Q4 2020 Trinity Industries Inc Earnings Call
Good morning, and welcome to you and the Trinity Industries fourth quarter, 'twenty and 'twenty results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by Tivo. After today's presentation, there will be and opportunity to ask questions.
To ask a question you May Press Star then one on your Touchtone phone.
Draw from the question queue. Please press Star then two lease.
Before we get started let me remind you that todays conference call contains forward looking statements as defined by the private Securities Litigation Reform Act of 1995 and include statements out your estimates expectations intentions and predictions of future financial performance statements that are not historical facts on.
We're looking participants are directed to trinity's form 10-K, and other SEC filings for a description of certain of the business issues and risks a change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward looking statements.
Please note. This event is being recorded I would now like to turn the conference over to Jessica Greiner, Vice President of Investor Relations and Communications. Please go ahead.
Thank you Kate and good morning, everyone I'm, Jessica Greiner, Vice President of Investor Relations and communications for Trinity. We appreciate you joining us for the company's rescheduled fourth quarter 2020 financial results conference call. Following the weather related events affecting Texas and surrounding areas last week.
Our prepared remarks will include comments from Jean Savage Trinity, Chief Executive Officer, and President and Eric Marquette and the company's Chief Financial Officer, We will hold a Q&A session. Following the prepared remarks from our leaders.
During the call today, we will refer to a few slides highlighting key points of discussion the supplemental materials are accessible on our IR website at www dot trend dot net.
The slides can be found under the events and presentations portion of the site along with the fourth quarter earnings call and definitely they are also available live during the webcast. It is now my pleasure to turn the call over to Jim.
Thank you Jessica and good morning, everyone.
Like to start today on slide three and pick up where we left off at our Investor Day in November last year.
And we laid out our strategy for Trinity rail platform to deliver premier financial performance and deploy capital to drive value creation.
2020 was a year of extraordinary change for Trinity.
This change to evolve into a cash flow and returns focused company during a global pandemic was all the more challenging.
But our team pulled together and made difficult decisions that have put trinity on a path to accelerate our financial performance.
I want to commend our people for their commitment to the company to each other and to our customers and all our stakeholders.
To begin my remarks, I believe there are several highlights from our fourth quarter and fiscal year, 'twenty and 'twenty performance that position us very well for the future per.
First we've aligned our business under our core purpose and laid out and strategy for improving the company's returns.
The strategic initiatives focused on optimizing our business structure and growing our product and service offerings to advanced modal share for the railcar industry.
Second in line with the strategy Trinity completed the vast majority of our planned restructuring efforts during 2020.
We also made further progress on leveraging Trinity is balance sheet under our targeted capital structure.
We expect to make additional progress and lowering our overall cost structure and 2021.
Third Trinity's rail platform proved resilient during the unprecedented market a balance of COVID-19.
Generating strong cash flow from operations.
And finally, there is potential to return additional capital to shareholders given the attractive cash flow profile of our business and the enhanced capital allocation framework, we laid out at our Investor day.
We are very excited about their future and very much extend 2021 to be a year of execution against our strategy to move the company forward.
We believe we have a number of levers at our disposal to improve our performance and we'll share those results with you along the way.
Turning to slide four let's review the key financial highlights.
Our fourth quarter financial performance reflects the decline and railcar demand as rail traffic fell amid the COVID-19 outbreak last spring.
As a result fourth quarter revenue of 416 million declined approximately 51 per cent compared to last year.
Our fourth quarter GAAP loss of $1 13, primarily reflects one time charges that occurred during the quarter.
Trinity's adjusted EPS of force them tell from prior year as a result of lower deliveries and softer railcar pricing.
Turning to his team, we're quickly and diligently to cut cost out of the business.
But our cost structure was burdened by the lost efficiencies from production declines.
While our leasing and operations held steady during a challenging market.
Lower lease portfolio sales and railcar deliveries and created an earnings headwind for the full year.
Our total GAAP loss for the year of $1 27 declined 217% year over year and 2020 adjusted earnings declined 71% to 37 cents per share.
Our earnings performance amid the COVID-19 environment is disappointing however, our platform continues to drive significant and stable cash flows.
Our fourth quarter cash flow from continuing operations totaled 195 million, which is down just 15% from the prior year.
Free cash flow after all investments and dividends of $64 million decreased 51% over the fourth quarter of 2019.
For the year and turning to slide five operating cash flow of $652 million improved significantly year over year.
As a result of our more conservative capital structure during the pandemic.
Free cash flow of 113 million declined approximately 22% given higher leasing equity capex for the year.
