Q1 2022 Trinity Industries Inc Earnings Call
Okay.
Good morning, everyone and welcome to the Trinity Industries' first quarter results conference call.
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Statements that are not historical facts are forward looking.
Participants are directed to <unk> Form 10-K , and other SEC filings for a description of certain of certain of the business issues and risks.
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At this time I would like to hand, the call over to Liam Madden Vice President of Investor Relations Ma'am. Please go ahead.
Thank you operator, good morning, everyone. We appreciate you joining us for the company's first quarter 2022 financial results Conference call. Our prepared remarks will include comments from Jean Savage Trinity's, Chief Executive Officer, and President and Eric <unk>, The company's Chief Financial Officer.
Hold a Q&A session. Following the prepared remarks from earlier during the call today, we will reference highlighting key points of discussion as well as certain non-GAAP financial metrics.
Conciliations at the non-GAAP metrics to comparable GAAP metrics are provided in the appendix of the supplemental slides, which are accessible on our investor relations website at www dot trend dot net.
These slides can be found under the events and presentations portion of the website along with our first quarter earnings conference call even like.
A replay of today's call will be available. After 10 30, a M. Eastern time through midnight on May four 2022. The replay number is 870 734 475 to nine with an access code of 733368 for a replay of the webcast will also be available under the events and presentations page on our Investor Relations.
<unk> website.
It is now my pleasure to turn the call over to Jim.
Thank you Lee and good morning, everyone.
Before we get started today I wanted to point out that both our 2021 annual report and our interim CFO or update report are available on our website.
I'm, especially proud that our CSR report provides a summary of our first formal materiality assessment.
The results of which are driving our ESG strategy forward with a priority focus on employee health and safety diversity equity and inclusion human rights energy consumption and reduction of greenhouse gas emissions.
I'll start my comments on slide three.
As we have seen some of the pandemic concerns and restrictions easing it was nice to be back in person and participate in industry events again in the first quarter.
We continue to see strengthening market tailwind as we discussed on our last call.
However, new headwinds appear to be developing including persistent inflation, increasing interest rate and the ripple effects of the war in Ukraine.
Particularly in the U S challenges persist in certain labor markets and supply chains as well.
I want to stress the optimism I have about the second half of this year.
Well, we will address some of the headwinds we saw the first quarter. We continued to expect leasing margins to improve with rising rates and increased utilization of the fleet driven by strong railcar demand.
Also our real manufacturing backlog is extremely strong and we will start delivering railcars in conversions that were sold and more favorable market conditions as the year progresses.
Our book to Bill in the quarter was over two times, our future lease rate differential improved to two 4% and it has now been positive for three quarters.
Our fleet utilization continues to improve and is back to pre pandemic levels at 96, 5%.
Although we will continue to face challenges in the second quarter, our forward looking metrics support our optimism about a strong second half of 2022.
And we are maintaining our EPS guidance with that in mind.
Now turn with me to slide four for our rail market update and commercial overview.
Through the first quarter, we saw continued improvement in demand, which is great, but the rail industry has had difficulties serving that demand.
Railroads have been very open about their struggles retaining and hiring labor to scale with the increase in freight demand.
Their struggle created a disconnect between weekly carload measures and true freight rail transportation demand.
We believe that demand for freight rail transportation is greater than the rail traffic measures would suggest.
This disconnect is most evident in the fact that although year to date North American rail volumes are down year over year. The number of railcars in storage continues to decline.
This decline has been steady since the summer of 2020.
The downward trend in railcar storage is a function of more demand from shippers to move product.
Increased scrapping and slower train speeds.
The railroads indicate they are working to improve efficiency and expect to resolve these issues later this year.
Improved efficiency is good for traffic growth long term.
As I mentioned, a moment ago, our Trinity rail fleet utilization improved in the quarter to 96, 5% as we place more railcars in service.
This was also aided by momentum in our sustainable railcar conversion program.
To date, we have converted 1095 railcars.
Remember these are railcars that would otherwise be underutilized or scrap by the rins that converted or upgraded to better meet changing market demand and drive higher returns on our invested capital.
Also our lease fleet demand our SLR D was two 4% in the quarter, the third consecutive positive quarter, giving us momentum into the revenue tailwind for renewing railcar lease rates.
Railcar orders and deliveries are both up year over year as well.
In the quarter, our rail products group received orders for 5055 railcars and delivered 2470 railcars.
