The Greenbrier Companies, Inc.
Q1 2008 Earnings Call Transcript

Published: 8 Jan 2008

[Operator:]

Hello, and welcome to TheGreenbrier Companies first quarter and fiscal year 2008 fiscal earnings releaseconference call. Following today’spresentation we will conduct aquestion and answer session. Until thattime all lines will bein alisten only mode. Atthe request ofGreenbrier Companies, this conference is being recorded for instant replaypurposes. Atthis time I would like to turn theconference over to Mr. Mark Rittenbaum Senior Vice President andTreasurer. Mr. Ribttenbaum you maybegin.

[Mark Rittenbaum:]

Good morning and welcome. After both Bill and I review our earnings release today and make afew comments about thequarter that just ended and theoutlook for 2008 and beyond, as always, we’ll open itup for your questions. Matters discussed inthis conference call today include forward looking statements within themeaning of the PrivateSecurities Litigation Reform Act of 1995. Throughout our discussion today we will describe some of theimportant factors that did cause our actual results in2008 and beyond to differ materially from those expressed inany forward looking statement made by or on behalf of Greenbrier. Today we reported our first quarter 2008 results. Or GAAP earnings were $0.16 pershare on revenues of $286 million, compared to earnings of $0.12 pershare on revenues of $247 million inthe first quarter2007. Our 2008 earnings were negativelyimpacted by $0.16 pershare due to several factors. 11% of theimpact is related to special charges and other costs associated with ourCanadian manufacturing facility. Thisfacility was shut down last year and is inthe process of beingliquidated. Inaddition, foreign exchangelosses which areprimarily related to theappreciation of thePolish Zloty impacted earnings by $0.05 pershare. And lastly our tax ratefor the quarter was57.5% compared to anexpected rate for thebalance of the year ofaround 46%. While our earnings were muted for thequarter and there is noise inthese earnings as I have just discussed, similar to thefirst quarter of last year, much of thesoftness is seasonal innature. Infact, if you look back over our last four fiscal years, on average only about30% of total fiscal years earnings before special charges and other unusualitems were realized inthe first half of theyear, with about 70% of our total yearly earnings realized inthe second half of thefiscal year. We expect itto play out much thesame this year, primarily due to anumber of factors that I’ll now discuss. We expect amore favorable product mix, seasonally higher refurbishment and parts revenues,that we’ll have thedisposition of our Trenton Works facility behind us, we’re inthe midst of enacting costreduction initiatives and we’ll have alower tax rate for thebalance of the year. I’ll go into these more ina minute, but I wantto step back first and as we enter our calendar 2008, there is little doubtthat we are seeing anincreasingly competitive new railcar environment inNorth America as aresult of moderation innew rail cardemand and a softer railenvironment. Industry deliveriesexceeded industry new carorders for each of thefirst three quarters of 2007. Except forour GE multi-yearorder that we announced inthe fourth quarter of thecalendar year, industry orders may bedown again when the Q4or down as compared to deliveries when theQ4 2007 data is reported. However, as we step back, there is also little doubt thatour recent strategic initiatives to diversify our revenue and earnings base andto shift our manufacturing footprint to lower costfacilities are alsobenefitting us in thecurrent operating environment and will continue to doso well into thefuture. I’ll now provide some color and highlights for thequarter. First, turning tomanufacturing. New railcar deliveries for thequarter were 1,900 units compared to 2,000 units inthe first quarter of’07. On our last quarter call we said weanticipated new rail cardeliveries for theyear would be around8,000 units. Today we believe that to bethe upper end of therange and our deliveries for theyear could fall somewhere between 7,500 and 8,000 units. Given that our November 30, 2007 backlog includes 4,500 units to beproduced during thebalance of ’07 and since we delivered 1,900 units inQ1 of this year, this implies that deliveries of thesomewhere between 1,100 to 1,600 units must befiled with orders received subsequent to 11/30/07. Our manufacturing margin for thequarter was 5.4% and as expected this was down sequentially from Q4 of ’07 dueto a less favorableproduct mix. Almost 60% of totaldeliveries for thequarter came from either covered hopper cars for theNorth America market or deliveries inthe European market,both of which aretended to generate lower margins than our overall product mix. You’ll recall last quarter we said manufacturing marginsthis year would behard pressed to meet or exceed last year’s margins of 7.8% due to aless favorable product mix and pricing environment and thestartup of our GIMSA GBfacility in Mexico. We still believe this guidance is valid,however, we do expectmargins to improve somewhat for thebalance of the yearboth due to more favorable product mix and continued improved results fromGIMSA. InQ4 of last year, GIMSA produced adrag on our earnings of about $1.3 million, where inQ1 of this year it wasnearly break-even. We expect this trendto continue at ourGIMSA facility for thebalance of the year,however, the resultsof our GIMSA operation and our overall financial results will beimpacted by about $1.2 million of startup costs related to our tank carline that we’re getting setup down there for theGE multi-yeardeal. Turning now to our Trenton Works facility inCanada, itis in theprocess of being liquidated. Thisearning has had aquarterly drag on earnings of about $0.10 pershare. This drag principally shows up inspecial charges, G&A expense and interest expense. We plan to bring this liquidation to ahead quickly. This [disclose] will botheliminate thequarterly loss of $0.10 ashare and could result inan income tick up whenthe final liquidationis completed, whereupon some of thelosses that we had been recording over thepast year now about could berecaptured. As touched on inour release, our marine repair, refurbishment and parts and leasing andservices business units which generated about $540 million of revenues in’07 all continued toperform well and we anticipate this momentum will continue. These units coupled with our European new railcar manufacturingbusiness unit should generate close to $800 million of revenues in2008. Now turning specifically to refurbishment and parts segment,we expect that our second quarter will bethe lowest revenuequarter this fiscal year for seasonal reasons, again, principally due toholiday plant shutdowns and capital budgeting cycles of our customers. Thesecond half of theyear is anticipated to generate higher revenues and thesequential decline inmargins we experienced this quarter from thefourth quarter of last year is also anticipated as aresult in thechange inproduct mix and we believe that themargins for thebalance of this year should remain atabout 15%. Turning to our leasing and services segment, which of courseincludes the results ofour 9,000 owned railcars and managed fleet of 138,000 railcars, our utilization for thequarter on the ownedfleet was 97.1% compared to 98.1% inQ4 of last year. We anticipate that ourutilization will remain high throughout theyear, but it coulddecline slightly. As anoverall comment, we aredefinitely seeing firming of lease rates inthe market,particularly on thenew rail carside of the businessand at times we areseeing some very aggressive, to saythe least, pricing inthe market from someof our competitors on new railcar transactions andsome of our competitors specifically inthe new railcar side of thebusiness. Thequarter includes $0.8 million ingains on equipment sales, compared to $3.2 million of gains inQ1 of ’07 and $2.6 million inQ4 of ’07. As stated inour last call, equipment sales arehard to forecast as they areopportunistic innature and are alsooften as a result oftransactions that we generate inthe market, however,we do expect thegains on equipment sales will bedown significantly from $13 million realized in’07. I want to emphasize this decline isdue to our expectation that we’ll have less trading activity this year than lastyear. Itis not a reflection inreduction in assetvalues, as thesecondary market for leased assets remains very liquid and robust. When you pull out gains on equipment sales, leasing andservices margins were 46% of revenues for thequarter compared to 47% inQ4 of ’07 and overall we our leasing and services margins to remain strong,high in ’08. Thetax rate for thequarter was 57.5% compared to ananticipated effective ratefor the remainder of theyear of around 46% as therate for thequarter was impacted by adjustments of tax estimates. The46% effective tax ratethat we expect for thebalance of this year compares to a40% rate in’07, obviously this is afairly significant difference and adrag on earnings and this changein ’08 and the’08 effective rate isdue to a changein thegeographic mix of pre-tax earnings of losses, minimum tax requirements incertain local jurisdictions and operating losses for certain operations with norelated accrual of atax benefit. Wrapping you up, inthe currently morechallenging operating environment we’re continuing to aggressively look toreduce our manufacturing overhead inG&A costs. We also have reduced ourcap-ex budgets to reduce discretionary cap-ex. We believe G&A will run less than $20 million aquarter and we hope and intend to bring this amount down further. Manufacturing cap-ex should run about $25million for the year,refurbishment and parts about $15 million and our net leasing cap-ex somewherearound $45-$50 million. On theleasing side this compares to anet cap-ex in ’07 of$0 and $93 million in’06. Our [DNA] expense should run about$35 million for theyear. Insum, while 2008 may not beas strong as 2007, we anticipate asolid year buoyed by our diversification efforts. Similar to fiscal ’07, we expect thesecond half of ’08 to bestronger than thefirst half with Q1 being our weakest quarter. Remind you that while thefirst half of 2007 was weak, theyear ended on a strongnote, just as we had expected. Thecurrent operating environment is more challenging, remain optimistic about thelong term fundamentalsof the railindustry and we believe we arewell positioned both inthe near term and longterm to successfully compete ina changingenvironment as aresult of our strategic decisions made over thelast year or so. I’ll now turn itover to Bill and then we’ll open itup for your questions.

