Q4 2019 Earnings Call
Before we get started let me remind you that today's conference call contains forward looking statements as defined by the private Securities Litigation Reform Act of 1995 and include statements. After the estimates expectations intentions and predictions of future financial performance.
Statements that are not historical facts are forward looking participants are directed Greg did you Trinity's form 10-K, another as you see filings for a description of certain business issues enrich.
The change and 88 change in any of which could cause actual results or outcomes to differ materially from those expressed in forward looking statements I would like to turn the call Verde Jessica Greener. Please go ahead.
Thank you care leaner and good morning, everyone. Thank you for joining Trinity Industries' fourth quarter 2019 financial results Conference call I'm, just good Greiner, Vice President of Investor Relations and communication I'm pleased to welcome Trinity's, New Chief Executive Officer, and President James Abbott will provide some opening.
Mark today on our call.
Eric Mercado Senior Vice President and group President of Trinity Rail, well addressed trinity's operations as well provide insight into our market outlook.
Melendy Love It senior Vice President and Chief Financial Officer will provide the financial highlights and 2020 guidance.
Following the prepared remarks, we will hold a QNX session.
Yesterday after market close Trinity reported strong fourth quarter and full year results for 2019 in the press release. We also provided our initial guidance and outlook for the full year 2020 during the call today, we will discuss certain non-GAAP measure definitions and reconciliations of these measures.
Provided in the table of the earnings press release, which is available at the Investor Relations section of our website at Www Dot trend Dot net it is now my pleasure to turn the call over teaching.
Thank you Jessica and good morning, everyone I'm very excited to be here in training and have the opportunity to talk to you today.
In a moment, Eric and melendy, well discuss trade fourth quarter and 2019 result.
Haven't been in my renewal for three days I've tried to think of the most important things on your mine, but I'm in a position to address today.
And so I plan to discuss three thing.
Do I am.
I'm excited to be a trinity and at a high level, whether my plans for the company.
I am an experienced transformational executive who has had the opportunity to work in multiple industrial businesses, including 12 years in the rail industry.
During my career I've had the opportunity to transform these businesses to deliver considerable value whether a change was needed due to fund the middle market changes or business cycle.
Whether business needed to operating structure improvement.
The weather change was needed to grow the business through technology and innovative products.
I strongly believe in listening to customers employees, and all stakeholders to gain understanding and knowledge of the business I'm diving into.
Hi, Dan use inside these insights in addition to the facts and data I gather to determine where the opportunities are to make impactful strategic decision.
You will find I'm also a strong believer in a disciplined capital allocation and planning for how this allocation may vary a different points in the business cycle.
During my tenure with progress real services I gained a very strong knowledge of the rail industry.
Routing developing relationships with customers.
And progress real we did everything from leasing railcars to repairing them at a network of shop to major modification program, along with component Remanufacturing wheel shop, new locomotive manufacturing and locomotive repairs.
In the last few years and Caterpillar I love the transformation of the surface mining and technology business.
Leveraging technology and innovation to change the way customers utilize the equipment, we produce to positively impact their business operation.
This work and experience in transforming various businesses has led me to the opportunity to get Trinity to service, a new CEO and president.
It's the right role for me at the right point in my career.
And I'm excited to lead Trinity into a bright new future.
I Love the rail industry and I believe Trinity is the best platform in the industry.
Trinity has a reputation for the highest quality railcars, the broadest range of service offering and the deepest strategic relationship with customers.
With all the changing dynamics within the railcar supply chain, there's a real opportunity to accelerate trainees position as an industry leader in the railcar market through innovative products and services that will transition Trinity to a higher quality recurring relationship business model.
I also think theres, a real opportunity to hone our strategy and optimize the organizational structure cost structure and capital structure of the company to accelerate Trinity's financial performance.
Trinity's management made some great strides in 2019 to improve our OE.
Lower trinity's cost of capital.
Streamline the organization and reduce cost and the balance of the capital allocation framework.
That being said management and the board have higher expectations for driving the performance of the platform for new level.
The board and management team are fully aligned and committed to optimizing trinity's integrated platform of businesses to unlock the long term value creation opportunities that the platform enables.
Although it's too early to give specific plans or lay out with strategic roadmap for the company I can share the areas in which I intend to focus my attention.
First I look forward to defining the strategic framework for the company with specific key performance indicators that we will share with the investors to help track and measure our performance.
We will share these with you as our plans become more defined and specific initiatives are identified.
I expect the initial focus of our strategy to center on the continued optimization of our operating platform and financial structure.
As previously shared we implemented certain restructuring activity late last year to bring an ongoing eight to 10 million improvement in our operating costs beginning in 2020.
I do believe we have additional opportunity here and melendy will address our initial expectations in the guidance comments.
