Q1 2021 Trinity Industries Inc Earnings Call
Yeah.
Good day and well.
So to the Trinity Industries first quarter results conference call.
All participants will be in listen only mode.
And do you need assistance, please signal and conference specialist by pressing the star followed by zero.
After todays presentation, and there'll be an opportunity to ask questions sort.
The asking question and my Press Star then the one only touchtone phone to withdraw your question. Please press Star then two.
Please note today's event is being recorded.
Before we get started let me remind you that todays conference call contains forward looking statements as the.
And by the private Securities Litigation Reform Act of the 1995.
And includes statements as to the estimates expectations intentions and predictions of future financial performance.
Statements that are not historical facts are forward looking.
Participants are directed the Trinity's form 10-K, and the other SEC filings for a description.
Of certain of the business issues and risks of change of any of which which are the change in any of which could cause actual results or outcomes to differ materially from those expressed and the forward looking statements.
And now I'd like to turn the conference over to Jessica Greiner, Vice President of Investor Relations and Communications. Please go ahead.
Thank you Rob.
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 first quarter 2021, and financial results Conference call.
Our prepared remarks will include comment from Jean Savage Trinity, Chief Executive Officer, and President and Eric Mark head of the company's Chief Financial Officer.
We will hold the Q&A session following prepared remarks from earlier.
During the call today, we will reference slides highlighting key points of discussion as well of certain non-GAAP financial metrics.
The reconciliation of the non-GAAP metrics are provided in the appendix of our supplemental slides.
The supplemental materials are accessible on our IR website at www dot trend dot net lease.
These slides can be found and as the events and presentations of portion of the site along with the first quarter earnings conference call at Bentley.
They're also available live during the webcast.
It is now my pleasure to turn the call over to Jim.
Thank you Jessica and good morning to everyone joining us today.
And I hope, everyone and stay healthy and looking forward to a brighter summer and year ahead.
We certainly are and are increasingly encouraged by the improving trends for our business and the economy as a whole while the railcar market is showing signs of recovery. In 2021, we are focused on the execution of strategic initiatives that are more within our control to position the company for and.
The acceleration in our financial performance.
Many of which were detailed either of our Investor day last winter as part of our three year strategic plan.
The highlight the key themes from the first quarter trend of these results reflect the initial impact of implementing certain of these project initiatives on top of challenging pricing and declining volume given the lower order volumes last year.
Additionally, two significant weather events affected our productivity and the quarter, one of which will have a lingering impact on their business and the second quarter.
Even so I'm pleased with our progress towards the goals, we laid out at our Investor day, and the tremendous effort our team put forth.
We feel very good about how we are positioning our business for a recovery and the embedded value, we are creating and the platform for long term performance.
While earnings were low given the reasons I just stated Trinity rail platform still generated a healthy level of cash flow and the first quarter.
We also believe the investments made during the quarter aligned with our capital allocation framework for trading and long term shareholder value.
Let's turn now the slide four and review our results.
As I mentioned in my opening we believe the railcar market is an early as early and this recovery from the pandemic related headwinds of 2020.
However, our first quarter financials continue to show the impact of lower demand and pricing pressure and the market over the past year.
Our first quarter revenue of $399 million was down 35% from a year ago, which was within our expectations, but nonetheless, not where we like it to be.
The past quarter will be the most challenging year over year comparison for us given the COVID-19 did not take a broader hold and the U S until the second quarter of last year.
Lower deliveries also impacted our adjusted EPS of <unk> <unk>.
Which was down compared to a year ago.
While the overall financial results remained weak Trinity's rail platform continues to drive solid cash flow relative to the level of earnings we achieved.
And the first quarter cash flow from operations totaled $70 million and free cash flow, which is essentially our excess cash after all the investments and dividends was $90 million.
Eric will go into more details on our cash flow results in a moment.
One is difficult to see and the consolidated results are the encouraging internal and external trends we are seeing.
I am pleased to report that our operational performance and railcar inquiries are turning the corner and trended positively as we progress through the first quarter.