[William Furman:]

Thank you Mark, well as some of our investors and those whofollow us, this quarter may seem like déjà-vu allover again, but it’s amuch better quarter than thefirst quarter last year and because of anumber of factors I’m going to discuss, I believe we aregoing into this year 2008 with much better operating fundamentals even thoughwe have an economicenvironment that hascaused caution on thepart of many buyers inthe railcar sector. With thevarious factors Mark hashighlighted and arealso highlighted in thepress release, we have factors inthe first quarter andsecond quarter which arenon-continuing and will beresolved, and I see ona continuing basisthis quarter in themid $0.30 range from continuing earnings. So, it is adisappointing quarter, but I believe itis just that and reflects both aseasonal pattern and themix of freight cars built inthe quarter andcertain operating adjustments we’ve made for theeconomic realities of this environment, where we arecurrently operating. Asofter economy requires afreight car builder toadjust production rates inorder to operate profitably and with strong cash flows through adownturn. We have taken steps to adjustour operations to theeconomic realities we’re facing and we believe thecompany is very well equipped inits car buildingsector to weather what we expect will bea softer economy and adry period in themarket for new freight cars, compared to therelatively robust build rates in2005-2006 and even in2007. Here’s what I seegoing on in themarketplace, in thefull year 2007, US carloads were down 2.5%, off therecord set in 2006 andintermodal loadings were down 1%, trailer loadings were way down, containerloadings were up only slightly compared to thevery high single digit growth rates of thepast two years. This is not abad record for therailroads, although aclear signal that aneconomic slowdown, however improved railroad velocity both from needing fewercars to transport fewer carloads and from railroad efficiency and improved cardistribution also always hasa multiplier effect inthe demand for freightcars. That is what is happening now andthese are simply factswe have to face. There arenot reliable published statistics incar storage inthe North Americanrailroad system, however, our own surveys and estimates indicate that agreat many cars arenow being stored or arebeing underutilized as would beexpected with theoperating environment I just described. This is occurring across theboard in almost allcar types expectcertain tank cars, amarket we just entered inMexico with themulti-year order from GE. While global insights and others are still forecasting a reasonably robust 2008with car builds above 50,000 cars, I do not believe the numbers are reliablefor 2008-2009 given the current economic climate. I think the likelihood is that car builders,as we are doing will adjust their production rates to adjust to a lower levelof car orders. There are literallyhundreds of miles of stored train sets including intermodal, coal, forceproducts cars, BDG cars, in fact cars of all varieties and neither leasingcompanies, shippers nor railroads are inclined to order cars robustly in such amarket. So, this is putting downward pressure on pricing and marginsin thenew car sector, thosecars which are beingordered as well as leasing pricing and pricing policies for new leases by some carbuilders have been very aggressive, very, very aggressive, bordering on very,very reckless policies. We’ll seewhether these leases work out and whether they may come bouncing back inthe economicenvironment of thenext year or two. We have aseason management team atGreenbrier that present market environments is nothing new to us. On atactical level we doseveral things to respond to this environment. First, we reduced production rates atGunderson’s facility where we produce double stacks to what we believe aresustainable levels through thefull calendar year 2008. Also, we’reconcluding thenegotiations on our existing backlog to pull up some orders from 2009 and swapcars which might otherwise bestored for cars which can beput into service by our customers. Inother words we’ll swap out cars which would otherwise go into storage inthe currentenvironment for cars that areuseful to customers and we believe that this will have avery positive outcome for us inthe longterm. Our very strong backlog will give us thelegs for long distancerun and we expect to increase our market share as we always have during aperiod like this using sensible leasing and deployment of capital into soundleases. We continue to operate and focuson our manufacturing expenses and as Mark hasindicated we will aggressively cut G&A costs during thecurrent cycle. Meanwhile, we’re clearly seeing thebenefits of a strongermore powerful network of repair shops and theoutcome of adiversified revenue base and theother units, leasing, marine manufacturing, repair, wheels and refurbishmentand management services that give Greenbrier abroader ability to operate ina challenging economicenvironment. Theoutlook for railroads is very positive and this is atemporary blip that we areinto in terms ofrailroad car supplyand demand. I think that inthe second half of theyear, we’ll be able todemonstrate the sameresiliency that we did inthe second half of2007. Notably our revenue mix is changingover the last twoyears from 2006 to 2007. Revenuepercentages from freight carmanufacturing have moved from the78% range down to 60% and in2008 we expect that to bein the50’s, whereas margins have moved from amixture of roughly 50/50 to 1/3 to 2/3 in2007 and in 2008, weexpect gross margin from theother more robust areas of our business model to approximate almost 75% of thetotal revenue of thecompany. Ingeneral I think our strategies areworking very well, we’re sorry as others aresorry about a disappointingquarter, but we remain very upbeat and think thecompany possesses very strong fundamentals for achallenging railroad market environment. Mark, back to you.