We also have been clear in our intent to optimize the balance sheet by adding leverage to the lease fleet in order to reduce trinity's cost of capital.
The debt markets have been strongly receptive to try to these offerings and we will certainly continue tapping this market to lower cost of capital.
There is a significant amount of capital that can be freed up which brings me to my last point of focus.
I mentioned earlier that I'm, a strong believer in disciplined capital allocation and that includes deploying capital for growth.
And returning capital to shareholders.
We will develop a framework that enables trinity to appropriately and consistently deploy capital depending on where we are in the cycle.
The board and management believes that the synergies from trendy platform creates strong and predictable cash flows.
Enabling meaningful investment and high return growth opportunities.
While returning substantial amounts of capital to shareholders.
The cash flow generation potential trading platform is the biggest driver of long term value creation.
We do believe other stock trades at a meaningful discount to the underlying intrinsic value as Brad said.
And it represents an.
Attractive investment opportunity.
As part of our objective to optimize our balance sheet, we expect to continue repurchasing shares.
Trinity has state its reputation on delivering career performance.
We have a responsibility to delever premier performance to all of our stakeholders, both internal and external.
I believe this organization is ready and position to make the needed changes toward stronger performance and to elevate and accelerate trinity's position as a premier provider of railcar products and services in North America.
Trainees people bring a commitment to excellence a customer driven focus.
A track record of execution and delivering quality products and services.
I agree with me my experience in a sense of urgency with DAPL and decisive action.
I look forward to working with the Trinity team to elevate our financial performance and unlock value for shareholders and to spending time getting to know and hear from you or investors.
I will now turn it over here.
Thank you Jane and good morning, everyone.
Trinityrail delivered solid results and our first year as a real focused company.
2009 team was a year of transition as we began the optimization of our rail platform, while encountering external challenges and changing market dynamics.
The organization was focused on managing the business business for quality over quantity they were moving both structural and cyclical costs from our platform.
Our own did manage lease fleet grew by approximately six NAV per se year over year to 125000 railcars with attractive returns relative to where are we target.
We maintain high utilization.
In the year at 96% with higher average lease rates.
And the organization delivered approximately 22000 railcars at 9.6% margin.
Brutal I'm very pleased that we delivered on our commitments to our customers.
Yesterday in our press release, we provided segment details or financial results for the fourth quarter and the full year 2009 thing.
Today I'd like to focus on some of the strategic activities.
He did were initiated during the year that contributed to our results and they do we expect will be foundational to our financial performance in the future.
Our real products organization had a very productive year.
We move forward with substantial investments and our manufacturing footprint to bring to market stated the yard railcar coatings capabilities and maintenance dropped capacity.
These investments will help aligned for these manufacturing capacity to customer demand and lower trays lease fleet maintenance cost.
While growing our maintenance services business for key industrial customers.
We also finalized integration of our truckload and logistics business from Trinity is diversified industrial business model it with the rail products business.
As well as other facility maintenance and engineering support functions.
I'm pleased with how these teams work together to streamline and improve our supply chain operation.
In addition, our product development team continued efforts to focused on providing differentiated offerings with the launch of for new product designs and enhancements serving various markets.
Our railcar leasing business made cigna significant investments in technology and systems.
The launch of our Trinity rail customer digital channel, which provides customers with anywhere anytime access to key information and services needed to optimize the use of their railcars.
This tool enables customers reduce friction associated with managing railcars, well, providing significant productivity improvements drove <unk>.
In addition, our investment in data and analytics capabilities over the last few years has had a meaningful impact on our commercial strategies.
Looking into 2020, we're continuing to align the organization for improved operational and financial results through the entire railcar market cycle.
However, industry fundamentals will be a challenging headwind to over were all results for the year.
For 2009 seemed to trade disputes and slowing North American industrial economy put negative pressure on rail traffic volumes and consequently demand for railcars decline.
This demand decline resulted in a growing fleet of underutilized railcar equipment and fewer new railcar orders.
We expect it will take some time for the impact of recent trade agreements.
Translate into your rail traffic volumes, but we're hopeful that the recent steps toward resolution of trade disputes, one Jack more clarity and certainty into the market.
Improve railcar loadings will need to first absorbing existing railcars before new orders accelerate.
That being said the North American economy is still a relative bright spot on the world stage.
GDP estimates anticipate modest growth.
On the consumer is still strong.
Mmm freight by rail is the most economical mode of land based transportation for industrial shippers.
We are somewhat encouraged by the recent narrative certain class one railroads to emphasize a focus on growth versus operating ratios.
Well PSR initiatives seemingly improve the train speeds and well times for individual erodes, the floating or the rail network is key to improving the performance of the rail supply chain.
Longer term, we believe fewer store initiatives are an integral first step to improving service levels for industrial shippers.
This is necessary for the rail market to re game modal sphere in the North American freight space.