Let's first briefly address the railcar market.
Turning to slide five as mentioned the rail market is still soft, but we are seeing signs of a recovery.
The market uncertainty and the wake of COVID-19 pandemic remains the largest headwind.
Our customers tell us they continue to refine their expectations for the North American economic recovery and what that will mean per their businesses.
Their concerns are starting to ease with increasing vaccine distribution and government stimulus programs.
Customer confidence and the economic outlook impacts their decisions regarding lease renewals fleet expansion and asset replacement.
Looking at rail traffic first quarter loadings were greatly impacted by weather events, but some positive momentum emerged and the last few weeks.
Additionally, we see nine straight months of railcars coming out of storage since the peak last summer.
Leading to industry utilization, returning to pre pandemic levels and trending around the five year industry average.
We see positive carload and storage trends for railcar types, representing over 50% of the North American fleet.
Previously fleet, serving the agriculture and consumer probably of markets, we're presenting the most opportunity based on improving carloads.
With the early signs of a recovery and the industrial economy high steel prices and increasing steel mill utilization as well as potential infrastructure. Bill. We are also seeing positive benefits on railcars within the construction and metals markets.
The energy markets continue to lag, but we are seeing some recovery from the pandemic lows across commodities like coal and crude oil and ethanol.
Likely associated with the reopening of the economy across the country.
Utilization and pricing are firming within our lease portfolio and railcar inquiries returned to a more normal level of activity.
Trinity's FLIR D metric declined slightly during the first quarter two of negative 14, 8% as a result of difficult comps and the quarter for expiring lease rates.
We expect lease rates to stabilize to slightly improve and many markets over the course of the year as excess railcar capacity returns to service to meet increasing carloads.
When looking at the potential for new railcar demand and we're currently expect industry deliveries to be below replacement levels. This year.
<unk> believes the current inquiry support railcar deliveries at or just above replacement levels in 2022.
I want to make a quick comment on steel prices.
Given the decline in the industrial production and the past few years, we are in a unique and dynamic environment as it relates to the supply of steel and the unprecedented rise in steel prices seen over the last six to nine months.
Trinity typically uses contracts specific purchasing practices and existing supplier commitments contractual price escalation provisions and other arrangements with our customers to mitigate the effects of steel price volatility on our operating profit for the year.
And general we believe there is enough capacity and the industry to meet current production levels and that our existing contracts will meet our current production forecast.
If current steel prices sustained at least at these levels or trend higher it could limit demand for new railcars.
Of similar importance current steel pricing could create a profit headwind and some of our near term deliveries as the supply chain ramps up to meet increasing demand.
Turning to slide six I'd like to provide a little further color on our segment results.
For the leasing business Trinity's lease revenue was slightly down compared to last year due to the continuation of softer pricing on lease rates and slightly lower utilization.
The good news is in addition, the prices firming and the market as demand improves we are seeing positive developments with leading indicators such as high renewal success rates and lengthening terms.
We are taking a disciplined approach to pricing on our lease rate and we believe we are nearing an inflection point as available railcars and certain markets are approaching full utilization.
We are also closely monitoring our cost, but expect that maintenance and other operational expenses required to position the lease fleet for increasing demand will be of headwind to the leasing segment margin for the year.
As part of our strategic initiatives, we will continue to work towards increasing the percentage of maintenance and compliance events handled internally within our shops.
Over the last few years, we have increased our service capacity from roughly one third to over half of our maintenance events and <unk>.
The target we set out at the end of 2018.
With our current footprint, we have the ability to get to 70%, which will continue to reduce the effect of maintenance cost of our fleet.
And improve the serviceability of the railcars for our customers.
And regards to our railcar production operations on the surface rail segment margins are understandably still below our targets.
We continue to work hard to right size, our operations and shift variable and the indirect cost.
During the first quarter, we reduced manufacturing head count by another 25% to balance our production capacity with demand.
We also experienced two significant weather events that disrupted our operations and the first quarter and impacted profit by roughly $4 million.