[Mark Rittenbaum:]

Thank you, Operator if you could please open itup for questions we’ll behappy to take them now.

[Operator:]

Our first question comes from FrankMagdlen with theRobins Group, please go ahead.

[Frank Magdlen:]

Good morning.

[Mark Rittenbaum:]

Hi Frank.

[Frank Magdlen:]

Acouple of questions. Your comment that thebarge manufacturing railcar repair et ceterawould come to $800 million, areyou including new cardeliveries in North America inthat $800 number?

[Mark Rittenbaum:]

No, we areincluding new cardeliveries in Europe,refurbishment and parts, marine barge and leasing and services. Those entities inaggregate we anticipate would approach about $800 million.

[Frank Magdlen:]

Alright, sothe number of barges inthe backlog?

[Mark Rittenbaum:]

Approximately 11.

[Frank Magdlen:]

11 atthis time, alright, I’ll jump back inqueue.

[Mark Rittenbaum:]

Thank you Frank.

[Operator:]

Thank you our next question comes from Mike Roarke withMcAdams Wright Ragen. Please go aheadwith your question.

[Mike Roarke:]

Hi Mark, good morning, I just have aquick question regarding therefurbishment and parts division. Isthat margin through theinhospitable economic environment that you describe, is that margin fairlysustainable between the15% and 18% range that we’ve kind of seen over thelast five quarters here?

[Mark Rittenbaum:]

Invarying environments I think that is agood range, for thenear term we expect itto be around the15%, at thelower end of that range, but from what we’ve seen today we dobelieve the 15% is sustainable inthe currentenvironment.

[Mike Roarke:]

Okay and would that hold true going into theback half of the yeartoo when you’re…

[Mark Rittenbaum:]

Yes.

[Mike Roarke:]

…expecting things to bea bit better. Okay. Second question too with theleasing margin dropping below 50%, does that look like thesustainable rate over thenext few quarters too?

[Mark Rittenbaum:]

Well I think agood part of thereason it’s below the50% is when you look atgains on equipment sales and there’s some other items similar to that, there’swhen we hold rail carson the lease fleet on atemporary basis before we sell them to other leasing companies, those inessence generate 100% margin because there’s no related costof sale. Soin this quarter thoseamounts were very low, sowe’re actually anticipating that our margins will bea little bit higherfor the balance ofthis year because we’re expecting alittle bit more activity inboth of these areas.

[Mike Roarke:]

Okay, I thought what I heard you saywas that you were expecting reduced activity on thetrading front.

[Mark Rittenbaum:]

Let meclarify that, we doexpect reduced activity as compared to ’07 when we had nearly $13 million ofgains on sale. This past quarter ourgains on sale were ateither $0.7 or $0.8 million for theyear as a whole, we’reexpecting, for thequarter that just ended that was $0.8 million, for theyear as a whole we’reexpecting a little bitgreater run rate thanthat $0.8 million, and as I mentioned before we’re also expecting some moreinterim rents before we sell railcars that will bring that margin up alittle bit.

[Mike Roarke:]

Okay. Great thank youand just one more if I could, thecash position that you currently have on thebalance sheet, is that alevel that you arecomfortable with or doyou feel that there is room to have more of acash cushion?

[Mark Rittenbaum:]

We feel very good about our liquidity position. One thing I’d comment on is I don’tnecessarily look atour cash balance and I don’t believe any of senior management looks atthat, we look at ourliquidity levels and our dry powder and based on our various lines of creditand financial covenants we have about $230 million of dry powder, sowe’re at very strongcash flows this year. We feel verycomfortable with this and as alluded to inthe release, we’recomfortable enough after having paid down $100 million of debt last year thatshould we find attractive opportunities, acquisition opportunities inthe market on amid-size to smaller-size scale that also have good visibility and strong EBITDAto it that we would beinclined to act on those opportunities.

[Mike Roarke:]

Okay. Great, thankyou very much for taking thequestions.

[Mark Rittenbaum:]

Thank you.

[Operator:]

Thank you our next question comes from Jb Groh of D.A.Davidson. Please go ahead.

[Jb Groh:]

Morning guys.

[Mark Rittenbaum:]

Morning.

[Jb Groh:]

Had aquestion on how much cut down work you did on thequarter, I don’t know if you covered that or not and what’s left on that and Iwould think that that would bea favorable impact tomargins in thefuture quarters.

[Mark Rittenbaum:]

We pretty much have run through that, that was inour backlog, any of that cut down would have been inrefurbishment and parts and we don’t break that out specifically and I prefernot to break that out. There’s not toomuch left in backlogother than anything that may occur as aresult of current discussions. Bill maywant to comment overall about theopportunities in thecut down area or thesize of the marketthat may be out therelonger term.