Both Eric and I will speak to the performance factors driving new these results and a minute, but the important takeaway from our consolidated fourth quarter and full year metrics is the resilient and stable cash flow generated from Trinity Israel platform, and a very challenging market.
A testament to the valuable synergies within the business.
Overall, we continue to operate and a soft but improving market.
Looking at slide six rail volumes, which are closely tied to the U S. Economic output have essentially recovered from the decline we saw over the first half of 2020.
We are seeing the strongest recovery and agricultural and consumer related markets.
Railcar loadings for energy related commodities like crude and coal continue to lag the recovery and given the impacts of the economic shutdown.
Industry railcar utilization is also improving.
Over 125000 railcars have returned to service orders scrap since the peak of railcars and storage last summer.
We estimate nearly 51000 railcars were scrapped in 'twenty and 'twenty, resulting in the first year of and industry fleet contraction and over a decade.
We expect this elevated pad and pace of scrapping to continue so long as higher steel prices incentivize railcar owners to scrap older assets.
Well the industry railcar store trade of <unk> 24 per cent remains above the five year average and the trend is a relevant indicator for the health of the railcar industry.
Looking at the bottom two charts specific and Trinity's business, we generally see the sector specific impacts and industry recovery first within our lease fleet.
Before we see improvement and new railcar demand.
During 2020 lease rates declined significantly compared to expiring lease rate as a result of lower demand for railcars.
As rail traffic has picked back up lease fleet utilization is stabilizing.
We are also beginning to see early improvement in sequential railcar lease rate with a future lease rate differential F. L. R D metric and flooding positively during the fourth quarter.
We introduced this metric at our Investor day to provide investors a sense of headwind or tailwind there.
And the current pricing environment will have a pump trinity's lease portfolio in the near term.
Orders during the fourth quarter were low as expected and for the year represent the lowest number of orders since the financial crisis and 2009.
This is not surprising given the availability of railcars within the industry and the current projections for a slowly recovering industrial economy.
We are seeing a significant increase year over year and the number of inquiries from shippers and class one railroads for available railcar equipment.
And while it's premature to estimate when these inquiries will lead to improvement and lease utilization rates and new railcar orders and it is a very positive sign for the rail market recovery.
Given where we are today, and we expect a modest recovery and railcar demand and the back half of 2021.
Yeah.
Trinity is market, leading platform and experience managing through railcar cycles and enables us to promptly respond to changing market dynamics and meet customer demand and.
More importantly, while the railcar market and may likely only improved to a more normalized or replacement level market and the near term.
We feel confident and our ability to execute our strategy and improve our financial performance.
Turning from the industry to Trinity results on slide seven.
The value and stability of Trinity leasing business was readily apparent as the year unfolded.
Our lease fleet utilization and took an initial step down and the first quarter of the year, then proceeded to hover around 95 per cent utilization through 2020.
We are highly focused on maintaining our utilization and are seeing green shoots of improvement within various railcar types.
Approximately <unk> 17 per cent of our portfolio was up for renewal and 2020 limiting the impact of declining lease rates on top line revenue for the leasing business.
Stronger lease rates on railcars added to the portfolio nearly offset the headwind from utilization and lower lease rates on renewal.
And with annual revenue from leasing and management declining approximately 1% year over year.
Looking into 'twenty and 'twenty, one we have approximately 20 per cent of our portfolio up for renewal and.
And we will have less of a headwind per lease rate pricing as reflected by the SLR day metric.
The leasing team did a tremendous job managing our maintenance expenses to offset the earnings impact of the revenue decline within the segment.
Segment profit also benefited from the change and our depreciation policy to extend the useful life of our assets and better reflect the economics of railcar ownership.
We have a number of initiatives in place to lower our overall maintenance cost structure through increasing the use of our internal network and implementing advanced technologies into our maintenance cleaning processes.
Looking into next year 'twenty 'twenty, one will be a heavier compliance you from maintenance events to leveraging our maintenance platform will be key.
The rail products segment, and dirt and difficult year as declining backlog required production cuts and layoffs within both our production and maintenance facilities.
Lower pricing and the Unabsorbed burden from the lower deliveries impacted the margin throughout the year.
And the fourth quarter and the performance was also impacted by startup costs related to our new maintenance facility and the Midwest and idling costs associated with other nonstrategic facilities, resulting in breakeven margin and the segment.
We do expect there'd be ongoing headwinds to segment performance and the first quarter of this year due to lower volumes further head count reductions and additional maintenance facility startup costs.
We anticipate the benefit of our cost savings initiatives will begin to benefit segment performance and the second half of the year and will improve the segment margin performance year over year.