Due to our customer experience strategy is to optimize the ownership and usage real for equipment.
Given the current level of demand and our near term outlook.
We're rightsizing, our production capacity and being very deliberate with the business we pursued.
Real products team met a very challenging production schedule in the fourth quarter for our customers.
While transitioning Jude lower production levels for 2020.
Our first quarter deliveries will step down by roughly half compared to a number of deliveries in the fourth quarter.
Which includes cost associated with headcount changes of approximately 20% and lost efficiencies.
The financial effects of this rightsizing will be a significant headwind to our first quarter financial performance.
However, this action was necessary to establish the appropriate capacity for 2020 delivery outlook.
Our outlook for the year incorporates a fairly even production cadence with approximately 60% over production schedule committed in the backlog.
Approximately 17% of our lease portfolio is up for renewal in 2020.
Current market rates are approximately 9% below expiring lease rates.
Which implies a 1% to 2% revenue headwind so the leasing segment.
New railcar additions at least we are expected to offset this revenue headwind.
Our platform continues to demonstrate the about the ability to successfully navigate through challenging market conditions.
Trinity's platform is built to deliver superior results through the railcar cycle.
Our business model fosters engagement with the direct customer delivering solutions that optimize the lifecycle ownership and usage railcar equipment.
And providing our customers with a single source for older railcar equipment and services needs.
We made great progress in 2019 to improve our financial performance.
In 2020 will continue the optimization of our platform so that our financial results match, the powerful commercial and strategic synergies of the business.
Our vision is to be the premier provider, a railcar products and services.
Turning team is actively working to transform our organizational structure to lower overall cost elevate our customer service focus and pursue innovation to build on Trinity Rail's position as the market leader.
Hi, I'm pleased to have gene onboard as our new CEO I believe she will have a tremendous impact in improving our operational approach to unlock value and deliver better results.
I'll now turn it over to melendy discuss our financial performance guidance.
Thank you, Eric and good morning, everyone.
Yesterday, the company reported strong improvement in our fourth quarter and full year 2019 results [noise].
Revenues adjusted operating profit and adjusting adjusted earnings per share all increased by double digits. As a result of fleet growth with attractive pricing and higher railcar deliveries with a favorable product mix.
Not only did our team delivered a strong operational results in a challenging market environment. So these leaders have made significant strides in executing against our strategic and financial priorities in our for first full year as a rail focused company.
Our priorities for 2019 included optimizing our cost and capital structure investing in value, creating growth opportunity and returning capital to shareholders.
We also committed to improving our financial filings and presentation to better highlights the value of the lease fleet and the rail platform.
As Aaron mentioned leadership has been focused on streamlining our operating structure as we transition from Trinity form of multi business holding company to a rail focused company.
These collective actions resulted in the reduction of more than $30 million I've asked in a during the year.
We have more work to do to optimize our business platform to the level of our expectation and we are evaluating both cyclical and structural costs to enhance our performance.
Another area of focus during 2019 was the optimization of our balance sheet.
These loan to value ratio on the wholly owned leased fleet improved from 46.6% to 55.1% at the end of 2019, when including the debt funding from our corporate revolver.
This was significant progress toward our goal to achieve an LTV ratio of 60% to 65% in the near term.
We expect to achieve this LTV target within the next 12 to 18 months.
Our debt funding secured in 2019 was it very attractive interest rate.
And as a result of our optimization efforts since the spin off Trinity has lowered our weighted average cost of capital approximately 150 basis point.
Balance sheet optimization and increased profitability for strong execution and reduction of call.
Resulted in trinity's year over year pretax return on equity increasing from 6.3% to 9.9% in 2019.
Trinity established a three year average pretax or are we goal of 11% to 13% in early 2019, which aligns with our long term pretax early target of mid teens through the cycle.
We're pleased with the solid progress in our first year.
Softer railcar demand will create a very challenging headwind for 2020, Aro improvement, but we are focused on the lever levers within our control.
Our current guidance would lead to a pretax or are we have approximately 10% to 10.5% in 2020.
He also made significant progress in demonstrating the cash flow generation capability of our rail platform.
Free cash flow before lease fleet investment was $423 million for the year.
Higher than our 29 team forecast as a result of strong improvement in working capital management as well as the delivery of rail cars at the high end of our most recent guidance.
As gene said earlier, the cash flow generation capability Attunitys rail platform is a significant driver for long term value creation.
Management and the board believes that the platform can you feel strong and predictable cash flows enabling meaningful investment in high return growth opportunities and substantial return of capital to shareholders.
To put this in perspective during 2019 Trinity invested in the growth of our portfolio with net lease fleet additions of approximately $875 million on a cash basis.
This growth was funded through our available cash on hand inappropriate use of leverage.
We also invested nearly $100 million in manufacturing capex for the growth of our railcar maintenance business.
