Q3 2021 Trinity Industries Inc Earnings Call
Yeah.
Good day and welcome to the Trinity Industries third quarter results Conference call, all participants will be in listen only.
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After todays presentation, there will be an opportunity to ask questions.
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Please note. This event is being recorded 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 includes statements as to estimates expectations intentions and predictions of future financial performance statements.
They are not historical facts are forward 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.
I would now like to.
I turn the conference over to Leann Mann, Vice President of Investor Relations. Please go ahead.
Thank you Eileen good morning, everyone. We appreciate you joining us for the company's third quarter 2021 financial results conference call our prepared remarks.
Marx will include comments from Jean Savage Trinity's, Chief Executive Officer.
Some of it and Eric Montana, the company's Chief Financial Officer.
The Q&A session. Following the prepared remarks from our leaders.
During the call today, we will reference slides highlighting key points of discussion as well as certain non-GAAP financial metrics. The reconciliations of the non-GAAP metrics to comparable GAAP measures are provided.
Certain projects or something else.
The supplemental materials are accessible on our IR website at www dot trend dot net.
Why is it can be found under the events and presentations portion of the website along with the third quarter earnings call Conference call about like it is now my pleasure to turn the call over to Jim.
Thank you Ann and welcome to training.
Good morning to everyone.
Truly had another strong quarter on a consolidated basis and continues to make great strides to optimize returns highlighted by our newly formed joint venture with Walker, and our new $250 million share repurchase.
And we had planned.
Both of which Eric and I will talk about later.
Overall, we remain very confident in our ability to execute and hit the targets. We shared with you at our Investor day, a year ago.
Let me summarize some key themes from our third quarter.
At the industry level.
As fundamentals continue to improve broadly but unevenly.
While industrial production levels have ebbed and flowed with supply chain disruptions.
Overall industrial production is approaching pre pandemic level.
And strong North American economic growth is forecasted over the next two.
Yes.
Would these macro economic train rail carload volumes arising from last year's lows.
At the same time, the population of railcars in storage has fallen with elevated scrapping levels and relatively slower train speeds.
From our vantage point, the improving railcar demand recovery will continue into 2020 two.
Which is very supportive fundamentals in both of our real focus business fun.
Let's look at the impact of these trends on our consolidated results highlighted on slide four.
In the third quarter Trinity generated revenue of $504 million up 10% from a year ago.
Our GAAP EPS was 33 cents compared to an adjusted EPS of 29 cents.
We will detail both businesses in a few minutes, but I think it's important.
I want to note the strength of our diversified platform.
While our real products group results may vary from quarter to quarter based on our specific orders deliver Trinity drove solid and consistent cash flow growth in the third quarter.
Cash flow from operations totaled.
$93 million and free cash flow or excess cash after all investments and dividends was $157 million.
Eric will go into more detail, but the important takeaway here is that our model can drive significant value creation through stable cash flow and return.
Capital to shareholders.
In summary, we remain pleased with our execution against our returns optimization initiatives.
And are equally excited to see continued strength in the industry fundamentals that underpin our future results.
Let's turn to slide five.
And we can review the railcar market as a whole.
First railcar load and traffic continued to improve.
The industry carloads are now roughly six 5% above 2020 year to date.
And we're moving closer to pre pandemic levels last seen in 2019.
Return of railcars and storage declined 6% compared to a quarter ago.
Aided by continued scrapping activity.
And continued deployment of vital assets in key markets like box cars gondolas.
Hoppers and tank cars.
Relative to the modest.
<unk> and carload levels slower train speeds are also helping to drive railcar demand as the average railcar in North America is getting fewer term.
Against that backdrop trinity's fundamental key performance indicators are improving as well.
Are.
Causation improved from last quarter to 95%.
And the future lease rate differential, which we call. The S. L. D turned positive and now stands at one 4% compared to a negative 29% just a year ago.
Demand.
<unk> railcars has been exciting as well in the quarter, we took orders for 2000, and 530, new railcars up 27% compared to a year ago.
As we noted last quarter, we believe stronger underlying leasing dynamics and higher car pricing should continue to.
Manford, obviously impact our results.
And new deliveries will likely trend in line with replacement levels in 2022 and 2023.
To be clear the trend may not be linear each quarter as our rail products segment results crew.