Before I turn the call over to err to discuss our financial results and further detail, let me close with an update on our initiatives to improve trinity's returns on slide eight.
First as a reminder, we believe there are a number of levers at our disposal to improve our pre tax ROE performance to a mid teen level through the cycle.
The strategic initiatives align hundred two areas of focus.
Optimization and growth.
As we detailed at our Investor day, there was a significant information and value in our rail platform and we are confident and our ability to monetize that value across services and parts and solutions.
And 2020, our balance sheet optimization was modest as a result of a healthy level of near term liquidity and our decision to maintain a more conservative capital structure through the pandemic.
During the year, our net debt increased approximately $135 million.
In 'twenty and 'twenty, one we expect to add additional leverage to our balance sheet as we have opportunity to deploy that capital.
And regards to SG&A we.
We achieved over 35 million of annualized administrative cost reductions in 2020.
And we'll continue evaluating SG&A cost reduction opportunities to process improvement and vendor management and as always manage the cost structure of our support organization to the size of the overall business.
To improve our manufacturing performance, we are moving forward with our supply chain initiatives to enhance the value of outsourced fabrication activities from our facilities.
We expect these efforts to shift approximately 45 million a cyclical head count cost savings achieved in 2020, so structural cost savings upon execution.
We've also made a modest investments subsequent to year end to acquire a railcar cleaning company with advanced proprietary and robotics.
We expect to scale this technology to our facilities over the next few years, which will improve our overall production operations efficiency and improve rail segment margin.
And regards to fleet optimization, we expect to make modest investments to reposition certain railcars to other commodity services that we believe have better longer term demand profiles.
We also expect to complete a modest level of portfolio sales from our lease fleet to financial investment partners with lowered hurdle capital.
Earlier this month, our commercial team was very excited to officially launch the new trend site digital service offering to our customers.
<unk> provides real time intelligence on the location and condition and status of railcar equipment, resulting and rail transportation efficiency and safety and enhanced rail feed operations per shippers.
This product offering is aligned with our sustainability commitment and as our key initiatives and our business strategy to improve the overall rail mobile supply chain.
Train size is generating a modest amount of revenue through the beta testing of the product and we are receiving a very positive response from shippers interested and services following the product launch.
It is early days for sure, but with a backdrop of improving fundamentals and our confidence and the strategy. We have developed it's an exciting time to be looking forward and Trinity.
With that let me now turn the call over to Eric to detail our quarterly results.
Thank you, Jamie and good morning, everyone.
And as Jim noted Trinity fourth quarter represents the continuation of lower railcar demand brought on by the COVID-19 pandemic.
Additionally, our fourth quarter operating results were impacted by a number of one time items.
These adjustments primarily related to the effect from the pension plan settlement.
Well as later stage restructuring activities included write downs from manufacturing related assets.
We also had a benefit from our final 2020 income tax provision.
As a result of tax law changes and 'twenty and 'twenty.
Starting with the income statement portion of slide nine.
Total revenues and adjusted earnings reflect the challenging railcar market with declining railcar deliveries and softer price.
At these lower levels of manufacturing earnings timing of railcar sales and fluctuations and leasing operations and.
Legal and administrative expense have had varying impacts on our earnings results.
During the fourth quarter Trinity incurred two impairment charges related to restructuring efforts and.
Other market related factors.
The first charge was a non cash write down related to existing maintenance facilities that day.
Uh huh.
Our operational strategy and cost profile and have been classified as assets held for sale.
Our maintenance business has realigned its operational approach to focus on large full service railcar maintenance facilities.
And thereby providing better and more timely service trades railcar lease fleet and our strategic customers.
The second charge was a write off associated with an investment and emerging technology for advanced steel materials, where the third party was unable to secure adequate funding.
And the process of liquidating.
Yeah.
Moving to our cash flow.
Total cash from operations during 2020 improved year over year as a result of free cash flow synergies.
These rail platform.
And as well as the counter cyclical effects of working capital from our balance sheet.
Currently generated approximately $652 million free cash flow from operations with the sequential fourth quarter increase resulting primarily from the receipt and was $64 million income tax receivable.
At year, and we have approximately $446 billion.
And income tax receivable associated with the 2019 and 2020 tax years.
We now expect to receive the 2019 refund and the first half from this year.
Currently invested approximately $102 million last year and manufacturing and other company Capex, which included the Buildout of our maintenance facility and the Midwest.
We also made a net investment on our lease fleet of approximately $464 million.
When considering the effects of modest leverage on new lease fleet additions and associated debt amortization during the year.
And our equity Capex required for this investment totaled $484 million and 2000 and for them.
