Trinity Industries, Inc.
Q3 2009 Earnings Call Transcript

Published: 29 Oct 2009

[Operator:]

Good day. All sites are now in a listen-only mode. Later, there will be an opportunity to ask questions. (Operator instructions) 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. It is now my pleasure to hand over the conference over to James Perry, Vice President, Finance and Treasurer of Trinity Industries. Please go ahead, sir.

[James Perry:]

Thank you, Collin. Good morning from Dallas, Texas and welcome to the Trinity Industries third quarter 2009 results conference call. I am James Perry, Vice President, Finance and Treasurer for Trinity. Thank you for being with us today. In addition to me, you will hear today from Tim Wallace, Chairman, Chief Executive Officer and President; Steve Menzies, Senior Vice President and Group President of the Rail Group; and Bill McWhirter, Senior Vice President and Chief Financial Officer. Following their comments, we will move to the Q&A session. Also in the room today is Mary Henderson, our Corporate Controller. A replay of this conference call will be available starting one hour after the conference call ends today through midnight on Thursday, November 7th. The replay number is 402-220-2331. Replay of this broadcast will also be available on our website located at www.trin.net. At September 30th, 2009, we had total borrowings of $1.91 billion. Borrowings at the corporate level were $450 million of convertible subordinated notes, $201.5 million of senior notes, and $3.2 million of other indebtedness. We had no borrowings under our $425 million revolver. The leasing company’s debt included $936.3 million of debt under long-term financing and $294.8 million outstanding under our $475 million railcar leasing warehouse facility for total leasing company debt of $1.26 billion at September 30th, 2009. This compares to a book value for total leasing equipment of $2.8 billion, resulting in total leasing debt to total equipment on lease of 44.7%. At September 30th, we had $180.2 million available under our railcar leasing warehouse facility and $336.1 million available under our revolving credit facility after accounting for $88.9 million in letters of credit. Combined with our unrestricted cash balance of $545.4 million, our total liquidity was in excess of $1 billion at September 30th, 2009. During the next 12 months through September 30th of 2010, our scheduled debt repayment commitment total $58.5 million. Our next debt maturity or renewal occurs in early 2011 when we will revisit the warehouse facility. Details of future commitments and our debt can be found in our 10-Q. We did not purchase any Trinity shares during the third quarter. Our cumulative purchases under the $200 million program launched in late 2007 totals 3,532,728 shares for a total of $67.5 million. The authorization under this program concludes December 31st, 2009. In today’s call, you’ll hear us refer to the non-GAAP term EBITDA, a reconciliation of which was provided in our press release yesterday. For the third quarter, EBITDA was $109.4 million. It was $205.4 million during the last four quarters. We are positioned well with a strong balance sheet and solid cash flows. We have been very focused on these items to ensure we are positioned to capitalize on business opportunities as they arrive. Now, here is Tim Wallace.

[Tim Wallace:]

