The Greenbrier Companies F1Q08 (Qtr End 11/30/07) Earnings Call Transcript

The Greenbrier Companies (GBX)

F1Q08 Earnings Call

January 8, 2008 10:30 am ET

Executives

Mark Rittenbaum – Senior Vice President, Tresurer

William Furman – President, CEO, Director

Analysts

Frank Magdlen - Robins Group

Mike Roarke – McAdams Wright Ragen

Jb Groh – D.A. Davidson

Art Hatfield – Morgan, Keegan

Peter Nesvold – Bear Stearns

Brannon Cook – J.P. Morgan

Paul Bodnar – Longbow Research

Matt Reams – Buckhead Capital

Steve Barger – Keybank Capital

John Barnes – BB&T Capital Markets

Presentation

Operator

Hello, and welcome to The Greenbrier Companies first quarter and fiscal year 2008 fiscal earnings release conference call. Following today’s presentation we will conduct a question and answer session. Until that time all lines will bein a listen only mode. Atthe request of Greenbrier Companies, this conference is being recorded for instant replay purposes. At this time I would like to turn the conference over to Mr. Mark Rittenbaum Senior Vice President and Treasurer. Mr. Ribttenbaum you may begin.

Mark Rittenbaum

Good morning and welcome. After both Bill and I review our earnings release today and make a few comments about the quarter that just ended and the outlook for 2008 and beyond, as always, we’ll open it up for your questions.

Matters discussed in this conference call today include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Throughout our discussion today we will describe some of the important factors that did cause our actual results in 2008 and beyond to differ materially from those expressed in any forward looking statement made by or on behalf of Greenbrier.

Today we reported our first quarter 2008 results. Or GAAP earnings were $0.16 per share on revenues of $286 million, compared to earnings of $0.12 per share on revenues of $247 million inthe first quarter 2007. Our 2008 earnings were negatively impacted by $0.16 per share due to several factors. 11% of the impact is related to special charges and other costs associated with our Canadian manufacturing facility. This facility was shut down last year and is inthe process of being liquidated.

In addition, foreign exchange losses which are primarily related to the appreciation of the Polish Zloty impacted earnings by $0.05 per share. And lastly our tax rate for the quarter was 57.5% compared to an expected rate for the balance of the year of around 46%.

While our earnings were muted for the quarter and there is noise in these earnings as I have just discussed, similar to the first quarter of last year, much of the softness is seasonal in nature. In fact, if you look back over our last four fiscal years, on average only about 30% of total fiscal years earnings before special charges and other unusual items were realized inthe first half of the year, with about 70% of our total yearly earnings realized inthe second half of the fiscal year.

We expect it to play out much the same this year, primarily due to a number of factors that I’ll now discuss. We expect a more favorable product mix, seasonally higher refurbishment and parts revenues, that we’ll have the disposition of our Trenton Works facility behind us, we’re inthe midst of enacting cost reduction initiatives and we’ll have a lower tax rate for the balance of the year.

I’ll go into these more ina minute, but I want to step back first and as we enter our calendar 2008, there is little doubt that we are seeing an increasingly competitive new railcar environment inNorth America as a result of moderation in new rail car demand and a softer rail environment. Industry deliveries exceeded industry new car orders for each of the first three quarters of 2007. Except for our GE multi-year order that we announced inthe fourth quarter of the calendar year, industry orders may be down again when the Q4 or down as compared to deliveries when the Q4 2007 data is reported.

However, as we step back, there is also little doubt that our recent strategic initiatives to diversify our revenue and earnings base and to shift our manufacturing footprint to lower cost facilities are also benefitting us in the current operating environment and will continue to doso well into the future.

I’ll now provide some color and highlights for the quarter. First, turning to manufacturing. New railcar deliveries for the quarter were 1,900 units compared to 2,000 units inthe first quarter of ’07. On our last quarter call we said we anticipated new rail car deliveries for the year would be around 8,000 units. Today we believe that to bethe upper end of the range and our deliveries for the year could fall somewhere between 7,500 and 8,000 units. Given that our November 30, 2007 backlog includes 4,500 units to be produced during the balance of ’07 and since we delivered 1,900 units in Q1 of this year, this implies that deliveries of the somewhere between 1,100 to 1,600 units must be filed with orders received subsequent to 11/30/07.

Our manufacturing margin for the quarter was 5.4% and as expected this was down sequentially from Q4 of ’07 due to a less favorable product mix. Almost 60% of total deliveries for the quarter came from either covered hopper cars for theNorth America market or deliveries inthe European market, both of which are tended to generate lower margins than our overall product mix.

You’ll recall last quarter we said manufacturing margins this year would be hard pressed to meet or exceed last year’s margins of 7.8% due to a less favorable product mix and pricing environment and the startup of our GIMSA GB facility in Mexico. We still believe this guidance is valid, however, we do expect margins to improve somewhat for the balance of the year both due to more favorable product mix and continued improved results from GIMSA.

In Q4 of last year, GIMSA produced a drag on our earnings of about $1.3 million, where in Q1 of this year it was nearly break-even. We expect this trend to continue at our GIMSA facility for the balance of the year, however, the results of our GIMSA operation and our overall financial results will be impacted by about $1.2 million of startup costs related to our tank car line that we’re getting setup down there for theGE multi-year deal.

Turning now to our Trenton Works facility inCanada, it is in the process of being liquidated. This earning has had a quarterly drag on earnings of about $0.10 per share. This drag principally shows up in special charges, G&A expense and interest expense. We plan to bring this liquidation to a head quickly. This [disclose] will both eliminate the quarterly loss of $0.10 a share and could result inan income tick up when the final liquidation is completed, whereupon some of the losses that we had been recording over the past year now about could be recaptured.

