Trinity Industries Inc (TRN) 2007 Q4 法說會逐字稿

Good day. All sites are now online in the listen-only mode. At this time, it's my pleasure to hand over the conference to your moderator, James Perry, Vice President of Finance and Treasurer.

Thank you, Colin. Good morning from Dallas, Texas, and welcome to the Trinity Industries fourth quarter 2007 results conference call. I'm James Perry, Vice President of Finance 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, February 28. The replay number is 402-220-2650. I would also like to welcome to our call our audio webcast listeners today. A replay of this broadcast will also be available on our 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.

On December 31, 2007, our borrowings at the corporate level were the $450 million of convertible subordinated notes, $201.5 million of senior notes, and $3.1 million of other indebtedness. The leasing company's debt included $334.1 million of secured railcar equipment notes, $75.7 million of equipment trust certificates, and $309.8 million outstanding under our railcar leasing warehouse facility. Our total debt to total capital ratio was 44% on December 31, 2007, as compared to 46% at December 31, 2006. Net of cash, our net debt to total capital ratio was 39% on December 31, 2007, the same as the ratio on December 31, 2006. On December 31, 2007, our cash position was $289.6 million.

Last week, our leasing subsidiary, Trinity Industries Leasing Company, increased its non-recourse warehouse facility from $400 million to $600 million and maintained the availability period of the facility through August 2009. We anticipate a structured lease financing during 2008, but this increase, combined with our cash at year end of $289.6 million, and our $425 million corporate revolving credit facility, provides us with adequate liquidity to continue the growth of our lease fleet.

In December 2007, Trinity authorized a $200 million share repurchase program through 2009. During the fourth quarter, we purchased 104,200 shares of stocks in the open market for $2.9 million. We will provide details of our purchases when we report our results at the end of each quarter.

Now here's Tim Wallace.

Thank you, James, and good morning, everyone. I continue to be pleased with our results. 2007 was a record year for Trinity in many respects. Our revenues increased 19% to an all-time high of $3.8 billion. The majority of our revenue increase was derived from internal expansion initiatives. Our net income increased 27% to a record $293 million in 2007. This is the fourth year of strong revenue growth. Our revenues have increased more than $2.5 billion in the last four years. This is over a 200% increase.

All of our business segments continued to perform well during the fourth quarter. Our focus on operational excellence and manufacturing flexibility helped each of our businesses increase their profitability.

We are continuing to invest in resources to improve and grow our businesses. During 2007, we continued to shift production to product lines with the greatest opportunities for growth and returns. Although the U.S. economic growth has moderated, we expect 2008 to be a good year for Trinity overall. Our railcar, barge, and structural wind towers businesses entered the New Year with strong backlogs totaling more than $4 billion. At this point, we continue to see railcar demand moderating and primarily driven by replacement needs. We expect quarterly results for our rail group to be a little choppy until demand for railcars improves.

In all of our businesses, we remain highly focused on execution while working to align sales with existing production run rates. Our employees are highly seasoned and adept at adjusting to changing market conditions.

In 2007, our North American railcar shipments increased 8.5% to approximately 27,370 units. TrinityRail is focused on maintaining similar production levels during 2008. This will allow our rail businesses to retain many of the efficiencies they realized during the past few years.

Predicting precise demand levels on an ongoing basis is difficult in moderate markets. Availability of equipment for rapid delivery is crucial in this type of a market. Fortunately, our broad product line allows us to pursue a wide variety of orders. Steve will provide more insight into TrinityRail's plans during his update.

Our rail leasing and management services group also had a great quarter. Our leasing company continues to grow while performing a strategic role for Trinity. We will continue to invest in our future by increasing the size of our lease fleet. The formation of TRIP Holdings during 2007 provided us additional financial resources and greatly enhanced our market flexibility. Steve will also provide more details about our leasing and management services group in his report.

Trinity's inland barge group continues to perform well. During 2007, our inland barge group's profitability improved and shipments increased by 25%. The increase in operating profit is directly related to productivity benefits associated with long production runs.

During the fourth quarter, our barge company's backlog remained steady. Our customers continue to visit with us about opportunities for future business. We are exploring a variety of ways to enhance our productivity and expand product offerings. Our barge backlog extends into 2009.

Our construction product group continues to perform well. Demand continues to be steady. Weather conditions in the southwestern part of the United States were construction-friendly during the first part of the fourth quarter but deteriorated slightly in December. So far this quarter, the weather in Texas has been moderately construction-friendly.