The market demand continues to be led by freight cars and in the first quarter. We saw replacement demand for box cars to serve predominantly the paper and food markets.
As our order book for 2022 deliveries as close to pool, we are now taking orders into 2023.
Deliveries are still being impacted by supply chain disruptions, but we did see on time deliveries improved steadily through the first quarter due to some easy and pandemic related to absenteeism as well as better internal handling of our inventory and supply chain.
We expect to end 2022 with daily railcar production basically doubling for where from where we started the year.
Again, another very tangible sign of strong market demand.
Turning to slide five.
Eric will go into more detail on our financial highlights, but I'd like to just note a few metrics.
Our Q1 2022 revenue of 473 million is up 43% from Q1 2021, driven by the strong external deliveries in the quarter.
Our GAAP EPS was <unk> 90 and includes another insurance gain from the Cartersville tornado that benefited the rail products segment.
Excluding that gain our adjusted EPS from continuing operations was <unk>.
Our cash flow from continuing operations was $29 million in the quarter and free cash flow was 48 million Boe.
Both impacted by working capital growth due to manufacturing volume increases and ongoing supply chain inefficiencies.
We believe our business is well prepared to handle these current headwinds of supply chain disruption high input costs and freight surcharges, but we're not immune to their effect.
We are managing these challenges and this is especially apparent in our working capital growth.
Our mitigation efforts include intentionally building up inventory to dampen the effects of supply chain unreliability.
Now moving to slide six and the discussion on our business segments.
And our leasing business, our revenues are up slightly quarter over quarter and have remained pretty flat over the last year as our utilization is improving while the overall size of the lease fleet has decreased slightly.
Lease rates are down slightly on average due to the mix of the fleet and the timing of fleet renewal.
As a reminder, our average remaining lease term is about three years, so while renewals and renewal rates are positive. It takes time to see these flow through the results.
Our operating margins in the leasing segment were challenged this quarter due to a few factors.
We saw an increase in the cost and volume of maintenance activities.
Additionally, as we have stated before the sustainable railcar conversion requires accelerated depreciation on donor railcars.
The railcars that are the best candidates for conversion are younger railcars.
So the impact of the accelerated depreciation can meaningfully reduce operating margins in the near term.
However, we continue to believe this program is a worthwhile investment and future benefit as our railcars drive more profitability to the fleet.
Moving to rail products.
Quarterly revenue was down sequentially due to the timing of deliveries, but still reflects substantial growth and improving fundamentals year over year.
Looking forward our orders taken in the first quarter were strong and reflected growth from both a revenue and a margin perspective.
Operating margin in the segment was two tenths of a percent, but includes a gain of $6 4 million from insurance proceeds from the Cartersville tornado.
We have removed this gain when calculating adjusted EPS.
But as a point of reference rail products margin would have been a negative one 4% excluding this gain.
Operating margins in the rail products group remained challenged as I mentioned on our call in February and the first half of the year. We are delivering railcars that were ordered at the bottom of the cycle.
<unk>, some fixed price contracts, which have been negatively impacted by high steel and raw material prices.
The orders, we are taking today and the orders we will be delivering in the back half of 2020 to reflect much stronger pricing and when those orders start to deliver we expect to see a meaningful step change in our margins in the segment.
In addition to the input cost inflation margins. In this segment were also impacted due to a higher level of production line changeovers.
Additionally, our maintenance services business struggled in the quarter.
Largely due to very high absenteeism in January due to due to the omicron wave leading to operating inefficiencies.
As so many other companies have mentioned them.
Cron was a meaningful disruption to our business in Q1, but quickly subsided.
We have previously talked about difficulties in hiring and retention specifically in the United States.
We are making changes to our compensation and benefits to stay competitive in the marketplace.
While early we are starting to see improvement.
Moving to slide seven I wanted to highlight a few improvements on our strategic initiatives.
Our LTV in the quarter of 63, 8% is within our target range of 60% to 65%.
We are in year two of the three year plan, we laid out at the Investor day in 2020, and think we are well positioned to reach the goals. We presented to you then including a mid teen pretax Roe goal.
And now I'll turn the call over to Eric to go into more detail on our financial results and our guidance for the rest of the year.
Thank you Jim and good morning, everyone.
There are a few things I wanted to point out before talking about the quarter's results.
First in 2020, we introduced the future lease rate differential or <unk>.
