growth of our Mexico facilities. We expect to produce 35% to 40% of our total railcar deliveries in our Mexico plants, with additional capacity available as the market and our order backlog requires.

Our railcar leasing and management services group continued to grow its railcar fleet during the third quarter. TrinityRail shipped approximately 2,800 new railcars to customers of our leasing company during the third quarter, all subject to firm non-cancelable leases. This represented about 40% of TrinityRail's third quarter railcar shipments.

During the third quarter, we sold approximately 490 railcars from our lease fleet. Sales from our lease fleet are an ordinary course of business to balance our portfolio, bundle with new car sales, and to respond to specific customer needs.

Additionally, we sold approximately 1,100 railcars from our lease fleet to TRIP Holdings as part of the planned funding of the new company. As a result of third quarter additions and sales, our fleet grew to approximately 35,890 railcars compared to 29.200 at the end of the third quarter of 2006.

We expect our lease fleet to continue to grow at a strong pace throughout the balance of 2007 and 2008. We expect to increase our fleet by a net $650 to $750 million in 2008.

Overall demand for railcar leasing services continues to rise as evidenced by our strong leasing backlog. Trinity's committed lease backlog, as of September 30, 2007, is approximately 14,500 railcars, or 46% of our total production backlog.

We see a long-term trend for railroads and industrial producers to use their capital resources to acquire assets, which are a quarter of 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 manufacturing. Additionally, it brings efficiencies to our production planning and generates a significant long-term stable earnings stream.

Our lease fleet utilization remains high and stable at over 99% at the end of the third quarter. The average age of the railcars in our lease fleet is 4.3 years, and the average remaining lease term is approximately 5.5 years.

Our fleet lease rates continue to rise as a result of high fleet utilization, strong levels of new car building, and higher new car prices. However, we expect renewal rate increases to decelerate during the near term.

In summary, TrinityRail is well positioned to respond to the challenges of the market in the near term and the opportunities available in the long-term. Our operating flexibility, innovative railcar designs, and product line will enable us to meet shifting demand among various railcar types, thereby building our strong railcar backlog.

We continue to enjoy significant operating efficiencies through extended production runs and our employees' ongoing commitment to reducing costs while maintaining high production levels.

These improvements, combined with our capital investments, are now enabling us to execute production line changeovers more efficiently. We continue to commit considerable resources to meet the growing leasing needs of our customers. The growth of our leasing business has also 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'm pleased with the overall performance of TrinityRail and the dedication 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 third quarter of 2007. We will file our Form 10Q this morning. You will find more details there about our third quarter results. During my remarks, I will provide earnings per share guidance for the fourth quarter and for 2008.

For the third quarter of 2007, we reported earnings of $1.08 per diluted share from continuing operations. This compares to $0.70 per share from continuing operations in the same quarter of 2006.

Revenues for the third quarter of 2007 increased 24% over the same quarter of last year to just over $1 billion. Earnings from continuing operations exceeded the high end of our expectations by $0.11 per share. These positive results were primarily due to the following -- excellent operational performance in our rail and inland barge groups, an improved overall tax rate primarily related to the use of certain foreign capital losses, and railcar sales to TRIP Holdings from our leasing company that exceed our estimates.

Moving to our rail group, revenues for this group increased 13% on a quarter-over-quarter basis. Rail group sales to Trinity's leasing and management services group were $235 million in the third quarter of 2007 with profits of $37.3 million, or approximately $0.30 per diluted share.

This compares with sales to our leasing group in the third quarter of 2006 of $168 million with profits of $19.6 million, or $0.16 per diluted share. These intercompany sales and profits are eliminated in consolidation.

Our margin results for the rail group were 15.5%. At this time, we anticipate margins for the rail group of between 12% and 14% for the fourth quarter. This margin decline represents the cost associated with significant line changeovers during the quarter, coupled with the competitive pricing environment and the mix of overall car types to be built during the quarter.

The rail group backlog, as of September 30, 2007, consisted of approximately 31,300 railcars with an estimated sales value of $2.6 billion. Our railcar backlog is broken down approximately as follows. Backlog to our leasing company, $1.2 billion. Backlog to TRIP Holdings, $600 million. And backlog to third parties, $800 million.