The pod said, we remain very encouraged by the industry dynamics in place today.
On slide six let's turn to Trinity segment results for the quarter.
And our leasing business revenue improved slightly compared to last quarter based on a combination of fleet growth.
Growth.
Higher utilization rates.
And increased servicing fees.
Revenue growth in the quarter was also partially offset by lower average lease rates as we cycled through legacy renewals.
To contextualize that impact it's important to note.
Note that the forward indicators for lease rates are positive.
Specifically, our renewal rates in the quarter were 7% higher than exploration.
And our view on overall lease rate trends remained positive as evidenced by the trend in the <unk> D. I mentioned earlier.
Our margins in leasing and management services were also strong up 340 basis points compared to a quarter ago.
Our leasing business benefited from higher servicing fees in the quarter, partially offset by fleet operating costs.
We also had modestly higher depreciation.
Driven by our successful sustainable conversion program, which I will detail later in my remarks.
Recall from our commentary earlier this year that we expect these expenses required to physician the lease fleet for increasing demand will be a headwind to the leasing segment margins.
<unk> for the year.
That said, we believe the headwind in the short term is a good problem to have given the value being created by rising demand and the resulting long term returns to Trinity.
Now looking at our results in the rail products group.
Margin.
<unk> improvement progress year to date was offset by labor shortages and turnover as well as supply chain disruption.
Specifically operating margins in the rail products group for the quarter was a negative <unk>, 9% compared to one 2% last quarter.
The path of the recovery in this segment will likely be less linear given quarter to quarter dynamics like delivery mix supply chain disruption and labor shortages.
That said, we remain confident based on two main indicators for the business.
The first.
As the demand for railcars continues to rise as evidenced by utilization.
Lease rates and orders in the quarter.
The second key indicator is railcar values.
While higher input costs like steel conserve as a near term headwind to our deliveries.
We remain very confident that higher cost will drive higher railcar values and ultimately margins as older orders worked through our pipeline.
Lastly, it's important to note that while this quarter was challenged Trinity continues to make significant progress on our expense optimism.
Optimization initiatives and the rail products group.
I'll move to slide seven with an update on our returns optimization initiatives.
We were busy and made some great progress over the quarter.
Beginning with our balance sheet Trinity <unk> and institutional.
<unk> announced a.
A joint venture partnership that targets $1 billion of diversified railcar asset sales over the next three years.
The joint venture is a significant step in our commitment to optimize trinity's balance sheet and drive Roe.
Trinity also renewed our commitment to return capital to shareholders with a new $250 million share repurchase authorization.
And our view.
Shareholders benefit both from the strong free cash flow the trinity's portfolio generates.
And also as we optimize our balance.
Balance sheet to help drive better returns on equity for the overall enterprise.
Touching on our enterprise cost reduction efforts Trinity dispose of three properties in the quarter for a total of $8 million in proceeds and $3 million of gains on asset disposal.
In manufacturing, we continue to drive meaningful improvements as our lean initiatives and other cost programs have reduced the brokerage breakeven cost of producing a railcar.
Turning to our lease fleet optimization.
Clearly the Walker a portfolio sale was.
A key event driving $325 million in proceeds.
Similar to last quarter.
We were also busy on the investment side, as we said a $112 million and leasing capex to add to and improve our lease fleet during the quarter.
Looking at the fourth quarter.
We would expect the pace to slow as we onboard and optimized for the actions taken year to date.
The key takeaway here is that fleet returns have improved both from mix and the accretive reinvestment of sale proceeds.
And.
In addition to portfolio transactions truly closed on a small $4 million of secondary market acquisition.
In the third quarter, our fleet improved as we've doubled the volume of sustainable conversions of tank cars, which totaled 242.
Compared to 119 last quarter.
Through the end of the third quarter, we have received orders for over 1400 sustainable conversions, which includes a mix of tank and freight cars comprised of internal and external orders.
Visa.
Sustainable conversions allow us to pivot our fleet by converting or upgrading existing railcars to better meet the challenging demands of the market and to improve the yield of our fleet.
This is an important piece to our fleet optimization effort.
Lastly.
The update on our new products and services, we are on pace with a number of initiatives.
For trend sites, we now have reached our 2021 goal for customers paying subscription fees for the service.
Additionally, new product development, we will hit our full goal for 2021.
