Q1 2020 Earnings Call
Good day, everyone and welcome to Trinity Industries' first quarter results conference call.
All participants are to listen only mode.
Later he'll have the opportunity to ask questions. During the question and answer session. You may have registered to ask a question at any time by pressing the star and one.
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Please note. This call may be recorded no will be standing by fusion need any assist today's conference call contains forward looking statements as defined by the private Securities Litigation Reform Act up 1995, and it didn't statements cost estimates expectations intentions and predictions of future financial performance.
What's that are not historical are forward looking.
Participants are directed to Trinity's form 10-K, and other SCC filings for a description of certain business issues and risks a change in which could cause actual results or outcomes to differ materially from those expressed any forward looking statements.
It's now my pleasure to turn todays conference over to your Vice President Investor Relations and Communications Jessica Greiner. Please go ahead.
Thank you David and good morning, everyone I'm, just good Greiner Vice President.
<unk> for Trinity. We appreciate you joining us for the company first quarter 2020, <unk> results conference call.
We will begin our prepared remarks with comment from trendy Chief Executive Officer and President.
Oh I know when do you love it our chief administrative officer.
Sure Mark how the company news <unk>, Chief Financial Officer will provide the financial highlight.
We will hold <unk> following the prepared remarks.
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During the call today, we will refer refuse line highlighting he wants to disgusting.
Supplemental materials are accessible on our IR website at Www Dot dot net.
These slides can be found under the events and presentations working on the site along with the first quarter earnings call exactly.
It's now my pleasure to turn the call everything.
Thank you Jessica and good morning, everyone.
The economic events and governmental action surrounding the current a virus or unprecedented and I'm extremely proud of their response from the men and women at training.
Turning rail is designated as an essential business by the North American Federal Authority.
Executive leadership team and I first and foremost wed like to commend our employees for their turbine and commitment to health and safety the business continuity and to keeping critical supply chains operational.
We thank you for your work you're spirit and your dedication to excellent, which all reflect strong culture and hard trying to.
We also like to thank our customers suppliers and all the businesses working to ensure communities stay safe and have access to all of our daily needs.
Of course, when expressed our deepest appreciation for all of those on the front lines in fighting over 19, we are most grateful for your commitment and service.
We are proud of the function, our employees and our railcars perform and sustaining our community.
Not only does the rail industry play an important role and preserving our planet has the most sustainable mode of land based transportation.
Rail transportation is the likelihood of the North American economy.
Railcars are a critical part of the supply chain of nearly every market.
We all depend daily on food treated water energy generating commodities and medical grade products.
I'm good deliver through the rail supply chain.
When the going gets tough it sounds good going I believe for lease commitment to excellence and the rail platform well once again prove our ability to withstand an economic crisis.
In my prepared remarks today I want to cover three main point.
The impact of Cobot 19 on our business and our actions to address it.
The financial resilience see of trainees railcar platform, our cost structure and liquidity position and the strength of trainees leadership team to manage through this crisis.
And our scenario assumptions for managing our business performance and capital allocation decisions a mid market uncertainty.
In the first two months of the first quarter trading was executing on a number of optimization efforts, which we had previously communicated to the market.
The purpose of these efforts wants to improve our go forward cost structure and decrease our cost of capital.
The accelerator competitiveness in the marketplace.
Certain of our covered 19 response actions, which I'll address snacks are highlighted in the supplemental materials on slide three.
As a gravity of the implication surrounding cobot 19 began to unfold Trinity Weirs took significant steps to protect the health and safety of our employees answer to support the communities in which we live and operate.
We instituted policies and procedures that are here to see DC and W.H.O. guidelines for social distancing cleaning <unk> sanitizing restricting visitation at our manufacturing facilities and establishing work remotes work arrangements for corporate and services work for.
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We restricted employees travel and have shifted most of our customer interactions to virtual method.
We have maintained our ongoing operations.
Today, we have not experienced any production delays and delivering products or services to our customers and we continue to work closely with our customers to understand their needs.
Procurement teams have also monitored our supply chain for potential disruption.
And I'm pleased that they have been able to ensure continuity of operations today.
Our first tier suppliers are predominantly based in North America and have yet to be significantly affected by the restricted flow goods from other countries.
We have established contingency plan should we begin to see major disruptions in our second and third year supply network.
On our last conference call, we discussed the Rightsizing actions, we anticipated from the industrial slowdown and decline in railcar demand in 2019.
In March as we began seeing the impacts from cobot 19, we reevaluated the potential for lower railcar volumes and equipment demand in the near term.