Our highway products business is expecting steady demand during the construction season. During 2007, we completed seven acquisitions of small bolt-on concrete aggregate and asphalt businesses. We expect to continue making similar acquisitions. We are optimistic about the potential for steady growth and improvement in this business.

Our structural wind towers business continued to expand during 2007. We grew our capacity by converting an idle railcar plant located in southern Illinois to wind tower production and by constructing a new facility in Mexico. Wind tower structures are currently being produced in our new plant. I'm very proud of the success we're having as we expand this business. We broke ground on our new plant in Mexico during the second quarter of 2007, and we expect to ship towers this month.

Also during 2007, our wind towers structures business worked synergistically with several of Trinity's other businesses. Our concrete business provided concrete for wind tower foundations, and our trucking transportation company delivered wind tower structures to jobsites.

Demand for wind towers is robust. Our order backlog was more than $700 million at the end of the year, and we have a number of inquiries in the pipeline. We continue to explore additional opportunities to serve the North American wind energy market. We are the largest structural wind tower manufacturer in North America and have aggressive growth plans during the next three to five years. In our five-year growth plan for this business, we expect to reach an annual revenue level of between $800 million and $900 million.

In summary, I'm very pleased with our fourth quarter results, and I remain optimistic about the opportunities for our businesses. We continue to benefit from the investments we made during the past decade. Our larger businesses have strong backlogs, and we are a highly flexible company. We are keeping a close watch on the vital signs of the markets we serve and are prepared to respond should the economy or demand shift in either direction. We continue to make additional investments that should benefit us for the future.

Trinity currently has a great deal of positive momentum, a strong balance sheet, and a great team of people working together. I expect us to continue to capitalize on opportunities.

At this time, I'll turn it over to Steve Menzies for his comments.

Thank you, Tim. Good morning. TrinityRail continued to perform well during the fourth quarter of 2007. Our shipments increased year over year, our order backlog increased from the third quarter, and our lease fleet continued to grow. TrinityRail's shipments increased 7.1% to 6,745 railcars compared with the fourth quarter of 2006. For the year 2007, we shipped approximately 27,370 railcars, an 8.5% increase compared to the prior year. We expect our production momentum to continue during the first half of 2008, although accurately forecasting exact timing of shipments is becoming more difficult given the current dynamics of the markets.

As Tim mentioned, we expect overall railcar demand to fluctuate throughout 2008. As a result, we are providing shipment information for the first six months as opposed to the first quarter. We believe these figures provide a more reliable estimate of shipment activity. At this time, we expect shipments totaling between 12,500 and 13,500 railcars during the first half of 2008.

A key component in our marketing strategy is ensuring railcars are available when our customers need them. Thus far we've been very successful at anticipating the needs of our customers. Our flexibility and our ability to meet customer delivery requirements, often on short notice, are key competitive factors. One of our goals is to retain the operating efficiencies we gained during the last few years. By keeping our production volumes stable, we should be able to accomplish this. Continued improvements in operating efficiencies, however, will only partially offset the downward pricing pressures we anticipate during 2008. We do expect our operating margin to decline under the highly competitive environment.

With regard to the overall railcar market, industry railcar orders during the fourth quarter continued at a moderate pace. Approximately 24,100 railcar orders were placed industry wide during the fourth quarter, and total year 2007 industry orders were approximately 54,300. Orders for the fourth quarter of 2007 were skewed upwards by long-term, multi-year orders reported by other railcar manufacturers.

At the year end, the total industry backlog stood at approximately 76,700 compared to a backlog of 67,700 railcars at the end of the third quarter. Trinity's order backlog comprises 42% of the total industry backlog. Recent order inquiry levels indicate first quarter 2008 orders could be in line with 2007 order levels. Independent forecasts place 2008 railcar production in the low 50,000-railcar range, which is consistent with the market inputs we review. We also believe, given today's economic environment, that North American fleet attrition rates as demand could continue at a similar rate to the first half of 2009. The replacement cycle for an aging North American railcar fleet will be a consistent driver for demand, providing a theoretical floor to railcar production.