Wally.
In conclusion Trinity remains very confident in the three year plan, we outlined at our Investor Day last fall.
And we still have a number of ongoing initiatives to continue to enhance returns, especially as railcar fundamentals continue to continue to improve.
One is the 2022 and beyond.
Before I hand, the call over to Eric I'd like to take a moment to discuss our focus on sustainability.
Trinity is committed to being a market leader in promoting and enhancing the sustainable environmental benefits of rail transport.
Inspiration.
We believe a more sustainable transportation system starts with a shift from highway to rail.
As rail reduces emissions to move one ton of freight 75% as compared to on highway.
It leads to less congestion and less.
While our critical infrastructure.
To promote this transition, we prioritize product and service ideas, which enables shippers to improve the efficiency of their supply chain.
Moving more freight with fewer railcars and fewer carload.
We've discussed.
Where a few of our new products that fulfill this forward thinking more sustainable vision, including our newest screen car and trend site.
Trinity has also put great focus and leveraging existing assets to meet new demand through our sustainable conversion program.
This eliminates.
Who needs to produce an entirely new railcar in certain markets.
Earlier this year, we introduced the railcar leasing industries first green financing framework and as of quarter end, approximately $4 $3 billion of our railcar.
<unk> that meets this designation.
At our facilities, we have implemented a number of different programs to reduce emissions.
Limit water use and recycle ways.
And meeting our purpose to deliver goods for the good of all we strive.
To reduce our environmental impact and increase our positive impact on people.
With that let me hand, the call over to Eric for more detail on our results.
Thank you Jim and good morning, everyone.
I will begin on slide eight with a summary of the quarter.
Overall as Jim said truly continues to benefit from both the steady improvement in railcar demand.
And our strategic initiatives.
Starting with the income statement.
Third quarter consolidated revenue totaled $504 million.
Up nearly 10% compared.
Compared to a year ago.
This was driven by higher external deliveries in our rail products group as.
As well as continued improvement in leasing fundamentals in the highway business.
Adjusted earnings per share of <unk>.
<unk>.
<unk> sequentially.
From 15.
And year over year from 17.
Driven by a combination of better fundamentals.
Gains on lease portfolio sales.
Our share repurchase activity.
Our third quarter results were negatively impacted by accelerated depreciate.
<unk> associated with our sustainable railcar conversion program.
Our adjusted EPS number excludes a <unk> <unk> benefit from insurance recoveries related to the tornado damage at our Cartersville facility.
As discussed our joint venture.
<unk> portfolio sale positively impacted our third quarter earnings with a gain of $33 million on our $325 million transaction.
And this joint venture.
<unk> owns 90% of the equity.
Trinity owns the remaining 10%.
Similar to the improvement in lease fundamentals, our new RV transaction is another example of the broadening market for leased railcar assets.
<unk> before the impact of lease portfolio sales.
Turning to the cash flow statement.
Year to date cash flow from operations totaled $428 million.
Cash flow for operations in the third quarter was $93 million, which includes the collection of 40.
$41 million of our tax receivable.
Our remaining tax receivable is $192 million, which is not included in our full year cash flow guidance.
Last quarter, we guided to full year cash flow from operations of 600 million to $650 million.
Given the higher cost of inventory as well as working capital changes we plan to implement we are reducing our target.
Our revised guidance is a range of $450 million to $475 million.
This is intentional as we are focused on strategic sourcing to mitigate inflationary pressures.
<unk> and protect against supply chain constraints as we increased the pace of deliveries.
In the quarter, we had a net reduction in investment for leasing of approximately $204 million.
Consistent of $112 million of lease fleet investments.
More than offset by lease portfolio sales.
Year to date proceeds from lease portfolio sales exceeded the investment in our lease fleet by $41 million.
Trinity's net lease fleet investment for the full year is now expected to between $40 million and seven.
As we continue to make disciplined investments at attractive returns that support our lease optimization initiatives.
Manufacturing capex for the quarter was $4 million, which brings our year to date manufacturing capex to $22 million.
Our man.
Factoring in Capex for the full year is now projected to be between 30 million and $40 million.
Total free cash flow after investments and dividends was $157 million in the third quarter, which brings the year to date total to $516 million.
As Jim noted the strength of our platform continues to drive these cash flows and allows trinity to drive value to shareholders through the return of capital.