[Jb Groh:]

Let methrow a question inthere, would that explain thevery strong second half of last year refurbishment and parts margin versus whatyou’re looking at overthe next threequarters in that kindof 15% range?

[Mark Rittenbaum:]

No, that is not. Thathad to do with someother refurbishment work that we did last year that was apart of the mix, thatwas some higher margin business as well as thewheel, you know we were operating atslightly higher volumes on thewheel side of thebusiness in thesecond half of theyear last year, just as you might have expected because we were ina more robust economicenvironment in thesecond half of our fiscal year last year.

[Jb Groh:]

And theoverall seasonality of that business is from holidays inQ1 and holidays inQ2? Or arethere other seasonal demand factors that areplaying in there?

[Mark Rittenbaum:]

Yeah, there’s both, holidays and our customer’s capitalbudgeting cycles that we feel pretty good and pretty confident that inthe second half of theyear that the revenuesfrom this segment will exceed thefirst half of theyear. One of theareas that we didn’t really talk much about, but where we’re really seeing somemomentum that will probably carry beyond ’08 is theparts part of our business that is included inthe refurbishment andparts side.

[Jb Groh:]

And then on Trenton Works inthe past there’s beenno real tax benefit associated with some of those charges, was that thecase this quarter as well?

[Mark Rittenbaum:]

Yes itwas.

[Jb Groh:]

Okay and then sort of doyou have an estimateof what you think themarket value of those cars that you have inequipment on operating licenses, I mean, obviously that’s going to vary, but,they’re on the booksfor $300 million roughly…

[Mark Rittenbaum:]

Right, there really is no blue book value on those anddefinitely as I mentioned earlier that market is robust and we’re stillconfident that thevalues will exceed our book value but we wouldn’t want to put avalue on it.

[Jb Groh:]

Okay and then lastly have you guys, with thestock where it istoday and some dry powder, have you considered abuyback?

[William Furman:]

We have, our board is going to continue to look atthis. We think thestock is very undervalued atthis point but we also arelooking at otheropportunities for investment and soit’s something that we’ll continue to evaluate.

[Jb Groh:]

Okay thanks for your time, seeyou this afternoon.

[William Furman:]

Thank you.

[Operator:]

Thank you our next question comes from Art Hatfield withMorgan, Keegan please go ahead.

[Art Hatfield –Morgan:]

Morning gentleman.

[Mark Rittenbaum:]

Morning.

[Art Hatfield –Morgan:]

Acouple question, I want to clarify my understanding of thepress release, when you make thecomment in there aboutnot being able to achieve thesame earnings level in’08 as you did in ’07,is that based on the$0.16 GAAP number in thequarter?

[Mark Rittenbaum:]

Yes, it’s GAAP earnings before special charges. That’s thecomparison that we’re trying to make, if you look atlast year the $1.37and then we had $0.85 of special charges net of tax related to our Canadianfacility, that is how we’re getting back to the$2.22 of earnings before special charges and for this year our comment wouldbe, so we’d betrying to compare apples to apples there, our net earnings and then adding backspecial charges to those earnings, this year again there’s no tax benefitassociated with those, any losses from those special charges, those aregoing straight to thebottom line.

[Art Hatfield –Morgan:]

So…

[Mark Rittenbaum:]

There’s no tax effect inother words to those special charges.

[Art Hatfield –Morgan:]

Okay, but when you make that comment, you’re looking atQ1 as being a $0.16number as opposed to a$0.27 or $0.32 number?

[Mark Rittenbaum:]

I’m looking atit being $0.16 plusadding back thespecial charge of 189,000 sothat’s effectively a$0.17 quarter.

[Art Hatfield –Morgan:]

Okay, that’s very helpful. Secondly, Mark, just want to clarify, when you were talking about theleasing business, I thought I heard you saythat you were seeing afirming of lease rates and then you made thecomment that you were seeing some aggressive pricing from competitors. Can you flesh that out alittle bit for me?

[Mark Rittenbaum:]

Yes…

[Art Hatfield –Morgan:]

Itseemed to contradict itself.

[Mark Rittenbaum:]

Well, on theused cars side I think we’re seeing firming inthe new and by firmingcertainly as compared to this time last year, rates would bedown from last year, I don’t think that would beparticularly surprising, there’s not atremendous amount of volatility there. On the new carsside of things, we areseeing some aggressive and attime erratic pricing on leases.

[Art Hatfield –Morgan:]

Okay, soyou’re making adistinction between used equipment up for lease and new equipment coming outfor lease.

[Mark Rittenbaum:]

I think they would both bedown from this time last year, I would saythere is not as much volatility inthe used cars side aswe’re seeing and as aggressive or rates being as down as much on theused cars side as attimes we’re seeing on thenew cars side.

[Art Hatfield –Morgan:]

Okay that’s helpful. Secondly, as you seefor new cars sales, you probably areseeing as you mentioned some more competition, areyou seeing any relief atthis point in time inany of your input costs?

[William Furman:]

We have avery aggressive global sourcing program that we’ve talked about before andthat’s definitely giving us abenefit, particularly on those products we can bring inin thePacific Northwest atour Portland facility. Longer term weintend to use that to achieve acompetitive advantage inour repair network. Soit is useful todayjust in terms of ourcurrent system and we’re seeing some softening incertain specialties and we’ve been able to seeeven some softening incertain categories of steel, sothere has been abit of that going on.

[Art Hatfield –Morgan:]

Okay. Thank you andas always thanks for taking my questions.

[William Furman:]

Thank you.

[Operator:]

Thank you our next question comes from Peter Nesvold withBear Stearns. Please go ahead.

[Peter Nesvold:]

Morning guys.

[Mark Rittenbaum:]

Morning Peter.

[Peter Nesvold:]

I was hoping to getsome perspective on themanufacturing margins of 5.4% and if I throw out last year because itwas a heavilydisrupted year, themanufacturing gross margins areback to where they were in’02 in this quarter,but your through part on therail carside is twice as high to build point previously, your global sourcing efforts arehigher and the bargethroughput is also probably twice as high as itwas back in ’02 soI guess what I’m trying to understand, what hashappened to bring that back down to that trough level soquickly. I know Canada is still abit of an overhang butit seems like theremust be more than justthe Nova Scotia plant inthere.