This metric calculates the implied change in revenue for railcar leases expiring over the next four quarters, assuming they're renewed at the current transacted lease rate for each railcar types.
We have refined the way, we aggregated data to better correlate with actual revenues.
<unk> already to account for this change in prior periods as Youll see on the trend line on slide four.
The goal of this metric metric is the same and we.
We view it as a good indicator of the direction of our future leasing revenue.
As we previously announced we priced a $245 million asset backed securitization.
That is expected to close tomorrow.
The debt is backed by a discrete pool of railcar assets, the TLC will continue to own and manage.
This financing is critical to our ongoing balance sheet management as the majority of the railcars. It will serve as collateral for this debt will come from our warehouse facility.
Freeing up more availability.
At an interest rate of 455%. It is clear that we are in a different financing environment than last year.
But we were very pleased with investor interest in our securitization program.
As we move forward, we will evaluate the most attractive financing structures for our capital needs.
Now please turn to slide eight with highlights from our financial statements starting with the income statement.
Total revenues of $473 million in the quarter were relatively flat sequentially and up significantly from the first quarter 2021.
The year over year increase was driven by increased rail product deliveries.
Our first quarter GAAP EPS from continuing operations was nine.
But adjusting for the Curtis.
<unk> previously mentioned, our adjusted EPS was <unk> <unk>.
We also benefited in the quarter from a gain of $11 million.
Came from portfolio railcar portfolio sales and a gain of $7 million on the sale of a non operating property.
Railcar portfolio sales are a normal part of our business and.
You can expect to see them periodically.
I also wanted to briefly talk about our results and discontinued operations, which youll see in our 10-Q that we'll file later today.
In the quarter, we recorded additional legal and transaction costs incurred in the period related to the highway products business that we sold in the fourth quarter of 2021.
Moving to the cash flow statement.
Cash flow from continuing operations was $29 million and free cash flow after investments and dividends was $48 million.
Our cash flow was negatively impacted in the quarter by increases in working capital requirements and continued supply chain issues.
As operating conditions normalize, we expect to see cash flow improve significantly.
We paid $19 million in dividends in the quarter.
As a reminder, we are unable to buyback any additional shares until the accelerated share repurchase program is complete which we expect by the third quarter.
Our current share repurchase authorization is $73 million remaining and expires at the end of the year.
Moving to slide nine we remain diligent in optimizing our balance sheet and have liquidity of $718 million as of March 31.
As you can see from our reported results we have benefited from lower interest expense, resulting from our previous financings.
Having fixed approximately 75% of our debt at rates are attractive relative to the current market.
We believe our debt profile and maturity schedule will help dampen the impact of the current rising rate environment.
I'd like to reinforce the guidance, we gave on our last call summarized on slide 10.
We are leaving our guidance unchanged as our first quarter results are in line with expectations.
As gene mentioned, our 2020 to forecast is significantly weighted to the second half of the year.
For the full year, we see industry railcar deliveries to be between 40050 thousand railcars.
Recent order and inquiry activity suggest virtually all of the deliveries already.
The industry backlog.
It's also worth noting once again these delivery numbers do not take railcar conversions into account.
Our long term commitment to disciplined investment in the fleet remains and we are anticipating net fleet investment of $450 million to $550 million.
In the year, depending on the timing of deliveries.
Embedded in this number are secondary market purchases, which were anticipating to be meaningful this year.
As we think about our three year fleet investment targets, we are balancing our fleet investment and a period of increased demand for new railcar leases with a very active secondary market.
We will continue to allocate capital to generate long term shareholder value.
We expect manufacturing and general capital expenditures of $35 million to $45 million, which.
Which will be primarily related to investments in safety efficiency and automation.
And finally, we expect adjusted earnings per diluted share from continued operations of <unk> 85 to $1 five for the full year.
Excluding any one time items like the cartersville game this quarter.
As we move into the second half of the year, we will see substantial growth in our business and we are confident that we have the initiatives in place to enable us to overcome the current headwinds in our business.
As gene mentioned our rate of new railcar production will increase significantly through the year based on the visibility from the orders we have booked in the last few months and.
And we expect that to be evident in higher revenues.
We expect to exit the year with mid to high single digit margins in rail products.
Meeting the goal we introduced at our Investor Day.
We expect similar trends in leasing with higher lease rates driving up revenue in this segment and normalization of maintenance costs driving up margins in those groups.