Year to date, turning to his return nearly half a billion dollars.
To shareholders with $69 million in dividends.
And $405 million and share repurchases, which represents approximately 17% of our market capitalization.
If we turn to slide nine let's review our capitalization.
Truly continues to have a very strong financial position highlighted by.
Quarter and liquidity of $1 1 billion.
Even after the return of capital I just discussed.
This liquidity provides flexibility as we plan to generate additional shareholder value through disciplined returns focused capital allocation.
Our.
<unk> two.
Type returns over asset growth remains unchanged.
While we expect to make investments in our lease fleet for growth, especially in markets, where we can meet increasing demand and we remain committed to the return of capital.
As you can see from our actions to date are strong cash flow affords us.
The ability to do both.
This quarter, we completed our previous $250 million share repurchase program and launched a new $250 million authorization that runs through 2022.
We continue to optimize our balance sheet and improve our return on equity which is a key.
Key focus of our long term strategy.
In closing, we are progressing well against our strategic plan.
While Trinity is not immune to the challenges of the current operating environment, our financial position.
Cases, the resilience of our platform.
And the ability to deliver returns through the cycle.
As the market recovers, we will demonstrate the power of our platform to generate attractive risk adjusted returns.
You may now take take us to <unk>.
Sugar participants.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up the handset before pressing the keys to withdraw your.
Your question. Please press Star then two.
Arthur.
<unk> question today comes from Matt Alcott with Cowen.
Good morning, Thanks, a lot for taking taking my question.
Jan Erik.
Canadian National has had but the one thing that im most enthusiastic about is the green energy carloads related to Alberta.
First a couple of hydrogen energy projects.
Some of the potentials.
The peak of the crude by rail.
But only.
More sustainable is that something that.
Presents an opportunity for you guys.
Yes, Matt Thank you for the question.
We have looked at hydrogen and continue to look at the different types of fuels that may be able to be.
Transfer by rail it's on the radar we're doing some development on that and we will continue and hope that overall that the government approves the movement by rail for the hydrogen.
Okay, and if such an approval is granted.
How much lead time should we expect before you guys have.
And appropriate part for that.
It would really depend on.
We have a design that would fit fairly well so it would come down.
Down to the testing that would be required by the different.
Governments of countries to put that on ramp.
Got it and just one more one more question on the guardrail business.
Is the improvement in anticipation of the infrastructure Bill and.
And.
Sure I'll start out, let's say that the highway business team did a great job.
Yeah.
Best third quarter ever in the history of our highway business.
This past quarter, the business is improving because of the input cost a lot. So that as we're able to pass along along with the freight cost. So you see that in the revenues.
When youre looking at the infrastructure Bill will it have an impact yes, but it's most likely at least six months to 12 months out the bill has to be passed they have to get the programs or the construction approved and then they normally by the.
The guard rail portion later in the cycle, so closer to when they are ready to start that construction so that would happen.
On litigation, you've seen smaller changes in our releases.
What's going on there we are seeing less new litigation come in it's.
Been dropping over the last few years.
And we expect that trend to continue.
And I think Matt did I get everything you were asking or did you have a follow up.
I believe side note. It was a three part question but.
I would imagine on the demand.
Is that related to the infrastructure bill even if there's a six to 12 month lag before the or.
It's reflected in the business I would imagine that the confidence will increase immediately after the passage of the bill and that could lead to some at least inquiry activity is that is that reasonable.
I think it is I think people may pre start some projects or they may go ahead with them, but we'll have to wait and see.
When it gets passed and what confidence had puts out there.
Okay and when you can.
When you guys spun off our coast a.
A few years ago, you understandably kept up the.
Guardrail business is the only non railcar business because of the litigation at the time, which is largely out of the way now.
Would you be open to divesting this business for the right valuation, especially that now it's an infrastructure.
Play and it might be in high demand.
Well, Matt I have said in the past that we believe the long term best owner for that business with.
Would not be Trinity as we focus more on the rail industry, but we would have to get into the right dynamics the right situation for us to be able to sell that so it is on the table and we have talked about that.
Okay.
Thank you very much.
Thank you.
Our next question comes from Allison Pollinium with Wells Fargo.
Hi, good morning.
Just wanted to turn to the input cost inflation that you you kind of called out.