As touched on in our release, our marine repair, refurbishment and parts and leasing and services business units which generated about $540 million of revenues in ’07 all continued to perform well and we anticipate this momentum will continue. These units coupled with our European new railcar manufacturing business unit should generate close to $800 million of revenues in 2008.

Now turning specifically to refurbishment and parts segment, we expect that our second quarter will bethe lowest revenue quarter this fiscal year for seasonal reasons, again, principally due to holiday plant shutdowns and capital budgeting cycles of our customers. The second half of the year is anticipated to generate higher revenues and the sequential decline in margins we experienced this quarter from the fourth quarter of last year is also anticipated as a result in thechange in product mix and we believe that the margins for the balance of this year should remain at about 15%.

Turning to our leasing and services segment, which of course includes the results of our 9,000 owned rail cars and managed fleet of 138,000 railcars, our utilization for the quarter on the owned fleet was 97.1% compared to 98.1% in Q4 of last year. We anticipate that our utilization will remain high throughout the year, but it could decline slightly. As an overall comment, we are definitely seeing firming of lease rates inthe market, particularly on the new rail car side of the business and at times we are seeing some very aggressive, to saythe least, pricing inthe market from some of our competitors on new railcar transactions and some of our competitors specifically inthe new railcar side of the business.

The quarter includes $0.8 million in gains on equipment sales, compared to $3.2 million of gains in Q1 of ’07 and $2.6 million in Q4 of ’07. As stated in our last call, equipment sales are hard to forecast as they are opportunistic in nature and are also often as a result of transactions that we generate inthe market, however, we do expect the gains on equipment sales will be down significantly from $13 million realized in ’07. I want to emphasize this decline is due to our expectation that we’ll have less trading activity this year than last year. It is not a reflection in reduction in asset values, as the secondary market for leased assets remains very liquid and robust.

When you pull out gains on equipment sales, leasing and services margins were 46% of revenues for the quarter compared to 47% in Q4 of ’07 and overall we our leasing and services margins to remain strong, high in ’08.

The tax rate for the quarter was 57.5% compared to an anticipated effective rate for the remainder of the year of around 46% as therate for the quarter was impacted by adjustments of tax estimates. The 46% effective tax rate that we expect for the balance of this year compares to a 40% rate in ’07, obviously this is a fairly significant difference and a drag on earnings and this change in ’08 and the ’08 effective rate is due to a change in the geographic mix of pre-tax earnings of losses, minimum tax requirements in certain local jurisdictions and operating losses for certain operations with no related accrual of a tax benefit.

Wrapping you up, inthe currently more challenging operating environment we’re continuing to aggressively look to reduce our manufacturing overhead in G&A costs. We also have reduced our cap-ex budgets to reduce discretionary cap-ex. We believe G&A will run less than $20 million a quarter and we hope and intend to bring this amount down further. Manufacturing cap-ex should run about $25 million for the year, refurbishment and parts about $15 million and our net leasing cap-ex somewhere around $45-$50 million. On the leasing side this compares to a net cap-ex in ’07 of $0 and $93 million in ’06. Our [DNA] expense should run about $35 million for the year.

In sum, while 2008 may not be as strong as 2007, we anticipate a solid year buoyed by our diversification efforts. Similar to fiscal ’07, we expect the second half of ’08 to be stronger than the first half with Q1 being our weakest quarter. Remind you that while the first half of 2007 was weak, the year ended on a strong note, just as we had expected. The current operating environment is more challenging, remain optimistic about thelong term fundamentals of the rail industry and we believe we are well positioned both inthe near term and long term to successfully compete ina changing environment as a result of our strategic decisions made over the last year or so.

I’ll now turn it over to Bill and then we’ll open it up for your questions.

William Furman

Thank you Mark, well as some of our investors and those who follow us, this quarter may seem like déjà-vu all over again, but it’s a much better quarter than the first quarter last year and because of a number of factors I’m going to discuss, I believe we are going into this year 2008 with much better operating fundamentals even though we have an economic environment that has caused caution on the part of many buyers inthe railcar sector.

With the various factors Mark has highlighted and are also highlighted in the press release, we have factors inthe first quarter and second quarter which are non-continuing and will be resolved, and I see on a continuing basis this quarter in the mid $0.30 range from continuing earnings. So, it is a disappointing quarter, but I believe it is just that and reflects both a seasonal pattern and the mix of freight cars built inthe quarter and certain operating adjustments we’ve made for the economic realities of this environment, where we are currently operating.

A softer economy requires a freight car builder to adjust production rates in order to operate profitably and with strong cash flows through a downturn. We have taken steps to adjust our operations to the economic realities we’re facing and we believe the company is very well equipped in its car building sector to weather what we expect will bea softer economy and a dry period in the market for new freight cars, compared to the relatively robust build rates in 2005-2006 and even in 2007.

Here’s what I see going on in the marketplace, in the full year 2007, US car loads were down 2.5%, off the record set in 2006 and intermodal loadings were down 1%, trailer loadings were way down, container loadings were up only slightly compared to the very high single digit growth rates of the past two years. This is not a bad record for the railroads, although a clear signal that an economic slowdown, however improved railroad velocity both from needing fewer cars to transport fewer carloads and from railroad efficiency and improved car distribution also always hasa multiplier effect inthe demand for freight cars. That is what is happening now and these are simply facts we have to face.

There are not reliable published statistics incar storage inthe North American railroad system, however, our own surveys and estimates indicate that a great many cars are now being stored or are being underutilized as would be expected with the operating environment I just described. This is occurring across the board in almost allcar types expect certain tank cars, a market we just entered inMexico with the multi-year order from GE.

While global insights and others are still forecasting a reasonably robust 2008 with car builds above 50,000 cars, I do not believe the numbers are reliable for 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 level of car orders. There are literally hundreds of miles of stored train sets including intermodal, coal, force products cars, BDG cars, in fact cars of all varieties and neither leasing companies, shippers nor railroads are inclined to order cars robustly in such a market.

