Q3 2020 Trinity Industries Inc Earnings Call
Good day and welcome to the Trinity Industries third quarter results Conference call. At this time all participants are in listen only mode. Later.
You'll have the opportunity to ask questions during the question and answer session.
<unk> registered to ask a question at any time by pressing the star and one on your telephone keypad todays.
Today's conference call contains forward looking statements as defined by the private Securities Litigation Reform Act of 1995 and includes statements as to estimates expectations intentions and predictions of the future financial performance statements that are not historical facts are forward looking but it's.
Participants are directed to Trinitys form 10-K, and other as Cc filings for a description of certain business issues and risks a change in India, which could cause actual results or outcomes to differ materially from those expressed in these forward looking statements. Please.
Please note today's call may be recorded I will be standing by should you need any assistance. It is now my pleasure to turn the call over to your Vice President of Investor Relations Jessica Greater Please go ahead.
Thank you David Good morning, everyone I'm, just gonna Grier, Vice President of Investor Relations <unk>. We appreciate you joining us for the company third quarter 2020, <unk> results conference call.
Our prepared remarks will include comments about really Chief Executive Officer, and President Gene Savage and Eric our head of the Companys Chief Financial Officer.
We will Oh acuity <unk> following the prepared remarks from our leaders.
During the call today, we will refer you slide highlighting you want to discuss the supplement.
The supplemental materials are accessible on our IR website at Www Dot <unk> dot net lease.
These slides can be found under the events and presentations worsening of the site along with the third quarter earnings call exactly.
It is now my pleasure to turn the call over to <unk>.
Thank you Jessica and good morning, everyone.
Great. It's been on a transformative journey over the last year to realign our business.
Our people our cost structure and our purpose.
To deliver superior returns to our shareholders.
The timing and execution of these initiatives were kinda lunch by the COVID-19 outbreak.
I want to commend our people and our business leaders for their resiliency and commitment to overcoming the hurdle is caused by the panda and they and their efforts to establish our strategic framework for the future.
All while delivering high quality products and services to our customers.
As a major milestone in our journey Trinity will host a virtual investor day in four weeks.
At this event the management team will present, our value proposition and strategic framework for accelerating or financial performance.
Today, we want to focus on the results of the third quarter and highlight how our results and actions taken during the quarter aligned with our goals that you will hear more about in the coming months.
The goals of our strategic framework are two one optimize the return of our lease fleet.
To reduce the impact of cyclicality and.
And three to increase the Murdo advantage of the railcar industry.
In the third quarter currently implemented its new strategy.
We expect these strategic shift to drive operating model performance and generate superior shareholder returns.
Our strategy is grounded in our newly defined purpose of delivering good for the good of all.
This purpose seeks to emphasize for all trainees stakeholders, the essential role that rail transportation plays and our daily lives.
As we did with our family clean.
Cleaner home.
Fuel, our cars and lead a safe and happy life.
Trinity has a rich history, a legacy of strong growth and a reputation of flexibility.
Well these attributes and our new focus treaties premier railcar products and services will support a central North America's supply chain.
Going forward well emphasize the optimization of our platform and scale, new product and service offerings that will make our existing investment more valuable.
This strategy will place more importance on cash flow and returns, resulting in more discipline levels of growth through the cycle.
Our management team continued our progress in optimizing the cost structure of the business during the third quarter.
As a result of the new strategy, we had additional head count and other administrative cost reduction.
We also made the decision to exit the U.S. trucking and logistics business and outsource the services to third party.
With this we have a small impairment charge relating to the trucking fleet that have primarily service Trinity former industrial business [laughter].
When including the actions from the first half of the year Trinity has implemented over 80 million worth of reduction in operating costs and other related costs.
Please refer to slide four of our supplemental material.
We continue to rationalize our footprint as well.
During the quarter further rightsizing resulted in a total manufacturing headcount reduction of 47% year to date.
We anticipate there could be additional reduction heading into the beginning of next year.
We are evaluating or material cost and reviewing the relative spend between direct and indirect costs in order to lower our breakeven point.
We believe through various cost effort the rail segment margin could meaningfully improve throughout the cycle.
Well share more detail on these efforts at our upcoming Investor day.
As you saw in our press release, we're also working on our balance sheet optimization and Eric will talk to you about our successes in the financial overview.
Overall, our business results were in line with our expectations from our base case scenario provided at the start of the COVID-19 pandemic.