We are seeing increased interest in utilizing existing railcars due to the rise in prices of new railcars.
Given higher demand, we're able to raise the rates on these older railcars that have a lower cost basis, and thus improve our return on equity.
In closing.
China has greater near term visibility and this allows us to have confidence in the company's ability to achieve our guidance for the year as well as our long term return goals.
We look forward to sharing our progress with you.
And now operator, we're ready for our first question.
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Our first question today comes from Vasco majors from Susquehanna. Please go ahead with your question.
Hey, good morning, and thanks for taking my questions.
I wanted to go back I mean, I know you had the three year plan out there.
Josh a lot of things have changed and some of them quite positive for your business others may be more mix. Since November of 2020, I was hoping we could maybe high level.
Through some of those factors that have shifted and talk about.
How they affect your business.
Starting maybe with interest rates and you alluded to 75% of your debt being fixed now but just.
How do you feel about the funding of the fleet and.
And what a sustained higher rate environment changes on your leasing strategy if it changes at all.
Sure Baskin sphere.
Yeah, Good question and I did.
Comment in our prepared remarks about our debt profile and we're very pleased with the mix of that we have we just.
As I mentioned, we just we're closing on another financing tomorrow.
We access the ABS market.
Clearly interest rates are elevated from where they were over the last couple of years.
But we have a very nice maturity profile very little in the way of maturities in the next couple of years.
Most of our leasing debt is fixed rate.
But.
The interest rate environment, increasing interest rate environment will have an impact it mainly has an impact on new railcar leases.
That's where you really notice the funding cost is on those investment decisions. When you acquired railcars, whether you acquired in the new assets are of your acquired railcars in the secondary market, that's really where that interest rate.
Comes into play.
<unk>.
The result of higher interest rates is going to make it's going to make investors hurdle rates higher which should make lease rates higher and thats that gets back into the existing fleet.
And.
We expect and we're seeing from our MLR D that interest that lease rates are going higher and that's one of the factors.
Allow that to go higher once you have periods of barrels, which we do have more <unk>.
Industry fleets more in balance today.
It is a change.
But I think overall.
With the existing fleet is more of a benefit.
Sure.
Alright, so short term since you have fixed so much of your portfolio in the last three or four years.
I think that inflation helps you more on revenue than it hurts you on funding.
I do.
Youre going to reprice the fleet over a three year remaining lease term.
Which we do on average.
So we're going to reprice, a significant amount of the fleet.
During the period of that.
The fixed piece.
So it does I mean, it does getting the timing, but overall I think it's a benefit.
Okay.
Go ahead.
Go ahead I'm sorry.
These are long term assets and so.
These are 30 40 year assets.
And part of the leasing business is.
You finance it and then you pay down the debt and you refinance it and every time to refinance those or liquidity events and so it just speaks to the cash flow generation of the lease fleet.
And even in periods with higher interest rates I would expect will still generate significant amounts of cash flow from it.
Overtime.
And I'll ask one more on kind of a similar angle I mean, certainly.
Steel prices and new asset costs have been dramatically more inflationary than I am.
Assuming you underwrote in that plan and in November of 2020.
Yeah.
I'm a little surprised the I think the annual guide for net lease fleet investment of $4 50 $500 million is roughly in line with what you had planned over three years and that period can you talk a little bit about the math between monetizing assets and a very high <unk>.
New car price environment versus investing in the future of your lease fleet and how that balance has changed or can change in this environment versus how you planned a couple of years, yes.
Very insightful question and.
Youre right on the waterfront, so things have changed.
The one thing that has not changed is our capital allocation framework and we're committed to we've talked about modest fleet lease fleet investment over that three year period.
We're still looking at modest fleet investment over that period, but things have changed and there's more demand for.
When we put out our Q today.
There's more demand for railcars currently.
That includes more demand for.
Lease.
<unk> product as well.
As our backlog for both has grown.
And so.
When you look at that net fleet investment that you cited the 450 to $5 50, just keep in mind that as a net number.
<unk> includes both additions all of our manufacturing sites with new fleece, New lease fleet additions, but also include secondary market.
Any secondary market activity that we do and then it is net of railcar sales.
Our platform has an opportunity to create value with all of those.
Inputs.
Net fleet investment I think what it comes down to is timing.
We do we have seen more demand for leases, we're seeing opportunities in the secondary market. We're also seeing more demand for our rail lease products through sales, whether it's through our RV platform or whether it's through the secondary market all that gets on the timing you cannot transact until you have the <unk>.