So, this is putting downward pressure on pricing and margins in the new car sector, those cars which are being ordered as well as leasing pricing and pricing policies for new leases by some car builders have been very aggressive, very, very aggressive, bordering on very, very reckless policies. We’ll see whether these leases work out and whether they may come bouncing back inthe economic environment of the next year or two.

We have a season management team at Greenbrier that present market environments is nothing new to us. On a tactical level we do several things to respond to this environment. First, we reduced production rates at Gunderson’s facility where we produce double stacks to what we believe are sustainable levels through the full calendar year 2008. Also, we’re concluding the negotiations on our existing backlog to pull up some orders from 2009 and swap cars which might otherwise be stored for cars which can be put into service by our customers. In other words we’ll swap out cars which would otherwise go into storage inthe current environment for cars that are useful to customers and we believe that this will have a very positive outcome for us inthe long term.

Our very strong backlog will give us the legs for long distance run and we expect to increase our market share as we always have during a period like this using sensible leasing and deployment of capital into sound leases. We continue to operate and focus on our manufacturing expenses and as Mark has indicated we will aggressively cut G&A costs during the current cycle.

Meanwhile, we’re clearly seeing the benefits of a stronger more powerful network of repair shops and the outcome of a diversified revenue base and the other units, leasing, marine manufacturing, repair, wheels and refurbishment and management services that give Greenbrier a broader ability to operate ina challenging economic environment. The outlook for railroads is very positive and this is a temporary blip that we are into in terms of railroad car supply and demand. I think that inthe second half of the year, we’ll be able to demonstrate the same resiliency that we did inthe second half of 2007.

Notably our revenue mix is changing over the last two years from 2006 to 2007. Revenue percentages from freight car manufacturing have moved from the 78% range down to 60% and in 2008 we expect that to bein the 50’s, whereas margins have moved from a mixture of roughly 50/50 to 1/3 to 2/3 in 2007 and in 2008, we expect gross margin from the other more robust areas of our business model to approximate almost 75% of the total revenue of the company.

In general I think our strategies are working very well, we’re sorry as others are sorry about a disappointing quarter, but we remain very upbeat and think the company possesses very strong fundamentals for a challenging railroad market environment. Mark, back to you.

Mark Rittenbaum

Thank you, Operator if you could please open it up for questions we’ll be happy to take them now.

Question-and-Answer Session

Operator

Our first question comes from Frank Magdlen with the Robins Group, please go ahead.

Frank Magdlen - Robins Group

Good morning.

Mark Rittenbaum

Hi Frank.

Frank Magdlen - Robins Group

A couple of questions. Your comment that the barge manufacturing railcar repair et cetera would come to $800 million, are you including new car deliveries in North America in that $800 number?

Mark Rittenbaum

No, we are including new car deliveries in Europe, refurbishment and parts, marine barge and leasing and services. Those entities in aggregate we anticipate would approach about $800 million.

Frank Magdlen - Robins Group

Alright, sothe number of barges inthe backlog?

Mark Rittenbaum

Approximately 11.

Frank Magdlen - Robins Group

11 at this time, alright, I’ll jump back in queue.

Mark Rittenbaum

Thank you Frank.

Operator

Thank you our next question comes from Mike Roarke with McAdams Wright Ragen. Please go ahead with your question.

Mike Roarke – McAdams Wright Ragen

Hi Mark, good morning, I just have a quick question regarding the refurbishment and parts division. Is that margin through the inhospitable economic environment that you describe, is that margin fairly sustainable between the 15% and 18% range that we’ve kind of seen over the last five quarters here?

Mark Rittenbaum

In varying environments I think that is a good range, for the near term we expect it to be around the 15%, at the lower end of that range, but from what we’ve seen today we do believe the 15% is sustainable inthe current environment.

Mike Roarke – McAdams Wright Ragen

Okay and would that hold true going into the back half of the year too when you’re…

Mark Rittenbaum

Yes.

Mike Roarke – McAdams Wright Ragen

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

Mark Rittenbaum

Well I think a good part of the reason it’s below the 50% is when you look at gains on equipment sales and there’s some other items similar to that, there’s when we hold rail cars on the lease fleet on a temporary basis before we sell them to other leasing companies, those in essence generate 100% margin because there’s no related cost of sale. Soin this quarter those amounts were very low, so we’re actually anticipating that our margins will bea little bit higher for the balance of this year because we’re expecting a little bit more activity in both of these areas.

Mike Roarke – McAdams Wright Ragen

Okay, I thought what I heard you say was that you were expecting reduced activity on the trading front.

Mark Rittenbaum

Let me clarify that, we do expect reduced activity as compared to ’07 when we had nearly $13 million of gains on sale. This past quarter our gains on sale were at either $0.7 or $0.8 million for the year as a whole, we’re expecting, for the quarter that just ended that was $0.8 million, for the year as a whole we’re expecting a little bit greater run rate than that $0.8 million, and as I mentioned before we’re also expecting some more interim rents before we sell rail cars that will bring that margin up a little bit.

Mike Roarke – McAdams Wright Ragen

Okay. Great thank you and just one more if I could, the cash position that you currently have on the balance sheet, is that a level that you are comfortable with or do you feel that there is room to have more of a cash cushion?

Mark Rittenbaum

We feel very good about our liquidity position. One thing I’d comment on is I don’t necessarily look at our cash balance and I don’t believe any of senior management looks at that, we look at our liquidity levels and our dry powder and based on our various lines of credit and financial covenants we have about $230 million of dry powder, so we’re at very strong cash flows this year. We feel very comfortable with this and as alluded to inthe release, we’re comfortable enough after having paid down $100 million of debt last year that should we find attractive opportunities, acquisition opportunities inthe market on a mid-size to smaller-size scale that also have good visibility and strong EBITDA to it that we would be inclined to act on those opportunities.