Total free cash flow after all investments and dividends paid to investors and magnitude of $113 million for the fiscal year.
Turning to return a total of $285 million to shareholders and 'twenty and 'twenty.
Including dividends of $92 million, and additional $193 million and share repurchases.
And at the end of the year, we have approximately $182 million remaining under our current authorization that runs through the end of 2021.
Before we move on and we also want to call investor attention to change and the treatment of our portfolio sales from our lease fleet on a prospective basis.
We will now present, all sales of railcars from the lease fleet.
And net gain from the disposal of long lived assets.
This should simplify our reporting for investors.
This change will slightly affect the presentation of our cash flow statement, and then net investment and new lease fleet additions, but.
But it will not change the net effect of our free cash flow metric per segment operating profit.
At this time, we're not providing specific earnings guidance, given the uncertainty and the market related to the economic recovery of the COVID-19 pandemic.
That being said our business model generates significant cash flow and we're highly focused on the value we can create from deployment of capital.
For 2021, we expect cash flow from operations to be between $625 million and $675 million.
Turning to slide 10 and as.
And as gene noted our balance sheet is well capitalized and we ended the fourth quarter with total liquidity of $727 million.
During the fourth quarter, we issued over $526 million of new debt.
And as interest rates of two 4%.
We estimate for net pre tax weighted average cost of capital improved during 2020 by 130 basis points share approximately 5%.
The capital markets for railcar Securitizations are at historically attractive rates as more and more investors are participating and lease financings.
As a pioneer and a railcar securitization market and the early two thousands.
We were pleased to see this response to the asset class.
And expect to take further advantage of the market and.
2021.
Okay.
In late January and we're proud of Trinity's leasing company was the first North American railcar lessor to establish a green financing framework.
As part of our commitment to sustainability, turning it takes our commitment to reducing our environmental environmental impact seriously.
Clc's Green financing framework opens and trading and capital raising to new investors with the growing appetite for investing and green assets and.
And the response has been favorable.
Turning remains and a very good capital position with ample liquidity and strong cash flow generation and approximately $1 4 million and <unk>.
Unencumbered assets.
When we consider the long term performance of the business and we're confident that the changes affected during 2020, we'll set our company on a path for accelerating our financial performance and unlocking value for shareholders.
And our Investor day in November we issued four key long term key performance indicator indicators presented here on slide 11.
For lease value inherent and the cash flows of our long duration railcar assets platform synergies and opportunities for growth.
And a disciplined capital allocation framework focused on shareholder returns.
One of value weighted over time, we believe as indicators collectively drive long term value creation.
And 2020 operating cash flow improved year over year as previously discussed and free cash flow declined modestly.
Our return on equity declined year over year from deteriorating market fundamentals.
However, the company has established a framework for improving our performance, which we feel many of the levers for improvement are within management's control.
Trinity executed on its commitment to deliver double digit dividend growth with our December dividend increase of 11%.
Which was paid in January of 2021.
Our dividend growth and 2020 compared to the previous 2019 year was also nearly 12% per year.
Book value per share slightly decline year over year, principally due to certain one time items.
Before I leave this slide let me reiterate the trading strategy to drive returns and cash flows will not be linear from quarter to quarter.
Each assets, we'd say, we've made with returns and cash flows and mind.
The pace of economic recovery impact the timeframe to achieve our goals, but we wanted to but I want to be clear.
That we expect to make progress against our returns and <unk>.
Cash flow growth rigs.
And regardless of the market environment.
And believe the Trinity is well positioned to do so.
Our crude oil and I'll conclude our remarks on slide 11.
Slide 12 by reiterating our key takeaways from the fourth quarter fiscal year, and and look forward into 'twenty and 'twenty one.
First we laid out a strategy to reposition trinity's rail platform.
Improved returns and the business and unlock shareholder value.
Second we made solid progress on our initiatives to optimize both process and expenses across all aspects of our rail platform.
We are proud of the hard work of our people put forth during a global pandemic.
To reposition the company for accelerating financial performance.
Third our platform demonstrated the ability to generate significant cash flow and a very challenging market environment.
And finally, our commitment to our capital allocation framework that focuses on long term shareholder value.
And 2021, we intend to further optimize our manufacturing platform for supply chain outsourcing and integrating advanced technologies.
Enhance our product portfolio through evolutionary products and services for our customers.
And continue to optimize our balance sheet through additional leverage.
Lease modifications and portfolio sales.
The uncertainty within the market could be a financial headwind.
So the impact of these initiatives, but.
But we believe they are critical to accelerating the company's performance.