Are you factoring I guess, one is it still or is it actually the components that you're seeing the most inflation and I guess you had mentioned some older contracts is there a way to think about how that evolves, where some of these input inflation start to get rolled into the contracts going forward in terms of deliveries.
Any color there.
Allison This is Eric I would just say.
For me.
The quarter, it was more probably steel and surcharge related than specialty components.
You also had.
Things like industrial gases being interrupted.
Both the oxygen.
Nitrogen.
So.
All of those things as those gases switch two.
Were diverted to a hospital usage.
Because of Covid, so that certainly had an impact.
Thank you.
The specialty side.
There's probably some pressure down the road on specialty components.
So you have.
That in terms of the backlog and how it works through.
As Jim said in her comments that it's probably less than what it is not going to be just linear.
It will be as we work through some of the older contracts.
Whether they are fixed price or escalators.
The demand environment.
Was not as good as it is now.
So you'll have that coming through over the next quarter or two.
Got it thanks, and then just a bigger question.
Jamie you had mentioned youre comfort with deliveries sort of reaching that replacement level. You know one pushback, we're getting quite a bit is you know obviously rails aren't operating as efficiently as they.
They would hope.
Given some of the network challenges that were just kind of to some extent not borrowing capacity at the situation, but some of these cars could actually reverse or something that demand you know any color. There in terms of how you're thinking about that or is it just really comfort with that replacement level kind of moving forward with limited impact from some stuff kind of returning to storage.
Sure.
Sure Allison so when you look at the number of cars getting scrap per year remember we have scrapped around 50000 in the last two years, we're on pace to do that and maybe a little bit more this year.
And the car types that are getting scribed many of those have high demand right now so there.
Theyre going to need those replacement cars.
If its box cars or grain cars or others. So our confidence in what we've laid out there for demand for the industry for the next couple of years of 40 to 50000 is really based off.
Placing the cars are in scrap right now so it's not a large increase overall.
Yeah.
Got it understood. Thanks for the time.
Thank you.
Yeah.
Our next question comes from Gordon Johnson with a G. L J research.
Hey, guys. This is James what else gain for Gordon Thanks for taking my questions.
So I guess the first.
And the mix of how it relates.
To the new JV was that for about 2000 railcars give or take.
Now as a 3600 brokers.
It's about 3600 railcars.
Theres more there'll be more detail obviously in our Q. There is also an 8-K.
We filed in August that has a lot of those details as well.
It was about 31 was $36 of railcars and the proceeds were $325 million.
Yeah.
I'll just go ahead and talk.
Talk about a little bit.
As.
That joint venture, we think really demonstrates.
One of them.
Our platform is it solves a lot of the initiatives that it's it's.
Something that we're doing in line with all the initiatives that we have in terms of optimizing our lease fleet and our balance sheet.
Right.
That's helpful.
Clearly, that's a that affects your utilization rate as well as Europe.
<unk> ratio is it fair to say.
And secondly.
Without that what would the utilization rate has been.
Okay. So.
Could slightly impact utilization rates by making a little bit lower the railcars that we sold those 3600 railcars.
All utilized so it does it does reduce the youre selling.
3% of the portfolio at 100% that does make it a little bit lower but I don't have the I haven't done the math to tell you what it is off hand, but I.
Thank you can you can do that math.
Okay in terms of the loan to value.
We're certainly.
The proceeds of $325 million some of those railcars were unencumbered some of those came out of.
Some of our debt facilities.
So there's a lot of ins and outs at the end of the day our leverage.
Our wholly owned fleet went up slightly.
This quarter it's.
So about 63%.
Yes, so that is within your earlier range that you previously guided is there any change in terms of.
Your strategy right now.
In terms of capital allocation.
Sure James.
Right.
The target we put out was 60.
2% to 65%.
We are now kind of in the midpoint of that range.
That range is still our near and mid term range. We haven't made any change, but we still certainly have flexibility.
To change that but right now that is that is.
Still a range.
Okay great.
And just to just a couple more I'll try to speak through them, but you mentioned that you were going to focus on accelerating deliveries.
Can you just.
Let us know how much of your backlog do you anticipate shipping this year.
So I think we talked about.
Eating cars ready for delivery.
And so they can go in.
And the market quicker, but market activity remains strong and for the year.
We came out with what it's been in the queue.