Mike Roarke – McAdams Wright Ragen

Okay. Great, thank you very much for taking the questions.

Mark Rittenbaum

Thank you.

Operator

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

Jb Groh – D.A. Davidson

Morning guys.

Mark Rittenbaum

Morning.

Jb Groh – D.A. Davidson

Had a question on how much cut down work you did on the quarter, I don’t know if you covered that or not and what’s left on that and I would think that that would bea favorable impact to margins in the future quarters.

Mark Rittenbaum

We pretty much have run through that, that was in our backlog, any of that cut down would have been in refurbishment and parts and we don’t break that out specifically and I prefer not to break that out. There’s not too much left in backlog other than anything that may occur as a result of current discussions. Bill may want to comment overall about the opportunities in the cut down area or the size of the market that may be out there longer term.

Jb Groh – D.A. Davidson

Let me throw a question in there, would that explain the very strong second half of last year refurbishment and parts margin versus what you’re looking at over the next three quarters in that kind of 15% range?

Mark Rittenbaum

No, that is not. That had to do with some other refurbishment work that we did last year that was a part of the mix, that was some higher margin business as well as the wheel, you know we were operating at slightly higher volumes on the wheel side of the business in the second half of the year last year, just as you might have expected because we were ina more robust economic environment in the second half of our fiscal year last year.

Jb Groh – D.A. Davidson

And the overall seasonality of that business is from holidays in Q1 and holidays in Q2? Or are there other seasonal demand factors that are playing in there?

Mark Rittenbaum

Yeah, there’s both, holidays and our customer’s capital budgeting cycles that we feel pretty good and pretty confident that inthe second half of the year that the revenues from this segment will exceed the first half of the year. One of the areas that we didn’t really talk much about, but where we’re really seeing some momentum that will probably carry beyond ’08 is the parts part of our business that is included inthe refurbishment and parts side.

Jb Groh – D.A. Davidson

And then on Trenton Works inthe past there’s been no real tax benefit associated with some of those charges, was that the case this quarter as well?

Mark Rittenbaum

Yes it was.

Jb Groh – D.A. Davidson

Okay and then sort of do you have an estimate of what you think the market value of those cars that you have in equipment on operating licenses, I mean, obviously that’s going to vary, but, they’re on the books for $300 million roughly…

Mark Rittenbaum

Right, there really is no blue book value on those and definitely as I mentioned earlier that market is robust and we’re still confident that the values will exceed our book value but we wouldn’t want to put a value on it.

Jb Groh – D.A. Davidson

Okay and then lastly have you guys, with the stock where it is today and some dry powder, have you considered a buyback?

William Furman

We have, our board is going to continue to look at this. We think the stock is very undervalued at this point but we also are looking at other opportunities for investment and so it’s something that we’ll continue to evaluate.

Jb Groh – D.A. Davidson

Okay thanks for your time, see you this afternoon.

William Furman

Thank you.

Operator

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

Art Hatfield – Morgan, Keegan

Morning gentleman.

Mark Rittenbaum

Morning.

Art Hatfield – Morgan, Keegan

A couple question, I want to clarify my understanding of the press release, when you make the comment in there about not being able to achieve the same earnings level in ’08 as you did in ’07, is that based on the $0.16 GAAP number in the quarter?

Mark Rittenbaum

Yes, it’s GAAP earnings before special charges. That’s the comparison that we’re trying to make, if you look at last year the $1.37 and then we had $0.85 of special charges net of tax related to our Canadian facility, that is how we’re getting back to the $2.22 of earnings before special charges and for this year our comment would be, so we’d be trying to compare apples to apples there, our net earnings and then adding back special charges to those earnings, this year again there’s no tax benefit associated with those, any losses from those special charges, those are going straight to the bottom line.

Art Hatfield – Morgan, Keegan

So…

Mark Rittenbaum

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

Art Hatfield – Morgan, Keegan

Okay, but when you make that comment, you’re looking at Q1 as being a $0.16 number as opposed to a $0.27 or $0.32 number?

Mark Rittenbaum

I’m looking atit being $0.16 plus adding back the special charge of 189,000 so that’s effectively a $0.17 quarter.

Art Hatfield – Morgan, Keegan

Okay, that’s very helpful. Secondly, Mark, just want to clarify, when you were talking about the leasing business, I thought I heard you say that you were seeing a firming of lease rates and then you made the comment that you were seeing some aggressive pricing from competitors. Can you flesh that out a little bit for me?

Mark Rittenbaum

Yes…

Art Hatfield – Morgan, Keegan

It seemed to contradict itself.

Mark Rittenbaum

Well, on the used cars side I think we’re seeing firming inthe new and by firming certainly as compared to this time last year, rates would be down from last year, I don’t think that would be particularly surprising, there’s not a tremendous amount of volatility there. On the new cars side of things, we are seeing some aggressive and at time erratic pricing on leases.

Art Hatfield – Morgan, Keegan

Okay, so you’re making a distinction between used equipment up for lease and new equipment coming out for lease.

Mark Rittenbaum

I think they would both be down from this time last year, I would say there is not as much volatility inthe used cars side as we’re seeing and as aggressive or rates being as down as much on the used cars side as at times we’re seeing on the new cars side.

Art Hatfield – Morgan, Keegan

Okay that’s helpful. Secondly, as you see for new cars sales, you probably are seeing as you mentioned some more competition, are you seeing any relief at this point in time in any of your input costs?