Thank you, James and good morning, everyone. We continue to make progress in confronting a variety of challenges associated with the recession. We are seeing benefits of our efforts to diversify our portfolio of businesses. Our flexibility, backlogs, and strong liquidity are also proving to be assets as we navigate through the current downturn. We continue to be highly focused on liquidity. During the third quarter, we made significant progress in strengthening our balance sheet. As James mentioned, we had $545 million of unrestricted cash and total liquidity of $1 billion at the end of the third quarter. Our success at diversifying our portfolio during the past decade has helped us offset the current losses in our rail group. The diversification of our revenue and operating profit along with our strong liquidity is providing us the ability to think strategically while our rail group navigates through the trough of its cycle. Timing plays an extremely important role at this stage of the business cycle. During recessions, there is a tendency for buyers of capital goods to carefully time the placement of their orders. They monitor economic conditions closely, trying to place orders at the bottom of the cycle and get the best pricing. Inquiries for orders can sit dormant for months until buyers feel the timing is right. When an order surfaces, our customers usually want their products as soon as possible. Other times, customers can request delays in existing orders for a variety of reasons. These actions create an air of uncertainty pertaining to the demand of our product. Our businesses are doing a great job of quickly flexing and adjusting as demand shifts and changes. Our rail group received orders in the third quarter, which allowed them to recall some employees. Our barge business was able to obtain enough orders to stabilize its backlog. Our wind towers business rescheduled production in the third quarter in order to accommodate customers. We know how to operate in fluctuating markets and I’m highly confident in our ability to successfully navigate through this stage of the cycle. The uncertainty makes it very difficult for us to provide financial guidance for 2010. As a result, we are limiting our guidance to the fourth quarter of 2009. A few of our businesses have seen some signs that demand is improving. Our businesses that produce construction products are seeing the most positive signs. Despite heavy rain in the Southern part of the United States, our construction products group maintained its positive momentum throughout the third quarter. Our highway products businesses received a good flow of inquiries and orders during the past two quarters. During the winter months, this business normally slows down as do the rest of our business in our construction products group. Although this group is relatively stable, we expect to have lower than normal profitability until the overall economy improves. The recession is continuing to have a major impact on our railcar manufacturing businesses. We anticipate an extended downturn in this business. Our rail group’s revenue has continued to decline and we expect shipment volumes to continue to decrease until they come aligned with order levels. Fortunately, our efforts to develop an integrated manufacturing leasing and services model reached critical mass before the recession occurred. Steve will provide more information on the rail group during his comments. Our barge business performed well during the third quarter. Our barge business has a base load of orders for 2010 and it’s working on additional orders. Our barge personnel continue to do a good job maintaining productivity. Our barge orders have lower margins than our current production, reflecting the softness of the market. As a result, we continue to expect profitability to decrease in the barge business during the next few quarters. Our energy equipment group’s third quarter profit reflected a decrease in production stemming from customer request to defer deliveries. Orders for new wind towers picked up slightly during the third quarter. Our order backlog for wind towers extends through 2011. We are optimistic that new orders will increase as a result of wind farm financing included in the stimulus bill. It remains difficult to precisely predict when this will occur. At this point, I’m pleased with Trinity’s overall position and financial strength given the state of the general economy. We are continuing to weather the recession much better than we did during the last economic downturn in 2002. In fact, at the end of the third quarter in 2002, we had $15 million in cash and a total liquidity of $264 million compared to $545 million in cash today and more than $1 billion in total liquidity. We’ve been working for years to position ourselves to remain very competitive in a variety of economic scenarios. Our success during the third quarter reflects the talents of our people, the diversification of our businesses, our emphasis on highly efficient manufacturing, and the strength of our market leadership positions. Challenging economic conditions are never pleasant, but we are fortunate to be well positioned. We are a very flexible company and we have proven our ability to respond quickly to challenges and opportunities. During down cycles, we have historically strengthened our portfolio of businesses and we believe there are opportunities to do so during this cycle. We are watching closely for opportunities while simultaneously keeping an eye on our businesses and our costs. I’ll now turn it over to Steve Menzies for his comments.

[Steve Menzies:]