Content and so I think when you look at it over over a single year can get a little lumpy when you get to over three years.
Nothing has changed in our in our framework on what we're going to do that as a really long answer, but there's a lot of inputs are a lot of puts and takes.
But.
I'll stop there and so you've got any questions.
Thank you.
Okay.
Our next question comes from Matt <unk>.
From Cowen. Please go ahead with your question.
Thank you good morning, guys.
I know the inquiry activity is still strong.
And that translation into orders.
Clearly picked up in the last two quarters as steel prices began to ease but has the translation to orders subsided again following the conflict in Europe , which.
Drove steel prices back up.
Good morning, Matt Jean.
We're actually still seeing strong conversion and so the impact of inflation the impact of.
Steel prices going back up after we saw them come down has really not changed that pattern yet as we look at it.
The current owners are making long term decisions on what they're going to put into their fleet and so some of the short term headwinds that we're seeing have not slowed anything down yet.
Got it so the quarter to date.
Quarter number.
Satisfy satisfying for you guys so far.
If youre talking about the second quarter, Yes, I would say, we're still happy with what we're seeing.
Got it and Jim <unk>.
When do you think we'll start seeing some of the largest lessors pull the trigger on placing the orders I mean, do you think that theyre going to.
Keep holding off until they see what steel prices will do or do you think that some of them are reaching a point where they need to add.
To their fleet, otherwise there'll be jeopardized customer relations and sacrificing scale.
So when we're looking overall at what's going on it's pretty well distributed.
We talked in the past about when you have a recovering railroads and third party <unk> is the first to the table.
And then the end shippers come in and we're seeing orders come in from all three of those areas. So I would say we're already getting the.
The activity and remember, though on this cycle, we are projecting $40 to 50000 railcars minus sustainable conversion or withheld.
Sustainable conversion and that's really replacement levels. So theres no big driver to do anything different than replace the fleets that have been.
Scrap over the last three years and are continuing to get scrap now.
Okay, and then you mentioned the 40 to 50, which you guys have kept unchanged.
Would you guys be willing to share any thoughts on where you think deliveries for the industry.
It could go in 2023.
So again, we think orders are going to be the 40% to 50000, and we would expect to see.
See similar deliveries to what Youre seeing this year.
Got it and then just one last quick question for me, which I asked one of your competitors three weeks ago. This cycle is driven by more than one or two railcars, which is typically the case, it's more a lot more broad based so I was wondering what the margin implications might be for a cycle that didn't.
<unk>, having to do more line changeovers, and we have done in the past I mean the.
Mid to high single digit margin you expect to finish the year at.
Is that pretty much you know where.
Where you can.
Hope to be in 2023 or is there more upside to that given the mix.
Of cars that are in high demand.
Well as you look at this year we started.
At a lower run rate, we said, we will double that by the end of the year, we're expecting next year to come in what that double right. So what we're ending this year, which helps you overall as far as efficiencies. So I would say there is potential upside for next year on those margins, but we still are.
<unk> orders for 2023 at tonight's already be getting orders.
It's early in the year for next year, but.
We'll have to see where that lines up and I would expect to see some possible improvement on that.
Thank you Jay I appreciate it.
You.
Our next question comes from Gordon Johnson from GE LG Research. Please go ahead with your question.
Hey, good morning, guys. Thanks for taking my questions.
This is James Whitehouse gains recorded.
Just had a call.
Question first on your rail group margins.
Clearly you had some.
Cars railcars that you are selling that you booked in the bottom of the cycle last year.
To the margin pressure now for the as we progress later in the year.
How are you how are you expecting cost pressures to evolve.
I guess.
And so far as the improvements for your rail group margins, how much do you expect to come from higher value cars versus easing of cost pressures.
So this is Jean I'll go ahead and take that James So when you look at the rail products for the second half of the year.
First we have definitely been taking the orders and the environment. We're in now which is a tighter market. So we're seeing better pricing that we're getting there better margin doesn't come along with that and that's no small piece I am not going to give you the exact percentage, but that is very helpful.
Other thing you've got to look at is we.
Had high impact at least in January from the Omicron bear in some of our facilities had up to 30% absenteeism during that time period, we've seen that abate as we've gone through the first quarter.