William Furman

We have a very aggressive global sourcing program that we’ve talked about before and that’s definitely giving us a benefit, particularly on those products we can bring inin the Pacific Northwest at our Portland facility. Longer term we intend to use that to achieve a competitive advantage in our repair network. Soit is useful today just in terms of our current system and we’re seeing some softening in certain specialties and we’ve been able to see even some softening in certain categories of steel, so there has been a bit of that going on.

Art Hatfield – Morgan, Keegan

Okay. Thank you and as always thanks for taking my questions.

William Furman

Thank you.

Operator

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

Peter Nesvold – Bear Stearns

Morning guys.

Mark Rittenbaum

Morning Peter.

Peter Nesvold – Bear Stearns

I was hoping to get some perspective on the manufacturing margins of 5.4% and if I throw out last year because it was a heavily disrupted year, the manufacturing gross margins are back to where they were in ’02 in this quarter, but your through part on therail car side is twice as high to build point previously, your global sourcing efforts are higher and the barge throughput is also probably twice as high as it was back in ’02 so I guess what I’m trying to understand, what has happened to bring that back down to that trough level so quickly. I know Canada is still a bit of an overhang but it seems like there must be more than just the Nova Scotia plant in there.

William Furman

I’m going to let Mark respond to that in more detail but in terms of the general things that are occurring, we are still reaching our pitch point at GIMSA so there’s still a little bit of a drag there. In terms of not producing the kinds of positive margins we are currently reaching at a run rate basis so there’s that factor. Principally it’s the combination of a lower production rate of double-stack cars, revenue recognition on some of our automax product and just a general mix issue I think that is affecting us. There is a lot of noise though as it relates to Trenton when you’re looking at GAAP numbers.

Mark Rittenbaum

Alright and Peter while there is noise, just to clarify, inthe margin the quarter that just ended there is not a lot, Trenton is, the noise from Trenton is principally during the special charges or G&A expense rather than margin but as Bill mentioned our GIMSA facility is still finding its footing sothe margins very low there, we anticipate that to continue for the balance of the year but, again, longer term we are very upbeat on that.

As well as we talked about in our prepared remarks, in Europe we’re finding the margins are lower due to some supply chain issues that we worked out and unfortunately while the market is very robust over there, much of the backlog that we’re producing this year with that backlog was booked ata time where the market was softer and so, frankly, we’re not enjoying as much as the benefit in that market of the return this year that we would like, so when you look at the mix of deliveries, that is depressing the margin along with really covered hopper cars which is more of a commodity car type which virtually all of the railcar builders other than pure tanker car builders, other than Union and Freight Car America, virtually all builders are building covered hoppers today it’s more of a commodity car type and for us that tends to bea lower margin car.

So there’s a number of the variables out there, we did say that we expected some margin enhancement as the year goes on, but not a tremendous amount of margin enhancement. The market environment, as Bill alluded to, is very competitive today.

Peter Nesvold – Bear Stearns

Arethe GIMSA results consolidated in your results or does that flow through the [GAV] line?

Mark Rittenbaum

It is consolidated and then the minority interest is backed out so you would see that, actually the minority interest was an add back, our share of the earnings, or we had a slight loss from our share of the results were a slight loss to the quarter.

Peter Nesvold – Bear Stearns

And Mark you made reference to $230 million in dry powder and that you’re comfortable with your covered ratios, I find ita little hard to just measure where your interest covered ratios are, just given the way you report externally, can you tell me, where are your 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 our revolver and one under our high yield notes. They’re typically IBITDA’d to interest or IBIDTDAR’d to interest plus rent test, you cannot in either case take them straight off of the financials, particularly on the high yield notes. I don’t have the calculation in front of me for this quarter, but we’re substantially, in one case the ratio is set at 1.75 to 1 and the other is at 2.25 to 1, in both cases the calculation of the ratios were substantially in excess of the required ratio, but I don’t have the numbers in front of me and probably would prefer not to disclose those.

Peter Nesvold – Bear Stearns

Okay and the last question, there has been a lot of press out of Nova Scotia about pension reform, have you accrued at this point for any kind of pension liability that you’re going to be on the hook for as a result of the new legislation?

Mark Rittenbaum

We believe, well first of all, that occurred after the quarter end, that legislation, so we do believe that we’re adequately reserved up at Trenton Works but the quarter that just ended, there would not have been accrual for the pension and again we believe that we’re adequately accrued up atTrenton.

Peter Nesvold – Bear Stearns

Gotcha, okay, thank you.

Operator

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

Brannon Cook – J.P. Morgan

Good morning. Just a question on the car type outlook as we through the balance there you talked about 60% of the cars coming from covered hoppers and European markets in this quarter, should we think about covered hoppers becoming a more important part of the mix as we go through the year and any color on that would be helpful.

Mark Rittenbaum

Covered hoppers over allare an important product of our operations, we are building covered hopper cars on two lines, one in our [Concor Reel] facility and one at our GIMSA facility and we’re very happy with our position in covered hoppers, I don’t mean to minimize that atall and in fact we’ve been gaining market share in this area. The reality is that is more of a commodity car type.

Having said all that, we are anticipating some higher production of some other car types, so that if you look at the total mix, we believe that we’ll have a more favorable mix as we will have inthe second half of the year, as an example, more double stack rail cars that are part of the mix and more of our automatic carrying car that will be part of the mix.

Brannon Cook – J.P. Morgan

Okay, when you look atthe pricing environment by car type, obviously the broader market is under pressure a bit, but are you seeing a big differentiation between car types and the level of pricing you’re able to get on intermodal versus covered hoppers or automax.

William Furman

Well I think there’s pressure, very aggressive pressure across the board on all new car transactions, whether those are manifested in terms of the lease rate, where there’s been considerable aggressiveness, or incar pricing. Probably a little less so on car pricing than on actually the leasing that some parties are willing to engage in. Some of that has to do with surpluses of cars that were ordered, perhaps on speculation, or even as speculative position that people are taking in cars inthe current environment. But I think it’s across the board, I think it’s effecting all builders and it’s going to continue through the period of time when railroads are storing cars, as they are.