Thank you, Tim. Good morning. Trinity Rail’s third quarter operating results reflect the benefits of our evolving integrated manufacturing, leasing and services business model. While demand for railcars remained weak during the third quarter, our lease fleet utilization rose to 97.2%. Our leasing and services income offset a portion of the 7.2% operating margin loss experienced this quarter in our railcar manufacturing operations. During the third quarter, we continued to align our railcar production footprint with demand. We shipped approximately 1,630 railcars, 47% less than the 3,080 railcars shipped in the second quarter and 81% less than our record 8,560 railcars shipped in the third quarter 2008. Approximately 870 of these new railcars were shipped to customers of our leasing company. We expect shipments of approximately 1,300 to 1,500 railcars during the fourth quarter. Our current production facilities are capable of producing a substantial portion of our product line and can quickly ramp up production to meet market conditions. We continue to experience weak demand in new railcar inquiries across most major railcar types. Industry orders for new railcars totaled 1,890 during the third quarter and approximately 6,500 railcar orders industry-wide year-to-date. At the current order rate, this will be lowest level for annual industry new railcar orders since 1985. We do not expect this to change until the large overhang of idle railcars is reduced and a sustainable recovery in industrial production occurs. In the interim, we are able to meet customer railcar requirements with railcars from our lease fleet and production of some specialty railcars. During the third quarter, Trinity Rail received orders to build approximately 1,000 railcars. At the end of the third quarter, our new railcar build order backlog was approximately 3,160 railcars, a 16.5% decrease from the prior quarter. Approximately 50% of our backlog is committed to customers of our leasing business. The growth of our lease fleet over the last decade has had a significant impact on earnings. In 2002, our lease fleet totaled approximately 15,000 railcars and contributed $31.3 million in operating profits for the year. During the third quarter of 2009 alone, our lease fleet generated operating profit of $30.3 million, about the same amount produced in the entire year of 2002. At September 30th, 2009, our lease fleet totaled 49,470 railcars. This is 12% higher than the 43,910 railcars in our lease portfolio at the end of the third quarter of 2008 and 230% higher than in 2002. As you can see, the size of our lease fleet during the current railcar market downturn is substantially larger than in 2002, plus providing operating profit and cash flow to mitigate the losses associated with our railcar manufacturing operations. We are pleased with the increase in our lease fleet utilization to 97.2% at the end of the third quarter compared to 96.4% at the end of the second quarter. We see improving fleet utilization as a precursor to stabilizing lease rates and as a positive sign that we are at near – at or near bottom with respect to railcar demand. Renewal and assignment rates are weak overall and vary depending upon the markets served. We are particularly encouraged by developments in the bio-fuel sector, an important market segment within our lease portfolio as production ethanol has come into better balance with market demand. We are closely monitoring a pending EPA decision that may increase the oxygenate blending requirements above the 10% prescribed today. This could have a significant effect on the supply/demand balance for ethanol and railcars used to support – to transport ethanol. The demand for distilled dried grains, a co-product of ethanol production, used as protein-rich feed supplement, continues to grow as well. In a weak lease rate environment, we carefully manage our lease expirations to minimize concentrations of certain railcar types expiring in a narrow window of time. Our 2010 lease expirations are consistent with our average remaining lease term and spread evenly throughout the year with no extraordinary concentrations. We have also been successful in renewing and assigning railcars on shorter lease terms during the downturn in expectation of re-pricing these leases in the future during a stronger market. As a result, our average remaining lease term declined to 3.9 years at the end of the third quarter from 4.6 years at the end of the third quarter 2008. In summary, some key indicators show we may have reached the low point for railcar demand. However, there is a lack of sufficient indicators pointing toward a sustainable recovery in the railcar market at this time. The solid performance of our leasing and service business is providing an important option [ph] to our railcar manufacturing business. Our commercial team has been successful in maintaining strong lease fleet utilization in this highly challenging and competitive market environment. We will continue to maintain that focus with an eye toward improving lease rates as market conditions permit. Our railcar manufacturing capabilities are poised to respond to customer specialty railcar needs in the near term, as well as any general increase in demand for new railcars. We will closely monitor administrative costs, improve inventory cycles, and strengthen our processes during this downturn. We expect to be well positioned for a market recovery. I’ll now turn it over to Bill McWhirter.

[Bill McWhirter:]