And paint and lining capacity as Eric mentioned.
Our capital allocation. During 2019 also included $377 million in returns to shareholders through share buybacks and dividends returning approximately 14% of our market cap.
We have approximately $1 billion and liquidity and have ample room to continue leveraging our balance sheet.
Now moving to guidance our capital allocation plan for 2020 follows a similar framework and underscores the value creation of our businesses.
Our capex guidance for 2020 includes approximately $90 million to $100 million for non leasing capex and approximately $435 million of net lease fleet investment.
Requiring less than $100 million in equity capital at a 70% loan to value.
Our free cash flow before lease fleet investment is expected to be approximately $600 million to $650 million, providing ample room to <unk> returned substantial capital to shareholders after investing in our business for growth.
Guidance for our financial performance in 2020 includes the following.
Topline revenues of approximately 2.5 to 2.7 billion after annuity like after elimination and earnings per common diluted share in the range of $1.15 to $1.35.
Our financial assumptions included production forecast of 16000 railcars of which approximately 40%.
I will be delivered to our lease fleet enterprise and an approximate margin of 7% for the rail product segment.
Leasing revenue of approximately $800 million with a 46% operating margin and $50 million a profit from sales of leased railcars from our portfolio.
Our 2020 guidance also includes significant cost savings opportunity across SDMA and administrative cost to sales with the goal of approximately $25 million to $30 million a reduction compared to 2019.
Interest expense and the tax rate are expected to be approximately $225 million and 27% respectively.
As you heard gene mentioned, we will be active in share repurchases through the year as we continue to optimize our balance sheet.
Our EPS guidance range incorporates meaningful amounts of share repurchases subject to board authorization.
Point, the 2020 guidance does exclude items outside the normal course of core operations, such as restructuring activities or pension plan termination charges.
We will report the effect of if and when they occur.
Regarding Ats cadence [noise], our full year EPS range compares favorably to 2019th fiscal results. However, our first quarter financial results will be significant headwind before recovering through the year.
As Eric mentioned, the real products group is transitioning to a much lower level of delivery and is impacted in first quarter 20 by lost efficiencies and rightsizing costs.
Other items that will affect our earnings cadence includes sales of leased railcars and S. unit cost savings.
At this time, we expect sales of leased railcars to be primarily concentrated in a second half of the year.
DNA cost savings will build through the year as we execute on initiatives to lower the associated costs.
You may have seen in our press release yesterday that we are changing the estimated depreciable lives of our railcar lease fleet.
This is expected to have a positive impact on our financial performance of approximately $27 million to $33 million year over year or 14 to 18 cents in Ethiopia and this is included in our financial guidance.
In our evaluation process, we compared our depreciation policy to extensive company in industry data and analytics.
Our analysis supports the extension of our estimated depreciable lives based on the performance and maintenance history of the rail cars in our lease fleet and moves Trinity more in line with the practices and performance appears in the industry, while still being at the lower end of public comp.
We also believe the updated estimated depreciable lives better aligns our accounting policies with the economics of our leasing business.
Following our conference call today, we will file our form 10-K for 2019.
Included in the report or enhance the disclosures around the economics of our business.
Including a selected consolidated balance sheet for the leasing company.
As of yearend the leasing company carry total equity of $2.3 billion. This would be the comparable equity balance to a standalone leasing company.
In consolidation the adjusted leasing group equity amounts to $1.5 billion, reflecting the cost advantage the equipment sourcing from our own manufacturing business one of the tangible benefits of our platforms.
Disclosures along with other metrics provided during the year, including the pretax or are we target and free cash flow before leasing capex or all aimed at showing how management assesses the value of our business and highlighting trinity's opportunities to create significant value for shareholders.
We made significant progress in 2019, demonstrating the value of our platform improving our OE lowering our cost of capital streamlining the organization, reducing costs and committing to a balanced capital allocation framework investing in business growth and returning capital to shareholders.
But we know we have more work to do.
As gene mentioned management and the board have higher expectations for driving the performance of our company to new level.
We understand in 2020, what's hot passed with transforming Trinity against challenging market headwinds.
Cities culture, and commitment to excellence, our great strengths and legacies of this company.
We're very excited to have gene on board. She has always admired and respected Trinity. She recognizes the strength of our people in our culture and she's experience and leading transformative change.
We will now transition into the queue in a session. Operator will you. Please give our listeners the instructions.
Thank you and at this time, if you like to ask a question. Please press the star in one on your Touchtone phone you may move yourself from the Q at anytime by pressing of Hanky. Once again, that's starting to want to ask a question.
Fresh crushing question comes from Justin long with Stephens. Your line is open.
Thanks, Good morning, and Jean Congrats and look forward to working with you.
Thanks, Justin.