First the severe winter storms that impacted much of the country over the middle of February impacted critical and utilities for several facilities with some buildings and sustaining minor damage.
Second very late in the quarter and tornado damaged our cartersville, Georgia of maintenance plant.
Fortunately no one was injured.
The tornado damage is expected to have a minor impact on the rail products group second quarter results and.
And we believe our insurance coverage is sufficient to cover property damage costs related to the event.
Additionally, the company may be entitled to a business interruption proceeds due to the work stoppage.
Looking forward, we expect progress on our optimization efforts will translate roughly into breakeven margins for the second quarter with continuous improvement through year end.
Approximately 55% of our backlog is expected to deliver and the year, resulting in declining year over year deliveries of.
Although we do expect our delivery rate to build through the year to meet demand from new orders.
Moving along the slide seven.
In terms of progress on our initiatives and the first quarter.
We executed against both of our efficiency and our balance sheet goals.
Over the quarter, we successfully launched various initiatives to enhance the value of our outsourced fabrication activities.
I already mentioned the completion of further head count reductions.
In the aggregate, we have made great progress to lower our breakeven cost on railcar production and we are starting to see tangible benefits from our efforts.
Through the remainder of the year, we plan to continue lean initiatives and install additional automation throughout our rail operations to lower the overall cost structure.
We are continuing to evaluate and cost savings across the enterprise.
We sold several idled facilities during the first quarter and we expect to conduct a number of these transactions over the next couple of years to clean up our operational footprint and reduce the carrying cost of these facilities.
And.
And the balance sheet, we completed a small sale of lease railcars as part of our portfolio yield improvement goals.
This portfolio sale is a small step toward the goal, but we have a number of strategies and progress to improve our balance sheet.
As you recall from our Investor Day Trinity has committed to lowering our cost of capital by raising our leverage to a target of 60% to 65% L. T D.
Eric will speak more to our balance sheet optimization shortly.
And finally, an update on <unk> site, which is our real time digital tracking and fleet data services.
We continue to have promising dialogue with customers and have moved to an act of pilot program with a growing number of those customers.
We look forward to updating you on the revenue opportunity and the potential for the market impact and the future.
In summary, we are executing our plans well and with continued improvements and rail fundamentals. We believe are returned and financials were incrementally improve on the up cycle, given the operating and financial leverage we are building and the business.
It's always difficult to predict the exact timing of and inflection or the pace of recovery.
But we are encouraged by the momentum we can see both within our business and within the market.
Eric I'll hand, it over to you for additional comments.
Thank you gene and good morning, everyone.
I'll start with the financial summary on slide eight and provide a few more details.
Currently the first quarter results were a combination of the challenging post pandemic market environment and our.
Our efforts to position the business for an acceleration and financial performance.
While the earnings results are lower and the first quarter of 2020.
We don't believe we're making the necessary changes per improved profitability and 2021.
And as James said.
We're seeing green shoots from our efforts within the business.
China has highlighted several business drivers of our financial performance, including lower overall deliveries and challenging lease and new car pricing compared to prior quarters.
During the quarter our earnings results were impacted by approximately $4 million.
Of direct costs and lost production time and associated with the state whether.
Weather events.
As we look through 2021, we expect modest earnings improvement and the next quarter with further acceleration and the back half of the year.
And year over year earnings improvement and 2021.
And regards to cash flow.
First quarter cash flow from operations, primarily reflects the lower level of operating income.
Our working capital was substantially unchanged during the first quarter, resulting in the $70 million and the operating cash flow for the period.
For 2021, we continue to expect cash flow from operations of between $625 million and $675 million.
Our investments and the quarter included approximately $108 million and leasing capex per new railcars and betterment.
And $9 million and manufacturing Capex following the completion of our Midwest maintenance facility.
For the year, our expectation for net leasing Capex and manufacturing Capex remains the same and 300 volume grew $350 million and 40.
And 45 million to $60 million respectively.
We anticipate completing additional portfolio sales from the fleet during 2021.