Our leasing business holding steady at around 95% utilization.
And we are controlling cost in order to minimize the impact of lower lease rates on renewal.
Lease rates on renewal declined in the third quarter relative to their expiring rates, however, pricing sequentially held fairly stable from the second quarter.
Our portfolio of expiration subject to renewal over the next 12 months is in line with our typical 15% to 20% average.
And we are closely monitoring our markets for signs of improvement.
Based on recent market pricing for renewal the read the lease rates for our current expirations and 2021, we'll have a much easier comp relative to the expirations this year.
We have already noticed improvements in certain markets like agriculture, including grain and intermodal.
Well the other markets like energy continued to see headwinds.
As an operating less or we aim to differentiate our product and service offerings on customer experience.
Making the ownership and usage of railcar equipment, a more attractive and valuable proposition for industrial shippers.
Scaling additional services that we can provide that leverage our broad platform market knowledge and analytics of our own demand its lease fleet can bring a premium reoccurring revenue stream to the business.
More recently, we've been developing the analytics and infrastructure to support. The addition of telematics on railcars.
And have partnered with other leading rail service providers to create a new technology platform called rail Paul.
We believe will help transform rail shipping and the future.
Well this platform and resulting services are in the early stages of development. We believe these capabilities are a key factor in improving the rail industry competitive position relative to other modes of transportation longer term.
Looking to get another third quarter performance, we incurred start up cost for our new maintenance facility in the Midwest as we Onboarded new employees and accepted our first customers into the plan.
We expect the inefficiencies from the start up of operations to be a headwind for the segment margin in the coming year.
But we do expect the new facility to be accretive to earnings in 2021.
We didn't capacity from this new facility. We believe we have the capability to service and maintain up to 60% of our lease fleet in house.
This exceeded the target we set two years ago at the time the spin off.
We will continue to evaluate further grow silver maintenance services business, including the expansion of service capabilities, an underserved market.
As I mentioned, our manufacturing operation continued to slow their production into the third quarter with additional rationalization of our head count how.
However, this was not at the same pace as a reduction we had in the second quarter, which allowed us to limit the amount of disruption to our plan.
And our base case scenario, our production plans for the remainder of the year assumed the full delivery of her 2020 backlog.
This would result in just over 11000 railcars delivered in 2020.
During the third quarter real manufacturing received orders for 2000 railcars composed primarily of larger complex transactions that reflect the strength of trainees rail platform and our ability to tailor solutions for our customers.
These orders were predominately for 2021 delivery and reflect competitive market pricing.
We continue to see a good pipeline of inquiries for railcars, new and existing.
Like so many others our business continues to operate with an even greater emphasis on the health and well being of our people.
Looking out over the next few years, we see the broader economic recovery driving more rail shipments and equipment demand as business and consumer confidence and renewed and shippers.
Across the continent, so confident in making long term capital decision.
Railcar loadings rebound in during the third quarter from the historical declines earlier this year.
However market uncertainty continues to cloud near term demand for railcars as much of the economy remains under pressure given the COVID-19 pandemic.
We remain cautiously optimistic regarding the trajectory of demand heading into next year.
Given the range of possibilities based on potential scenarios for the economy, the election and the pandemic well.
We are still operating in a very fluid environment and are electing to not provide guidance.
That being said, we're committed to improving the financial performance of our platform and we believe much of the improvement is within our control.
A recovery in the cycle when it occurs will be an added tailwind.
Eric I'll turn it over to you.
Just go some of our financial initiatives.
Thank you Jeanne and good morning, everyone.
Trinity's platform has demonstrated the ability to generate significant cash flow originating railcar transactions.
Leverage the synergies of our business model.
We believe the cash flow generation from our platform.
And the ability to optimize our balance sheet within a disciplined capital allocation framework will create long term shareholder value.
During the third quarter.
We generated $129 million of cash flow from operations results.
Resulting in year to date adjusted cash flow from operations of $596 million.
Our investments for the quarter included approximately $183 million of net lease investment for new railcar additions and fleet modifications and.
And $29 million for other enterprise capital expenditures.
As Jim has said up.
Optimization of the friendly rail platform has been a key focus for management and the board in the last year.
We're addressing optimization in all areas of our organization.
Our operations and our balance sheet.
The combination of balance sheet optimization with a disciplined capital allocation framework under sales.