So maybe to start with the 2020 revenue guidance I'm, having a little bit of difficulty bridging to the two and a half to $2.7 billion on a consolidated basis with somebody else assumptions that had been laid out.
Is there anything unusual with Nick.
For the magnitude of eliminations or maybe the railcar sales all being units that are younger than one year that are included in that revenue number I think it would just be helpful to get a little bit more color on each of the component that bridge to that total revenue outlook.
Good morning, Justin its melendy.
There is there's not really anything unusual in the 2.5 to 2.7 billion consolidated revenue number certainly if you'd like a follow up call. Later today, just been I'd be happy to go into the details and help you with any with with anything we can.
Okay and on the share Count you mentioned, you're incorporating a significant amount of buybacks would you be able to share what number you're using for the share count in 2020.
Since the spin off you know that we have consistently stated our plans to return meaningful inconsistent capital to shareholders and you've seen us do that in 2019 through both share buybacks and increasing our dividend.
We certainly expect the cash flow generation of our platform to allow us to continue to do this.
Our 2020 guidance range incorporates for Tim potential share repurchases that are roughly equal to what we did in 2019 and of course this is subject to board authorization.
Okay. That's helpful and lastly add maybe this is one for Eric just in terms of that demand dynamics for railcars were close to two months ended the year, what what have you seen in terms of order and inquiry activity year to date and any kinda early expectation on how first quarter.
Orders could look relative to what we saw in the fourth quarter.
Sure adjustments there as we began 2020 railcar loadings are you at the top one railcar loadings are still pressured we're still seeing year over year trends that are on favorable.
Although we are seeing.
Several areas of recent improvement.
Parts of the chemical space or grew in the refine refined products.
Some of the farm products and autos, we've seen improvement there.
When you look at our guidance of 16000 railcars are delivering for the year.
There is.
So about 60% of those that are in our backlog. So that implies a that we still have railcar order activity that we're up to get next couple of quarters to achieve those 16000, what we're seeing so far this year and what would expect is kind of that pace that we saw no in 20.
The second half a 2020 to continue.
Through this year.
Through the first couple of quarters into this year.
Thank you mean that second half of 29, I mean second have a 29 team yes, continuing into the first part a 2020, that's what's kind of baked into our that's what's implied in our guidance.
Okay, Great. That's helpful. I'll leave it at that I appreciate the time.
Thank you and your next question comes from Matt Elkott with Cowen Your line is open.
Good morning, Thank you and gene Congratulations I look forward to working with you.
My question is and it looks like you guys are expecting five or 6% growth and leasing revenue and 2020, but based on your guidance for railcars built for the lease fleet, which is lower than last year and your guidance for sale of railcars.
It looks like maybe or at least sleeves gone to grow at a lower rates than me a revenue growth rates by at least a couple percentage points.
And then renewals are going to be a headwind this year.
I'm sorry.
Yeah. If that's if that's true are you baking in secondary markets.
Purchases or that would.
A lot going to hit that 800 million dollar revenue growth goal.
Good morning, Matt its melendy.
Alan Guard I'll start in responding to your question.
Our assumption as far as the percentage of.
Railcars that are going into the lease fleet is roughly the same as it wasn't 2019, just a reminder, that the eliminations now include modifications and betterment as well as the additions to the lease fleet. So the fact that our deliveries have.
Come down from 2019 is the primary driver of the number of railcars being added to the fleet coming down.
As far as your question around secondary market sales, we do have a small amount.
Secondary market sales a planned into our net lease fleet investment guidance that I shared.
You're right that our current forecast of sales of lease railcars and the and the operating profit for resulting from that is lower than our 2019 results.
And part of the reason for that a reminder, we had sales type leases.
That that are showing up in our car sales numbers for 2019 and that was $160 million. So that's the primary reason for 2019 car sales being at a higher level than 2020.
Okay, but you're you're not baking in any type of a secondary market purchases four year lease fleets and my and my guidance.
Right when you if you're looking at leasing revenue. The main drivers there as I mentioned that in my comments.
Are there was a headwind on renewals as you noted and then there is gonna be fleet growth.
Which was the numbers Monty talked about.
In terms or additions the fleet, where you're getting differences in terms of of the amount of fleet growth, we're expecting relative to the revenue number that's mainly going to be the timing of both the.
Headwind on renewal activity and then the timing of deliveries.
To the fleet Theres not any big secondary market purchases that are baked in to that guidance. So that does that mean a area. That's.
I see additions to the lease fleet will happen earlier than.
The bulk of the headwind.
On renewals.
It would imply that they also remember that the railcars that we're adding to the fleet are gonna be more expensive and have higher lease rates are then.
Existing railcars, so you got a little bit of mix changes as well in terms of the nature of that revenue.
Got it and.
Just want one more question Eric.