[William Furman:]

I’m going to let Mark respond to that inmore detail but interms of the generalthings that areoccurring, we arestill reaching our pitch point atGIMSA so there’s stilla little bit of adrag there. Interms of not producing thekinds of positive margins we arecurrently reaching at arun rate basis sothere’s that factor. Principally it’s thecombination of a lowerproduction rate ofdouble-stack cars, revenue recognition on some of our automax product and just ageneral mix issue I think that is affecting us. There is a lotof noise though as itrelates to Trenton when you’re looking atGAAP numbers.

[Mark Rittenbaum:]

Alright and Peter while there is noise, just to clarify, inthe margin thequarter that just ended there is not alot, Trenton is, thenoise from Trenton is principally during thespecial charges or G&A expense rather than margin but as Bill mentioned ourGIMSA facility is still finding its footing sothe margins very lowthere, we anticipate that to continue for thebalance of the yearbut, again, longer term we arevery upbeat on that. As well as we talked about inour prepared remarks, inEurope we’re finding themargins are lower dueto some supply chainissues that we worked out and unfortunately while themarket is very robust over there, much of thebacklog that we’re producing this year with that backlog was booked ata time where themarket was softer and so, frankly, we’re not enjoying as much as thebenefit in that marketof the return thisyear that we would like, sowhen you look at themix of deliveries, that is depressing themargin along with really covered hopper cars which is more of acommodity car typewhich virtually all ofthe railcar builders otherthan pure tanker carbuilders, other than Union and Freight CarAmerica, virtually allbuilders are buildingcovered hoppers today it’s more of acommodity car type andfor us that tends to bea lower margin car. Sothere’s a number of thevariables out there, we did saythat we expected some margin enhancement as theyear goes on, but not atremendous amount of margin enhancement. The marketenvironment, as Bill alluded to, is very competitive today.

[Peter Nesvold:]

Arethe GIMSA resultsconsolidated in yourresults or does that flowthrough the [GAV]line?

[Mark Rittenbaum:]

Itis consolidated and then theminority interest is backed out soyou would see that,actually the minorityinterest was an addback, our share of theearnings, or we had aslight loss from our share of theresults were a slightloss to the quarter.

[Peter Nesvold:]

And Mark you made reference to $230 million indry powder and that you’re comfortable with your covered ratios, I find ita little hard to justmeasure where your interest covered ratios are, just given theway you report externally, can you tell me, where areyour interest covered ratios right now and how does that compare to the[talven] end?

[Mark Rittenbaum:]

We have two primary interest coverage ratios, one under ourrevolver and one under our high yield notes. They’re typically IBITDA’d to interest or IBIDTDAR’d to interest plusrent test, you cannot ineither case take them straight off of thefinancials, particularly on thehigh yield notes. I don’t have thecalculation in frontof me for thisquarter, but we’re substantially, inone case the ratio isset at 1.75 to 1 and theother is at 2.25 to 1, inboth cases thecalculation of theratios were substantially inexcess of the requiredratio, but I don’t have thenumbers in front of meand probably would prefer not to disclose those.

[Peter Nesvold:]

Okay and thelast question, there hasbeen a lot of pressout of Nova Scotia about pensionreform, have you accrued atthis point for any kind of pension liability that you’re going to beon the hook for as aresult of the newlegislation?

[Mark Rittenbaum:]

We believe, well first of all, that occurred after thequarter end, that legislation, sowe do believe thatwe’re adequately reserved up atTrenton Works but thequarter that just ended, there would not have been accrual for thepension and again we believe that we’re adequately accrued up atTrenton.

[Peter Nesvold:]

Gotcha, okay, thank you.

[Operator:]

Thank you, our next question comes from Brannon Cook withJ.P. Morgan.

[Brannon Cook:]

Good morning. Just aquestion on the cartype outlook as we through thebalance there you talked about 60% of thecars coming from covered hoppers and European markets inthis quarter, should we think about covered hoppers becoming amore important part of themix as we go through theyear and any color on that would behelpful.

[Mark Rittenbaum:]

Covered hoppers over allare animportant product of our operations, we arebuilding covered hopper cars on two lines, one inour [Concor Reel] facility and one atour GIMSA facility and we’re very happy with our position incovered hoppers, I don’t mean to minimize that atall and infact we’ve been gaining market share inthis area. Thereality is that is more of acommodity car type. Having said allthat, we areanticipating some higher production of some other cartypes, so that if youlook at thetotal mix, we believe that we’ll have amore favorable mix as we will have inthe second half of theyear, as an example,more double stack railcars that are part of themix and more of our automatic carrying carthat will be part of themix.

[Brannon Cook:]

Okay, when you look atthe pricingenvironment by cartype, obviously thebroader market is under pressure abit, but are youseeing a bigdifferentiation between cartypes and the level ofpricing you’re able to geton intermodal versus covered hoppers or automax.

[William Furman:]

Well I think there’s pressure, very aggressive pressureacross the board on allnew car transactions,whether those aremanifested in terms ofthe lease rate, wherethere’s been considerable aggressiveness, or incar pricing. Probably alittle less so on carpricing than on actually theleasing that some parties arewilling to engage in. Some of that hasto do with surplusesof cars that were ordered, perhaps on speculation, or even as speculativeposition that people aretaking in cars inthe currentenvironment. But I think it’s across theboard, I think it’s effecting allbuilders and it’s going to continue through theperiod of time when railroads arestoring cars, as they are.

[Brannon Cook:]

Okay and just afinal question, inyour press release you talked about the$800 million that was set to come infiscal ’08 outside of North American railcar building. Thenumbers seemed alittle higher than I would have thought, you know within themanufacturing segment I generally think about maybe $100 million of revenuescoming from Europe and maybe call it$60 million coming from barge, arethose ball-park-ish right numbers to think about inthe manufacturingsegment?

[Mark Rittenbaum:]

Good question, I think theEuropean is a littlebit light and that’s really theresult of two things, one we’re building athigher production rates over there and frankly with thedepreciation of theDollar against theEuro principally therevenues translate into more US dollars, sothat $100 million inEurope is a littlelight.