As you know, railcar demand shifts periodically from car type to car type and fluctuates from quarter to quarter. Order levels in the fourth quarter reflected steady demand for auto racks, multiple types of covered hoppers in tank cars, improving demand for coal cars, and continued weak demand in select markets such as intermodal and boxcars. More than 60% of the total railcar orders for the year were for covered hoppers and tank cars, driven by growth in renewable fuels, improved grain export shipments, and chemical loadings growth. The need to replace smaller, less efficient covered hoppers and tank cars has also boosted demand for these car types.

During the fourth quarter of 2007, TrinityRail received approximately 7,310 railcar orders. Many of these orders extend current production lines for a variety of railcars. Specifically, we received orders from third-party leasing companies, railroads, industrial shippers, and utilities for covered hoppers, coal cars, boxcars, open-top hoppers, flatcars, auto racks, and tank cars. The diversity of our orders reflects the broad breadth of TrinityRail's product line.

Total railcar orders for TrinityRail in 2007 were approximately 23,370, or 43% of the total railcar market. At the end of the fourth quarter, TrinityRail's firm order backlog was approximately 31,879 railcars compared to approximately 31,300 at the end of the third quarter 2007. Our strong order backlog, which extends through 2009, produces good visibility for our production plans. This visibility provides important benefits. It enables effective production planning, positions us to pursue additional operating efficiency, and allows us to retain our highly trained and skilled labor force.

Our motivated workforce is keenly focused on achieving further efficiencies as well as reducing production retaps. Our plan for production for 2008 includes a number of open slots weighted toward the second half of the year. We have experienced some shifting of existing orders from 2008 to 2009 for railcars serving the renewable fuels market due to plant construction delays, creating some voids in our 2008 production plans. We believe we have now firmed our production plans for renewable fuels orders for 2008 production.

We will continue to aggressively pursue additional orders which will extend existing production lines to maintain current production rates. Our flexibility will allow us to adjust production rates up or down as necessary. We are building railcars to hold for future sale to bridge or extend production continuity. Our broad product line, operating flexibility, and ability to deliver railcars when our customers require them provides us a competitive advantage to secure orders and sustain production.

We are particularly pleased with the production growth and operating efficiencies of our Mexico facilities. During 2008, we expect to produce 35% to 40% of our total railcar deliveries in our Mexico plants. We have additional capacity in Mexico that we can use when necessary. We continue to invest resources in Mexico to expand our ability to manufacture additional railcar types, which will further enhance our operating flexibility.

Our railcar leasing and management services group continued to grow its railcar fleet during the fourth quarter. TrinityRail shipped 1,695 new railcars to customers of our leasing company during the fourth quarter, all subject to firm, noncancelable leases. This represented about 25% of TrinityRail's fourth quarter railcar shipments. During the fourth quarter, we sold approximately 1,500 railcars from our lease fleet, including 1,180 railcars to TRIP Holdings, the independent leasing company formed last summer. Sales from our lease fleet are an ordinary course of business to balance our portfolio, bundled with new railcar sales and the response to specific customer requests. As a result of these fourth quarter sales and our fleet additions, our lease fleet grew to approximately 36,090 railcars compared to 30,550 at the end of 2006.

Overall demand for railcar leasing services continues to increase, as evidenced by our strong leasing backlog. Trinity's committed lease backlog as of December 31, 2007, was approximately 17,730 railcars, or 56% of our total production backlog. We continue to see a long-term trend for railroads and industrial producers to use their capital resources to acquire assets which are core to their businesses while relying on leasing for operating assets such as railcars.

The investment in our leasing business provides several benefits. It helps us to develop long-term relationships with the end users of our railcars and provides an important distribution channel for our railcar manufacturer. Additionally, it brings efficiencies to our production planning and generates a significant long-term, stable earnings stream. Our lease fleet utilization remains at more than 99% at the end of 2007. The average age of the railcars in our lease fleet is 4.5 years, and the average remaining lease term is approximately 5.5 years.

These two key operating metrics give support to our ability to maintain high fleet utilization. Our newer, highly productive railcars are less likely to be returned from lessees upon lease expiration during the market downturns. Customers typically return older, less efficient railcars as they downsize their fleets. Our high average remaining lease term provides a hedge against short-term market downturns, therefore mitigating some remarketing risks. Renewal rates have continued to increase as the railcars available for renewal were placed into service during a low lease rate environment in the 2002 to 2004 time period.

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 and product line have enabled us to meet shipping demand among various railcar types, thereby building our strong railcar backlog. By sustaining current production levels, we can retain our skilled labor force, realize prudent operating efficiencies, and be ready for market recovery.