Yeah. The last time, you guys did 7% I think was 7.4% manufacturing margin was in 2080 and I think your delivery is worth about 20000 cars now you're guiding for seven first half on 16000 cars can you help us understand despite the fact that you may have a negative mix.
Shifting 2020, why you're able to get that same margin has 28 see an on lower deliveries.
Well the obvious is better performance, but besides that you certainly do have a mix the mix change is going to be a big piece of it for sure.
And we as you know we see it as a headwind this step down roughly 30% of both industry deliveries in our own production footprint. So really don't think of it is better performance in 2016 were looking to.
Improve our performance this year.
Over what we're saying we're going to continue to take cost out of our platform and and improve what we're doing.
If you if you look back at the last five or six years I think your margins got up to about 21% during the crude by rail boom and.
The bottom was 27 for sounds which is similar to what you're expecting in 2020.
If we look at <unk> normalized mid cycle margin going forward given all the rightsizing the cost cutting you're doing in the manufacturing segment, what would that look like.
So I think you really have to pull out some of the high margins from the crude cycle just because the you know elasticity of demand that we experienced in that time.
Railcar delivery was ever so powerful is at that time, and we're not anticipating that in the near term a with our guidance. So when you look at you pull that out mid cycle margins for us are going to be in that we're talking about this year and that Heidi high single digits.
Margin percentage is what we'd expect.
Got it. Thank you very much mid mid to high that's I guess were met on it.
Hi, Thanks, guys. Thank you.
Thank you and your next question comes from Allison Poliniak with Wells Fargo. Your line is helping.
Good morning.
Morning.
Just want to go back to you I guess the cars that you're putting release be better new for manufacturing I'm could you give us a little color in terms of you know obviously utilization at 96% has in the car sitting idle and you certainly have to renewals coming up is there any end market. That's driving some of that that new interested at growth relative to what you have out there right.
Now any color there that you can help.
Sure Allison this there absolutely or when you look at Wifi, just step back and look at new railcar demand.
Replacement demand is still the single largest driver that that is driving new railcar builds and a while we have.
Well as you mentioned the idle, 96% utilizations that implies available railcars or and then when you look at the industry fleet or some of the underemployed and unemployed railcars in the market. There are still pockets of strength of like I mentioned earlier, we're seeing demand in the chemical space specifically plastics.
Refined fuels would be a lot of tank car demand.
Some of the farm products in the in autos. So while there are the market is fairly efficient, but it's not perfectly efficient we are seeing demand for some of those markets that have have pockets of growth whether that's growth in terms of railcar loadings replacement demand.
The replacement demand is going to be much mainly around the boxcar fleet.
Got it and then just your thoughts on storage I'm, you know obviously with the interest in newer cars more efficient cars you know any thoughts on you know what's that real storage number which it looked like through a cycle. I mean, obviously were elevated now giving topic I assume some of that certainly not going to come back in terms of capacity.
You know Alstom is there and that's a.
Certainly a lot gets talked about by the rail cars in storage.
The D.A.R. puts out.
As we look at it we kind of break that into two categories. I mentioned earlier, you have unemployed railcars, which literally would be rail cars in storage.
You have underemployed railcars that a our measure looks at railcars and haven't made a revenue move in 60 days. There is a good portion of the fleet that doesn't make revenue move in 60 days, but still under lease back to an active part of the lease fleet. Some examples of that would be plastics cars. So a seasonal fleet.
Grain cars fertilizer or railcars pressure tank cars for LPG of a seasonal aspect to it I wondered buffer fleets that shippers have extra cars in order to.
Compensate for some of the volatility of railcar service and so that's you know it may not make or a load in 60 days, but it's still an active part of their fleet.
So when you look at when you looked at B. I think with the more important number there is the change.
What has happened and when you look over the last year.
That number that they are puts out has been about increased about 100000 railcars.
The biggest driver there were small cube covered hoppers.
That weve they have increased by about 30000 railcars. Since this time last year and that number so that's a big driver.
And then some of the other.
Results from traffic trends, which is a fewer goal cobos has been a big impact I don't see as much of an impact from PSR Ah you I would say the impact from PSR is probably less than a quarter or that increase and that number that they really puts out.
Does that that helpful.
Yeah No. That's that's very helpful. Thank you and then just lost or me on the S. You need cost savings that you expect to do this year. It's early to think about I'm not first yes structural versus cyclical or is it two muddy at this point.
We are evaluating as we mentioned Allison, we're evaluating both a structural and stick local aspects of our business in order to achieve the saving and I'm not really prepared to to breakout that level of detail at this point in time, but what I can tell you in terms of of modeling is.
We expect the majority of those savings to come out of that total assay in a number that's around 263 million for 2019.
Not all of the cost reductions will be a s., United but we expect the majority to be.
Great. Thank you.
Thank you.