Execute on our initiatives to improve lease fleet returns.
Total free cash flow after investments and dividends totaled $90 million and Q1.
The improvement from cash flow from operations is the result of the timing and the financing of our lease fleet growth for the quarter.
All of selling the equity capital required.
And also completed the previously announced acquisition of of railcar cleaning and break ground and the company for approximately $17 million.
We expect two leverages, new technology and build the capability as part of our automation efforts and the rail maintenance operations.
We continue to return meaningful amounts of capital to shareholders through our dividend and share repurchases, which combined for approximately $60 million during the quarter.
Our share repurchase authorization is $145 million remaining through the end of the year.
As we look across our opportunity set for deploying capital.
<unk> taken the returns based approach and do right by the shareholders.
Turning to slide nine.
Premier remains in strong financial position with the balance sheet capable of opportunistic deployment.
We're also making steady progress on our leverage target goals and lowering our cost of capital.
During the first quarter currently and expanded the size of the work of our leasing warehouse.
The increased size of the warehouse is currently of the ability to lower our overall interest expense, while gaining exposure to floating rate debt.
Our liquidity at the end of the quarter at the end of the first quarter was $772 million.
We expect to continue taking the advantage of the low interest rate environment to reduce our overall cost of capital.
And of the nearest term debt maturities primarily related for our partially owned subsidiaries, which refinanced and a much different interest rate environment.
Rail asset backed securities have continued to attract new investors and creating the very deep market and compelling environment for completing the new debt deals.
The announcement of our Green financing framework for lease Securitizations is also potentially opening new pools of capital.
We're taking a disciplined approach to matching the increase leverage on the balance sheet with the ability to deploy that capital to create shareholder value.
Near term our capital allocation priorities remain a modest investment and our lease fleet group and our lease fleet for growth and <unk>.
Normalized level of manufacturing Capex, which includes implementing new cleaning technology and of our maintenance business.
And as well as small tuck in acquisitions for both the secondary market portfolios and other services.
Our loan to value and of the first quarter at 61%, which leaves us positioned to take advantage of attractive market opportunities and.
Including returning cash shareholders.
In closing, we believe that the strategic plan, we laid out to investors is taking hold and.
And while the true success of our efforts will take time to come.
Come to fruition within our franchise and we're focused on executing upon the initiatives that are more within our control and we will accelerate our financial performance as the market recovers.
After a year of major change and a worldwide pandemic.
And a big and big.
Big Downpayments towards restructuring the company and 2000 and forming.
The first quarter of 2021 was another example of our people rising to meet the challenge.
Our platform continues to prove its resiliency delivering a healthy level of cash flows against otherwise low earnings number.
We remain committed to and disciplined approach for allocating capital to build long term shareholder value.
We are encouraged by the continued positive trends, we're seeing across the railcar industry and believe outside of the pandemic setback the rerun.
On the road to recovery.
Rocco you may now take us the questions from our participants.
Thank you Sir.
And I will begin the question and answer session.
The question and we'll start with one other you touched on the phone.
And the speaker phone, we ask that you. Please pickup your handset before pressing the keys to withdraw your question. Please press Star then two.
Today's first question comes from Allison <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
And then is it.
And just wanted to talk about you know really positive comments in terms of the railcar builds and you know in 'twenty to kind of sort of reaching that replacement level, you know and I understand you're not giving specific guidance, but any thoughts on how you guys are viewing that cadence is it the stronger inflection and the second half that we could see this year or is it more of a gradual build and your perspective just in general.
And that all thoughts.
Okay, well, thanks, Allison as we look at of the trends that we're seeing into the second half. We believe those will continue it's a combination of supply and demand last year. We had over 50000 cars that were trading the health of the industry and we're expecting to see 50.
Or maybe a little bit more and trade out this year based off the run rate from the first quarter flow. If you look at those dynamics.
You would expect to see higher pick up one thing I do want to point out is in this recovery the mix of car types is much different than and the last one so freight cars are coming back much quicker than the tank cars and so that just at a low nuance into what we're seeing.