As a result, we took additional action and further reduced our manufacturing workforce by 30% from year end to align with our production capacity.
Based on our current backlog visibility, we believe our manufacturing platform as appropriately sized to serve our customers.
The second point I wanted to be sure. We addressed today is our belief in the financial resiliency of trainees business model.
During October 19 preparedness actions, we extensively reviews, our financial models and assumption.
Stress testing or balance sheet and liquidity against various scenarios as dean or deeper than those experience during the financial crisis in 2009 and 10.
Well go into more detail on the analysis later in the prepared remarks.
[noise] Dream railcar down cycle, the long term nature of the contracts and training leasing business protect the company from short term market disruption and are critical to the relative stability and cash flow generation of the company.
There are also counter cyclical aspects of our operational cash flow from working capital really.
Given the highly variable cost structure of our manufacturing business.
Another driver of value creation for our business model is a significant tax efficiencies that come from combining or leasing company and our manufacturing business.
As we continue to grow the lease fleet accelerated depreciation of railcars offsets taxable income from our other businesses.
The net operating losses generated our then generally carry forward to reduce future taxable income.
The recently passed cares act further enhances the tax synergies of the rail platform.
Trinity will utilize a tax losses generated and not in 2018 and 19, primarily from accelerated depreciation associated with our lease fleet investment to recover taxes paid in prior years at higher tax rate.
By year end, we expect to receive 300 million and tax refunds, resulting from the loss carry back provision in the legislation.
I could not have imagined that in my first few months Estrace, new CEO I would be leading this great company through one of the biggest financial and economic crisis, our markets I've seen.
Our leadership team has deep experience the managing through rail cycle volatility and they are prepared for the challenge at hand.
Based on a current knowledge and analysis of market condition, we believe trainees platform and cash generation capability can withstand the global pandemic and take advantage of value creation opportunities we may fine.
I expect that through it all we will emerge when a champion spirit and proved that our rail platform is though to deliver.
To deliver essential goods to society to deliver innovative solution products and world class service to our customers and also to deliver long term value creation and returns to shareholders.
I'll now turn the call over to the London, Eric talks are operational and financial remarks in more detail before closing with my final point on our go forward business assumption.
Thank you gene and good morning, everyone. Our first quarter results reflect the commitment in execution on a number of actions taken to align the company's organization with our go forward rail strategy into improved business performance.
While we recognize the current environment, well make accomplishing our financial properties more challenging we have not lost sight of our longer term goals.
Our primary objectives as a leadership team are to protect the health and safety of our employees and to ensure business continuity and capital preservation.
Fortunately the steps, we're taking to optimize the company's cost structure, where timely and advantageous given actions needed amid the covert 19 crisis.
During the company's fourth quarter earnings call, we announced a target reduction of $25 million to $30 million in administrative cost across the organization.
In the first quarter. The company took action on savings totaling $9 million to $10 million, which included employee reductions and the consolidation of our logistics and equipment services businesses into the operations of the rail products group.
It also included the decision to relocate our corporate campus to a more cost effective location and the disposition of a non operational facility.
These actions resulted in a restructuring charge of approximately five and a half million dollars.
Additionally, management has identified savings at $15 million to $20 million that we expect to take action on during the next few quarters as we realigned our organization and streamline administrative support costs.
When combined with the cost saving actions taken throughout 2019 total reductions in S. DNA in other administrative costs are nearing $60 million.
We are committed to accelerating the performance of the platform through effective and efficient alignment of our organization and we will provide updates on our cost optimization progress through the year.
Another key priority for the company has been the optimization of our balance sheet through the leveraging of our lease fleet to lower our cost of capital.
As part of this process, we identified the early redemption of our 2016 securitization TRL fives as an optimization opportunity.
The securitization had a remaining principal balance of approximately $105 million and a coupon of 5.9%.
The net book value of these assets at the time of redemption was approximately $303 million.
These railcars are now available to be monetized through recapitalization of the assets or three secondary market transaction.
With this redemption the weighted average coupon rate on our wholly owned leasing that was just under 4% at quarter end.
The company also purchased approximately 1.9 million shares for $35.4 million in the weeks following our fourth quarter conference call.
As of the end of the first quarter. The company has approximately $90 million remaining under our current amended authorization.
Trinity's management has served together and collaborated very closely and setting the strategic priorities for the company has a real focus it's a rail focused organization.
It's been my honor to service Trinity CFO over the last year and to get to know many of our shareholders and potential investors.
I have great confidence that we are aligning our leadership in organization to better serve our customers and our stakeholders and to accelerate trainees performance to unlock shareholder value. Once we emerged from the Corona virus pandemic.