[Brannon Cook:]

Okay but thebarge is pretty close?

[Mark Rittenbaum:]

Yes.

[Brannon Cook:]

Okay, thank you.

[Operator:]

Thank you, our next question comes from Paul Bodnar withLongbow Research. Please go ahead.

[Paul Bodnar:]

Yes to sort of follow up just give alittle more color interms of what’s going on inthe Europeanoperations in terms ofturning those around and making them more profitable and then secondly alsoalong those lines, does aEuropean revenue number look more like $140 million type thing for ’08 then?

[William Furman:]

I’ll let Mark talk to therevenue number, there aretwo forces that were acting on Europe going in2007 going into 2008 that arestill operating, although we’re cleaning them up. One, Mark mentioned was that we had alot of our backlog that was booked atearlier pricing and thesecond was supply chaindisruption and we have management changeover there, I guess is even athird. Supply chaindisruption caused operating difficulties there. Those factors have been addressed. We’re still working off thelower price backlog and I expect that this will continue through atleast the first halfof our current year. Longer term thoughas Mark has indicated Europe’seconomy is more robust, we have stuck to our guns inEurope and want to continue to dothat because of theinteraction in theglobal marketplace and particularly theopportunities to reduce costs inour supply chain.

[Mark Rittenbaum:]

Regarding your specific question, to just give you afeel in ’07 Europeanrevenues were about $150 million, this year we believe that they could come incloser to $200 million.

[Paul Bodnar:]

Okay that’s helpful. Secondly also within theleasing business, how does revenue break down there between thecars that you manage and thecars that you lease and particularly I guess interms of what the nextimpact would be of a[unintelligible] decline inutilization rates?

[Mark Rittenbaum:]

Well I could give you more of arevenue breakdown. Our managementservices revenues areabout $25 million on the138,000 cars that we manage. Theoverall margins on themanagement services side of thebusiness tend to beless than on the ownedfleet as you might expect because themanagement services is not avery capital intensive. I would not wantto share or it’s not as simple algorithm to share what a1% either increase or decline inutilization equates to interms of revenue or margin because itwould depend on where that changewas coming from. Inother words, which cars aregenerating and what kind of margins were on thecars that were generating thespecific increase or decrease inutilization.

[Paul Bodnar:]

Okay. And then last inrefurbishment parts how does theback half of the yearyou said would improve versus thefirst half of ’08. How does that lookcompared to the backhalf of ’07 which was pretty strong?

[Mark Rittenbaum:]

Just bear with mea minute. I think as compared to last year we wouldanticipate somewhat comparable numbers inthe second half ofthis year as compared to thesecond half of ’07. Inother words, around $115 to $120 million of revenues ineach of those quarters.

[Paul Bodnar:]

Okay and then you said seasonally thesecond quarter would head downward, I mean how much further down would that go?

[Mark Rittenbaum:]

I would saywithin the same rangesof the first quarter,whether it’s plus or minus alittle from where we were inthe first quarter thisyear which was just over $100 million, we would expect that kind of aballpark.

[Paul Bodnar:]

Okay and then I guess kind of further along interms of the economicenvironment, [unintelligible], traffics down, I mean how dothe revenues end uptracking in aneconomic decline in’08, ’09 in thatbusiness overall? If you stop getting thebenefits from some of thesame cut down work is itpretty much just follow GDPor if GDP is down it’sgoing to tend to track along with that, or what’s thebest way to look atthat?

[Mark Rittenbaum:]

Again I don’t know that there’s asimple algorithm, thewheel services side of our business and when you look atthe total revenues wheelservices are going to bein excess of $250million out of themaybe even a littlecloser to $300 million out of something of total revenues that arein excess of $400,that will tend to have theleast amount of volatility to what is compared to repair and refurbishmentwork, which, again, would bemore capital budgeting process. Butthere’s going to besome on the wheelservices side of thebusiness, of course that is going to beeither is going to besome bearing as to how strong theeconomy it just more railcars moving and moving athigher velocity. But again I don’t knowthat you could develop asimple algorithm. Overall though thatwould probably tend to bethe least sensitiveside of the business.

[Paul Bodnar:]

Okay. And just onelast housekeeping question I guess, [unintelligible] thetax rate, you said that was going toaverage 46% for theyear or it will be46% in each of theremaining quarters for theyear?

[Mark Rittenbaum:]

Itwill average 46% for thebalance of the year iswhat we believe.

[Paul Bodnar:]

Okay, thanks alot.

[Operator:]

Thank you, our next question comes from Matt Reams withBuckhead Capital, please go ahead.

[Matt Reams:]

Good morning gentleman.

[Mark Rittenbaum:]

Good morning Matt.

[Matt Reams:]

You had gutted theinterest expense of about $36 million for theyear, that’s a littlebit higher interest expense than FX inthe first quarter, canyou tell us what’s going on there?

[Mark Rittenbaum:]

Right, well part of that is, again we had about $1 millionof FX losses this quarter and certainly we would hope and also aretaking steps to try and minimize of FX loss, if losses were to continue atthat amount then we would beobviously running closer to $40 million rather than $36 million. There’s not atremendous amount that theterm debt amortization this year, sothat’s why our original guidance was around $9 million aquarter and we came incloser to $10 million this quarter.

[Matt Reams:]

Okay. Soare you going to changethe interest expenseguidance or are yougoing to wait to seehow the yearprogresses.

[Mark Rittenbaum:]

No I think right now we’re not, I think for thebalance of the yearour expectation would bethat that would come incloser to $9 million aquarter, maybe even come down abit, we’re taking some measures to try and improve on working capital and as weflush out some inventory and assets [unintelligible] for sale, we’d hope that thedebt balance would come down alittle bit.

[Matt Reams:]

Okay. You started toallude to one of my second questions, was what order of magnitude will you getworking capital gains this year, I think you’ve talked about leanmanufacturing, obviously manufacturing is slowing, but inthe second half, willworking capital gains beoffset by increasing orders inanticipation of GE orjust production increases?