Got it that's helpful. And then you had mentioned margin and rail products and improving throughout the quarter any color you can price to help us understand that accident rate and then I guess in line with that you know you you've continued to do some head count reductions there should we anticipate that the stabilize here going forward.
Sure Thanks, Alan and so when Youre looking at the head count and I'll start there.
Should expect to see that to start to stabilize as we've gotten out of that.
The account ready or in place for the demand that we had for the first part of the year and.
And we had said that we would expect to see.
The demand increase through the second half so you might see a little bit of a change there on what's going to happen. So.
The.
So it is basically in line for right now.
And if you look at the margins a couple of things to look at there is we have been actively taking actions.
And we talked about the improvements we were going to make and both the outsourcing some of the lower value added fabrication that is starting to take hold we have done some initiatives with supply chain overall, where possible to lower cost of input.
The materials coming in and Thats.
And Thats forgoing the steel price as you know that is going up and going and they go the wrong direction. There and we've also spent time on automation and lean events within our factories, we're starting to see that pull through with better efficiencies coming out of the factory. So all of that.
And coming to fruition gave us a better run rate coming out of the quarter that we see sustaining through the year.
Perfect. Thanks, I'll pass it along.
And our next question today comes from Matt <unk> with Cowen. Please go ahead.
Good morning, Thank you.
And Eric maybe did.
Did you guys kind of what's your definition of replacement demand is at 45040 thousand.
So.
And when you're looking at anywhere between 40 and 50000 cars is what we would say replacement demand is.
Okay got it.
And.
Eric I think you mentioned year over year improvement this.
This year and earnings can you help us just.
The bottom.
The modest improvement.
Meaningful improvement.
Okay math of Zurich.
No.
We did say we're going to have improved but we did not include any other adjectives around and besides it was improvement year over year, but when you look at where we are and the first quarter.
Obviously it was low gene commented, we expect things to get.
Modestly better and the second quarter and really more backend weighted so I think thats what that is.
We expect and Thats, what you can expect to see from us.
Got it.
And then.
And maybe a bigger picture longer term question about the manufacturing footprint right sizing you guys have been doing that for a while now and we've got some more of this quarter and.
And I believe the youre not ruling out even more and the future how much of the guests and due to the currency.
<unk> environment and how much of it is long term strategic meaning maybe not coming back and if we take out.
Three to five year view.
And what will.
The company as a whole look like from a manufacturing perspective are we talking about a much smaller manufacturing footprint.
They are in large part the support leasing.
Or can we expect you guys to.
Moving backhaul.
Percentage of the manufacturing backlog to the <unk>.
40% of slots that you once had.
As recently as a couple of years ago.
Matt I'll start on that and then we'll hand it over to Eric if he wants to add anything so when you look at our manufacturing footprint and one thing that I want to point out is some of the properties that we're selling have been not utilized so they were there for potential future growth or other types of the.
Businesses were cleaning those up and we still have numerous facilities left that fall into that category. So when we talk about selling those.
Types of properties Thats, what im talking about for the next few years.
When we look at demands and the industry and what we're setting up for we really think that.
The industry will be at industry or replacement levels through possibly 2024.
So we would make sure that we're sizing for that type of environment and what we believe our share is.
And then the next part of it is even as we have taken some of our capacity alter offline. We've also taking some of the work outside those lower value added fabrications going outside opens up floor space and existing buildings that would actually.
Allow us to produce more cars.
And we would just be doing more of the high value add and assembly and our facilities.
Hopefully that answers your questions.
That's very helpful. Thank you very much.
Thank you next question today comes from Gordon Johnson with <unk> Research. Please go ahead.
Hey, guys. Thanks for taking the questions.
Just I guess on the operating cash flow the guidance for the year is a bit higher than what we see and the first quarter is there anything out of it seems like what you guys are expecting a and improvement of business and the back half anything additional to that.
Guys are doing that's going to help that cash flow number that we should know about.
Yes, Gordon and <unk>.
And pointed out today about half point and this is Eric have pointed out.