We continue to commit considerable resources to meet the growing leasing needs of our customers. The growth of our leasing business has supported our production plans while enhancing Trinity's long-term financial stability. I am very pleased with the overall performance of TrinityRail and with the more than 7,000 men and women dedicated to achieving our goals.

I'll now turn it over to Bill McWhirter.

Thank you, Steve, and good morning, everyone. My comments relate primarily to the fourth quarter 2007. We will file our Form 10-K this morning. You will find more details there about our full year.

For the fourth quarter of 2007, we reported earnings of $0.97 per diluted share from continuing operations. This compares with $0.72 per share from continuing operations in the same quarter of 2006. Revenues for the fourth quarter 2007 increased 32% over the same quarter last year to a record $1.1 billion. Earnings from continuing operations exceeded the high end of our expectations by $0.05 per share. These positive results were primarily due to the following--excellent operational performance in our rail and inland barge groups, railcar sales from our leasing company that exceeded our estimates, and a partial offset due to a year-end cash true-up.

Moving to our rail group. Revenues for this group increased 10% on a quarter-over-quarter basis. Rail group sales to Trinity's leasing and management services group were $137 million in the fourth quarter of 2007, with profits of $22.2 million, or approximately $0.18 per diluted share. This compared with sales to our leasing group in the fourth quarter of 2006 of $184 million with profits of $33 million, or $0.27 per diluted share. These intercompany sales and profits are eliminated in consolidation.

Our margin results for the rail group were 12.9%. At this time, we anticipate margins for the rail group of between 11% and 12% for the first quarter. As we look forward, we expect margins of between 8% and 10% for the remaining three quarters of the year. This margin level represents the competitive pricing environment and the mix of car types to be built during the year.

The rail group backlog as of December 31, 2007, consisted of approximately 31,870 railcars with an estimated sales value of $2.7 billion. Our railcar backlog is broken down as follows. Backlog to our leasing company is $1.4 billion. Backlog to TRIP, $500 million. And backlog to third parties, $750 million.

Now turning to our inland barge group. The inland barge group's fourth quarter performance was once again very strong, posting revenues of $137 million and operating profits of $26.3 million. As a result, the inland barge group continues to reflect a high level of operational excellence. This group's backlog as of December 31, 2007, totaled approximately $753 million. This compares with $464 million one year ago. We anticipate inland barge group use of between $130 million and $140 million in the first quarter. Operating profit margins are expected to range between 15% and 17% during the quarter.

Now moving to the energy equipment group, during the fourth quarter, this group's revenue topped $141 million, a new record. Operating profits were $16.7 million with an operating profit margin of 11.8%. The energy equipment group's revenue growth continues to be driven by our wind tower business. We anticipate the wind tower business will account for approximately $380 million in revenue for 2008, representing a 54% growth from 2007.

Revenues for our construction parts group improved slightly when compared to the same quarter of the previous year. Operating profit was $13.3 million for the quarter, representing a 10% improvement over last year.

Our railcar leasing and management services group reported revenues of $194 million compared with $114 million in the same quarter of 2006. Operating profit was $47 million with $17.8 million resulting from car sales. During the fourth quarter, car sales from the fleet were $121 million. TRIP accounted for $96 million of those sales. In addition, TRIP purchased $94 million worth of railcars from our manufacturing companies during the quarter.

As we have discussed in the past, TRIP 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 company and leasing company.

Trinity holds a 20% equity ownership in TRIP through a subsidiary and is responsible for managing the cars. All sales to TRIP are for railcars with firm leases in place with independent third parties. TRIP has the capability to expand its purchases beyond its current commitment of $1.4 billion. TRIP 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 2008, we now anticipate between $650 million and $750 million in net additions to our Trinity leasing fleet. As a form of clarity, net fleet additions are the fair market value of cars added to our fleet less the proceeds of our sold fleet.

Moving to our consolidated results, for 2008 we expect non-leasing capital expenditures of between $180 million and $190 million. During the first quarter, we expect to defer approximately $250 million of revenue and between $28 million and $32 million in operating profit as we grow our leasing business and sell cars to TRIP. This represents between $0.23 and $0.26 per diluted share. We anticipate earnings from continuing operations for the first quarter of 2008 to range between $0.69 and $0.74 per diluted share. Included in these projected results are car sales from our fleet of $38 million versus $121 million for the fourth quarter of 2007. Our 2008 full-year guidance is slightly improved at this time, at $3.20 to $3.50 per diluted share. Included in our assumptions for 2008 are normal weather conditions, no unanticipated adverse resolution of legal matters, and railcar demand remaining at moderate levels.