Underscores our commitment to being a returns focused company.
We made additional progress in the third quarter and since quarter closed in raising that leveraged our lease fleet to lower our cost of capital.
In late July we completed the upsizing of arterial 2017 financing what are those additional 225 million of debt funded at LIBOR plus 150.
Earlier. This week, we also redeemed $153 million of secure railcar equipment notes.
Carried interest at 3.8% and issued a new 156 million securitization bearing interest just below 2%.
We are further evaluating the capital markets.
Taking advantage of attractive interest rate environment to lower our cost of capital.
Truly is operating in line with the base case scenario that we presented to investors as a guide post at the start of the pandemic.
It's contemplated within our base case scenario, we have maintained our dividend and completed our share repurchase authorization.
During the third quarter, we were we returned approximately $111 million of capital to shareholders through dividends and the completion of our share repurchase authorization.
Our returns to shareholders over the last 12 months totaled $275 million.
Approximately 11% of our market cap as of yesterday.
Earlier this week the board authorized a new share repurchase program.
We completed our second such authorization since the spinoff two years ago.
The new $250 million authorization runs through the end of 2021.
Returning capital to shareholders is a key element of our investment story and it.
And isn't enabled by strong cash flows, resulting from the synergies of our platform.
We are highly focused on maintaining a strong balance sheet, which you will see on page five of the supplemental materials.
As of the end of the third quarter. The company had committed available liquidity of approximately 790 $719 million in the form of cash and cash equivalents and.
And availability under our various credit lines.
At this time, our income tax receivable is $485 million.
It gives us greater certainty of cash flow over the next several quarters.
This receivable is a direct result of the tax efficient benefits between our leasing and manufacturing businesses.
Which one reinvested through our disciplined capital allocation framework should generate even greater value for shareholders.
We're maintaining significant financial flexibility I remain close to our capital providers.
Our committed credit facilities are adequate and our RV partners have appetite for more assets through our programs.
At the end of the third quarter, the company had $1.4 billion of unencumbered real per assets on our balance sheet.
These railcars to be monetized or leverage or secondary market transactions.
We believe our balance sheet and financial strength enables friendly to navigate the volatility of the COVID-19 pandemic and capitalize on opportunities that may emerge for long term shareholder value creation.
Given the market uncertainty, we're maintaining a very fluid evaluation of our financial condition and business performance based on various scenarios.
Market conditions are improving within the railcar industry, but there are still headwinds to overcome being a path for full recovery.
These conditions make forecasting our business given earnings guidance difficult.
We are committed to providing specific targets for financial performance, we have more control of our performance.
As we move into 2021, we will reevaluate the bark market conditions and to the extent, we can provide expectations of our financial performance and capital allocation.
We believe we are well positioned to respond to a rapid inflection in market demand should conditions improve.
With a strong balance sheet defend against lingering market disruption.
In closing we have put in place a disciplined capital allocation framework with a focus on improving our returns.
As part of our Investor Day, we will lay out our expectations for the impact of balance sheet and other optimization efforts on our returns.
We believe that through aggressive cost control measures discipline capital allocation and selective actions to enhance returns were owned and leased portfolio we will.
We will start to bring on a path of accelerating our financial performance.
I'll now turn the call back over to James for closing comments. Thanks, Eric you know.
No. This is a very exciting time for training our people and I believe our investors while much has been said about the obvious challenges throughout 2020. This year has been a year for tremendous positive change a trendy.
Our work has let us to prepare for a fresh start a new.
A new perspective, and a new operating model.
In addition to the opportunity to hone our strategy and operating structure I mentioned in my first earnings call as CEO, but I believe there's a real opportunity to accelerate trainees position as an industry leader in the railcar market through innovative products and services.
We believe this strategy will transitions Friday to a higher quality recurring relationship business model.
The focus of our strategic framework, we will lay out at our Investor Day, we'll focus on the following thing.
One to optimize returns and performance of our for me.
To to reduce the sic code cyclicality of our business model.
And three to increase the Moto advantage of the railcar industry.
We look forward to discussing these topics in more with you on November 19th.
And we'll now take some time to answer your question on our third quarter performance result.
Operator will you please give our listeners the instructions for the <unk> session.
At this time, if you'd like to ask a question. Please press the star and one cheese on your telephone keypad keep.
Keep in mind, you mayor move yourself from the question queue at any time by pressing the pound <unk> once again.