Now, turning to our inland barge group. The inland barge group's third quarter performance was once again very strong, posting revenues of $126 million and operating profits of $22.3 million. The results of the inland barge group continued to reflect a high level of operational excellence.

This group's backlog, as of September 30, 2007, totaled approximately $771 million. This compares with $424 million one year ago.

We anticipate inland barge revenues of between $125 and $135 million in the fourth quarter. Operating profit margins are expected to range between 14% and 16% during the quarter.

Now, moving to the energy equipment group. During the third quarter, this group's revenues topped $101 million, a new record. The energy equipment group's revenue growth continues to be driven by our wind tower business.

Operating profits were $11.6 million, with an operating profit margin of 11.4%. Margins continue to be impacted by our wind tower business as a result of the challenges associated with rapid growth. We expect margins for the group, overall, to increase as we achieve operational efficiencies in our wind tower production lines.

We expect revenues for the group will total approximately $430 million for 2007, which represents a 28% improvement in revenue over last year. The wind tower business will account for approximately $230 million of the total revenue.

Revenues for our construction products group grew slightly when compared to the same quarter of the previous year. Operating profit was $19 million for the quarter, representing a relatively unchanged result from last year despite this year's slowdown in residential construction.

Our railcar leasing and management services group reported revenues of $204 million compared with $61.4 million in the same quarter of 2006. Operating profit was $47 million with $18.4 million resulting from car sales.

During the third quarter, car sales from the fleet were $134 million. TRIP Holdings accounted for $93 million of those sales. In addition, TRIP Holdings purchased $139 million worth of railcars from our manufacturing companies during the quarter.

As we've discussed in the past, TRIP Holdings is a leasing company formed in June of 2007. It has committed to purchase approximately $1.4 billion worth of railcars during a two-year period from Trinity's railcar manufacturing companies and leasing company.

Trinity holds a 20% equity ownership in TRIP Holdings through a subsidiary and is responsible for managing the cars. All sales to TRIP Holdings are for railcars with firm leases in place with independent third parties. TRIP Holdings has the capability to expand its purchases beyond its current commitment of $1.4 billion.

This new company benefits Trinity by allowing our leasing company to continue its core competency of lease originations, while realizing a portion of the economic upside associated with railcar leasing.

For 2007, we now anticipate between $525 and $575 million in net 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.

Moving to our consolidated results. For 2007, we expect non-leasing capital expenditures of between $180 and $190 million. During the fourth quarter, we will defer approximately $190 million in revenue and between $24 and $27 million in operating profits as we grow our leasing business and sell cars to TRIP Holdings. This represents between $0.19 and $0.22 per diluted share.

Also, during the fourth quarter, we anticipate approximately $75 million in sales to TRIP Holdings from our existing lease fleet which will provide approximately $0.07 of income per diluted share.

On a go-forward basis, we expect TRIP Holdings to be primarily supplied with railcars from our manufacturing companies. We anticipate earnings from continuing operations for the fourth quarter to range between $0.87 and $0.92 per diluted share.

As a result, our 2007 full-year guidance is $3.54 to $3.59 per diluted share. Included in our assumptions for 2007 are normal weather conditions and no unanticipated adverse resolution of legal matters.

In our earnings release yesterday, we provided a reconciliation of the non-GAAP term EBITDA. EBITDA from continuing operations for the third quarter of 2007 was approximately $183 million as compared to $130.5 million in the same quarter of last year. Additionally, we provided preliminary earnings guidance for 2008 of $3.10 to $3.50 per diluted share.

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

Thanks, Bill.

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

(OPERATOR INSTRUCTIONS.) One moment while our questions queue. John Barnes, BB&T Capital Markets. Please go ahead.

Hey, good morning, guys. In looking at the guidance, Bill, can you give us an idea kind of what underlying business levels get you the $3.10 number versus the $3.50 number? I'm just kind of curious as to that $3.10 number. How bleak a picture is that on the rail side?

Yes, John, not wanting to expand a whole lot on the guidance for 2008, I think it's fair to say that we are expecting comparable revenues to 2007.

As we discussed in the press release and here today, we are seeing a moderate railcar demand level, and we anticipate compression in the margins for the rail group. But, at this time, we're not really prepared to provide specific guidance on margin targets or revenue targets in any one individual business. But, we will provide updates to the overall guidance on a quarterly basis as is our standard practice.