In our earnings release yesterday, we provided a reconciliation of the non-GAAP term EBITDA. EBITDA from continuing operations for the fourth quarter 2007 was approximately $182.3 million as compared to $129.1 million in the same quarter last year.

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

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

Thank you, sir. (Operator Instructions.) And our first question comes to us from Brannon Cook with JP Morgan. Go ahead, please.

Good morning.

Morning.

So a question about the railcar margins as we look forward to 2008, understanding that there's some pricing pressures there. Do you see your mix of car types that you build changing meaningfully from '08 versus '07? And what kind of expectations do you have around new order levels, specifically with your demand for some coal car types?

Well, whenever you're in a moderate market, your product mix changes because you have to pursue what railcars are out there in demand. And Steve, you might want to elaborate on that a little bit.

Well, we took orders again in the fourth quarter for a broad array of railcars. We're seeing similar demand continuing here in the first quarter of '08. Specifically, with coal cars, we have seen improved demand for coal cars, and we expect that to continue through 2008 and into 2009.

As a follow-up up to that, you mentioned talking with customers in the biofuel arena and specifically around ethanol. Are you seeing any firming of production plans of the ethanol producers, given the energy bill coming online? We've heard that in the marketplace, there's a bit more visibility to some of that production coming online. What are you hearing from your customers about that?

Steve, do you want to take that one?

Sure. Well, I think you've got, first of all, some digestion of, in the marketplace with the capacity that's been brought onstream from the first wave of renewable fuel standards. And I think until that settles out, you won't see a real firming of plans to start to address any further expansion of ethanol production to meet the higher renewable fuel standard. But this is a market that's going to develop over a long period of time, and I think it's going through some natural cycles of a bit of a shakeout, and you'll see some of the fringe players perhaps be absorbed. And then I think we'll see some renewed momentum in the market to build more plants and start to reach the higher production levels required by the renewable fuels standard.

Okay. And then just finally, on the structural wind towers. You've got the new Mexican facility coming online later this month, you mentioned. Could you kind of talk about how much incremental capacity that provides you in terms of percent growth of capacity for structural wind towers? And then also, kind of how to think about margins of that capacity coming online? Should we think as that starts up, there's perhaps some margin pressure in the segment, and then there's some margin momentum from that new plant as we look to the year?

You know, Brannon, I think that's, from a new plant coming online, that's why we went ahead and gave guidance for the full year on the wind tower business. So incorporated in the $380 million for 2008 is that plant coming online. I think with respect to margins, you know, we said in the past you'll see some volatility in the margins as we ramp up new lines and we gain efficiency. But we have had a substantial improvement in the ramp pace and gained efficiency throughout the wind tower business, so the guys are doing a really good job with this.

Okay. Thank you.

Thank you. We'll take our next question from Paul Bodnar with Longbow Research. Go ahead, please.

Hey, what is the, what your plans were in terms of how you're planning on executing the repurchase agreement throughout the year? And just to use cash, I guess, as related to that?

Yes, I've got--.

This is Bill McWhirter. You're asking about the stock repurchase agreement, I assume. The stock repurchase agreement calls for an authorization of $200 million over a period of two years. It's generally going to be our policy that we will discuss what we have purchased in each of these calls and issue that data on our Q and our K rather than precursoring our use of the funds. Clearly, it will be a rational use of capital as the Company weighs other opportunities for growth and investment.

So you'll basically balance that between building up the lease fleet and any other opportunities out there?

Absolutely.

And then secondly, just in terms of lease fleet and in terms of what's coming up for renewal this year, I know you've added a lot to that. Any kind of guidance or what is going on with the lease renewal division, the pricing is still good in case you're coming up over '02 and you go forward to meet your comps? Just a little color on that, if you could?

Okay, Steve, do you want to take that one?

Sure. Paul, we don't comment on our specific renewal exposure, but again, our 5.5-year average remaining lease term gives you some indication that we have a fairly small number of cars coming up for renewal in 2008 and in 2009. And again, we think that longer average remaining lease term does provide us a hedge against a market downturn as we might be experiencing presently.

And in terms of the leases, what kind of a mix of cars do you have going in that currently? Is it a pretty even breakdown, or is it weighted towards the ethanol cars and some of those to get pushed out to '09, or anything else on that?