Once again to ask a question today. Please press the star and one key on your Touchtone telephone keypad.
And we'll take our first question from Bascome majors with Susquehanna. Please go ahead. Your line is open.
Yeah, good morning, and thanks for taking my questions I'm looking.
Looking at the average sales price implied in the backlog it looks like it may have been.
Revalued lower this quarter can you speak to that you know whats driving that if that is the case and then maybe any comments on the timing and magnitude of a further.
A further manufacturing rationalizations that you kind of alluded to in the prepared remarks.
Okay for the backlog it was just an adjustment on material cost that we've seen and so it wasn't as though due to cancellations, but just the adjustment on material.
For the rationalization of facilities, we mentioned that we have to complete line and production before we can make any changes.
And some of that is people related some of that is facility related.
As we look at our facilities, we look at what worked well we have committed to them and as we see that either decline or we choose to move that work elsewhere, well be able to take actions and to say, which facilities will remain and are crucial to the ongoing business or which way.
Ones that so we will go ahead and Uh huh.
Can you sort take out.
Okay. Thank you for that.
On the leasing business you know the margin was was higher than its been historically and you know some of that.
Some of that you had alluded to it's the depreciation reduction from the small cube covered hopper write down, but but maintenance expense also played a pretty big part on that I'm just curious.
On the maintenance right, what's driving that and how sustainable is this.
As we look forward to the profitability of that business.
So if you look at year to date, our matrix's expenses down about 15%.
Some of that is driven from the fact that people aren't really seeing the cars. So if you don't have the cars you can't do the work other parts of that are due to our being able to do more of that work internally and when we can do that work internally, we have the ability to lower the.
Cost improves the turn time and then lay out third part of that is they are expensed. The work that's being done under a our billing is lower so that would be more of their running repair type work not the planned repair. So all of those combined to half the improvement that you're seeing.
Yeah do you think any of that is sustainable or is it just a number of things coming together in the same quarter.
I think some of it is sustainable says we look again at what we can move in house, we've proven again, our cost to do that work in house is lower and again, we get the cars turn quicker so they're out to our customers and then as far as he a are you know the railroads have reduced manpower throughout their systems.
I think that maybe having a little bit of an impact on their ability to do something there running the bears. There's also it's better for everyone. If that does factor repairs can be done at either the beginning or origination or at the end of those loans, so you're not stopping or disrupting the flow of the traffic.
Okay last one from me I know you said that we'll get a much more significant capital returns update in a month at your Investor day, but.
If I recall from some of the nature of the tax free spend that you did and we're about to have the two year anniversary on there were some limitations on your ability to to recapitalize. The business you're about to last that is is that give you an opportunity to be more aggressive with perhaps some other I guess or are some pull forward on this incremental.
250 million buyback, you've just authorized and maybe if.
Maybe if you can if you can't answer that I'm curious if the 2021 in date implies that you hope to complete this 250 million by the end of next year.
Sure Bascome. This is Eric as far as an MSR goes we certainly have that ability to do it but oh, we have not announced anything that would be the $250 million authorization is a little shorter window than we normally put on it just a running out through the end of next year as you mentioned.
And you know business conditions.
We continue like we said back in April when we put out our base case, our stress case yeah.
Long or base base, we expect it to fulfill our.
Phil our last authorization, which we did we completed this quarter and so if things continue along that trajectory than than we would expect to complete it if the market changes we'll adjust.
Thank you.
Thank you thanks.
We'll take our next question from Matt Elkott with Cowen. Please go ahead. Your line is open.
Good morning, Thank you Oh Jeez, you say 11000 deliveries this year.
I feel that correctly.
I said just over 11000 deliveries this year, yes.
Okay.
So I guess the fourth quarter delivery number is just over 1700 Oh.
I was wondering how much margin downside is gone the column on the all lowered <unk> number I mean are we getting.
How are we getting into an active and by how much.
So we're not giving guidance. So I can't tell you what that margin is going to be but the work that where we have been doing this year and that will talk about in November is getting the structure in place. So even in a normal down cycle. We won't go negative Oh, we made some strides on that you've seen.
Got it in the numbers that so we're showing you in the supplemental material. So.
I like it to help you we've made a lot of improvements I just can't give guidance.
Okay.
Ah so.
It's plausible that the margin will be fairly stable in the fourth quarter, despite the lower deliveries.