Terms of how much of our backlog is delivery.
Liveries right and this year, it's about 30, 32% 31, 8% is what will be in the Q4.
What.
The percentage of our delivery that will deliver in 2021.
Some of our new railcar deliveries.
Got it.
And in.
I'll cut it off.
There is a final question since it is a very loaded question I do apologize for that but.
Given the rising costs that we are seeing.
Is there any way you could decipher how much should be upward pressure youre seeing in lease rates today, it's a factor of improving conditions versus simply.
<unk> passing on the higher costs.
And with that I'll say, thank you, Jim and Eric very much.
Yes. Thanks.
So when you're looking at.
Rate changes that we're seeing a lot of that has to do with supply and demand in the markets, where you have fewer cars available.
Less absolutely seen the rate increase I mentioned that we had a 7% in the quarter.
The increase on the renewal rate versus the expiring rate.
Our forward looking SLR D was positive so that means looking at the cars that will be coming off of.
Lease are expiring or expecting to see an increase overall in that.
Right. So it's still a positive trend for us.
Okay wonderful. Thank you very much again guys. Thanks.
Thanks, Jamie.
Our next question comes from George Sellers with Stephens, Inc.
Hey, good morning.
Good morning, George So I guess my first question you talked about railcar valuations, increasing and I'm just curious so on the pricing varies by car type, but could you talk about the percentage increase you generally seen in new railcars.
And then how much of that is a function of higher commodity prices versus more just core pricing trends.
So George.
Obviously mix in car types matter and the amount of steel matters.
We've talked when you have.
Some of the input costs that have doubled and tripled over the once that's released from a pre pandemic level.
That has translated into core prices being anywhere from 20% to 30% higher.
And how much of that is steel input cost a lot of it is stable input costs. It depends on yes, there is a margin component.
<unk> 200, and it probably depends on where you're starting from.
So margins have improved over the last couple of quarters.
But I would say much more.
Of the.
The increase is related to just the inflationary pressures on new railcars.
That just ties into.
As an owner of 105000 existing railcars those 105000 railcars benefit greatly from the higher input costs in the 2000 2500 cars that we delivered this quarter and so that's really where we get into.
Where we see.
Railcar valuations getting impacted because.
As those new railcar prices give the existing railcars more room to run in terms both in terms of lease rates.
And in terms of valuations from a depreciated replacement value level. So that's really where we did.
Excited about the future.
Please wait.
Okay.
And then you talked about the backlog, but could you could you say how much of of.
The current backlog is going to be delivered to the lease fleet in the fourth quarter.
I did not get into that.
But I've got to look at their Q I may have to may have to.
I'll come back to fundamentals.
Okay. That's 30 30, 34% of our deliveries are related to the leasing company.
Gotcha.
Okay. That's helpful. Remember in the past, we told you that typically the railroads and the third party lessor.
<unk>.
We will come in and buy new cars first that's still occurring right now we're getting some <unk>.
Secondary market and.
And shippers buying but the majority are still railroad first and then third party lessors.
Okay. That's really helpful. I'll leave it there. Thank you all for the time.
Give me.
Our next question comes from Datacom majors with Susquehanna.
Yeah. Thanks, good morning, and thanks for taking my questions.
In the spring and even in the summer you had talked about how you were really well positioned on manufacturing labor.
Being employer of choice in East, Texas, and the regions Youre in in Mexico. It does seem like that has become more challenging.
Can you unpack for us kind of what changed in the last three months in and maybe give us a little bit of visibility into.
Regionally or functionally.
<unk>, we are having the most challenge with labor and and how you feel that's trending as we get deeper into the fourth quarter. Thank you.
Sure Boston This is Jay I'll take that so we were very fortunate during the beginning of the pandemic not to have the supply chain and labor issues.
And as we've gotten further and it was just this past quarter that we started to see some things some of it. We think is transitory and that's going to be some of the gases that Eric already talked about where there was a short term disruption in supply.
And then we had some valve as far as the labor.
And Mexico is still very strong very low turnover very low shortages, but in the U S. Just like I think every other company who has.
Labor.
Is experiencing some of the higher turnover as people are leaving for other job Jerry Henry Tiring.
And taking himself out of the marketplace.
So that came in again more of the third quarter for us.
And it's something that we'll continue to work on like everyone else, making.