Eric has been a key leader in this company and the rail industry throughout his career.
This has been a seamless transition for our team and for our business leaders and he will be a familiar face to our investors as well.
I'll now turn the call over to Eric to discuss more detail of our financial performance.
Thank you money and good morning, everyone.
I'm honored to be assuming the CFO position after 25 years of service to the company.
For the working with our stakeholders in this role as we continue to improve upon both the effectiveness and efficiency of our platform and to drive enhanced performance and value creation opportunities.
With the onset of the Cobot 19 outbreak.
Remember limited preventative measures without significant interruptions, thus far to our daily operations.
However, we expect that there will be negative financial impacts to our business.
Well just accordingly.
We will justify accordingly.
Well there were a number of moving pieces in the first quarter within Trinity's corporate line items and consolidated results. The operational performance of the railcar leasing and products businesses were slightly better than our internal expectations.
The leasing group's revenue and profit from operations.
Grew year over year, primarily due to growth in the lease fleet.
And higher average lease rates.
The changed our depreciation policy also contributed to the increase in this segment profit margin.
During the first quarter, we completed a small portfolio sale to one of our RV partners.
Demonstrating the value of railcar assets with leases attached.
Even in a state of heightened financial market disruptions.
Real products group delivered just over 3700 railcars in the first quarter, while reducing production capacity within our manufacturing facilities.
As I mentioned on our February earnings call. We expected these margin headwinds from the inefficiencies in slowing our production and reducing our manufacturing capacity and headcount.
Commercially we were impacted by the evolving uncertainty within the industrial market and lower North American railcar loadings.
Leased fleet utilization declined to 95.4% a new railcar orders for the quarter totaled 1970 railcars.
By our analysis, we believe approximately 80% of our customers operate as essential businesses and infrastructure as defined by governmental authorities.
And many of our other customers indirectly support these businesses within the supply chain.
Given the prevalence of public data of railcar loadings, which is a primary indicator for our business.
The shift in demand environment for railcar equipment should not come as a surprise.
We've seen significant declines in rail volumes, which ultimately lead to underutilized railcar equipment.
However, there are few market sectors that present as a bright spot for rail equipment demand.
The best near term opportunities, we believe will be an agricultural markets.
The victory grains and fertilizers.
The age of the fleet of railcars and relatively high asset utilization.
There was not one railcar market there are several markets railcars.
Each one specific to their own demand drivers and fleet dynamics.
We're closely monitoring economic forecasts for recovery in all of our markets.
Regardless of the market you Directory, our management team is experienced in responding to rapid shift and railcar demand.
Compounding the issue surrounding Tobin 90, the drastic declining crude oil prices in the first quarter has created a historic Joel to the energy markets.
In response, we removed approximately 540 tank cars from our first quarter backlog.
There are expected to go primarily into crude service because the customers financial condition had changed materially since the orders were made.
Our backlog no longer includes any railcars for Frac sand service for crude oil service.
With that said internally is lease portfolio approximately 4% currently serves the crude oil market.
And approximately 8% serves the frac sand market.
These markets have experienced numerous structural shifts over the past decade, and the challenges spurred by the mining the brown sand. The last few years are widely acknowledged.
Weeks, but the collapse in shale oil production could leave the frac sand industry financially vulnerable.
Closely and continually monitoring market developments to mitigate or risk and protect the return on this investment.
A small percentage of our customers have also requested for an answer really in the current <unk> environment.
Where appropriate Trinity has implemented certain criteria for extending payment terms for customers at this time.
And we'll continue to evaluate how we can support our customers.
As it pertains to Trinity's financial position, we believe is really starting from a position of strength.
Following the rapid deterioration of the financial markets due to covert 19.
The company tested several scenario analysis on our cash flows to evaluate the strength of our balance sheet and liquidity.
Through all of our assumptions trays platform was resilient.
A summary of our liquidity and balance sheet is provided on slide four of the supplemental materials.
As of the ended the first quarter the company had committed available liquidity of $760 million.
In addition, we expect to receive 300 million in tax refunds. This year, resulting from reinstatement of tax loss carry back provisions in the carriers Act.
The cash tax benefit reflects the significant financial synergies within their platform.
We have a diverse leased fleet of approximately 130000 railcars for body beliefs and fee income visibility.
Which includes total committed revenue of $2.5 billion.
As well as a railcar backlog with the value of $1.6 billion.
When considering the relative market stability to date from our highway and maintenance businesses.
We expect trade to generate solid cash flow in 2020 and to maintain our Libby liquidity position and our base case scenario.