That's possible Yep yep okay.
And then another question, that's a kind of a bigger picture industry question rail traffic is starting to head in the right direction and it looks like we're going to have that traffic growth.
In the foreseeable future that hopefully will be sustainable, but this will be the first time I think ever that we have rail traffic growth.
While all the railroads are implementing P.S. are are you. You know are you guys starting to get calls from a you know a cost existing or new customers that are concerned.
About this or.
Oh, you know from your angle from your conversations with customers are you starting to get any sense Iraq disruption in the remote work.
The man, we aren't getting calls from customers without concern right now I think everyone's just cautiously optimistic that things are moving in the right direction, yes, three straight weeks with year over year improvement or something we haven't in the total rail traffic numbers something we hadn't seen since the beginning.
2019, I think have as all thinking maybe it's going in the right direction. There and then you know Weve had 75000 cars come out of storage in the last quarter. So that's also a great indicator that things might be heading up. So we may have bottomed and started the upturn.
Well.
And then if I may one last question on the guard rails segment. So I.
You know I noticed in your release that part of the reason.
Oh, I see an a decline was lower litigation risk.
I guess, which may have something to do with that parts of some disruption and dynamic.
But I think the overall risk to you guys is you know pretty much behind you on that from now when when this whole litigation issue is completely gone away would this job.
Segment be a you know a consideration for a divestiture.
And we have talked in the past about the fact that when the timing was right. We wouldn't look at possibly divesting the highway business to the right partner. So is it on the table. So yes, we would consider that we just have to make sure that it makes sense.
For us in the marketplace and as you mentioned the litigation is in a point where that can happen.
Got it thank you very much so.
Thank you.
We'll take our next question from Gordon Johnson <unk> G. L. J research. Please go ahead your line is open.
Hey, Good morning, everyone. This is James Bardowski in for Gordon.
Yes, so your balance sheet optimization I know previously you were targeting about 60% to 65% leverage.
40, 57.9 last quarter is there any change to that all your leverage target.
Hi, James Airport said, Oh, I know, we've talked about that's 60, 65%.
A target or we have not we have not changed that target. We're currently as you mentioned right around 58%.
The capital markets are Ah or very attractive right now as I said in my prepared comments. So we will which we just we just closed on on a transaction earlier. This week as I mentioned and we are we will continue to evaluate those markets.
Okay, Great and also a number are you guys mentioned that.
Second quarter press release, as well, but you raised your maximum leverage covenant can you just quickly remind us to what the new target is so a we didnt.
So a we didn't disclose what the new target was but we did we did adjust our covenants as we <unk>, we put out our.
Base case in our stress case scenario back in April.
When we looked at the stress case, we'd look to mitigate items and one of the things that we wanted to make sure was that we have ample liquidity. So we were.
So we worked with our corporate revolver banks and amended that covenant.
That will run for the through 2021, we thought that was a good inexpensive insurance policy and the case, we got into a stressed environment.
That's helpful.
And also you guys mentioned that this new Midwest facilities will likely be a headwind to to your margins I know this kind of reaching into the guidance realm, but do you have any idea or can you give us any idea of what the magnitude of that headwind might be or how long it could last.
So this is Jane in my prepared remarks, I did say that the other so they wouldn't be accretive in 2021. So it's just the fact that you have to ramp up to so they make sure that so you get the volumes and the training to cover.
Oh, the cost and that is probably as far as I can go without without giving guidance.
Yeah, that's fair that's fair Thanks gene.
And then I just ask one more and then I'll handle it.
Last last quarter, you guys had about 40% of your backlog is expected to be recognized this year, which is kind of basically on point with the 11000 shipments you just guided today. So is it safe to say that the 2000 orders you received is for next year.
Can you just talk a little bit about the mix of these orders.
You mentioned earlier that the transactions are more complex, but then when we look at the value of the orders, it's down roughly 30% year over year, So where are you seeing the real value.
So when you look at that so when I'm talking about complex, it's our ability to work with some of these customers and maybe take some car types. They don't need any longer back into our fleet that we can put back out and lease provide them with a new car build.
And management, possibly or maintenance for those cars. So it's coming up with a transaction that's more than just a car sales and that's where I talk about complex. The 2000 cars that we did good for them and a lot of what we talked about in the second quarter came through but there was also a mix of some other.
Cars.