And we're confident and our ability to execute.
And look forward to sharing our results with you throughout the year.
Okay.
And I will take us two questions from them from our participants.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw from the question queue. Please press Star then two and.
Our first question comes from Justin Long of Stephens. Please go ahead.
Thanks, and good morning.
So Jim maybe to start with something I think you said on rail group margins. I believe you said second half margins would be better year over year versus the second half of 2020 I wanted to one just to make sure that I heard that correctly and maybe if there's any additional cash.
You can provide around quarterly cadence.
First half you mentioned some cost pressures.
Cost saves and not really kicking in until later in the year. So maybe you could give us some perspective on how margin should flow versus what we saw on the fourth quarter.
Sure Thanks, Jess and for the question. So when you look at the rail products segment. While we have seen is the headwinds on very competitive pricing out on the market and then also the abundance of railcars that had been announced and the market and available.
To put to use.
Remember that we switched to making sure that we utilize our existing please before we go and add new cars into that fleet.
My comments on their prepared remarks were that the first quarter, we expect to see some headwinds.
And that is still some decline and the volumes, we still have some head count reductions going on and we still have our Midwest facility coming up to speed.
But the second half of the year, we expect to see results of our initiatives that we have underway, putting a positive and that I said, we would expect the rail segment margin year over year to improve.
Okay, but to clarify that was just for the second half and and not for the full year.
No for the full year, we would expect the rail segment margins to improve okay.
Perfect and then second question is on the operating cash flow guidance, maybe Eric. This is for you I was wondering if you could update us on the cares act money that you're expecting in 2021 and is that factored into this operating cash flow guidance and then maybe you could talk about.
What you're anticipating from a working capital standpoint as well.
Yes, Jeff and it's there.
So as I mentioned in my <unk>.
Repaired remarks, the we received our 2018 return.
$2 million, we had expected and our Investor day.
We're talking about the 2019 return we expected that to be received in 2020 it was not.
And that's about $245 million.
So that is now and that cash flow from operations number and given you.
Based on the timing of the.
<unk>.
'twenty early 2019 refund.
The 'twenty 'twenty refund.
Which is about $190 million.
It is not we are not included and that our cash flow projections for 2021.
So basically we had a slide we slid 2019 into 'twenty.
'twenty, one and will slide 2020 and into 'twenty, one 'twenty two.
And then in terms of working capital.
We got a big and we got a significant pick up from.
Working capital in 2020.
And would not expect that same type of benefit this year as our.
Most of that is.
Flow through in 'twenty and 'twenty already.
So we're not anticipating big pickups from working capital.
Okay. That's helpful. I appreciate the time thank.
Thank you. Thank you.
Yeah.
The next question is from Allison Pollinia, Inc of Wells Fargo. Please go ahead hi.
Good morning, and.
Just wanted to follow along on Justin's comments on your question around the margin.
And you certainly taken a lot of structural cost out of the business model here is there a framework to think about incremental margins here as we hopefully start to move towards a recovery.
Sure Allison I'll start on that if you follow the investor deck on page 18, we talked about the manufacturing margin and how we were going to lower the breakeven by 30% and you should expect the margin improvement over the three years to improve from free.
And by three to five five basis points. So we are executing on there the timing and thats going to vary it's really hard to say quarter over quarter or year over year, because most of those initiatives are multi year projects. We have in 2020 made a big down payment.
And by resetting our overall cost structure and we'll continue to update you as we complete these initiatives.
Okay, Great and then within your lease rate trends have been positive you know obviously, we didn't see any industry storage level come in you know I don't know Eric. If this is one for you or gene just any perspective on how you think that starts to evolve is there sort of key areas that we should be looking for in terms of driving demand.
And at least just sort of a replacement level I guess do you feel like we're getting closer to that that actual bottom or we could see M. M. A greater inflection it sounded like that based on your comments.
Sure. So I'll go ahead and start with that Allison and Youre looking at the North American carloads and year to date carloads are down about two three per seat.
Traffic and top three 3% and looking at and those areas that have the bright spot there.
Chemical and agricultural are the best or the most.
Accretive to us and we still have some headwinds with the Petro.
And the coal markets.
The other thing, though thats playing into this as attrition I mentioned in the prepared remarks first and about 51000 railcars.
And where scrap last year.
And the areas that have the older or the age fleet, such as the hoppers and gondolas and.
Covered hoppers and boxcars and now the rate and scrapping increased as the year went on and I think as long as the scrap prices remain high and that Youre going to continue to see a higher level of scrap and.
Got it and I guess.
And I guess, we're hearing scrapping and it's coming down and.