As further liquidity options. The company has unencumbered assets are approximately $1.5 billion available for monetization through leverage for secondary market transactions.
When considering the company's debt maturity profile in the additional levers we have to unlock capital.
We believe our balance sheet and financial strength enables trades navigate the kobin 19 pandemic.
We will continue to maximize the cash flow from the committed business well use our commercial reach and market knowledge to navigate these unusual times.
As a result of are shifting priorities to manage our balance sheet amid covert 19, we anticipate the company's leverage ratios may decline as we go through the year.
We're closely monitoring our available capital and liquidity needs to determine our course of action and to balance our long term goal of balance sheet optimization.
Our platform is demonstrating that is built to deliver and sustain.
I'll now turn the call back over to Jim for closing comments.
Thank you, Eric and you can see from our first quarter performance treaties, taking steps to align our cost structure to our current demand environment.
We are doing that amid a challenging market environment and in accordance with our longer term plans to accelerate friday's performance through the cycle.
Given the limited visibility in the markets stemming from the current a virus, we're not providing financial guidance at this time like numerous other companies have stated we cannot predict at this time the impact or duration of covert 19, and the collapse in energy prices on our business or the impact to our.
Customers and suppliers businesses.
We are highly focused on scenario analysis.
Continuity and contingency planning and preserving and bolstering our liquidity position.
Fortunately Trinity has long duration lease contracts that protect against market disruption and a solid backlog in which we can flex their capacity to rightsize for demand.
We do hope to put forth a brother framework for Trinity strategic roadmap on their third quarter call in October.
However for the time being we thought it would be helpful to give you some context behind the scenario analysis, we performed on the financial position and condition as a company as guide posts.
Slide five of the supplemental materials provides a summary of the inputs to this analysis.
These scenarios also provide a framework to guide our capital allocation decisions in the current market environment.
The base case scenario assumes the economy reopens in the near term and railcar loadings began to improve sometime in or around the third quarter.
And this type of environment, we would expect other lease fleet utilization remains approximately 95%.
Backlog delivers.
We transact a modest amount of lease railcar portfolio sale and achieve our S DNA optimization target.
And our stress case scenario if covered 19 continues to restrict the recovery the market we have modeled the potential for deferral of her backlog.
Utilization dropped below 90%.
And the inability to transact railcar sales in the secondary market.
And either scenario, we expect the financial synergies or the rail platform to yield positive operating cash flow.
The closer our financial performance resembles our stress case scenario, our capital allocation framework will shift towards preservation.
The more our performance reflects our base case scenario, our capital allocation will enable continued and prudent investment in the business.
Todays current plant Trinity current plans for manufacturing and corporate Capex is fairly committed and 2020 due to construction in progress for new maintenance facilities required to service our growing lease fleet.
This spend is estimated to be approximately a 100 million for the year.
However, historically manufacturing capex because the rail business has ranged from five to 20 million per year in downturn.
Proving our ability to pull in the spend significantly if necessary.
As a result railcars in our backlog.
[laughter] customers.
And the potential for lower secondary market sales in our various scenarios.
We believe the range of net lease fleet investment couldn't be between 350 million to 500 million and 2020 in either of these scenarios.
Well combating the economic ramifications of Cobot 19.
We will be a major feet Trinity has historically maintained its dividend.
Again, and either scenario as shown our confidence in the cash generation of trading platform supports our commitment to shareholder returns.
Today, the company will pay out or 224th consecutive quarterly dividend.
Management and the board of directors are aligned and our expectation that the synergies of the rail platform enabled me reinvestment in the business, while continuing to support substantial returns of capital to shareholders.
And the time I spent my first few months this Trinity CEO I cannot be more crowded the team we haven't place.
From our welders on the shop floor. So the dedicated men and women the service our customers and business stakeholders to the experienced leadership team and support of our board.
We are continuing to align organization and operations to maximize our performance.
Slide six in the supplemental material recaps, our chief financial and operational goals.
The Corona virus has created a challenging hurdle to overcome in pursuit of our longer term goal.
That being said and regardless of the point in the cycle, we find ourselves.
Energies are the rail platform and the cash flow generation are the driving engine behind trinity's value creation for shareholders.
Our platform is built to deliver and we believe we are in a position to withstand the current market environment and deliver long term value to our shareholders.
Operator, we will now take questions from or listener.
At this time, if you'd like to ask a question. Please press the star and one keys on your telephone keypad.
Keep in mind, you may or May have yourself from the question Q at any time by pressing the pound cake.