Other thing I'll say is first quarter, there were some more supply chain issues, especially in some of the specialty items hatches valve cut.
<unk> is that we had to get that we've been working to abate by the second half of the year.
Some of that working capital that we're putting into the inventory will help us.
Limit the number of changeovers, we were doing due to not having components to finished cars, that's really disrupt Paul during a run and you have to pull cars out. So you can we all materials to come in so there is a combination of having better labor avail.
The ability, having better supply chain and also having better dynamics around the orders that we're getting.
Okay.
Very helpful and also helps explain.
Inventory build.
For the in terms of orders a day I think you might have mentioned this on the prepared in your prepared remarks, so I apologize if I missed it but.
Where are you seeing some of the some of the pickup in activity which sectors.
So it is pretty wide base as we look at where orders were coming from right now it's not in a single area.
If you look at the top areas box.
Boxcars definitely there has been a lot that has been scrapped over the last few years. They were getting older and they are being replaced grain cars remained strong and plastics would be some of the top three areas.
Okay great.
And then just squeezing.
Quick one please.
So your new orders.
In my opinion, I think it looks pretty good compared to last year, particularly in.
And especially in the.
And the average value that you guys reported.
So you.
You mentioned, the boxcars in plastics, where.
Or some of the higher demand items, but how broad our customers are at least pick up in orders coming from just a few customers or are you seeing more more and more of a source.
It's pretty broad based and across all the different areas that we're seeing those customers come in which we mentioned a little bit earlier in the discussion and the questions was the fact that it typically starts with railroads and third party lessor and it's moved into shippers also buying more cars. So it's great to see.
He has progressed.
As we look at the different areas the shippers.
We're seeing a lot more interest we get an eco marks are insulated boxcar.
That's a new product design for all both gaining some more momentum.
Okay, Okay very helpful.
I'm sorry, this is actually the last one.
In terms of your downstream shipments to the leasing is there any indication that you guys have given as far as how many cars will be.
The selling in house.
So James this is Eric when we put out our Q, we will show that we break out the backlog between.
How much of our deliveries.
They're in our what our leasing backlog is our leasing backlog has grown.
It's just under $700 million of our backlog, which is up dramatically from the same time last year in the queue.
Youll see that all in the Q, which will get filed.
Saturday.
Alright, great and that would all be doing this evening. Thank you Gina Eric. Thank you very much. Thank you.
Yes.
Our next question comes from Steve Barger from Keybanc Capital markets. Please go ahead with your question.
Hey, good morning, guys, Ken Newman on for Steve.
I am sorry, Walter.
Hi, it's Ken Newman on for Steve.
Thanks.
Yeah, Hey.
I appreciate the color on expectations for rail segment margin.
For the first half, but I'm curious if you could just help us think about the sequential improvement in margin for second quarter versus the first quarter.
Should we expect margins will kind of be in that low to mid single digit range or should we expect that similar to the first quarter level.
So Ken Unfortunately, we're not giving quarterly guidance.
We typically just give annual guidance, we're trying to help you all island levels at talking about first half versus second half and in Brian's prepared remarks, I talked about a step change.
And the margins for the second half of the year and Thats really as far as we'll go on that.
Okay. So maybe just asking it into different wavelengths.
Now you've talked about full.
Full year margins kind of being in that mid to high single digit exit rate.
Is it.
Is it fair to assume that the segment margins in the second half will be below that top end here just trying to think about the magnitude of that change.
Shane.
Second half.
One thing I will tell you as we've mentioned that in the first half of the year, we will be delivering the orders.
Or is that we've taken at the bottom of the market.
And so until we work through those.
Don't see a step change once you get to the orders that we're taking now that will deliver in the second half of the year I think youll see again, a mark or a step change and what those margins will be.
Understood.
For my follow up.
Feels like service levels from the class one.
Obviously <unk> taken a hit amid the current supply chain environment.
Just to clarify on the inquiry comments that you made earlier are you seeing any new inquiries for 23 talking about demand beyond replacement activity or is it still primarily replacement at this point.
There are certain markets that are seeing some growth, but overall.
Bill replacement type demands that we're seeing and remember that as the shippers or car owners.
The fleet plan start looking for the long term not just for that short term impact that youre seeing from the railroads.
We're still looking at either opening new plants.
Some of the replacement or growth opportunities you might see.
Okay.
One last one if I might.
I'm just curious if you could talk a little bit about the largest impacts from the supply chain at this point, obviously, we know that but feel it's been a big impact.