I guess, it's in the order inquiries that you're receiving or are you starting to sense and appetite for replacement demand at this point.
So I mentioned again in the prepared remarks that we have a lot more inquiries and year over year and that's great to see that.
And what we haven't seen yet is everyone translating those into orders and so inquiries are up there and the markets that we've talked about you can look at those with high utilization low cars and storage and those that have the highest scrap rates or where the demand is definitely picking up.
Apparel and why.
And to make sure I understood. What did you say it was going down and I wonder budgets.
Idle cars and storage number and obviously youre getting and Scrappage and and just sort of where we could expect that inflection on replacement. So thanks Dorothy.
Got it thanks I'll pass it along.
Okay.
Okay.
The next question is from Gordon Johnson of G. L. Jay. Please go ahead.
Hey, guys. Thanks for the questions.
Just a few on my and she's telling me how much of the operating cash flow was from the one time tax reform I E. The cares Act.
Yes.
As I mentioned and 2020 was $62 million.
That will receive that of.
Of our cash flow.
And that would have hit into cash from operations.
Okay, sorry, if you said that I didn't catch that sorry, no problem no growth.
And no problem and then and then with respect to the SLR day. This seems like a new metric.
What's the significance of this and.
How does it balance with the utilization rate, which was down a little bit I think this quarter.
So the <unk> was.
We showed that at the Investor day. The purpose of that was to give you a forward look.
Some of the things to think about for the SLR D is one of our comps are getting better year over year, which is good.
We've seen the lease rates and the market stabilized and improved slightly on a sequential basis.
If current market pricing holds lease.
And we would expect <unk> to improve in 2021, given our current year portfolio renewals have that easier comp.
And we plan on providing the authority on a quarterly basis. So we think and will help you as far as your modeling going forward and what to expect from us either a tailwind or headwinds.
And Gordon nucleus that dentists for additional context, when we did provide that future lease rate differential for the first time relative to Q3 of 2020 and the supplemental materials. We have given you know when you look back. So you can see how that metric has trended over the last 12 months.
Okay. Thanks, that's really helpful. And then with respect to the backlog can you guys give us any indication of how much you expect to realize this year and it's got that all front or backend loaded.
Sure I'll go ahead and start on mountain Gordon.
Right now, we expect 60% of our backlog current backlog to deliver.
And 2021.
And we'll see what other orders come in during the year.
Okay.
Okay. That's helpful.
And then I guess I got a line.
One more if I could so this is more broadly on a general question. It seems like there could potentially be there. There's some thoughts out there that we could be entering into.
And somewhat of a commodity long term commodity super cycle.
And maybe that's right and maybe that's wrong, but if that is indeed right could you guys talk about how that may affect your business. This.
This year and kind of over the next couple of years. Thanks for the questions guys.
You bet Gordon airports.
So.
If we are if we're not.
Let me one thing that you would directly see and we're already seeing that now as higher steel costs.
Higher steel costs.
We see the big input on new railcar prices.
And so that could have if we.
If your premise is correct and.
We hit a commodity Super cycle, then that would make certainly asset prices new railcars increased.
Obviously that may.
Dampen some appetite for railcars, but the railcars and the margin that gets built would be more expensive.
That would have a positive lease rate.
Increase and that would provide more of a lift.
And the existing car rates more of an opportunity for those existing car rates to move.
On the on the more on the supply side is.
And third the commodity Super cycle, and a lot of commodity is moved by rail.
That's for domestic use or exports.
And so that would certainly have an impact on the demand side and.
Kind of depends on where it goes but I think generally.
And generally of deposits and any impact from the <unk>.
The Keystone pipeline on southern.
And your business day.
Positive and negative.
Okay.
I would call it neutral at this point there wasn't a part and there hasn't that pipeline hasnt existed and so the demand has been there on the margin.
It should be slightly positive, but we havent seen that yet.
Alright, Thanks, guys. Thank you. Thank you.
The next question is from Boscombe majors of Susquehanna. Please go ahead.
Yeah, Thanks for taking my questions.
Eric to follow up on Justin's question kind of digging into the cash flow guidance could you just clarify.
Our share maybe a range for cash interest and there and any other book to cash reconciling items that could be lumpy. Besides the the.
The refund quantification.
So basketball.
And I just want to clarify return on interest income and.
Interest expense interest our interest expense and the operating cash free.
So that passengers.
So that would not be and it would be and the.
Income.
Net balances haven't really changed.
That much and.
So it should be relatively.
Stable as we've talked about you'll see it are and where we're at.
Lisa.
Later today.