Previously a recall we have a <unk>.
The other large tax receivable on our balance sheet.
And we are expecting at least the portion related to our 2019 tax year to come and to come into this year and thats approximately $245 million, so that will flow through our operating cash flow number when the receivables converted the cash.
That's the that's the other piece of it the other piece of your IC is obviously, our cash flow as our earnings improve.
And we would also expect our cash flow from operations improve.
Okay.
Really helpful and then.
We expect and some of our other and industrial sectors for things improve and the back half.
And it seems like you guys do too is there something that we should look to our metrics.
Maybe something out of the ordinary and maybe something in the ordinary we spoke to two I guess just kind of gauge how things are trending versus your expectations.
Yeah.
So the normal metrics that you look at as far as carloads that youre seeing.
Over time, what youre seeing for the industry production rates.
And theyre going on overall signs that the economy is opening back up will all lead to.
Good recovery or.
Potential recovery for rail industry.
Gordon the weekly railcar loadings or group.
Indicator of the health of our industry and so that's the beauty of and is that you get the you get that real time information every week and so.
So the one metric that I would point you to for our industries can be though.
Excellent. Thanks, a lot for the questions guys.
Thank you.
And the next question today comes from Justin Long with Stephens, Inc. Please go ahead.
Hey, Good morning. This is George sellers on for Joseph Wong.
So I guess the start on your long term Roe target it.
It sounds like the.
The replacement demand levels for railcars that youre expecting to reach in two years or a little bit lower than maybe what you were expecting.
When you gave that longer term ROE target. So just wondering if theres anything thats changed with the timeline there.
So George is there let me just I would say that generally speaking from what we said last November when we at our Investor day that our outlook for the industry really hasnt changed and its kind of moving.
And as we would've expected.
So the longer term goal of at 11, 13% goal that was out and Thats out there and Thats still remains.
We've talked about that and the unit replacement level demand over the cycle of.
Obviously this year is a bit below replacement cycle.
Or we would expect it to be and then getting back to replacement levels, So and with.
Of that splitting hairs I would say that the.
The level of nothing has really changed for our industry outlook over the over the near term.
Got you. Okay. That's helpful. And then could you give us an update on the secondary market for railcars in terms of.
Valuations are and just the level of activity there.
So the secondary market is better than it was last year definitely more robust as you saw we had a small deal and the first quarter and remember we can be both the buyer and the seller and this market and continue to look I think of it.
It is strong and will remain strong through the year.
Yeah.
Okay, Great I'll leave it at that thank you all.
Thank you.
And our next question comes from Braskem Wagers with Susquehanna. Please go ahead.
Yeah. Thanks for taking my question and.
Wanted to dig into the encouraging commentary on the inquiry levels and.
It sounds like maybe some increased conviction that the manufacturing market will recover towards mid cycle levels next year.
I mean, you've just taken down capacity and labor markets have been challenging and a lot of industries here.
Cost of materials, and steel and beyond and and just general supply change had been kind of gummed up and a lot of industries as well.
Can you talk about the conviction that when your customers want the cars that youll be able to ramp that capacity back up the 50% to 100% you would need to to get the mid cycle and and.
How you're confident that you'll be able to deliver kind of of historical trading margin and as you get to that run rate. Thank you.
Okay, well the go ahead and start on that one.
And you look at our management team they are very strong and experienced and they've gone through the cycles. Many times and they are really capable of.
The reacting very quickly to the change in demand.
And what we shuttered or idled and pursue the facilities, we're offsetting with efficiencies enhanced supply chain and some of that outsourcing of those low value added fabrication. So that also helps us.
And the ability to ramp the production is more dictated by the ability to get the labor force and it's not the manufacturing space.
We're fortunate that we have a very qualified people and the plans we have our own welding schools inside of our own plans. So if we need to go in and bring new people into the industry and train them, we have that capability.
So, we're feeling pretty comfortable with our ability to ramp up for the demand.
And thank you for that and.