Well, it's got to ask a question today. Please press the star and one case on your Touchtone telephone keypad.
Well take our first question from Allison Poliniak with Wells Fargo. Please go ahead. Your line is open.
Hi, Thanks for taking my question and thanks, and congrats Eric I'm on the appointment well deserved.
Just want to go back to the commentary around.
These rates they are pretty favorable for Q1 was there something unique to those cars and maybe can you talk to how things are trending as you know this I guess pandemic accelerates hearing in the U.S.
[noise]. Thank you Allison this is Eric I'll take that so I wouldn't say that the increase in our lease rates was the average lease rate or portfolio or that is more impacted by the ins and outs of our portfolio in terms of what we added a fleet and what we sold to the fleet.
In terms of absolute leased rates.
We are we are like we said the in our last call. We are still seem headwinds on on lease rates and with railcar loadings friend in those where they are and expect that trend to continue and the in the near term.
Understood and secondary market, you've been pretty active selling into it you know it seems obviously just given that no concerns macros in front of macro side and that dynamic could be switching you know any color. There could you see some consolidation even I amount. That's the smaller players here any thoughts on that sure I was there again.
So yeah, we did have we sold about $110 million worth the railcars in the in the first quarter I thought you know that was we sold those in March that was kinda at the height of the uncertainty.
Especially the volatility in the equity markets. So I was pleased that we're able to execute as we go forward as gene mentioned in silver stress cases that is a scenario that we've stressed and many of our situations the ability to transact if it does not if it's not a sellers market than that may turn into a buyers market.
And I, just don't know where those market clearing prices are.
In order for if people are going to sell portfolios I'm not expecting to see distress portfolios in the near term, but is the longer this goes maybe that changes.
Pete and then just one last question for me just one I understand your philosophy, you know between utilization and and better lease rates, obviously, we'd like both but and this kinda scenario, what what is trying to be focusing on he said. This morning. It was the sand or lease rates. Your house, how are you balancing out here.
Yeah. This there again I I would say right now we're focused more on utilization.
Even with our utilization going down we are focused on utilization or to the extent railcars.
Are needed you know if they have less of a customer does not need the cars that are made up your rate that maintains that.
We are still renewing railcars and we expect to continue to renew railcars on on expiring leases this year or there will be some rate headwinds as we go forward though.
Great. Thanks, so much on possible.
Thank you.
We'll take our next question from Justin Long with Stephens. Please go ahead. Your line is open.
Thanks for taking my questions maybe wanted to start with one on returns I totally understand at 2020 guidance being drawn but you did had this three year.
Target for 11% to 13% was wondering if you could provide an update on that target and the timing of that target as we think about the assumption that you have embedded in getting to that 11% to 13% do we need to see a return to normalcy.
I used to lease rates and normalized build rates to get there or are there enough levers that you can call better company specific to hit that target even in a below replacement market.
This is doing a thanks for the question Justin.
Well the current environment will make achieving our long term targets in the original timeframe extremely challenging we're still committed to achieving these targets in due course I would expect with the uncertainty in the market right now it will take us a little bit longer to decide if we have lever.
That could could keep that on track, but I think the headwinds will push that out a little.
Okay and on headcount savings that you called out at nine to 10 million is that number included within that assay in a cost saving target of 25 to 30 million and maybe as you think about this downturn and.
Stress case.
I mentioned in hand to slide on is there a way to think about the incremental costs you can take out in that scenario beyond what you you've outlined that 25 to 30 million.
Hello, Justin its melendy, yes, the nine to 10 million that I mentioned in my prepared remarks is included in the 25 to 30 million goal that we announced in the fourth quarter and as I as I said in my my prepared remarks, we have identified and plan to complete that 25 to 30 million goal. This.
Here as we laid out in the stress case, if we see further contraction if we see the Coca 19 situation extended we are prepared to make further reduction.
Okay, and maybe just one last quick one on that guidance for operating cash flow to be positive. This year could you talk about the change in working capital that assumed within that guidance and does that also included 300 million tax benefit.
Yes.
Hi, Justin this is Eric so.
I'm not going to give you specific working capital guidance, but when we talk about after operating cash flow as our as our production volumes.
Decline there will be some natural or working capital gains that we pick up through the year as a as our run rates decline that that's typically we've experienced set and the previous cycles as well.
And in terms of the refund that is included and that is part that will be part of our operating cash flow.
As we talked about previously.
Even without the cares act, we would expect it positive operating cash flow for the year.
Okay.
Is that what we're focused on liquidity.
We're going to you know we play as I said in my comments, we plan on liquid maintain their liquidity throughout throughout the year and we have levers to pull to make sure we maintain that.