Thank you, Steve and good morning, everyone. My comments relate primarily to the third quarter of 2009. We filed our Form 10-Q this morning. For the third quarter of 2009, we reported earnings of $0.29 per diluted share. This compares with $1.09 per share in the same quarter 2008. Revenues for the third quarter of 2009 were $557 million. Moving to our rail group, revenues for this group decreased on a quarter-over-quarter basis by 78% to $166 million. Margin results for the rail group were a loss of 7.2%. Looking forward, we anticipate that the rail group will report an operating loss of between $9 million and $12 million for the fourth quarter of 2009. This projection reflects the lower pricing environment and the numbers of cars to be shipped during the period. The rail group backlog as of September 30, 2009 consisted of approximately 3,160 railcars with an estimated sales value of $264 million. Our railcar leasing and management services group reported revenues of $82 million compared with $207 million in the same quarter 2008. Operating profit for the third quarter was $30 million. The decline in the third quarter revenue and operating profit resulted from a significant decrease in the number of railcars sold from the fleet during the third quarter of 2009. For 2009, we anticipate approximately $175 million to $200 million in net fleet addition. This level of investment compares with $940 million in net fleet addition during 2008. Now, turning to our inland barge group. The inland barge group’s third quarter performance was once again strong, with revenues of $114 million and operating profit of $26.7 million. This group received sufficient orders in the third quarter to maintain a backlog with that consistent of the second quarter. At September 30, 2009, the barge backlog totaled approximately $350 million. We anticipate inland barge revenues of between $110 million and $120 million in the fourth quarter. The operating profit margin for this group is expected to range between 18% and 20% for the same period. Now, moving to our energy equipment group. During the third quarter, this group’s revenue declined quarter-over-quarter by 28% to $133 million. Operating profits were $16.2 million with an operating profit margin of 12.2%. The backlog for the wind tower business remains healthy at $1.1 billion as of September 30, 2009. Revenues for this group are expected to be approximately $115 million in the fourth quarter. Margins are anticipated to decline to between 10% and 12% in the fourth quarter as we manufacture less profitable orders from our backlog. Revenues for our construction product group declined 27% compared to the same quarter the previous year due to the overall slowdown in the infrastructure spending during the third quarter. The group recorded operating profits of $13.1 million with a margin of 9%. Unfortunately, the weather has not been construction-friendly thus far in the fourth quarter. Moving to our consolidated expectations. For 2009, we expect non-leasing capital expenditures of between $50 million and $55 million. This compares to $132 million in 2008. During the fourth quarter, we expect to eliminate approximately $70 million in revenue and between $1 million and $2 million in operating profit as we build railcars for our lease fleet. We anticipate earnings per share for the company to range between $0.08 and $0.13 per diluted share in the fourth quarter. Our current cash balance of $545 million places the company in a strong position. The relatively small loss in our rail business was more than offset by the positive results produced by our other business lines. Prudent deployment of cash will be key as we navigate through the economic uncertainty. We are staying focused on finding growth opportunities and managing our overall liquidity. At this time, I’ll turn the presentation back to James for the question-and-answer session.

[James Perry:]

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

[Operator:]

Thank you, sir. (Operator instructions) And just give us a few moments to go ahead and queue this up. And our first question comes to us from Steve Barger with Keybanc. Go ahead, please. Your line is open.

[Steve Barger:]

Hi, good morning.

[Tim Wallace:]

Good morning.

[Steve Barger:]

I’m not sure I heard this correctly. Did you say a $9 million to $12 million operating loss or operating margin – negative operating margin next quarter on the rail deliveries of 1,300 to 1,500?

[Tim Wallace:]

Bill, why don’t you take that?

[Bill McWhirter:]

Yes. Steve, we said a $9 million to $12 million operating profit loss, not a margin or dollar loss.

[Steve Barger:]

Okay. So that, I think, implies better operating margin certainly at the low end than what you just put up. Is that a function of just further cost right-sizing or is a mix of deliveries?

[Bill McWhirter:]

Yes. Well, I think at this level of production, there is a lot of cost of that slate in our facilities related to burden in fixed costs. So that’s why we give a little bit of a wide range between $9 million and $12 million, but certainly could be better based on product mix or a little worse based on performance.

[Steve Barger:]

Right. Well, that would – I think that would be a pretty good outcome. Now, shifting to the wind business for a second, GE took $1.3 billion in turbine orders in the quarter. Another company I cover that reported today in the wind supply chain had a pretty good book-to-bill. Can you talk about what you are hearing from customers in terms of order expectations looking into 2010?

[Tim Wallace:]

Yes, this is Tim. As far as order expectation in the wind industry, there is a lot of anticipation on the part of the OEMs that we supply our towers to that things are looking more positive than they were six months ago. Keep in mind that we have a large backlog and a lot of the orders that we have in our backlog are for business that they plan to deliver in the next – in 2010 and 2011. And so when the orders actually will come to us for towers, we are still a little bit unclear on.

[Steve Barger:]

Okay. And one on the lease side of the business. Are the cars you putting on lease right now generally a shorter term than the 3.9 year fleet average or are you having to put anything out there with longer term just to generate some demand given – ?