Yes. No, we have a very diverse fleet, and we monitor our fleet diversification very closely so that we can provide balance, and that's certainly something that the financing institutions look very closely at as we go to market. So we're very pleased with the diversification of our lease fleet.

But as part of your backlog, is there any weight towards anything, towards the ethanol compared to tank car, the 30,000-gallon tankers, or anything else in particular?

Well, there are ethanol-related cars in our backlog. We don't give the specifics of the breakout of our backlog, Paul.

Okay. Thanks.

And we'll next go to Todd Maiden from BB&T. Go ahead, please.

One question regarding the stimulus package that's out there. If that gets approved, given the bonus depreciation element, what material uptick do you think you'd see across your different business segments, and which segment do you think would benefit the most?

Bill, you want to try to respond to that?

Yes, sure, I'll take a shot at it. I think any time you get a bonus depreciation bill out there and a stimulus package, it tend to bode well for people who produce capital goods such as Trinity does. So I think it's a little hard for us to tell you which line of our business it will impact the most. But generally speaking, across all of our products, we would find that favorable.

Steve, do you have comments on that?

Yes. Just to add, we've had specific discussions with some customers looking to opportunistically replace their fleets, upgrade some older cars, and it seems to be tying nicely into some of the production voids that we have in our plans for 2008. So I guess early indications are we think the bonus depreciation could be a positive for our railcar business.

All right. And then, what would we expect to see, or if you could give us any color on what we might see from a change in your CapEx structure?

I think our CapEx at this time is $180 million to the $190 million in our manufacturing business is the guidance.

Okay.

And $650 million to $750 million on the leasing company is the guidance. So a pretty strong CapEx program as we go into 2008.

All right. And then one other question. Construction products division. I know, obviously, we've seen weakening in the housing sector across the country. But Texas has been somewhat of a lagging market. I know there's been a little weakness there, but what are you looking at as far as aggregates, concrete, construction products, going out the next 12 to 18 months in Texas?

Yes, I think the Texas market has held up pretty stable, particularly from a residential perspective. We're pleased with the business. Last year we made some pretty good moves in shoring our portfolio a little bit. We divested some businesses that weren't good fits, acquired some businesses that were even better fits, and you start to see that in the fourth quarter, where you have a little incremental movement in revenue, but a better movement in the margin line. So we look for quite a lot of things from our construction group.

Okay. Thank you very much.

(Operator Instructions.) We'll next go to [Lynn Clariton] from [H.E. Wellington]. Go ahead, please.

Okay. The tax rate went up from about 34% to 39% quarter to quarter. If you could detail a little color there. And also, perhaps a detail on the end market shift that's underway in the railcar business. Hopper cars versus coal cars, et cetera?

Okay, this is Bill. Why don't I take the tax rate, and then I'll pass off to Steve on the railcar question. Third quarter tax rate was reasonably low as a result of some state tax law changes in Texas. As we mentioned, fourth quarter reflects kind of more of a year-end true-up movement. So a better answer for tax rate for Trinity as a whole is probably in the 37% to 38% range as we look at the business.

Lynn, this is Steve Menzies. I don't know that it's a shift from covered hopper cars to coal cars. We're seeing additional demand for coal cars, a recovery in that market--albeit a bit slow, but it is happening. The demand for covered hoppers, we're seeing largely replacement. We're seeing opportunities to bring larger, more efficient railcars into the system and replace older, less efficient cars. So really, those things are happening in parallel as opposed to a shift from one to the other.

So that it's growth in coal cars, but it's slow, and in hopper cars, it's mostly replacements?

Yes.

Okay.

Thank you, sir. Our next question comes to us from Steve Barger from KeyBanc Capital. Go ahead, please.

Hey, good morning, guys. It's actually Joe Boggs just filling in for Steve. I'm just wondering if you can talk quickly about your, the current funding environment that you're seeing for highway construction and how you think it might impact your construction products business in 2008?

Yes, this is Bill. Current funding for highway again has been slower than we have anticipated. We've been talking about that, I think, now for three or four quarters, and certainly we're hopeful that the funds will continue or start to flow at a higher rate. But right now, the business performs well, and we're prepared for the upside should we see more funds flowing out of the system.

Okay. On your last call, you guided between 7,100 and 7,300 railcars that you expected to deliver. Can you tell us about maybe where the majority of the delta was from your actual deliveries in 4Q?