Okay. Okay. That's helpful. So that ties into the whole customer service dynamic alright, well. Thanks. Thank you for your time everybody.
Thank you.
We'll take our next question from Allison Poliniak with Wells Fargo. Please go ahead. Your line is open.
Hey, guys good morning.
We just want to talk to the the cost opportunities anything really aggressive on the cost reduction activities, which makes sense, but as you look you're evaluating some I would say further opportunities should we think they're more cyclical in nature here or are you not just because of the volume declines in such arsenic Marci I guess greater structural opportunities becoming available to you.
Any color there.
So we're looking at both but I would say in the structural side of it Weve got work going on to make sure that we're keeping a the higher value added processes in our facilities and either sub contracting or go into supply base for some of the lower value added as.
As that work happens that will transition out of our facility that will be more of a structural cost reduction for us and then.
And then as we look at the potentially getting rid of some on non operational facilities are selling them.
That's also going to be a structural move for us. So we've got to try on any cost opportunity that we see and we're carefully bucketing them between what could be structural and what may be cyclical.
We want to position ourselves, what keep talking about a lower breakeven point and making sure that as we go through a cycle, we can get our margins a in a more controlled manner or range yeah.
And we'll talk more about that in November.
Okay. That's helpful and I always say I know, you're not talking about it a little bit more in November in terms, the manufacturing and kinda lessening that variability I guess within that are you sort of narrowing your focus on what you'd be willing to build as a result.
So what we're doing is we still have a broad range for a building for ourselves and for third parties. We expect to continue to do that it's just the way that works, we build a again by doing some of that outsourcing will have the need for fewer head count to produce the same number of.
Cars that we produced in the past as we look at our indirect and direct material cost or services that we get and bring those costs and everything were looking at is helping us to lower those costs and making sure as we go through an upturn we don't go through a high.
The increase in our cost structure to make that happen.
Understood helpful. Thank you very much.
Well take our next question from Justin Long with Stephens. Please go ahead. Your line is open.
Thanks, and good morning.
So I wanted to ask about the lease fleet eliminations. If you look at the implied margins there last quarter. They were about 7% versus rail group margins. There were about 2% in the third quarter. If you look at the implied margins on those lease fleet elimination.
Hey, Alan I get announced a 1.6% and that was closer to what we saw in the rail group what was that gap closing just a function of mix and maybe you could just talk about how you expect that gap to trend going forward should should those numbers trend more in line.
Hi, Justin this is there the short answer is yes. They should let me, let me explain a little bit so.
Uh huh.
When we sell railcars from when we transfer railcars from our manufacturing segment to our leasing segment, we transfer those it market. So if the if it's the same mix than the margins should be very similar on the eliminations versus the the rail segment. You know consider you know there's other things.
That go into that the lease rates et cetera.
The car types et cetera, but generally speaking those should move in tandem.
Okay, and it sounds like going forward, you're not anticipating any major differences in mix between what you're delivering externally versus internally for the lease fleet.
Going forward, we're not providing any guidance, but you know again if mix were if you control for mix they should be in line with you know the elimination margin.
And the ER segment margin.
Certainly be in line, there's other things in that segment margins that you're getting your maintenance services and other things but.
The Lions share what's going to move in line with the rail segment margin.
Okay got it that that's helpful and there was commentary around the expectations for deliveries.
This year, but if we look at the backlog today could you talk about how many units are locked in for 2021 at this point and just in terms of margins I know, you're not giving specific guidance, but when you look at those 2021 deliveries that are locked in.
Directionally do you think margins can be up versus what we've seen in the past couple of quarters.
So we're not giving guidance so I really can't tell you the number of units locked down, but I will talk to you again about the fact of the work that we had going on this year that will continue and we'll talk about in November for reducing our overall cost structure.
And when you reduce that cost structure that should allow you to have higher margin that are coming out of that so if we continue along the path that we've been on and we've been sharing with you what our goals are expectations and then we share with you when we pass those and even.
In the release.
Oh that just came out the way we talked about we've hit the 80 million, which we told you is gonna be 70, and we're not done yet so well continue to look at how we can improve those margins and not just for the short term not just for the down part of the cycle, but how we're going to be able to.
To change our methods and modes to be able to help the overall cycle performance.
Thanks Gene and just one last quick one you mentioned the number of railcars in storage.
Coming down do you.
Do you have a view on where that percentage of cars in storage needs to go before we get to a more of a replacement demand level for new railcars.