Making sure that we're positioning ourselves in the best place to respond to the needs of the market.
Your pain points in the U S started to stabilize do they feel like they're getting worse, just curious where that stands versus the surprise you started to feel in the quarter.
So at the beginning of the quarter ago, Lasse have went up and it's pretty much stabilize from there.
So.
So again, just getting now the resources in place to be able to make sure. We continue to meet all the demand.
Thank you and you know.
You gave your future lease rate differential and it was encouraging to see that inflect positive.
Positively for I think the first time since you've been reporting that metric.
Can you give a sense of what that feels like on the ground is there I mean are we approaching a point, where this price escalation in new cars, which you talked about on a previous question.
Is creating that that that that.
That fast or inflection that you tend to see in up cycles, where lease rates can move very quickly I'm just you know.
We there yet or are we getting there is that in your site just just any thoughts on on the supply demand dynamic.
Tied into lease sorry, new car price inflation, and what that means for lease rates into next year.
I'll start on that and then turn it over to Eric now remember that our fleet.
It does expire at different times, so about 17% to 20% of the fleet expires each year. So when youre looking at the change of that lease rate.
Is over many years to work through all of them.
We mentioned the 7% increase on renewal rates versus expiring for the quarter, but the overall average lease rate for the quarter still had some headwinds so its still down a little bit. So I think it will take time to work all the way through but we are encouraged we've seen a renewed.
Renewals go up and in the markets, where they are supply demand metric is more towards needing more supply you'll see that move quicker than some of the other areas.
Eric Yes.
And I would just add to gene's comments that it does change car type by car type but.
Absolutely.
Pollute terms.
New railcar prices.
Which lead to higher new car lease rates.
Will cause.
Existing car rates to allow existing car rates to come up as you price them.
But then also.
We've seen steady for.
Team 15 months railcars coming out of the storage at least that metrics of the fleet continues to get tighter both from attrition and from increased railcar loadings. So both those things in.
Increased railcar loadings or or needing more railcars to move the same great.
So those factors are.
Sure.
Tailwind.
Demand for existing assets, and new assets and should lead to opportunities to improve pricing I.
I think thats one of the benefits of our platform as a large manufacturer of large lease company.
With our maintenance.
So operations, we see the market and we generally are able to see these points of inflection.
Quickly and respond accordingly.
No. Thank you for that and maybe to just put.
Put a period on that discussion and I apologize if you mentioned in the prepared remarks, I was hopping calls but the.
Is there a way.
Way to think about I mean, I know spot is not the right word, but kind of an incremental current renewal rate.
And how that's trended quarter over quarter or month over month, just just any sense of the sequential improvement you're seeing.
With the caveat that we understand that the renewals happened slowly and you know the overall average lease rate for the portfolio. It.
The software to move thank you.
<unk> in the market activity has absolutely been increasing and so sequentially, increasing very very strong.
For us as far as renewal rates or assignment rates that go into that and then we are still seeing a lot.
Takes a while activities for a quote for new cars, and we see orders continuing to come through on that.
Thank you.
Thanks, guys.
Our final question today comes from Steve Barger.
<unk> with Keybanc capital markets.
Thanks, Good morning.
Can you quantify the labor and supply chain issues in the rail group I'm, just trying to get a sense for how much of the operating loss was that versus volume and mix.
All three of them play a role in the results that.
We had.
Going change that when Youre looking at supply chain, the inefficiencies that come in from not having access to be able to do the work you need to do or another example is a valve that you need to put on.
Play into the fact.
That you can get towards that on the time that.
That you wanted to then you also have the fact that neither has turnover of labor shortages.
To be able to do that work. So when you put all those together it absolutely has an impact we've not gone through to say.
That 25% 30%.
But when you combine all of them I think.
We hear most.
Industries or industrial is talking about that impact for the quarter.
And Steve as we've talked in the previous calls about this.
Our order book being more freight car centric.
Sure.
So that's there but I wouldn't.
You have it out as a change from say the second quarter to third quarter in terms of mix.
The reason why we're calling out the labor in the supply chain just because those are the biggest drivers.
Got you and Eric I, just want to make sure I understand your comment on what <unk> could look like if you don't sell more cars into the JV then.
Call that or minus <unk> <unk> seems like it's going to look more like <unk> given the loss in the rail group.