Okay. If I go back and look at your initial '07 guidance, I think it was $3 to $3.15. It was a much, much tighter range. Again, I understand you don't want to get too granular with the guidance but, again, why such a broad range? I mean, why such a wide range? I mean, $0.40 is a big range.

John, keep in mind, the initial guidance we provided in 2007, we came out with at the fourth quarter call, which was in February, so we were a little ways down the road into '07. So, this guidance is, in essence, four months ahead of that guidance time. So, a little broader range, I think, is prudent.

Okay. All right, that's all I've got right now. Thanks, guys.

Thank you, John.

Steve Barger, KeyBanc Capital. Please go ahead.

Hi, good morning.

Morning.

You said TRIP could expand beyond the $1.4 billion. Was that capped before, and is that a change? And how big could it get now under whatever authorization is out there?

It is a not a change. It was not capped before. The partners would have to agree to grow the fund, and that is a decision that will made by the partners at the appropriate time.

Okay. Coming back to the guidance, and I understand that you don't want to get too specific, but I guess the operating margin at the low end implies -- is that -- would we below '06 levels relative to what you're thinking about in that $3.10 scenario? Is that a fair question?

Well, it's a fair question, certainly. We're not prepared at this time to provide margin guidance into 2008.

We did provide margin guidance for the fourth quarter in the rail group of between 12% and 14%. That compares to the third quarter of 15.5%. So, you're seeing some of that compression in the fourth quarter.

Okay. You talked about looking at strategic options relative to the barge business. Could you give a little bit more clarity on what you're thinking about there?

Yes, we are looking at a number of different way to expand our production here in the States.

And we're also looking at various options that we have to be able to assist on a, I guess you would say, international type basis where there is demand for bulk barges that we might be able to participate. We don't have anything in the works, but we've have people with our barge designs talking to other people that there may be some strategic opportunities there.

That's excellent news. I guess one last one, thinking about the structural wind towers -- and I know that's a ramping business as you open these new facilities against the mature tank business.

Once those get up and running, will the mix -- without getting into specific guidance, but can you exceed your historical operating margin range, directionally, by a material amount in energy equipment once those come online?

Well, it does get into a mix question, and productivity levels and how close the factories are to where the job sites is -- because transportation cost is a big factor in there. And we need to get a little further down the line on a productivity basis.

But, we really never see a bottom to an estimate that we have on how much cost we can remove or a top to a margin level. So, our people are constantly challenged to look for ways to be able to remove costs and to bring productivity elements into our business that enhance the margins.

But, given what you're thinking about mix, I mean, structural wind towers are presumably a higher margin business than your tank business.

Yes.

So, is it fair to say that, going forward, you'll have a significantly better margin profile in the segment than has been historically true?

Well, you could think that with the revenue volume, but you also have the challenges associated with bringing on new labor forces and the training that's associated with that. And trying to predict the productivity gains that we may get in the various factories is very difficult at this time for me to give you some sort of guidance in that area.

Okay, fair enough. I'll jump back in line.

Thank you. Brannon Cook, JPMorgan. Please go ahead.

Good morning. You talk about the pricing pressures looking towards 2008, which is not a surprise. But, the industry has been pretty cyclical in the past. Could you provide some context around the pace of pricing pressures that you're looking for in 2008?

Well, we compete in a number of different submarkets, and each submarket has a demand level, and then it comes down to the various production lines that the industry has in place. And it's just extremely dynamic.

And this is why Steve has said that he and his people are going to be aggressively pursuing orders to maintain our production line continuity at best. And it's very difficult to predict the fluctuations that will occur in that area.

Steve, you have anything to add on top of that?

Well, you're right, Tim. It does vary by car type and, markets that they serve were seeing, actually, price increases in our tank car sector. We've seen stable prices in several of our freight car sectors. And a few of the freight car sectors, where demand is extremely low, prices are decreasing.

So, hard to make a general statement about your product portfolio overall but, really, by market and by car type is the best way to look at it.

Okay. When we think about your production capacity looking towards next year, I guess this year we saw Trinity continue to ramp up their potential to produce cars in Mexico. Looking towards 2008, if overall deliveries are down a bit, I guess we can think about a mix shift towards some lower cost production facilities.