[Mark Rittenbaum:]

We areexpecting that we’ll seesome improvements inworking capital, you’re right that there will besome partial offset from ramping up of thetank car line that’sgoing to come up in, we’ll beproducing cars in thefourth calendar quarter this year. But inEurope we are workingaggressively and have to bring down our inventory balances where we have inparticular we’re carrying afair amount of inventory and also today as we’re finding our footing on thefirst production line atGIMSA where we would hope to achieve some improvement. Overall we’re trying to bring down theinventory balances during thebalance of theyear. I don’t believe these aregoing to be seismicshifts, but maybe in theneighborhood of $20-$30 million would bea good target or agood goal for us.

[Matt Reams:]

For theyear?

[Mark Rittenbaum:]

For theyear.

[Matt Reams:]

Okay, that’s great. SG&A came down nicely this quarter relative, I think you wereguiding to $21 million aquarter and you were going to beintensely focused on reducing SG&A. You’ve now kind of guided down to closer to $20 million I think aquarter. I know you had one time costswith investment banking and other types of things going on last year, what canthat quarterly SG&A number come down to kind of given theenvironment we’re in?

[Mark Rittenbaum:]

We’re still working on that Matt, we certainly believe asmentioned here that we can bring itin under $80 million,we’re setting some more aggressive targets than that, but I think we haven’tcompleted our work inarea. You’d certainly if you went backto ’01 or ’02 you’d seethat we, which was of course amuch worse operating environment, you’d seewe took some very aggressive measures and cut out about $2 million of SG&Aor more. We’re not necessarilyindicating that we took some pretty drastic measures there, we don’t think thatwe’re at that point inthis cycle, I think on our next call we’ll beable to provide more guidance on just how much further and what kind of targetswe’ve set in thisarea.

[Matt Reams:]

Okay, that’s great. Iknow sometimes those kinds of things aredifficult to talk about ina public format. Just getting back to Europe, longer term, Ithought Bill’s comment was interesting that you lumped itinto less cyclical businesses. I thinkseveral years ago youwere looking atexiting that business, doyou expect that longer term Europe can perform or getto margins similar to North America, up into theteens, low-teens?

[William Furman:]

We think that with acontinued evolution of thebusiness model inEurope, perhaps approximating more closely our model here, that we can have aviable business inEurope. If we find that we cannot, wewon’t hesitate to look atother alternatives. Theopportunities, particularly insourcing and parts area value inEurope. Now with thecurrency differential changingas it has, we may findthat there are someunexpected opportunities that Europe can bea value to us even inNorth America.

[Matt Reams:]

So theless cyclical component is getting more into kind of parts and service typearrangements?

[William Furman:]

Yeah, aterm less cyclical is not thecorrect term, perhaps itmoves to a differentbeak there and moves ata different perhaps ina differentcycle. Theoutlook currently inEurope and we believe for afew years there is going to remain strong inthe railsector due to a numberof forces that arefinally achieving full impact there inthe European economyand the railsystem with privatization and alot of very robust activity inthe shipment offreight in Europe andwith trade with Russia.

[Matt Reams:]

What about themargins longer term? Can they approachNorth America and much better environments?

[Mark Rittenbaum:]

I think they can, Matt, you referenced theteens for new rail carmargins in NorthAmerica would be on theupper end of the rangebut overall your comment, can we getto the type of marginsthat we realize in therailcar in NorthAmerica, yes we believe we can and infact historically there have been sometimes that we have done that, we justhave not been able to doit on aconsistent basis.

[Matt Reams:]

Okay. And what’s yourproduction capacity inEurope?

[William Furman:]

Itremains a difficultenvironment and we areexamining the entirebusiness model there. We’re making someprogress in Europe butwe’re still very conscious of thedistraction that itcan present, so we’llcontinue to evaluate it.

[Matt Reams:]

And what kind of production capacity doyou have in Europe?

[Mark Rittenbaum:]

Roughly about 2,000 units.

[Matt Reams:]

Okay and I think you had mentioned that itwas about 1,500 units you were expecting to produce this year?

[Mark Rittenbaum:]

Yes, that’s correct.

[Matt Reams:]

Okay, soyou still have room to increase utilization inEurope without having to make substantial investments?

[Mark Rittenbaum:]

Yes, we have iton the margin, on themargin we do. With any of our plantswhere we give a rateat capacity includingEurope where we say2,000 units or any of our plants, that really is allthe stars lining upperfectly, where you’re having longproduction runs of aminimal number of cartypes, but yes, we could squeeze out alittle bit more over inEurope.

[Matt Reams:]

If I could just add one more question. I know manufacturing hastypically occupied themajority of senior management’s time, with themanufacturing slowdown, what kinds of things areyou doing related to parts and refurbishment to really try to accelerate thegrowth opportunities without having to invest alot of additional capital?

[William Furman:]

Last year, as was indicated insome of the year endinformation we did three organic transactions interms of growing therepair network. We’re finishing upintegration of the twoacquisitions at thetail end of that now, still getting some benefit from that. We have continued to focus very keenly onthat segment of thebusiness and I think thenumbers are reflectingthat.

[Matt Reams:]

Arethere any particular opportunities, I know like Kansas City Southern is tryingto become a much moreefficient operator, expand intermodal, things like that, arethere specific things that you’re working on with therail companies orlease companies to begin to take on alot more work there?

[William Furman:]

Yeah but if I told you what they arethen everyone would rush after them so, we have anumber of things that we don’t want to publish, we’re very exciting about thisnetwork and if you insist that we give you the20 second first on it, it’s anetwork business, we’ve got avery efficient network, there’s avery strong demand for what we can provide, which is reliable service, shortdwell time, bumper to bumper coverage with thecustomer and it playsright into what therailroad’s current needs aretoday, which is areliable partner inproducing velocity and efficiency intheir operating model.

[Matt Reams:]

Okay, well that’s fair enough…

[William Furman:]

…right now to enhance that segment of thebusiness.

[Matt Reams:]

I’m sorry, I didn’t catch that last part.

[William Furman:]

We’re working on anumber of operating and other deals to enhance that business, we intend tocontinue to grow itand make it stronger.

[Matt Reams:]

Okay, well I appreciate your comments I know it’s obviouslycompetitive issues, maybe we can talk more about that offline, but thanks foryour time today I appreciate it.