Brannon Cook – J.P. Morgan

Okay and just a final question, in your press release you talked about the $800 million that was set to come in fiscal ’08 outside of North American railcar building. The numbers seemed a little higher than I would have thought, you know within the manufacturing segment I generally think about maybe $100 million of revenues coming from Europe and maybe call it $60 million coming from barge, are those ball-park-ish right numbers to think about inthe manufacturing segment?

Mark Rittenbaum

Good question, I think the European is a little bit light and that’s really the result of two things, one we’re building at higher production rates over there and frankly with the depreciation of the Dollar against the Euro principally the revenues translate into more US dollars, so that $100 million in Europe is a little light.

Brannon Cook – J.P. Morgan

Okay but the barge is pretty close?

Mark Rittenbaum

Yes.

Brannon Cook – J.P. Morgan

Okay, thank you.

Operator

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

Paul Bodnar – Longbow Research

Yes to sort of follow up just give a little more color in terms of what’s going on inthe European operations in terms of turning those around and making them more profitable and then secondly also along those lines, does a European revenue number look more like $140 million type thing for ’08 then?

William Furman

I’ll let Mark talk to the revenue number, there are two forces that were acting on Europe going in 2007 going into 2008 that are still operating, although we’re cleaning them up. One, Mark mentioned was that we had a lot of our backlog that was booked at earlier pricing and the second was supply chain disruption and we have management change over there, I guess is even a third.

Supply chain disruption caused operating difficulties there. Those factors have been addressed. We’re still working off the lower price backlog and I expect that this will continue through at least the first half of our current year. Longer term though as Mark has indicated Europe’s economy is more robust, we have stuck to our guns inEurope and want to continue to do that because of the interaction in the global marketplace and particularly the opportunities to reduce costs in our supply chain.

Mark Rittenbaum

Regarding your specific question, to just give you a feel in ’07 European revenues were about $150 million, this year we believe that they could come in closer to $200 million.

Paul Bodnar – Longbow Research

Okay that’s helpful. Secondly also within the leasing business, how does revenue break down there between the cars that you manage and the cars that you lease and particularly I guess in terms of what the next impact would be of a [unintelligible] decline in utilization rates?

Mark Rittenbaum

Well I could give you more of a revenue breakdown. Our management services revenues are about $25 million on the 138,000 cars that we manage. The overall margins on the management services side of the business tend to be less than on the owned fleet as you might expect because the management services is not a very capital intensive. I would not want to share or it’s not as simple algorithm to share what a 1% either increase or decline in utilization equates to in terms of revenue or margin because it would depend on where that change was coming from. In other words, which cars are generating and what kind of margins were on the cars that were generating the specific increase or decrease in utilization.

Paul Bodnar – Longbow Research

Okay. And then last in refurbishment parts how does the back half of the year you said would improve versus the first half of ’08. How does that look compared to the back half of ’07 which was pretty strong?

Mark Rittenbaum

Just bear with mea minute. I think as compared to last year we would anticipate somewhat comparable numbers inthe second half of this year as compared to the second half of ’07. In other words, around $115 to $120 million of revenues in each of those quarters.

Paul Bodnar – Longbow Research

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

Mark Rittenbaum

I would say within the same ranges of the first quarter, whether it’s plus or minus a little from where we were inthe first quarter this year which was just over $100 million, we would expect that kind of a ballpark.

Paul Bodnar – Longbow Research

Okay and then I guess kind of further along in terms of the economic environment, [unintelligible], traffics down, I mean how dothe revenues end up tracking in an economic decline in ’08, ’09 in that business overall? If you stop getting the benefits from some of the same cut down work is it pretty much just follow GDP or if GDP is down it’s going to tend to track along with that, or what’s the best way to look at that?

Mark Rittenbaum

Again I don’t know that there’s a simple algorithm, the wheel services side of our business and when you look atthe total revenues wheel services are going to bein excess of $250 million out of the maybe even a little closer to $300 million out of something of total revenues that arein excess of $400, that will tend to have the least amount of volatility to what is compared to repair and refurbishment work, which, again, would be more capital budgeting process. But there’s going to be some on the wheel services side of the business, of course that is going to be either is going to be some bearing as to how strong the economy it just more rail cars moving and moving at higher velocity. But again I don’t know that you could develop a simple algorithm. Overall though that would probably tend to bethe least sensitive side of the business.

Paul Bodnar – Longbow Research

Okay. And just one last housekeeping question I guess, [unintelligible] the tax rate, you said that was going to average 46% for the year or it will be 46% in each of the remaining quarters for the year?

Mark Rittenbaum

It will average 46% for the balance of the year is what we believe.

Paul Bodnar – Longbow Research

Okay, thanks a lot.

Operator

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

Matt Reams – Buckhead Capital

Good morning gentleman.

Mark Rittenbaum

Good morning Matt.

Matt Reams – Buckhead Capital

You had gutted the interest expense of about $36 million for the year, that’s a little bit higher interest expense than FX inthe first quarter, can you tell us what’s going on there?

Mark Rittenbaum

Right, well part of that is, again we had about $1 million of FX losses this quarter and certainly we would hope and also are taking steps to try and minimize of FX loss, if losses were to continue at that amount then we would be obviously running closer to $40 million rather than $36 million. There’s not a tremendous amount that the term debt amortization this year, so that’s why our original guidance was around $9 million a quarter and we came in closer to $10 million this quarter.

Matt Reams – Buckhead Capital

Okay. Soare you going to change the interest expense guidance or are you going to wait to see how the year progresses.