And <unk> as I mentioned in my remarks, we're going to right now have 350 to 500 million and potential new lease fleet additions hundred million a manufacturing capex.
Yeah between 150 in 200 million and shareholder returns through dividends and share repurchases and we're still expecting to maintain our liquidity.
Thanks, that's helpful. Everyone. Appreciate the time.
Thanks, Justin.
Well take our next question from Gordon Johnson with G.O.J. Research. Please go ahead. Your line is open.
Hi, everyone. This is James Bardowski on for Gordon. Thanks for taking my question. So you have one first on the utilization and don't should optimization program, but we see a leasing group.
So the targeted leverage of 60% to 65% onto your balance sheet optimization program. It depends on the besides your fleet as well as a correct me if I'm wrong.
Expected size of your fleet in years ahead, so last quarter I don't think that utilization so to us a 95.4% I believe was [laughter] no.
Well, you said that there's been little effect babies and customers you did acknowledge that loadings a week rates are weak weaker relative so if if we don't see any kind of sharper recovery, but it's more of an l. shaped recovery.
Customers do starts to cancel orders, how how low would you tolerate fleet utilization to fall before taking action to ER to manage your fleet down.
And biting into expected leverage that was tied to featured fleet Chris.
Hey, Gordon This is Eric let me, let me try and.
James I'm, sorry, I take that.
No as though when we look at the stress case, it and we modeled we in a stress case environment. We expected utilization there we saw where utilization you can get below 90%.
And even within that we thought the business performed well.
Well or you know what form adequate and through the cycle.
In terms of you know would we start I think than what you're asking is what we sell off assets in order to.
Preserve leverage is that in a sense nears yeah. That's certainly you know that's certainly a lever that we have because we have such a large unencumbered lease fleet, where as I mentioned is $1.5 billion. We believe that gives us a lot of financial flexibility.
To either sell assets or finance assets to maintain or expand liquidity.
And so that and that's kind of.
Not necessarily utilization or centric.
Okay. That's that is very helpful. [laughter]. So so there's not the basically there's not as set target, where where you would start to accelerate sales out of lease fleet, let's say Oh filtering 88%.
No no there is not immune it's going to depend on what what's going on the secretary markets. You know, we would do a if there's opportunities to sell assets when that would be an option, but you have utilization fell that far than we got we assume one of the things. We assume was we wouldn't be able to so many assets because of the state of the market. So it's kind of works again.
So.
Well at least that's press situation, Oh, and then a and then quickly turning to the real Oh, Oh, I know set new orders fell again for fifth straight quarter onto your year over year level.
And you Didnt mention that cancellations now.
The crude oil aspect from a backlog of albeit you still have exposure through your utilize fleet. Currently <unk> now is that the say that you basically you don't expect any cancellations going forward or is there any other kind of shaky areas that are that we might expect to see additional waves care.
Relations I know you mentioned agriculture strong, but is there any any other sectors, where you see potential growth offsetting that can maybe help your help your orders.
Sure James It limits. There again, you know I'd say longer term and even even this year the biggest driver that still going to drive.
New orders is going to be replacement demand.
Replacement demand is the single largest driver for new railcar deliveries and new railcar orders or I don't expect that to go to zero.
As we've seen in other cycles, it's it does become a bit of a buying opportunity for for customers with a longer term view to buy assets.
At this part of the cycle. So I don't expect that are really to a.
Happened.
And we continue to get some orders and even in the past week. We've received several hundred orders so even in the Miss.
The challenge is a customer still need some of these railcars.
Okay. That's very helpful. Thank you and then finally, a one more question to that alone Oh here, though so.
You did mentioned one of the reasons for the contraction in your market share for the decrease rather in your margins and rail group related to quote unquote efficiencies.
And it looking back historically it does look like your cost operate on a lag.
That said given the move to cut your utilization how is there any kind of expectations that you could give us as far as what to expect the margins or a potential costs and development, maybe awesome second quarter.
James we're not doing many a forward margin guidance Oh, we hope to give that at our next quarter call Busted thing Stabilus.
Okay. That's helpful actually and then real quick if you could how many of the railcar orders in the first quarter, how many were for the leasing group.
Roughly about.
Little bit half or more than a little more than half of the orders were for leasing.
Alright. Thank you very much appreciate the time, thank you for their answers.
Well take our next question from Matt Elkott with Cowen. Please go ahead. Your line is open.
Good morning. Thank you I haven't an industry question first I think maybe Eric kits for you or there's a big number of cars are idle right now and we know some information about the pipes, but lots of sub types.