[William Furman:]

Very good and we have time here for one or two more, sowe’ll go ahead and take those.

[Operator:]

Thank you, our next question comes from Steve Barger with KeybankCapital, please go ahead.

[Steve Barger –Keybank Capital:]

Hi good morning.

[Mark Rittenbaum:]

Hi Steve.

[Steve Barger –Keybank Capital:]

Hi, I had to hop off for asecond just tell me ifthis has been covered,but in your commentsyou cited mixed costreduction initiatives and alower tax rate asdrivers for theearnings improvement through therest of the year, canyou talk about therelative impact of each one of those, you know which is most critical to allowyou to get theimprovement or what might beleast important there?

[Mark Rittenbaum:]

I think you could dosome math yourself on that, if you take thetax rate, obviously that’s an11% swing in thetax rate that goesstraight to the bottomline for any future earnings, then also we have said that we expect ourrefurbishment and parts margins to remain around 15% and that therevenues from that will beabout $115-$120 million perquarter in thesecond half of theyear and then we said slight improvement innew railcar margins, but still theupper end of the rangeof that is 7.6%, soyou could probably go ahead and rank those yourself based on that.

[Steve Barger –Keybank Capital:]

No, I appreciate thecolor there, thank you. I’d like to ask aquestion about the perdiem, as you’ve seen theslight reduction in theutilization rate onyour lease rate, areyou seeing an increasein inquiries for perdiem and would you expect to seethat as people wait for even better lease rates, even though you talked about themore aggressive environment?

[William Furman:]

In amarket like this it’s not unusual to lease, if you have cars coming up forlease, to lease short rather than going long, just as it’s usual to go longin astronger period. We went on our portfolioto the degree we hadcars that we didn’t not want to put into service which have higher revenueyields, we went longon most of our fleet, we have anaverage term now of about three years. Sowe’re easily able to go through this economic cycle without alot of negative effect on our corefleet. On themargin there will beissues and we’ll evaluate putting cars into perdiem if we convert from term to perdiem typically we have agood swap on revenues, sothat’s an offset we’lllook at. We have anunusual capability to keep cars inservice due to the waywe’re organized and our connection with thesystem through our various business units. So, per diem isa strength that wehave, but it can bea risky area as well, sowe don’t want to getoverloaded on it.

[Steve Barger –Keybank Capital:]

And you have not seen asignificant shift inthat direction interms of inquiries atthis point?

[Mark Rittenbaum:]

Nope, we haven’t, is theshort answer.

[Steve Barger –Keybank Capital:]

Okay, one last question, I know on theparts and service side of thebusiness is a littlemore fragmented, areyou seeing more aggressive bidding out there with lower utilization rates? You know similar to what you may beseeing in terms of theleasing or new carside from some of those smaller, maybe less rational competitors?

[William Furman:]

No, not materially. Not that we can’t counter by thebenefits of thenetwork. What we’re selling isreliability, short dwell times and shorter transportation moves and anetwork has asubstantial advantage over individual carshops, so I think isgoing to be quite alot of opportunity, continued opportunity inperfecting this network over time.

[Steve Barger –Keybank Capital:]

Alright very good thanks.

[William Furman:]

Thanks.

[Mark Rittenbaum:]

Thank you and we have time here for one more.

[Operator:]

Thank you our last question comes from John Barnes fromBB&T Capital Markets, please go ahead.

[John Barnes –BB&T Capital Markets:]

Hey good morning guys, most of my questions have beenanswered but I had two quick follow ups. Number one, on theshut down at TrentonWorks, you indicated that was part of thelower SG&A run rateand that you expected Trenton Works, that shut down, to kind of take some of thepressure of on costs, can you kind of quantify what costs you believe you’reincurring associated with that shutdown that’s not captured inthe special charges?

[Mark Rittenbaum:]

Well thetotal cost is runningabout 500,000 aquarter. Sothis quarter it wasslightly higher than that, sopart of the breakoutof that is in specialcharges, the balanceof that would be inG&A, other than about 100,000-150,000 or sothat’s in interestexpense, so eachquarter it will behard for me to giveyou in advance howmuch of that would be inspecial charge versus G&A, but, on thewhole, maybe 400,000 of that or sowill be between thosetwo line items.

[John Barnes –BB&T Capital Markets:]

Okay, alright and then just aclarification on apoint you made earlier inyour comments about amore favorable product mix inthe second half, canyou just elaborate on that alittle bit? I mean does itgo back to the thoughtabout longer sustained production runs, is that kind of what you were alludingto or is that better priced product, could you just elaborate there?

[Mark Rittenbaum:]

Yeah, I think itis really a pure mixthing, we said that inthe first quarter herethat 60% of our deliveries either came out of Europe or covered hoppercars. We anticipate that that numberwill be, that percentage will belower in thesecond half of theyear, primarily as aresult of a greaterpercentage of industrial stack intermodal cars and our automax car.

[William Furman:]

Let mejust add to that. We have spent quite alot of time during thequarter ended and even prior to that working on asustainable backlog in2008. Sowe are verycomfortable now with thebacklog we have interms of having theability to sustain more stable production in2008 and there hasbeen some effect in thetrailing quarters of efforts that we’ve made to reposition ourselves. It’s very, very important that we doreposition ourselves to adjust to theeconomic realities. I think we’veachieved that now, sogoing into the balanceof calendar 2008 I think we have avery sustainable production book which will give us more predictability and thebenefits of longer runs.

[John Barnes –BB&T Capital Markets:]

Okay, very good. Thanks for your time guys.

[Mark Rittenbaum:]

We’ve run out of time here, sowe’ll, we appreciate allyour interest, I know several of you may have had additional questions or thatwe didn’t get to, I’dinvite you to contact meafterwards, after thecall, we do have boardmeetings and our annual shareholder meeting scheduled alittle bit later in themorning, this afternoon, soI’d encourage those of you who have been trying to getahold of me to doso sooner rather thanlater. And as always I want to thank allof you for your participation inour call and of course we’ll bewebcasting our shareholder’s meeting later on today for those of you who wouldlike to participate inthat. Thank you very much and as I saidwe appreciate your interest inGreebrier. Have agood day.

[Operator:]

Thank you, that does conclude today’s conference, you maydisconnect at thistime.