So what we need to do is did the.
Moving rental cars upto about 85% of our around the mid Eightys 80, 587%. When you have that many running you're going to see a lot more new railcars coming out and.
And just a little other color for you besides railcars coming out yeah. We've had some scrapping of railcars this year and through the third quarter. There were 40000 railcars scrap.
If you use that run rate through the end of the year that would put between 50 and 55000 being scrapped and.
Yeah, the delivery expectations for this years according to third parties about 31000.
So we're going to actually see a net reduction in the fleet size. This year and that contraction has not been not happened in the last 10 years. So that's also a benefit for getting some cars out of the system and then opening up the need for new railcar deliveries.
That's a good point I appreciate the help.
Thank you bye.
Well take our next question from Steve Barger with Keybanc capital markets. Please go ahead. Your line is open.
Hi, good morning.
Born gene.
You said you expect to transform rail shipping in the future that seems like a pretty bold statement can you talk a little more about rail pulse or how fleet analytics will transform the industry.
Sure we talked in the past about the fact that PSR is really focused on just one railroad in their line and what they can do and in order to really affect that supply chain, we've got to get across the entire says.
The entire system ecosystem, which means across railroads across different less or being able to see that information and the shippers to be able to make smart decisions and to be able to overcome some of the hurdles that the stopping them from going from the trucking mode into.
To the rail mode.
So really this would be you from the car side trying to help the class ones with system fluidity, or just you know being able to get better asset utilization.
It's not just the railroads are not a they do play a part it's really helping the shippers because once the shippers are confident in their supply chain and that they're going to be able to maintain the inventories at a level that they can sustain and not worry about getting a product.
Long time, so they have that utilization of overall assets being the higher the better.
The better all we're better off we're all going to be in the industry.
Right.
But I can I can anticipate what people are going to ask which is if you. If you don't increase system fluidity doesn't that imply that you need less equipment overtime.
It could mean that the other thing is I railroads continue to push out of there.
Their portion of the railcars and if we increase modal share that.
That would be a great way to increase the number of railcars that are needed.
Yep I right, it's more sustainable we really have to keep getting that message out there.
As far as the mode of transportation other than shipping rail is the second best a sustainable method for getting products around the U.S.. So we really need to make sure people understand that especially as they're talking he estee.
Yep understood and you talked about the net reduction in fleet size this year and over the past few quarters Youve talked about expecting to take market share I'm. Just curious what you think the trajectory of the railcar fleet itself will be over the next few years I guess do you take the over the under on the current fleet of 1.7 million cars.
[laughter] Wow that because I haven't thought about that whenever that may be a little tough I, what I will say that I expect though we're expecting for next year.
So you might see a contraction or more railcars getting scrapped the new railcars getting delivered.
Hi, Sam I don't know that I prepared to answer we may be able to follow up Steve I'll, just add that when you look at the flammable fleet with the regulations that came out you know that there's going to be some retirements that have to happen in that fleet that would be relatively early relative to a 50 year carlife. So you are going to have.
A bit of a rightsizing event.
As those regulations as the end dates come with those regulations, which 2023 for ethanol on 2025 and 2029 for other flammable products. So that will force a little bit more attrition than what historically would have been normal.
Yeah, that's exactly what I was going toward is you know you're going to have some flammable cars come out you probably have some sand cars, which are maybe permanently impaired so you'd need mid single digit fleet growth to be flat, maybe 10% growth to show meaningful upside. So the question is what's up what's categories of cars could expand to offset that.
Kind of.
Reduction that we're talking about.
Well I think you're still gonna have been years, if at all as a function of industrial production and where industrial production Rose and that's you know that's what are sort of.
Some of the things that we're looking at it as North America as some things in the onshoring that may happen if that continues.
Then you'd have increases in industrial production.
You're going to see that we think rail will be well served to serve industrial production, especially if we can get the especially.
Especially if we can get the the modal share growth.
I can take you know one of the one of the good examples Arizona is whether it's agricultural and food type products that a lot of that moves by truck now and if we can successfully moved more that the rail. The then that there is enough opportunity for growth.
Appreciate it looking forward to the 19th.
Thanks, Steve.
And there are no further questions on the line at this time I will turn the program back to Jessica Greiner.
Thank you David and his team and we look forward to engaging with you all again before we had our upcoming Investor day on November.
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Mm Hmm.
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