Mark Rittenbaum

No I think right now we’re not, I think for the balance of the year our expectation would be that that would come in closer to $9 million a quarter, maybe even come down a bit, we’re taking some measures to try and improve on working capital and as we flush out some inventory and assets [unintelligible] for sale, we’d hope that the debt balance would come down a little bit.

Matt Reams – Buckhead Capital

Okay. You started to allude to one of my second questions, was what order of magnitude will you get working capital gains this year, I think you’ve talked about lean manufacturing, obviously manufacturing is slowing, but inthe second half, will working capital gains be offset by increasing orders in anticipation of GE or just production increases?

Mark Rittenbaum

We are expecting that we’ll see some improvements in working capital, you’re right that there will be some partial offset from ramping up of the tank car line that’s going to come up in, we’ll be producing cars in the fourth calendar quarter this year. But in Europe we are working aggressively and have to bring down our inventory balances where we have in particular we’re carrying a fair amount of inventory and also today as we’re finding our footing on the first production line at GIMSA where we would hope to achieve some improvement.

Overall we’re trying to bring down the inventory balances during the balance of the year. I don’t believe these are going to be seismic shifts, but maybe in the neighborhood of $20-$30 million would bea good target or a good goal for us.

Matt Reams – Buckhead Capital

For the year?

Mark Rittenbaum

For the year.

Matt Reams – Buckhead Capital

Okay, that’s great. SG&A came down nicely this quarter relative, I think you were guiding to $21 million a quarter and you were going to be intensely focused on reducing SG&A. You’ve now kind of guided down to closer to $20 million I think a quarter. I know you had one time costs with investment banking and other types of things going on last year, what can that quarterly SG&A number come down to kind of given the environment we’re in?

Mark Rittenbaum

We’re still working on that Matt, we certainly believe as mentioned here that we can bring itin under $80 million, we’re setting some more aggressive targets than that, but I think we haven’t completed our work in area. You’d certainly if you went back to ’01 or ’02 you’d see that we, which was of course a much worse operating environment, you’d see we took some very aggressive measures and cut out about $2 million of SG&A or more. We’re not necessarily indicating that we took some pretty drastic measures there, we don’t think that we’re at that point in this cycle, I think on our next call we’ll be able to provide more guidance on just how much further and what kind of targets we’ve set in this area.

Matt Reams – Buckhead Capital

Okay, that’s great. I know sometimes those kinds of things are difficult to talk about ina public format. Just getting back to Europe, longer term, I thought Bill’s comment was interesting that you lumped it into less cyclical businesses. I think several years ago you were looking at exiting that business, do you expect that longer term Europe can perform or get to margins similar to North America, up into the teens, low-teens?

William Furman

We think that with a continued evolution of the business model in Europe, perhaps approximating more closely our model here, that we can have a viable business in Europe. If we find that we cannot, we won’t hesitate to look at other alternatives. The opportunities, particularly in sourcing and parts area value in Europe. Now with the currency differential changing as it has, we may find that there are some unexpected opportunities that Europe can bea value to us even in North America.

Matt Reams – Buckhead Capital

So the less cyclical component is getting more into kind of parts and service type arrangements?

William Furman

Yeah, a term less cyclical is not the correct term, perhaps it moves to a different beak there and moves ata different perhaps ina different cycle. The outlook currently in Europe and we believe for a few years there is going to remain strong inthe rail sector due to a number of forces that are finally achieving full impact there inthe European economy and the rail system with privatization and a lot of very robust activity inthe shipment of freight in Europe and with trade with Russia.

Matt Reams – Buckhead Capital

What about the margins longer term? Can they approach North America and much better environments?

Mark Rittenbaum

I think they can, Matt, you referenced the teens for new rail car margins in North America would be on the upper end of the range but overall your comment, can we get to the type of margins that we realize in the railcar in North America, yes we believe we can and in fact historically there have been sometimes that we have done that, we just have not been able to doit on a consistent basis.

Matt Reams – Buckhead Capital

Okay. And what’s your production capacity in Europe?

William Furman

It remains a difficult environment and we are examining the entire business model there. We’re making some progress in Europe but we’re still very conscious of the distraction that it can present, so we’ll continue to evaluate it.

Matt Reams – Buckhead Capital

And what kind of production capacity do you have in Europe?

Mark Rittenbaum

Roughly about 2,000 units.

Matt Reams – Buckhead Capital

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

Mark Rittenbaum

Yes, that’s correct.

Matt Reams – Buckhead Capital

Okay, so you still have room to increase utilization in Europe without having to make substantial investments?

Mark Rittenbaum

Yes, we have it on the margin, on the margin we do. With any of our plants where we give a rateat capacity including Europe where we say 2,000 units or any of our plants, that really is allthe stars lining up perfectly, where you’re having long production runs of a minimal number of car types, but yes, we could squeeze out a little bit more over in Europe.

Matt Reams – Buckhead Capital

If I could just add one more question. I know manufacturing has typically occupied the majority of senior management’s time, with the manufacturing slowdown, what kinds of things are you doing related to parts and refurbishment to really try to accelerate the growth opportunities without having to invest a lot of additional capital?

William Furman

Last year, as was indicated in some of the year end information we did three organic transactions in terms of growing the repair network. We’re finishing up integration of the two acquisitions at the tail end of that now, still getting some benefit from that. We have continued to focus very keenly on that segment of the business and I think the numbers are reflecting that.

Matt Reams – Buckhead Capital

Are there any particular opportunities, I know like Kansas City Southern is trying to become a much more efficient operator, expand intermodal, things like that, are there specific things that you’re working on with therail companies or lease companies to begin to take on a lot more work there?