And I think most of your EPS came from the gain on sale this quarter right.
So my comments in the fourth quarter were.
Around margins before when you when before you take the impact.
Impact of car sales and it was on margin percentages. So when you just take the revenue that we said the margin percentages would look similar when you exclude that.
I think thats, a good way to think about it.
From those from those numbers.
In terms of.
The car sales I wouldn't.
Plaza, we did $325 million.
Car sales to walk through this.
The third quarter.
As we've talked about that's more of a programmatic.
Over the next three years.
I would expect.
Those.
Large we don't were.
Walker transaction in the fourth quarter.
Okay, how about the first part of next year is it can you.
It's a three year deal over with $1 billion. So you would think about it ratably over that over that time got it and so it <unk> it looks like <unk> for the rail group than the rail group's not going.
We're not planning to operating income this year.
Do you think <unk> will be trough for rail group margins or given recent asps for new orders should we be tempering, our expectations for the OEM business for the first part of 'twenty two.
Remember I said it won't be a linear trajectory for the royal products.
Contributing so it's really going to depend on.
The next and the volume going to that I would expect to see improvement I'm, just saying it may not be linear.
And so we do have a lot of the optimization initiatives and lean initiatives.
That are still going on that occur through.
The full three year period that we laid out in Investor day, and as each of those complete you'll see different types of improvements flow through our results.
But is it fair to say that given the asps that you've taken over the last couple of quarters and the volumes that you expect that the margins will.
We are not going to rebound sharply in the first half of 'twenty two.
I think the Isps.
Really reflect more of the mix and the margins I wouldnt read too much into the Asps from a margin profile standpoint.
It's more about the mix.
I think I talked about.
The margins.
<unk> on new railcars that were taking.
Our improving because.
Because it's a better demand environment than what we did.
Say in during the height of the pandemic.
And so from that standpoint.
<unk> backlog stabilize as backlog start to extend them.
Then generally on the manufacturing side you start to see.
Margins expand as well.
With all of these supply chain disruptions and labor et cetera, we're just being cautious about.
Getting ahead of ourselves in terms of expectations, because theres a lot of noise in.
In the results and so but generally speaking the demand profiles, improving which leads to the pricing environment improvement.
Okay and last one for me can you just talk a little bit more about the sustainable railcar conversion program. How are you converting them to make them more sustainable.
So as a market.
<unk> change, we look and see that.
Maybe you have a car types you could put into a different market and have better utilization and higher yield. So we can do some modification work to that dnb taking.
I mean, a different hopper on things like that to go ahead and reposition that car.
And improve overall utilization and improved yield.
Are you doing that on a speculative basis or in response to a customer, saying I want a new railcar I don't want to pay the full railcar price and you're finding a creative way to say well I can do some more to this car and maybe make it suitable.
<unk> for your purposes.
Great question, and we continue to say that we want to utilize existing railcars first our existing assets and that's what we're doing here instead of building a new car and having.
The older asset sitting there maybe not as July we're making the choice to win.
When it makes sense financially and from a return standpoint to convert that car and put it to use in the market that may have a either a longer run or a higher need at the time.
But youre doing that proactively or in response to customer requests.
In response to customer requests were not doing.
Doing anything like that proactively we either have orders from external customers are we have orders that we need to fill from our lease fleet.
And just last one how many cars in your fleet are in the total fleet do you think lend themselves to conversion.
So Steve I mean, that's going to be in the eye of the owner.
And then each fleet owner is going to have.
Different things when you think about some of the other some of the car types that were recently.
Okay.
Been softer rehab slower or lower utilization do you think of the small cube covered hoppers.
Where that fleet.
Got.
Ahead of itself has demand changed as car loadings change. So those are relatively young assets and so those those.
Each owner is going to make a decision we've made and the same goes on tankers, where you've had tank cars. Some of the some of the sustainable conversions or things that.
You can do think re tank tank cars et cetera. So all of those have an impact and it depends on the underlying age of the.
Of the railcar.
And it goes to the strength of our platform again, we have the capability of doing those conversions in our own maintenance shops.
It does help meet the demand for the customers.
And provide us a more sustainable product overall.
Thanks very much.
Thank you.
This.
A question and answer session I'd like to turn the call back over to Leann man for some closing remarks.
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