And we've had a little bit of a pickup from lower interest rates.
It's offset by marginally higher debt balances.
So year over year, I would expect not a big change and.
Interest income sorry keeps it income interest expense.
And the numbers, but you will see that as we when we when you dig into the cash.
And any other book to cash reconciling items that could be a little lumpy.
And that number there is theres always some lumpiness, but mainly the big components of it are going to be.
Depreciation and amortization, which is a big number and then and I mentioned, some modest working capital and and you got the tax receivable certainly.
The $189 million.
And kind of the bigger.
Other than depreciation and amortization.
Thanks for that.
There were some earlier comments about <unk>.
Taking some of the cyclical savings and the manufacturing business and then becoming more permanent this year can you talk about you know.
And perhaps the long term footprint and that business once we get through this cyclical.
Challenging time and you know.
How captives that manufacturing business is expected to be longer term.
And to your leasing business versus selling to third parties and it is that mix expected to change. Thank you.
Sure when you look at it we don't expect that change and our business model, we think theres a lot of synergies.
Play out.
Last year, we did have a lot of.
Resetting of that manufacturing to make sure going forward, we could deliver on the margin improvements that we've talked about and investor day through that cycle.
We're going to continue to do on initiatives you.
Page 20 of the Investor deck has what.
Some of those initiatives are and you can also look at page 50. It gives you and outline over the three years.
I would say throughout the three year cycle, we will be making changes overall, we'll be looking at.
And <unk>.
Implementing the strategies that we have in place and you should see the improvements show up through the year as I just can't give you the exact timing per each one of them.
Understood and thank you and perhaps lastly here.
And I don't know, if gene or Eric and wants to answer this but theres certainly seems to be.
A public equity investor appetite for looking at backlog are long cycles cyclical businesses on me.
Mid cycle earnings and being willing to ascribe that valuation even with those arent necessarily here this year and next.
Do you think that's a useful way to look at Trinity business with the changes that you're making from a valuation standpoint and are you willing to kind of frame to investors what that elusive hypothetical mid cycle could look like with the with all the initiatives that you've got taken place.
During Investor Day, we tried to lay out what we would expect on a returns through a cycle on average and I think that.
Once you really need to look at as a business as we are transitioning to being lease focused and having our new production and our maintenance facility support.
Our overall business model, we don't expect to stop.
Providing new products into third parties, we think that will help overall with a footprint that we have but again our focus is utilize assets we have first.
And then we will put new products into our portfolio from there and well services third party.
And we think our model will perform and we put out return projections and we think the platform. The way it's configured with these businesses that we're going to be able to produce.
Very attractive returns on equity.
Thank you both thank.
Thank you.
The next question is from Matt Alcott of Cowen. Please go ahead.
Good morning, Thank you Eric.
Eric I think you said 60 per cent of the existing backlog is for delivery. This year based on this and the current order and inquiry activity, which has not been translating into ore into orders really as much as one would like.
I guess and deliveries this year could be materially lower than last year is that does that.
M reasonable.
Total it's Hugh this is Jane sorry, if you look at the rash.
Yeah, no problem the range of deliveries this year.
From the low Twenty's to 48.
And Thats out there if you look at existing backlog currently and the industry realistically, it's probably towards the.
On the 20 level are mid Twenty's and not to the 14th there would have to be a lot of orders coming in and very quickly because it takes three to six months for those orders once received the translate into the production.
Mhm.
But you still feel even if the deliveries are lower for you guys. This year you still feel confident.
Confident about growing the operating the manufacturing margin.
We do we've got a lot of levers in our hands that we can pull and it's just incumbent on us.
On implementing successfully those initiatives that's.
All while we are trying to lower the breakeven point and.
And.
And we will start to realize it.
As we produce our results throughout the year.
Got it that's helpful.
And.
And Eric can you elaborate on your comment that railcar securitization market that.
It's been at historically favorable levels I think you know.
What what are the drivers.
And that and what it could mean for you guys. This year.
Yes.
Simply on the.
And we accessed the securitization market for about a half a billion dollars.
Last year.
And with a lot with a lot and we did and the fourth quarter.
And as we look as others have entered the market this year.
Invest those and get those investors are looking for.
Yield and.
And railcar assets provide an attractive risk adjusted yield to them and so and.
And that is driving driven spreads down.
And coupled with low benchmark so that's.
And that's why we're seeing the financing that we're doing and where.
And what it means for us this year I.
I think when we when.
And when we access the markets I think there'll be favorable and we will continue to lower our cost of capital.
Okay and you know.
During certain phases, and the past decade, or so there have been interest by financial and Busters and railcar assets looking for yield from the.