You have a sense.
What percentage are roughly of that idle supply railcars.
Is never going to come back even yes, no matter how demand.
Oh, how much do then you know comes back meaning they may be you know dated D. O. T 111 tank cars that are just not going to be able to use in anything.
Our just waiting for the rights scrap price to be taken out of a of the idle population.
Matt. This there you know probably on the spot forgiving opinion right.
It is not great data on that but we've done research within our fleet and some other things that we've looked at and.
It is the rail cars in storage number as I mentioned on previous calls can be a little bit deceiving, but the trend line is is I think what's more important if we had to put a number on kind of that long term storage and I'd define long term storage is it hasn't been used in a year or longer.
Then I would kind of.
Deemed that as surplus or destined to scrap I would put that number in the.
70 to 90000 railcars bucket.
I think the principal car types that make that up are gonna be or some of the higher <unk> boxcars and some older covered hoppers and then some of the old coal cars.
I hope that helps that's but that's my opinion.
Now that we can you can look at those numbers are grateful for the opinion and then.
This I mean, maybe help what's already been called base case scenario, but I just want to make sure that.
The base case scenario that you guys are presenting and the scenario, which you think knowing what you know now.
It was what you think will is more likely to happen.
So Matt this is gene I just want to say some of those are guardrails. We brought in many many scenarios. We wanted to give you confidence that we've looked at what levers we have the pool based off the changing environment, Bob until the industry stabilizes and we know what's going to occur.
We can't Yeah, a any effect give you guidance on what we think is really is not going to happen there.
Got it.
And then you guys say what percentage of your Crane backlog, which I think is 13000 cars.
Is for the luxury this year.
We did not but it will be in our Q and it's about 10000 railcars.
Our scheduled for delivery this year.
Baseline onto the best case scenario, there's no risk to that number yourself.
Under our base case scenarios as we said that that'd be the that delivers in our base okay.
Got it.
[noise] and also Eric I think you gave some utilization numbers and middle East crude and Frac I think 4% of your lease is crude at 8% as frac of the lease fleet. Yeah that was not in that was not a utilization number that was last certainly units of our fleet what's the.
Last service.
Okay. So it's not 4% the utilize suites.
It is not is 4% is.
4% of our total fleet.
That's a good question actually because what state ones.
And on on those calls so it's a it's on the it's on the hundred percent of our fleet is what we looked at the last content and so if there was in crude and is currently idle then it's occurred car. It was in Frac sand and it was currently idle, it's a frac sand car.
We're not breaking up utilization by the individual car types.
But you know 8% of.
Of the of our fleet as a last load of.
Frac sand and 4% has less load of crude.
Okay. So the actual percentages of the utilized sleep.
RV meaningfully lower than 4% than 8%.
I think I understood that I think the answer I'm not sure I follow the the math on that.
Yeah, I mean, yeah, I think Youre Seasonalization, <unk>, 95% 95 asset right Oh.
Oh got population that's utilized.
If the percentage that's crude and frac is lower than the 4% an 8% you gave.
Right now the number the number car, yes, that's right.
That's right got it got it Oh.
Oh that makes sense.
[noise] and just one last question.
Can you give us any any underlying assumptions for the stress case scenario that you're using macro assumptions.
We were looking at a really the railcar loadings not to start to come back into the second half. The 2021. So it was a oh later recovery.
The overall industry.
Okay, great. Thank you very much appreciate it.
Okay.
Well take our next question from Bascome majors with Susquehanna. Please go ahead. Your line is open.
Thank you.
Production I understand the.
Yes.
Willingness or or caution around guiding anything big you mean, you took production rates down.
50% or close to it in a single quarter could you share with us the runway there on a weekly or bi weekly or monthly basis was actually a core. So you kind of get a sense of how things are are moving right now before any further adjustments.
So on manufacturing, we talk the a in the quarter. So from the end of last year through the first quarter, we had a reduction of 30%.
So just want to make sure that was Claire.
Okay and.
In the headcount yeah production. So yeah, yeah, I was asking about the production rates and the Liberty right. Okay. Yeah, Baskin I'm, sorry, we're not going to give get into the run rates are for competitive reasons and for guidance reasons, but oh, we did take those actions throughout the quarter. Many of those actions were that we did in the first.
Border weren't necessarily cobot 19 related we've talked about those in our February call that we were going to you know we expected our production to decrease.
So the extent there's further declines in that then from Cobot, then that would have come out of that number.
And are you running all three of your primary production locations below capacity or is there an opportunity to consolidate some of that we can work.