Yes, in a market like we're in, where it's moderating, as I said earlier, you have some production shifting and flexibility issues. And Steve, you might talk about what's happened in that part of the business.

Joe, really what we had are some timing issues that just really shifted from the end of the quarter, and we'll see some of that made up here in the next quarter.

Okay. And finally, can you just talk about your raw material cost expectations for 2008? Any potential pass-through mechanisms that you have, particularly for steel? And is there typically a lag between when you can implement those increases?

Yes, this is Bill. We continue to talk about it as a cost coverage inside the company. Cost coverage from our perspective is selling business with escalation provisions, developing firm contract relationships with our suppliers, as well as using our inventories on ground. So while we are seeing some upward movement in certain steel pricing and commodities, we do have a pretty good cost coverage program throughout the company that I'm pleased with.

Thank you, guys.

And we'll next go to the site of Jonathan [Prague] from Atlantic Investment. Go ahead, please.

Good morning. Just in terms of the tax going forward, what should the cash taxes look like compared to that book tax rate of 37% to 38%?

And Jonathan, we're not going to give guidance on a cash tax rate, and when our K comes up this morning, you'll get an idea of deferred taxes for the year. And the leasing company continues to provide accelerated depreciation benefits to the company. So those can be repeated, but I can't provide a guidance on a cash tax rate.

Okay.

(Operator Instructions.) We'll next go to Timothy Jones from Wasserman and Associates. Go ahead, please.

Good morning. You talked about that you had some holes in your anticipated production in railcars in the second half relating to renewable fuel segment customers deferring their orders to 2009. Roughly, what percentage of your second half shipments does that represent? And do you think that this change in the depreciation and so forth and the customers are talking can fill that up?

Yes. As I mentioned in my remarks--this is Steve, Jonathan. As I mentioned in my remarks, that--I'm sorry, Timothy. As I mentioned in my remarks, we have gone through our backlog and looked very closely at our backlog related to renewable fuels and have firmed it up. We think what's in our backlog now for '08 is solid. It actually gives us a good visibility into 2009, in particular for production of covered hopper cars and tank cars related to renewable fuels. And so we think we've rationalized what's going to happen there.

The interesting thing is, those holes now provided us opportunities to sell different types of cars to other customers, and thus far we've been very successful doing that.

But will the margins be relatively comparable, or is that part of the reason that you're taking your margin guidance down to 8% to 10%?

Well, I think Bill gave you margin guidance for the overall rail business, and in the course, that takes that into consideration.

Yes, I would think so. Okay. And no one ever talks about the port barge business. I just don't understand how the backlogs in this business are up 62%. I was through the impression that it's a nice little business, but it was fairly mature.

Well, we love the barge business, and our barge group is performing outstanding, and we're extremely proud of the job that they're doing. And we've accomplished a lot of the investments that we have put in capital investments over the last three or four years in this business, as you can see, are paying off, and that's why we've got a, we have a, we're continuing to put capital into our barge business and our other businesses to generate productivity improvements and expansion.

I'm pretty sure the internal growth rate of the barge business isn't that high. Could you give me a rough estimate of what your market share has done in the last two or--last three years or so forth? I'm sure it's quite impressive.

There's not an industry organization that tracks all the deliveries and shipments and everything in barges like there is in railcar. And so we don't have precise numbers. And we don't really focus on market share in that business. We focus on receiving orders that's going to enable us to obtain the productivity improvements that we have been obtaining and continue our lines as long and as smoothly as possible.

So it's a function of you putting more, trying to develop better, newer, more efficient products than your competitors with this innovation and R&D, then?

Well, not so much innovation and R&D in the particular product. It's more about internal productivity improvements inside of our plant operations. Trinity historically has been, has a high level of competency and has demonstrated this. When we get large backlogs of orders and we get repetition working throughout our factories, we're able then to extract some additional productivity through a number of different initiatives that we have. And right now in our barge group, as an example, there are some productivity initiatives taking place with some lean activities and some other similar type activities occurring.

Okay. Well, thank you.

(Operator Instructions.) All right, sir, it appears there are no further questions at this time.

Thank you, Colin. This will conclude today's conference call. Remember, a replay of this call will be available starting one hour after this call ends today through midnight Thursday, February 28. The access number is 402-220-2650. Also, this replay will be available on our website at www.trin.net. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.