Anything that we should kind of be aware of as we think about some of these escalations and inflated or other supply chain partners.
The cadence from one period to the second quarter.
The biggest thing that we still see lingering on the supply chain and lease and the U S. Labor shortages still are causing them to delay some of their shipments.
Not get them tools and the time frame that we expect we are trying to mitigate the majority of that that we can buy that inventory build that we've talked about to try to smooth the impacts on our facilities.
We still think we will see some of those impacts during the first half of the year and expect to see that getting better in the second half.
Okay.
Thanks Kim.
Yeah.
And our next question comes from George Sellers from Stephens, Inc. Please go ahead with your question.
Hey, good morning.
It's been kind of a hectic morning, so sorry, if I missed this but could you all talk about the sequential progression and lease rates that you saw in the first quarter and maybe quarter to date as well for both freight cars and tank cars.
Sure. So when you look at our <unk> D.
At two 4% is what we're reporting.
The first quarter into the third quarter in a row that we've seen a positive that's all R&D.
And as you look at a tightening market that we still see out there for railcars.
All cars in storage going down scrapping continues.
Railroads being a little bit slower as far as your speed all are contributing for that demand as long as we continue to see that demand I would expect to see.
Being able to adjust to increase that lease rate and keep up with some of the inflation that we're seeing.
Okay got it that's that's helpful.
And then sort of thinking about some of the impacts that the Russia and Ukraine conflict have had on the energy markets have you all seen some of those customers reenter the market or some increased activity.
In coal and Frac sand markets and.
Yeah.
How should we think about that from both a lease perspective leasing cars and then also potentially some new railcar orders.
I'll start and then I'll, let Eric jump in here, So first our thoughts and prayers go out to the people in Ukraine with award that Theyre going through and we don't see.
Any positives coming from that it's a terrible situation to be dealing with and think overall, it's going to be minimum impact.
To the the cars and the orders that we're seeing here in the U S, but Eric I don't know if you'd add.
I wouldn't put the drivers on the war, but you do have you asked about small cube covered hoppers, we are seeing.
Increased drilling activity.
Started really last year, and we're starting to see that fleet gets tighter it's not tight but it certainly tighter.
And do you see any movements.
In terms of the crude oil side.
Most of that is going to move by pipeline, we don't see that as a big Big rail move where we are seeing growth.
On the liquid side is more on the Biofuels.
Greater demand for Biofuels and that is helping the tank car fleet and getting that tighter.
<unk>.
Clarifying a little bit of that.
Okay. Thank you.
Is helpful as well.
Then one last one more more longer term going back to your Investor day in 2020.
Highlighted some some new products.
Potential operating income impact of $150 million to $200 million.
How much of that has been realized at this point and how do you expect.
Some of those products to.
To progress this year and maybe next year as well.
Well it was multiple years. So you know it takes a little time to do the design and get the cars out and running and pick up but I'm going to point to a few things our new green car covered hopper.
Has done extremely well and that's a $54 59.
Any of the railroads have picked up on that car.
Throughout North America, not just in the U S and has done well for us.
Our boxcar work is also picking up and that's inflated boxcars refrigerated Dan some of the standard so making moves on all of those.
The auto rack redesign we did it's an hourglass Iraq. It's meant for the large vehicles and then allow some more space on the interior design for people to get in and out as our loading and unloading those cars.
Starting to see auto rack demand pick back up and I think youll see that escalate as the chip shortage is overcome and you can get those automobiles out and running.
We haven't really said how much of the dollar amount.
We'll be done for this year, but we are making progress we're seeing that go up and we still have confidence that we'll hit.
Yes.
A big chunk of that number.
Okay. Thank you I'll leave it there. Thank you both for the time thank.
Thank you.
Yes.
And ladies and gentlemen, with that we will be ending today's question and answer session I would like to turn the floor back over to Jean Savage for any closing remarks.
Well, thank you and thank everyone for joining us this morning the.
The excitement of the second half of the year is high.
As we've shared with you today, we look around our business and see improving metrics and data that forecast higher returns and earnings later in the year.
We look forward to seeing our hard work pay off and reporting those positive results with you. Thank.
Thank you for your support of Trinity and please reach out to Leann with any further questions.
And ladies and gentlemen, with that we'll be concluding today's presentation. We do thank you for joining you may now disconnect your lines.
Okay.