[Tim Wallace:]

Steve, would you handle that?

[Steve Menzies:]

Well, I think in general there, we are at the shorter term of the spectrum, but there may be some instances where we have longer term. That might be the case of specialty railcar that we put on a longer lease term, but the general trend is shorter lease terms for us right now with the expectation that we can re-price assets in a stronger market.

[Steve Barger:]

All right. That’s good. I’ll get back in line. Thanks.

[Operator:]

Thank you, sir. And our next question comes to us from Paul Bodnar with Longbow Research. Go ahead, please. Your line is open.

[Paul Bodnar:]

Hi, good morning guys.

[Bill McWhirter:]

Good morning.

[Paul Bodnar:]

A question – to clarify, you said that expiration in 2010 are consistent with the average terms. So would that mean – am I looking at maybe about a sixth of all cars coming up next year then or are you just kind of saying to divide by four to give you a total cars or I guess, how should I – could you give a little clarity on that?

[Steve Menzies:]

Yes. I think the math is divide – multiply by one-eighth to get the approximation.

[Paul Bodnar:]

Multiply by – okay – of the term, okay. Great. Then the – also this quarter, I mean obviously you sequentially improved the utilization. Can you give any detail on how you did that or what you are able to do on the margin if there was that one big customer took a bunch of cars or – but obviously current conditions you’ll have a surprising – and kind of congratulations to your quarter, too.

[Steve Menzies:]

Yes. Thanks. Well, we’ve had – we did have some displacement earlier in the year, particularly in the bio-fuel sector, but I think our commercial team has done an excellent job of placing those cars and we just had a good field coverage and good relations with customers and have been successful in competitive situations and placed our idle cars into service.

[Paul Bodnar:]

So it sounds like ethanol kind of having a little bit of resurgence here helped you.

[Steve Menzies:]

Yes.

[Paul Bodnar:]

Okay. And I guess lastly, just the – on the tank side, I mean, who is ordering there? Is it dry bulk or tank and how is it different from the normal mix of types of barges being ordered?

[Tim Wallace:]

What product were you saying?

[Paul Bodnar:]

The barges, the tank versus the dry bulk barges and what – who is ordering what there?

[Tim Wallace:]

Oh, okay. If we –

[Paul Bodnar:]

How different is it than your normal pattern?

[Tim Wallace:]

We don't see anything really different than our normal pattern on a year-in, year-out basis. Orders tend to come in based on – like I said, when our customers feel like they are making good strategic buys and our – we don't really disclose and talk about how many tank barges we receive versus how many hopper barges. We do it in dollars and totals – dollars that we receive.

[Paul Bodnar:]

But you’ve stated tank versus dry – versus hopper looks similar to last year in terms of a percent or something –

[Tim Wallace:]

Well, I think that in this quarter and I’m just talking off the top of my head, I think there were more dry barges that we sold than there were tank barges.

[Paul Bodnar:]

Okay. Thanks a lot guys. I’ll get back in line here.

[Operator:]

Thank you, sir. Now, we’ll move on to Patrick McGlinchey. Go ahead, please. Your line is open.

[Patrick McGlinchey:]

Hi, good morning everybody. Just in your comments, it sounded as if your outlook here for each of your segment’s profitability in the continued – in the near quarters are going to continue to be pressured. All things being considered – I know you are not looking out to 2010, but all things being the same, are you kind of thinking that the first half of 2010 at least will kind of be similar to that of what you are looking at the fourth quarter? And if you could, just as far as improving segments, what you think the most likely strengthening segment in your portfolio could be in 2010?

[Tim Wallace:]

So – this is Tim. As I said, there is just an air of uncertainty pertaining to the demand for our products at this time and it’s extremely difficult for us to even think about providing any kind of financial guidance for 2010. It’s – things are happening very fast and very rapid and I’m very confident in our businesses’ ability to aggressively pursue orders and get the orders, but many times, these orders come in right at the last minute. In fact, in the third quarter, with our rail group as I mentioned, we had laid off some employees. Right, Steve? And then we recalled them within a couple of weeks, I believe, of that kind because we booked some business. And so there will be a quite a bit of yo-yoing that will be occurring in the market until there is a full-scale recovery underway and I think this will happen in all of our markets that we compete in just because it’s kind of the nature of the capital goods industry. We have seen some stronger signs in our highway related products because things that our sales people tend to think is related to the stimulus bill, but it’s extremely hard to identify an order and then just relate it back to something that has come from a stimulus bill. I think all companies are having that type of problem and you can just guess that you receive the order as a result of that.