William Furman

Yeah but if I told you what they are then everyone would rush after them so, we have a number of things that we don’t want to publish, we’re very exciting about this network and if you insist that we give you the 20 second first on it, it’s a network business, we’ve got a very efficient network, there’s a very strong demand for what we can provide, which is reliable service, short dwell time, bumper to bumper coverage with the customer and it plays right into what the railroad’s current needs are today, which is a reliable partner in producing velocity and efficiency in their operating model.

Matt Reams – Buckhead Capital

Okay, well that’s fair enough…

William Furman

…right now to enhance that segment of the business.

Matt Reams – Buckhead Capital

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

William Furman

We’re working on a number of operating and other deals to enhance that business, we intend to continue to grow it and make it stronger.

Matt Reams – Buckhead Capital

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

William Furman

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

Operator

Thank you, our next question comes from Steve Barger with Keybank Capital, 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 a second just tell me if this has been covered, but in your comments you cited mixed cost reduction initiatives and a lower tax rate as drivers for the earnings improvement through the rest of the year, can you talk about the relative impact of each one of those, you know which is most critical to allow you to get the improvement or what might be least important there?

Mark Rittenbaum

I think you could do some math yourself on that, if you take the tax rate, obviously that’s an 11% swing in the tax rate that goes straight to the bottom line for any future earnings, then also we have said that we expect our refurbishment and parts margins to remain around 15% and that the revenues from that will be about $115-$120 million per quarter in the second half of the year and then we said slight improvement in new railcar margins, but still the upper end of the range of that is 7.6%, so you could probably go ahead and rank those yourself based on that.

Steve Barger – Keybank Capital

No, I appreciate the color there, thank you. I’d like to ask a question about the per diem, as you’ve seen the slight reduction in the utilization rate on your lease rate, are you seeing an increase in inquiries for per diem and would you expect to see that as people wait for even better lease rates, even though you talked about the more aggressive environment?

William Furman

In a market like this it’s not unusual to lease, if you have cars coming up for lease, to lease short rather than going long, just as it’s usual to go longin a stronger period. We went on our portfolio to the degree we had cars that we didn’t not want to put into service which have higher revenue yields, we went long on most of our fleet, we have an average term now of about three years. So we’re easily able to go through this economic cycle without a lot of negative effect on our core fleet.

On the margin there will be issues and we’ll evaluate putting cars into per diem if we convert from term to per diem typically we have a good swap on revenues, so that’s an offset we’ll look at. We have an unusual capability to keep cars in service due to the way we’re organized and our connection with the system through our various business units. So, per diem is a strength that we have, but it can bea risky area as well, so we don’t want to get overloaded on it.

Steve Barger – Keybank Capital

And you have not seen a significant shift in that direction in terms of inquiries at this point?

Mark Rittenbaum

Nope, we haven’t, is the short answer.

Steve Barger – Keybank Capital

Okay, one last question, I know on the parts and service side of the business is a little more fragmented, are you seeing more aggressive bidding out there with lower utilization rates? You know similar to what you may be seeing in terms of the leasing or new car side from some of those smaller, maybe less rational competitors?

William Furman

No, not materially. Not that we can’t counter by the benefits of the network. What we’re selling is reliability, short dwell times and shorter transportation moves and a network has a substantial advantage over individual car shops, so I think is going to be quite a lot of opportunity, continued opportunity in perfecting 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 from BB&T Capital Markets, please go ahead.

John Barnes – BB&T Capital Markets

Hey good morning guys, most of my questions have been answered but I had two quick follow ups. Number one, on the shut down at Trenton Works, you indicated that was part of the lower SG&A run rate and that you expected Trenton Works, that shut down, to kind of take some of the pressure of on costs, can you kind of quantify what costs you believe you’re incurring associated with that shutdown that’s not captured inthe special charges?

Mark Rittenbaum

Well the total cost is running about 500,000 a quarter. So this quarter it was slightly higher than that, so part of the breakout of that is in special charges, the balance of that would be in G&A, other than about 100,000-150,000 or so that’s in interest expense, so each quarter it will be hard for me to give you in advance how much of that would be in special charge versus G&A, but, on the whole, maybe 400,000 of that or so will be between those two line items.

John Barnes – BB&T Capital Markets

Okay, alright and then just a clarification on a point you made earlier in your comments about a more favorable product mix inthe second half, can you just elaborate on that a little bit? I mean does it go back to the thought about longer sustained production runs, is that kind of what you were alluding to or is that better priced product, could you just elaborate there?

Mark Rittenbaum

Yeah, I think it is really a pure mix thing, we said that inthe first quarter here that 60% of our deliveries either came out of Europe or covered hopper cars. We anticipate that that number will be, that percentage will be lower in the second half of the year, primarily as a result of a greater percentage of industrial stack intermodal cars and our automax car.

William Furman

Let me just add to that. We have spent quite a lot of time during the quarter ended and even prior to that working on a sustainable backlog in 2008. So we are very comfortable now with the backlog we have in terms of having the ability to sustain more stable production in 2008 and there has been some effect in the trailing quarters of efforts that we’ve made to reposition ourselves. It’s very, very important that we do reposition ourselves to adjust to the economic realities. I think we’ve achieved that now, so going into the balance of calendar 2008 I think we have a very sustainable production book which will give us more predictability and the benefits 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, so we’ll, we appreciate all your interest, I know several of you may have had additional questions or that we didn’t get to, I’d invite you to contact me afterwards, after the call, we do have board meetings and our annual shareholder meeting scheduled a little bit later in the morning, this afternoon, so I’d encourage those of you who have been trying to get ahold of me to doso sooner rather than later.

And as always I want to thank all of you for your participation in our call and of course we’ll be webcasting our shareholder’s meeting later on today for those of you who would like to participate in that. Thank you very much and as I said we appreciate your interest in Greebrier. Have a good day.

Operator

Thank you, that does conclude today’s conference, you may disconnect at this time.

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