[noise] and your next question comes from Bascome majors with Susquehanna. Your line is open.
[laughter] Melendy I believe I heard you say that your guidance assumes share repurchase was going to be similar this year versus last [laughter], which would certainly suggests.
Authorization needs to be resumed sooner rather than later, given the 2.6 million shares remaining on it.
I think you also mentioned before that that authorization was charged up to avoid running your feral over an IRS private letter ruling related to spin off [laughter] can you help clarify where we might be off here and what the buyback intentions are for investors.
Certainly good morning, bass them, you're correct, what I shared was that our 2020 guidance range.
It includes potential share repurchases that are roughly equal to what we did in 2019 subject to.
Board authorization.
And it's certainly a bascome tax considerations are one of the important factors that we consider.
In our share repurchase plan, so that will have an influence or on our timing.
Okay understood you don't want more capital allocation here.
You've talked about growth Capex or acquisition, a part of the trading strategy in the next 12, 18, 24 months and anything specifically.
You know they could you go be on investing in railcar assets to really adding adjacent service lines or rail related businesses could could build the portfolio out more broadly and.
The more recurring.
Revenue stream that you alluded to in your prepared remarks. Thanks.
So bascome. This is gene I will say that were always looking for the right time in the right opportunity to make investments and as we discussed earlier, we're wanting to make sure we have a balance and both growth and then returns to our shareholders. So we are keeping a list will come.
Can you to monitor that and see if we find the right purchase at the right time.
And Bascome I would add that Oh, we mentioned in our comments that our near term focus is on optimizing our our platform of businesses and really driving a the financial performance improvement so totally agree with with the genes comments.
We're continuing to look for the right opportunity at the right valuation with our main focus being on optimizing our existing business.
Okay and in last one from me gene when do you think you're gonna be far enough along and your strategic planning efforts to deliver that plan to investors whether that comes Vienna analyst day or some other format. Thank you.
Well as far as the timing we're still working this is Dave three or actually the started they for for me. So if you give me a little bit more time I'll get that a how to you, but I am planning on doing some calls I'm in the near term and then making sure that I get out and talk with our investors.
And so I will do some type of a roadshow ER visits.
Hopefully that helps but that's all I can give you right now.
Alright. Thank you appreciate it.
[noise] next question comes from Gordon Johnson with G.O.J. here.
She Lj research your line is open.
Hey, guys. Thanks for taking me a questions.
You're welcome [laughter], Alright, So I guess first some do you guys talked about you need to see some increased orders to hit your guidance for 2020 can you give us some sense of kind of what the lead times are with respect to those orders and when should we expect you to start to see those orders to kind of get towards your 2020 guidance.
Sure Gordon this is Eric.
Speaking generally general allergies around that but what I said is that our guidance implies that we will we have unsold space in our.
The guidance of 16000 railcars so.
So generally the timing of those orders are gonna have to be the first half of this year in order to the place deliveries. So so I would say generally speaking is gonna be in the first or second quarter order activity there in order to deliver it.
In 2020.
Okay. That's helpful. And then can you guys help me understand it seems like you guys stub change a definition with respect to free cash flow, well, where you're including the sells a fleet and free cash flow, but the capex associated with that fleet isn't included in free cash flow can you guys help me understand how to.
Navigate that definition.
Hi, Gordon this is Jack <unk> as Wendy mentioned, we did provide free cash flow before lease fleet investment and following our our last conference call that was a name measure that we provided and it was in our earnings release, we've maintained the definition of that.
And I have that non-GAAP measures, they're happy to walk you through any particulars questions. You may have about the measure.
And Gordon this is melendy I would just add debt and.
The reason we want us.
Talk about free cash flow before our lease fleet investments because we consider that lease fleet investment discretionary and you know driven by demand in the marketplace and just a reminder, that that lease fleet investment we're talking about on a cash basis. The total cash that it takes.
To grow our lease fleet, but we can we can lever that those adds to the lease fleet on their market value or rather than their cost and that's a real advantage to the platform. So that's it that's an important driver for why we've chosen to free cash flow before at least split investment definition.
Okay. That's helpful. And then just one last one as we look to the orders with respect to the are assigned numbers that are reported.
It looks like kind of you guys average around 30% to 40% of those are OSI orders. So as we look to those numbers coming out you know for Q1 I guess over the next couple of months are you guys in graining in your in your guidance, a significant increase and industry orders or would you say that you have the I'm the visibility into your own you know order.
Is that even if the industry orders are low you're confident you'll studios be able to hit your guidance. Thank you.
Thank you Greg Gordon This is Eric I'll answer that I think I mentioned this earlier, but we're into what is implied in our delivery guidance is order level in the first half of this year, that's going to be consistent with.
What the industry experience a second half of 29 team. So I would imply boat industry activity and our own orders that we take.