You know if you look back over the years, we've consolidated lot of our manufacturing a assets. We currently are operating or three facilities are major facilities on the on the new production side Weve too you know, we will continue to look to optimize that and it.
Ends on where it goes in terms of we're going to operate.
One two or three facilities sooner than you.
No no fun.
Thank you.
A couple on leasing then I'll pass it on.
It's the rail ABS market open today should you want to access that and do you have any sense of.
The kinda coupon rates and collateral advance rates that we might see.
Specimens, Eric again, I believe that when the time comes for us to access the ABS market, we will be successful and accessing it I think spreads will be a little bit higher than they would than the last deal we did.
With the overall benchmarks low you know it I think the coupon will.
Likely be higher than what we achieved previously.
But it kind of depends on when we do access to markets, but I believe will be open.
I do you I mean, they advance rates I think historically been in your last few deals by seven days do you think theres any give on that as well you know it at the pet that's possible, it's always a tradeoff and and a lot of times. It's it's a you have flexibility and all the markets how much you want to push the advanced rate.
Are you, whether you do different trophy assets or natural to be tranche.
If you do a single transaction single Traunch transaction, the advance rate, maybe a little bit lower but you know that's a little bit of inside baseball in terms of securitizations, but.
I would expect that it would be similar to years past.
And last one for me the crude and sand exposures I. Appreciate you disclosing that if you could add it up to 12% of the car count in your fleet, we got number be meaningfully meaningfully different if we were to size it up as a percent of book value or or maybe a percent of current or committed revenue.
In.
Maybe to book in that <unk> or the customer conversations that you're hearing where they're requesting financial or leave for payment deferrals or that's coming from these end markets or is that more broad. Thank you.
Great Oh this is Eric I'll take that so in terms of you looked at it from a book value, but we disclose a unit count or when you looked at it from a book value perspective, and in total is going to be pretty close that 12% when you add them up.
The book value the one will be the.
On average it'll come out but that number when you look at the revenue a I will tell you on me.
Frac sand cars that 8% if you look at the revenue in the first quarter, a that would've been about 4% of our revenue in the quarter.
And so and then the second part of your question around.
Let's see discussions.
Those would be included in that number but we are seeing a request from a broader market than just frac sand in energy.
The impact is affected many customers are many industries.
So we are seeing we are talking to many of our other customers.
Thank you guys.
<unk>.
Well take our next question from Steve Barger with Keybanc capital markets. Please go ahead, Sir your line is open.
Good morning, everybody or good afternoon.
I know you don't want to get into guidance, but its current conditions are basically what we get for awhile will the next few quarters just looked like one Q in terms of deliveries and consolidated operating margin or Directionally, how should we think about the second half versus the first half just based on what you can see now.
I would expect that the second quarter will be more challenging than we were in the first quarter based off of the environment that we're operating and currently.
Okay, and and just as you think about the back half or any color there.
So again, we do have the base case and stress case remember in the stress case I said, we were looking for the rail loadings to start to recover to the second half a 2021, so I would refer back to that stress case on what we might expect.
Yeah, we really appreciate you providing that basin stress case, I guess, just as you think about that stress case, if that were to play out just in terms of a range does operating margin stay high single digit or does it fall to mid single digit any just broad kind of expectations.
Yeah, we're not getting into ppas or guidance I would expect you know so.
I'm not going to comment on that right now we hope to give you more guidance information in the second quarter a in July.
Got it.
And and just one more than I get that makes and production runs matter, but just rough math what is the minimum railcar production level, you need to stay to breakeven or to stay breakeven in the rail group.
Steve This is Eric let me, let me just say that the breakeven analysis will depend and it depends on if it's a smooth production cycle. If it's a smoother production cycle your breakeven points can be lower if theres a lot of volatility it's got to be higher.
As I mentioned earlier, one difference in our platform today versus 2009. In 2010 is we are operating fewer facilities and I I think we have a more of a variable cost structure and those facilities.
So I wouldn't that that by itself should be a mena will be the lower breakeven point, but life's not you know that there's we're not all things being equal so it's hard to get into word actual breakeven run would be.
Understood. Thanks.
Thank you.
And there are no further questions on the line at this time altered the program that to just get greater.
Thank you David that concludes today's conference call a replay of todays call will be available after one o'clock eastern standard time through midnight on May seven 2020.
This number is four zero to you know 1111, a replay of the webcast will also be available under the events and presentations page on our Investor Relations website.
We look forward to visit you again on our next conference call. Thank you for joining us this morning.
This does conclude today's program. Thank you for your participation than you may now disconnect.
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