Domestically and then from Europe and from Japan.
What are what's the kind of investor profile, you're seeing now is it is it all of the above or is there any region that stands out where people maybe are starting to look at north American railcar assets.
Yes.
I think when you look back over the last decade, or so we've certainly seen new entrance coming to the market and look for.
And invest and railcars.
Some of those have slowed and their interest others have increased their interest accounted depends on where their exposures are.
But we still see interest from investors that have yet participated and the market.
And that are interested in and coming into the market and for those same same reasons. They like the risk adjusted yields on the railcar leases.
They like the diversity and they'd like to inflation hedge.
Potential of the assets and so we're still seeing that appetite from investors.
Okay got it and gene will last question you mentioned that the Inc.
Free activity has picked up significantly recently.
Translation and the orders has not really happened yet.
Any.
Reason and you see re guys and have about why people are not pulling the trigger yet.
Yeah.
So when you look at and it's through really still too early and the steel pricing going up is causing some to hesitate on.
And I think as you continue to see.
The availability of existing railcar was out there.
Following our ski on getting tighter and Youll see that pick up the other thing is uncertainty when you look at COVID-19, when you look at the fact that we still need to get a lot of people. Vaccinated. Then you look at the economic recovery from manufacturing.
We had some supply issues disruptions there, especially in the automotive and so that's occurred so all of that's weighing in on and people being uncertain and hesitated.
Okay and.
And just finally did you guys quantify the magnitude of the lease rate improvement and the fourth quarter.
So if you saw the investor deck on the well.
And we gave you up from the third quarter was 21% negative.
And for the fourth quarter was minus 13, 6%.
Inflexion point and it started coming back up and as I mentioned earlier there are signs that indicated we will continue to improve this year.
Great. Thank you very much.
Okay.
And the last question today will be from Steve Barger of Keybanc. Please go ahead.
Thanks, Good morning.
And if I try and frame up everything you've said about opportunities and headwinds. It sounds like you think earnings can improve and 21, but you don't expect a significant step up like like 'twenty. One it's more of a stabilizing year is that fair.
Yes.
Yes.
We're trying to quality, we gave we've given you qualitative guidance.
And I don't want to turn it into quantitative quantitative guidance. So.
And just suffice it to say, we see and improving.
Did here that we don't see we don't see industry deliveries being a big catalyst for improvement and its more of a it's more of a self help cost profile changes that we're making.
And then hopefully we will start to see demand pick up later in the year.
Understood.
As you've modeled out organic lease revenue based on sequential changes and traffic and utilization rates.
Care to take a shot at what quarter, you expect F. All R&D could go positive and 21.
No we're not going to guess on that so like I said, we expect improvement to continue based off of the green shoots we're already seen but we'll provide that guidance on a quarterly basis and.
Youll be able to see that trend.
Okay.
And one last just kind of modeling question based on pipeline.
You take orders for delivery. This year do you expect a nice change and mix or is the revenue per car and backlog that you have right now a good way to think about delivery mix for 'twenty one.
So on 'twenty, one I would expect that the freight cars, we will pick up first and that's where the demand is higher currently and where there is less cars available and that you would see tank cars lab that recovery.
Got it okay.
And can you talk more about trend and site how does that generate revenue what is the benefit to the customer and how long before that becomes material.
So from our Investor day, we talked about the fact that we're going to see growth there and we think it's valuable to our customers.
We're already seeing revenue were seeing a lot of interest and having a lot of discussion. It provides them data on where the car is the health of that car on it.
And also provide them information to look at.
And the cargo that's their safety implications. So a lot of positives for them and those discussions are going well, but we expected modest growth. During this three year planning period.
And so maybe I didn't understand is train site apart of rail pulse are those two separate things how do they relate.
They are separate.
And so railcar pulse of the industry initiative, we are a big player and that.
But <unk> side is our own internal information that we have from our rail platform that we are using to help our customers overall with their supply chain.
And what what's different about rail pulse then thats exclusive of what you just said about trends site.
So first rail Paulson is really just kicking off so it's behind where we are on trend sites.
On the other things as Ralph also set the standards.
For the industry overall, we're a player and there. So we can help have those discussions and make sure that we're and involvement with that.
Got it thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Jessica Greiner for closing remarks.
Thank you Kate a replay of today's call will be available. After 10 30, a M. Eastern standard time through midnight on March 3rd 2021. The replay number is 877, three and four 475 to nine with and access code of one or 1513.
Six zero.
A replay of the webcast will also be available under the events and presentation page on our Investor Relations website located at Www Dot trend dot net.
We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.