Just one more on the capital allocation you talked about the returns based approach you talk about your near term priorities.
And with the stock at 28 to 30 Bucks and instead of and the low Twenty's can you give us some thoughts on how you prioritize the buyback versus the dividend on a go forward basis and.
And you know maybe beyond that we've talked a little bit about acquisitions and your core North American railcar market.
Is there an opportunity to maybe be a railcar owner and some overseas markets that may offer some more growth mid term. Thank you.
Thanks past and this is Eric.
When you get into capital allocation and obviously it is dynamic.
And our share price.
<unk> changed from last year, it has improved quite a bit and so that certainly does change the equation, but so of the returns and and everything else that we expect going forward. So.
It's a very dynamic process, we look at each investment decision and the and we.
And what's the highest return.
And when you look at what we have ahead of us and what we're and our opportunities are and I think you can expect acquisitions dividends and share buybacks here and see a combination of all of those things from us and.
And the and we're going to do right by the shareholders.
And on the idea of potentially investing capital and overseas railcar markets, whether it be Europe, or India or somewhere else just any thoughts on whether that's and the potential sort of decision tree is as you generate cash going forward.
Sure basketball take this gene. So we are looking at M&A and different areas and we will also look for markets that can provide the returns that we need or we're expecting and our business. So have we considered or will we consider and the future. Yes, we just have to get and find the right market and the <unk>.
The price to be able to enter into some of them.
Thank you.
Thanks, Brad.
And our next question today comes from Steve Barger with Keybanc capital markets. Please go ahead.
Thanks, Good morning.
Can you go back to your comments on steel prices and supply chain constraints did you say the current and backlog could have some margin pressure due to steel prices.
What I was talking about on the steel prices is we do a lot of different actions to mitigate any of those.
Pricing headwinds.
And there could be something that comes out that we're unaware of that may cause some pressure, but for the most part we are covered and our mitigation efforts forward orders that we have in place.
But you do think the higher steel prices, if they were to persist could cause some demand destruction.
We do so customers have been already delaying and making some decisions. We think some will continue to delay until they have more confidence and their business and where it is and the recovery.
But as you look at that steel prices and our new car production, even though of ranges depending on the type of the car has gone up 10% to 20% for a car. So that does change the dynamics and the decision, making so where youre going to see people, placing orders or those that.
So you don't have cars that are available anymore for them to take and use they're going to have the baidu and.
And Steve when we said that.
And that will make the existing railcar assets more attractive.
It's one of the things we like about our platform the demand goes through our existing fleet and then to the new the.
New manufacturing builds and so.
So that will leave our existing that will leave existing assets a little more room to run in terms of increased lease rates because of the replacement costs have gone up and so.
We see that we expect to see that and the future and that's why we're.
We're confident and and.
And our outlook.
Makes sense.
And just in terms of supply chain I think you said something about component prices.
Any comments on price and availability from of disruption standpoint.
We've been very fortunate throughout the pandemic, we've had very few if any supply disruptions most of our supply chain is in North America. So above 90%. So we've now been experiencing the same disruptions others may have.
And are you protected contractually on the.
Manufactured components to go into your railcar production.
So just like our other businesses you have escalation clauses in there sometimes for the changes in material input costs.
And so that's where we talk about our contracts. We also pass those through to make sure that.
Theres coverage for specialty components of its generally comes through and what we call scrap surcharges and our contracts contemplate those.
Got it and the last one for me I know you've been really focused on digital platforms and data analytics and and the analyst day talked about.
20% to $25 billion addressable market opportunity for for those services any update on how that platform or how those commercial initiatives are coming along and maybe any early read entre and site.
I'll go ahead and take that one so I mentioned in my prepared remarks that we were seeing more and more customer interest.
Most of the time the customer now is bringing that up and our conversations where and we're talking to them about their needs.
We have.
Approximately 50 customers right now who are in process of going into pilot stages for these and we've seen an increase and the number of cars and are already paying or coming onto that platform. So it's still the beginning is still initial results, but very favorable.
Recognition from the customer and demand from them.