[Patrick McGlinchey:]

Got you. What I will say with all this yo-yoing in all of your markets, I think you guys have done a great job here in managing each of the businesses over the past six months and I think your results here have proven that. Thanks for your time.

[Tim Wallace:]

You’ve got some insight there.

[Operator:]

Thank you, sir. We’ll now move on to Mark Dishop with The Boston Company. Go ahead, please. Your line is open.

[Mark Dishop:]

Hi, thank you. I just have three quick ones. First, what were the gains – what were – were there any cars sold or scrapped and what were the related gains on that? And then I have two more.

[Tim Wallace:]

Are you talking about railcars sold and scrapped out of our lease business?

[Mark Dishop:]

Correct.

[Tim Wallace:]

Bill, why don't you take that?

[Bill McWhirter:]

Yes. For the quarter, we only sold $1.5 million worth of cars and that could have been sold or scrapped or destroyed. There was no gain reported on those for us, no gain, no loss.

[Mark Dishop:]

Okay. Thank you. And then you said your lease fleet additions for the year would be $175 million to $200 million, I believe. What was the addition in Q3 and what would be the expected addition then in Q4?

[Bill McWhirter:]

Yes. When we said we would eliminate approximately $70 million as we added cars to our lease fleet in Q4, a little of that elimination is in internal parts, heads, things of that nature. So the bigger piece of it would be cars. And in Q2, I don't have the number right in front of me, but year-to-date I think we were sitting on about $130 million. That would take you real close to the $200 million.

[Mark Dishop:]

$130 million. That was year-to-date Q3?

[Bill McWhirter:]

Yes, year-to-date Q3.

[Mark Dishop:]

Year-to-date Q3? And I’m sorry, you said that the lease fleet additions will eliminate $70 million in what costs in Q4?

[Bill McWhirter:]

Yes, we take $70 million of revenue out. So as the cars that are sold from our manufacturing companies that are leasing and that gives you insight into the investment that we are making in the leasing company, as well as offshoot with what our reported top line will be because we have to eliminate those cars as we transfer them over to the leasing company.

[Mark Dishop:]

Okay. And what – how much did you add in Q2 on that?

[Bill McWhirter:]

We added a net of $85 million. We had a car sale in Q2.

[Mark Dishop:]

$85 million in Q2. So that does that mean – this goes to my third question, as you sell cars to your lease fleet, you also have – you assign more of your fixed manufacturing costs to it? Does that fluctuate based on your – how many cars you sell to your lease fleet?

[Bill McWhirter:]

The accounting rules regarding transferring cars and/or transferring any kind of inter-company inventory product are pretty specific and you can’t take the kind of an unutilized portion of the facility and transfer it in as well. So that gets expense as a period expense within the rail business.

[Mark Dishop:]

Right. So if you have – if you make 1,000 cars, your manufacturing costs gets allocated to all of them and then if half of them get sold to your lease fleet, then half of the manufacturing costs goes there and if only a tenth gets sell – gets sold to the lease fleet, then only a tenth goes to the – ?

[Bill McWhirter:]

Yes, it’s actually more specific than that. It’s by car-by-car, product-by-product. The cars could differ; it’s related to the market value associated with the car. So it’s pretty specific and the elimination is disclosed in our press release, both from a revenue perspective and a profit perspective, pretty easy to find (inaudible).

[Mark Dishop:]

Okay. And then what – do you have any preliminary expectations for your lease fleet additions next year?

[Tim Wallace:]

No. As we said, we are not really providing any type of guidance in the next year because of the uncertainty that we are experiencing.

[Mark Dishop:]

Okay, thanks. But your – just to clarify, it sounds like – this is my last thing, it sounds like you are adding a few more cars in Q4 than you did in Q3. Is that correct?