I feel good about the visibility that we have today with the orders we've taken and we still have work to do an order hit that delivery target for the year.
Thanks again guys. Good luck.
Thanks.
And they next question comes from Steve Barger with Keybanc capital markets. Your line is now open.
Hi, good morning.
Morning.
Andy I'm, sorry, if I missed this but when you were talking about the headwinds in one Q from the transition to lower production and how that's going to pressure, one Q well that drive EPS down into the single digits or maybe can you talk about the percentage of VBS you expect in first half versus second half.
Good morning, Steve, We don't give quarterly guidance and so.
Just wanting to let you know that that our first quarter is being impacted by lower deliveries last efficiencies and rightsizing cost.
You know I think you're I think your thoughts are are generally in the range, but again.
Not wanting to not wanting to turn it into quarterly guidance and if I understood.
And Jean I welcome aboard I know you started this week, but since you do have that experience of progress and having been on the board you know PSR has been a huge topic in 2019 any thoughts on how you view that in terms of positioning trendy relative to opportunities are threats from that.
Sure I think overall for the industry TSR will help us increase the efficiency of that mode of transportation and allow future growth. So as you look at both sustainability and the fact that.
Transportation by the rail is four to six times more sustainable than by trucks that I think you'll see a movement overtime as the overall performance of the railroads to deliver the product.
At the right time and consistently for their customers I'm. So.
I guess, that's a that's what I'd say for the PSR I think it's good for us and good for the railroad.
Got it and.
Just thinking about your experience, but are you talked about in the surface mining business and that again in progress can you talk about early thoughts on opportunities to bring technology into Trinity help optimize the business, maybe talk both internally and for external initiatives.
Sure I'll just start out with some of the work that I did was surface mining and technology. It was all about making the performance of the total cost of ownership for our customers. The best in the lowest it could be we use technology to help them understand where their equipment was how it was performing.
And also how to get the maintenance done before they had either an issue or a breakdown of that equipment same type of philosophy can work for the railcars that we have and monitoring the health of those railcars, making sure that we can plan to pull those cars out of service prior to them, having an issue with that.
Car and having a bad ordered maybe and sat out Oh, you [laughter] for them. So I think as we looked at how we make improvements there is that there's also a for tank cars. Some sensors that we can put on them to help us see how those tank cars are performing made sure that.
If there any emerging issues or concerns that we can notify both the shipper and the Uh huh.
The railroad.
Thanks for that color and then and then just last one for me Eric I think you addressed this to some degree but 2019 orders were the lowest since 2016 I know, it's tough forecasting cycles, but did I hear you said that you think this 10000 run rate for trendiest kind of trough ish.
I did not say that but what I did say was that.
The industry, where I expected to near term industry orders to maintain that pace that we saw in the fourth quarter third and fourth.
Its all <unk>, Stevie I've tried to be too, but it all gets back into what's going on railcar loadings.
He'll be an unfavorable I I would've expected them to turn because the comps are little bit easier they have not yet because we got to keep watching what's going on in terms of railcar loading activity.
That will lead our outlook on a railcar demand.
Okay. Good thank you.
And the last question comes from Douglas Greiner whistle thinks Smith and Thomas Your line is open.
In regard to the balance sheet optimization plan, specifically moving from the 55% LTV on the whole into lease fleet to the 60% to 65% target over the next 12 to 18 months what are the steps in that operational plan and the biggest challenges you're facing in order to execute on that successfully thanks.
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Good morning does this isn't melendy.
As far as the specific as far as the specific steps.
You know that's going that some of that's going to depend on what our come or what our commercial activity is what our.
Railcar investment vehicle partners are doing but basically the steps are we have we have set the 60% to 65% goal at the near term call I mentioned, we expect to reach that.
In a 12 to 18 month, so basically as we need the capital.
To grow our business and to return capital to shareholders. We will go out to the debt markets and evaluate what is the right debt for us to raise a given the cost of debt in our time horizon and such and on an as needed basis, we will add that debt to our leasing.
Leads to move that loan to value to the 60% to 65% level.
Doug I'd just add this is eric that the debt capital markets or certainly available for us to issue to get more capital and it you know as far as the challenge is I would say the challenges are mostly related to like I said that things are out of our control. So so timing for.
Example, this year, we had forecasted to have our loan to value at a 57.
57% Oh, we ended the year at about 55% because we did better on our working capital management and didn't need to raise as much capital.
Great. Thank you Caroline and to all of our investors that concludes today's conference call. A replay of today's call will be available. After one o'clock eastern standard time through midnight on February two.
27, 2020, the access number is four zero to do to zero seven to three three a replay of the webcast will also be available under the events and presentations page on our Investor Relations website located at Www Dot trend Dot net we look forward to visiting.
Do you again on our next conference call. Thank you for joining us this morning.
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