Got it thank you.
Thank you.
And our next question today comes true Barry Haimes with Sage asset management. Please go ahead.
Okay.
Thanks, so much.
A couple of questions here.
One is and.
And I think you mentioned that the F allergy was down 14, 8% and the quarter and.
And in part due.
And the tough comp on cars coming off lease could you talk about have the comp looks for the second and third and fourth quarter. So as we go through the year.
The comp state.
The state of similar level or just the start to get a little bit easier and that's the first question.
Okay. So remember our <unk> D is the forward looking rate for the next 12 months that we're seeing based off of.
And the renewals that we've had recently, but let me talk a little bit about lease rates and see if I answer the question.
Remember there are many different markets and they are all recovering of different rates.
40% of our markets are seeing sequential increases in rates already.
Other markets still have cars and storage and availability from other lessors.
Those will continue to have rate pressures until they're put back into service.
Scrapping plays a role on the so if you're scrapping 50000, plus cars a year the demand supply and demand metrics will give you higher lease rates.
What we're seeing is that everything.
And that underpins that lease rate is trending and the right direction.
Got it okay, well, let me follow up and.
And that's one related question.
And so maybe to try and give a little bit more clarity if you could take.
One or two of the car types.
Perhaps and are starting to get better could you talk about where the lease rate would have been at the end of the year, where it is now but more importantly, with the higher price of steel.
Where the lease rate would need to be for you guys to build the car and put it into lease fleet, so and theoretically where does it have to get to to justify new builds if you will.
So and.
In terms of.
Car types, where you've seen improvement.
And really the im not going to give them a lot of details on different car types, but generally we've seen a little more.
As the slack has tightened on the free course on splits.
Quickly.
Covered hoppers for grain and agricultural products, we've seen a little more tightening there and term.
And less so on some of the tank car side on the tank side, specifically energy related tank cars.
There's still there's still a.
Excess railcars and serving those markets.
And getting them to your question on.
What is <unk>.
Investable levels, So Jean mentioned, 10% to 20% material cost increases.
That statement.
With no other changes, we've made and lease rates for the need to go up 10% and 20%.
I'm not saying, we've seen lease rates go up by 10% to 20%, but thats fundamentally if youre going to hold the same.
Hurdle rate on your investment then they would need to go up.
And Thats why we think the existing car rates will come up because.
The alternative is invested and the new railcar.
The new railcar oftentimes provides the ceiling on lease rates for existing railcars, they have similar utility and so the <unk>.
Investment of those capital costs on the new railcars and went up we'll give lease rates of little room the road.
And so that takes time it doesn't the market is not perfectly efficient so and it doesn't just happen at once or information of our market is less than perfect and so as people start to see the.
Over the next quarter or two quarters, maybe even three quarters, you'll start to see the trim pick up and continue.
Thanks, that's very helpful. One more very quick one one of steel as a percentage of cost of goods sold for you guys of approximately.
Yeah, we really don't get into a lot of detail on that.
Obviously, when you look at it.
There's different types of steel we of steel plate steel coil and all of our components.
All of our components are generally steel what's your cash products.
And we're talking to steel and term today, we're talking more about the raw steel go into and coil steel and plate steel when you get into the overall all of the componentry and of railcar then basically the the material cost of our entire railcar is feels so.
The only other point on that is that our labor and overhead piece. So when you put all of it together is the very high and mix. When you just look at the coil steel and the plate steel and then.
And it's well under.
The more it's much lower than the net.
Great. Thanks very much.
Thank you.
And ladies and gentlemen, this concludes our question and answer session I'd like to turn the conference back over to just your brother and for any final remarks.
Thank you Rocco a replay of today's call will be available. After 10 30, a M. Eastern standard time through midnight on April 29 2021.
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A replay of the webcast will also be available under the events and presentations page on our Investor Relations website located at Www Dot trend Dot net and we look forward to visiting with you again on our next conference call. Thank you for joining us this morning.
Thank you Ma'am. This concludes today's conference call and thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.