[Tim Wallace:]

Bill, you want to take that?

[Bill McWhirter:]

Yes. They are really about – we are adding fewer cars as we go forward, but it’s really close. But the other thing to remember is of the backlog of $264 million, we have said that about half of that backlog is dedicated to our lease fleet. So you can assume that we are committed for half of that $264 million.

[Mark Dishop:]

Okay. Thank you so much.

[Tim Wallace:]

Thank you.

[Operator:]

Thank you. And our next question comes to us from Alex Blanton with Ingalls & Snyder. Go ahead, please. Your line is open.

[Alex Blanton:]

Hi, good morning.

[Tim Wallace:]

Good morning.

[Alex Blanton:]

Tim, the results on the operating line and the gross margin line are absolutely stunning in this cycle compared with any other that I’ve experienced over 40 years in this business for you and also for most of the other capital goods companies. And what I mean is this. Your overall decremental margin is on the operating – on the gross margin line is a minus 19%. In other words, $0.19 for every dollar of sale, your gross profit went down. So that your gross margin, year-over-year, is – with sales down something like 50%, your gross margin is flat, which is – I’ve never seen these kinds of results before and in the individual segments, your railcar business is down year-over-year in this quarter 78% and you’ve got a decremental margin of only 12%. You are losing money, but it’s nowhere near what you have in the past. And in the construction products group, you said decremental margin of only 8% with a 27% sales decline. And in inland barge, it’s a decremental margin of only 7% with a 29% decrease in sales. The only exception here is your energy. And I wanted to ask you about that, what happened there because the 25% decline in sales, but your decremental margin is 32%, which is a lot more than the other segments. But first, how did you achieve these kinds of results? The cost reduction here is pretty unbelievable and also, what happened in energy? Why wasn’t that – why weren’t the ratios similar in that segment?

[Tim Wallace:]

Well, I appreciate your comments and you always do a great job of analyzing our business a whole – in a whole lot more detail than I can almost keep up with listening to you talk. I think that we’ve got a really strong team of seasoned people here; we’ve been through cycles before. And we have worked very aggressively as a team within our company together to leverage the synergies that we have within the company and the expertise and the knowledge that we have to be able to minimize the effects of the downturn and successfully navigate through it and accumulate cash as we go along. And so I'm very pleased with the performance of our company. There is really not a secret one or two things that I could disclose. And so here is how it all happened. It just took a lot of effort on everybody’s part to go after the cost reductions and leverage the strengths that we have as a company. As far as the wind energy business goes, I – in my comments, I mentioned that we had accommodated a customer – a major customer’s request to defer some of their production into 2010 and 2011 out of 2009. And this came through right at the last minute when almost up to a week or two before the production was running and our people did a remarkable job of salvaging what I felt could have been a devastating situation for us. The customer is pleased with the results that we provided them and so we built relationship there and we turned what could have been a negative into as much a positive situation as we had hoped. So one might look at it and think that that was a poor performance. I look at it with admiration of what our people were able to do to salvage a situation and it really reflects the capabilities and the responsiveness of our company.

[Alex Blanton:]

But could you be just a little more specific on how that situation caused – your processor in energy, unlike the other sectors, were cut in half on the 25% sales decline.

[Tim Wallace:]

What I can say is when you ship production at the last – at the 11th hour so to speak, and delay production like that without losing levels of productivity, you – in a manufacturing – in a high volume repetitive manufacturing environment, you just – you – there is a lot of risk there of losing a great deal of productivity. And what I was pleased with is that we did not lose a whole lot of our productivity. We lost a portion of it, which you can see in the margins and everything, but longer term, we preserved the orders and we will be able to continue to ship to this customer the full number of towers that they had ordered from us.

[Alex Blanton:]

So this was a deferral of deliveries, the stuff that you had already produced or half produced or –?

[Tim Wallace:]

Well, it was stuff that we had scheduled to be produced.

[Alex Blanton:]

Okay. So you had –

[Tim Wallace:]

When we were in the process of – we were manned and we were – we had ordered some materials and so we had to do some reshuffling.