Should we think about you continuing to expand your Mexican production facilities next year, or more just a focus on costs?

Yes. Our shift of production to Mexico has been a long-term strategy where we've made investment there. We'll continue to make investment there. We're very pleased with the production levels, and the level of quality, and the operating efficiencies that we gain at those facilities. And we're committed to continuing to build our capacity at our Mexico facilities.

Are you pretty much well positioned to build all the major car types that you focus on in Mexico at this point, or is it specific to car types?

We build most of our major car types in our Mexico facilities, and we continue to expand their capabilities to build all our car types as we move forward.

Okay. And then, just a question on order levels. I wanted to make sure I heard you correctly. I think you talked about order levels improving in 4Q versus 3Q.

Was that a broad-based comment about overall industry order levels? You had a competitor announce a large order that will likely hit in the fourth quarter. Or was that specific to Trinity and things you were hearing from customers?

Yes, my comment was relative to the industry as a whole. And again, I think my comment was specific that we, at this point, see order levels pointing towards levels consistent with the first and second quarter of this year.

Okay, thanks for the time.

(OPERATOR INSTRUCTIONS.) Paul Bodnar, Longbow Research.

Hi, guys, a quick question on just the leasing business overall. Just, in general, what do you see in there in terms of, I guess, the market ignitions may be weakening a bit there. And I guess, primarily -- and I know that you built that business a lot.

But, when do you start seeing a greater number of cars expiring, which would kind of give you a little more, I guess, exposure, adjusting lease rates, going forward?

Steve, you want to handle that?

Sure. Well, one of the things that we monitor very closely is the length of term in our leases. And specifically, the average remaining lease term in our portfolio is 5.5 years which, perhaps by industry comparisons, would imply that we have less exposure to near-term cycles for the remarketing of cars that may be coming off of lease. And again, that's a very deliberate strategy on our part.

We are seeing, obviously, right now, some pressure for lower lease rates on some renewals and on new cars. And again, that varies really be car type and by market sector.

So, any idea what kind of percent of the fleet would come up for renewal in the next 6 to 12 months -- or it's 8 on 12 months -- basically through '08?

Well, without getting into specifics, I think if our fleet has an average remaining lease term of 5.5 years, you can kind of do the math and--.

--Yes--.

--Figure out what the runoff might be.

Okay. And then, secondly here, I just kind of wanted to find out -- I know that you tend to have different margins between cars you sell to your lease fleet versus ones you sell externally. What was the difference on that in the quarter, I mean, if you have that number?

Yes. Now, when you're talking about the difference in margins on cars we sell to our sales versus cars we sell outside, the primary differential is that, when we eliminate, we have to eliminate it at slightly higher margin, more like a gross margin, as compared to an operating profit margin.

So, it looks a little higher. But, in actuality, cars sold to our leasing fleet are sold at market value comparable to our outside customers.

So, it's kind of consistent with previous quarters, basically, right?

It's consistent with previous quarters, and it's really just more of an accounting feature--.

--Yes--.

--That requires you to defer more or eliminate more profit.

Okay. And one last question. In the second quarter, you guys had opened an Illinois and other wind tower construction facility, whereas it looks like revenues in that segment, although I don't have the 10Q yet, did not really accelerate.

Is there any kind of reason behind that, or is that really going to pick up in the fourth quarter? Or why was the kind of -- looks like there's kind of a lag there in terms of when you brought the facility online, the wind tower revenue.

No, I think there appears to be a little bit of a lag there, but the business is doing well. I personally made a trip to the facility this quarter and was very impressed with the work that everybody is doing there. Plant management and the team are doing an excellent job.

And we, obviously, guided revenues up with our fourth quarter statement that it would be at $230 in total. So, that would suggest a much stronger third quarter -- or fourth quarter, sorry about that.

So, should we think about that four, when you bring this facility online in Mexico next year in second quarter, or is probably going to be a similar period or delay in your revenue?

I think anytime you're bringing up a major manufacturing facility, there's always the possibility of shipments slipping quarter-to-quarter one way or another. So, we'll provide more guidance around the wind tower business as we get into 2008.

Okay. Thanks a lot, guys.

(OPERATOR INSTRUCTIONS.) It appears that we have no further questions at this time.

Thank you, Tasha. This will conclude today's conference call.

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We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.