[Alex Blanton:]

Yes. So you had built up the expense levels for this and then didn’t have the sales – against it?

[Tim Wallace:]

That’s right.

[Alex Blanton:]

All right. Thank you.

[Tim Wallace:]

Thank you.

[Operator:]

And it does appear we have a follow-up question from Paul Bodnar with Longbow. Go ahead, please. Your line is open.

[Paul Bodnar:]

Thanks. Good morning, again. Just next year – what’s your approach to the leasing business and are you kind of going to be a little more hesitant to deploy some additional capital there. You virtually have more third-party sales just to get the downturn or what’s again your thought for going in – on that business?

[Tim Wallace:]

Well, we’ve always used our leasing business as a strategic tool that enables us to maintain key relationships with customers and introduce new products, as well as – as you see, diversify our earnings and we’ll continue to do that. During a down cycle, we can’t just say to customers, “Sorry, we are not in the leasing business; we’ll be open for business when things get better.” So we meet with our customers, we understand what their needs are for equipment, we got to get good returns on the deployment of our capital, and we built up our capital in our company where we now have the flexibility to make choices of where we see the highest and best usage and deployment of our capital will be going. But we can’t make short-term decisions to say just because we are in a slow market we are going to shut off the valve on our leasing company. Steve, do you have anything to add?

[Steve Menzies:]

Well, I think, Paul, true – right now, we are able to respond to our customers’ railcar requirements with cars out of our lease fleet. To the extent that we don't have a car on our lease fleet to respond a customer’s requirement, we’ll certainly consider producing it provided we can get the appropriate returns, as Tim mentioned, on that investment. And we are finding that we are able to do that today – in today’s market in some specialty categories, in some specialty covered hoppers and tank cars. But broadly across the market, we don't see the type of returns in new car leasing that we have seen previously. So until we see that improve, I don't think you’ll see a large investment in new cars in our lease fleet. Our first priority is to keep our existing fleet employed and utilized.

[Paul Bodnar:]

Yes, that make sense. And then I just want to make sure that I heard this right from early – when you said there was about, I think Steve Menzies said it, with an eighth of the cars. It sounds like maybe up for next year, I mean, plus or minus a little bit. Was that what you were trying to say there?

[Steve Menzies:]

Yes. If the – if your average remaining lease term is four years, that implies that about an eighth of your cars, give or take, should be up for renewal in any one year and 2010 seems to be a consistent year with that line of thinking.

[Paul Bodnar:]

Okay. No, I just thought that was a fourth for everybody. And last thing, just – on the last call you mentioned something about potential acquisitions or looking on that front. Any further thoughts on that on what you might look at doing there or to kind of just more of a wait and see until you see it recover?

[Tim Wallace:]

This is Tim. We look at acquisitions very opportunistic. We have such a good market leadership positions in the industries that we are in, that we have lots of contacts with lots of different people and so we have routinely people approaching us and we are approaching others and it just doesn't – it’s not something that we will comment specifically on, except we are in the season when opportunities of our type are fairly right and we think that will be in the next 12 to 18 months. There will be quite a bit of opportunities that will across our dashboard. And we have the – we have the – we are positioned to be able to be very selective in the types of deals that we would consider pursuing. So we are fairly active right now and looking at and reviewing a number of different options for us.

[Paul Bodnar:]

Have you set the (inaudible) on your core businesses of rail already or I don't – I think you mentioned you might find something that – which is attractive in a depressed typical business?

[Tim Wallace:]

Well, we have a – on an approach that we look within our core businesses and we look at businesses that are adjacent to our core businesses where we think we may have some synergy and some value and some connections and benefits to be able to offer them. So each of our businesses provides us a platform to look at a number of different alternatives.

[Paul Bodnar:]

Okay. Thanks a lot.

[Tim Wallace:]

Thank you.

[Operator:]

And at this time, we have no further questions. Mr. Perry, do you have any closing comments?

[James Perry:]

Thank you, Collin. This does conclude today’s conference call. Remember, a replay of this call will be available starting one hour after the call ends today through midnight Thursday, November 7th. The access number is 402-220-2331. Also, this replay will be available on our website located at www.trin.net. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

[Operator:]

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