Q3 2022 Trinity Industries Inc Earnings Call
Good day and welcome to the Trinity Industries third quarter results Conference call.
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Before we get started let me remind you that todays conference call contains forward looking statements as defined by the private Securities Litigation Reform Act of 1995 and include statements as to estimates expectations intentions and predictions of future financial performance.
Statements that are not historical facts are forward looking or forward looking.
Participants are directed to Trinity's Form 10-K, and other S E SEC filings for a description of certain of the business issues and risks.
And 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 turn the conference over to Leigh Anne Mann, Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone. We appreciate you joining us for the company.
Quarter 2022 financial results conference call our prepared remarks, some quick comments on G fast as chief executive.
Officer, and President and Eric <unk>, the company's Chief Financial Officer, They will hold a Q&A session. Following the prepared remarks from earlier.
During the call today, we will reference slides highlighting key points of discussion as well as non-GAAP financial metrics.
Filiation at the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the supplemental slides.
But you are accessible on our Investor Relations website at Www Dot trend that met these slides can be found under the events and presentations portion of the website along with the third quarter earnings conference call event like.
A replay of today's call will be available. After 10 30, a M. Eastern time through midnight on November 1st 2022.
Replay information is available under the events and presentations page under Investor Relations website.
It is now my pleasure to turn the call over to gene.
Thank you Leann and good morning, everyone when.
When we last spoke in July I told you that we were expecting significant acceleration in the back half of the year in terms of railcar production lease rate growth and better financial results.
I am pleased to report today that we are on the path we laid out for you and we continued to see momentum in the markets we serve.
Well there is a lot of uncertainty in the economy, we believe our business and the industry are resilient to a minor recession.
They are underpinned by the significant improvement in the balance of supply and demand of railcars over the past two years.
In short our view of our business is relatively unchanged in the last quarter.
Turn with me to slide three to talk about our key messages from today's call.
All of which we will expand on later in our prepared remarks.
First we are reporting GAAP EPS of <unk> 35 cents and then adjusted EPS from continuing operations for the third quarter up 34 cents, which is up 20 cents from last quarter and up 16 cents year over year.
You'll see in our remarks today that our results show strength across our businesses as higher external deliveries and gains from another successful whopper transaction bolstered our results.
Second our future lease rate differential or SLR D was a positive 11% this quarter, which we believe is evidence that the market will continue to support solid increases and renewing lease rate.
This is due to a higher fleet utilization in the quarter 97, 9% for our lease fleet showing that demand remains high and available supply remains limited.
Third this quarter, we completed the sale of 2000, and 678 railcars to our joint venture with Walker up as part of our previously announced rail investment vehicle program.
This sale generated proceeds of $254 million and we recorded a gain of $25 million and our leasing business.
In addition to the Walker at car sale, we sold several other small portfolios in the quarter for total proceeds of $300 million and a gain of $34 million.
And finally earlier this month, we announced a six year 15000 railcar border, which drove our reportable third quarter backlog up to an impressive $4.1 billion and our book to Bill ratio for the quarter was five times.
This order increased our backlog by $1 $8 billion.
Again each of these sales in the orders is a reflection of the visibility we see in demand relative to supply for our industry.
We are encouraged to see many of our customers continue to make long term investment decisions.
And now, let's turn to slide four for a market update.
While rail traffic is still impacted by labor shortages and service issues, we are starting to see some easing.
Rail traffic is still below pre pandemic levels, but we continue to see improvement in railroad head counts and believe this is a needed step to support better rail service.
There is no quick solution, but we are in full support of increased efficiency and service in the rail industry.
After 23 months of declines in railcars in storage the storage number ticked up slightly over the summer largely driven by seasonal grain cars going back into storage before the fall harvest and tank cars in storage to make preparations for the winter heating season.
However that trend reversed in October when the a our reported 16, 9% of inactive cars as compared to almost 21% a year ago.
This is the lowest percentage of inactive cars in October since 2018, and the lowest absolute number of idle railcars since 2015.
Moving to the Trinity specific data on the bottom half of slide.
As I mentioned at the top of the call our SLR D and fleet utilization are once again favorable in the quarter and we believe will drive up leasing revenues in coming quarters.
Our F. L. R. D is down slightly from last quarter, but this is more of a function of the mix of cars expiring as opposed to a decline in remarketing rates.
The strength, we have seen in lease rates is broad based.
We delivered 3935 railcars in the quarter.
57% increase over the second quarter. Despite continued challenges with railroad service and supply chain disruption.
Last quarter, we stated we plan to have approximately doubled deliveries in the second half of the year as compared to the first half of the year.
Our pace of production has continued to accelerate and we still have line of sight to achieve this target in 2022.
Yeah.
Moving to orders in addition to the 15000 railcar multiyear order with J T X we.
We received orders for an additional 4500 railcars in the third quarter.
Women's trading the continued momentum of the market.
We believe the market demand is driven by attrition of AG NASA.
And so we would expect order ball games to remain steady in the short term despite macroeconomic uncertainty.
Lessors seem to be less speculative than during previous cycles, which is keeping demand more consistent and rationalized.
With the continued growth in our backlog Trinity is beginning to take orders for production space in 2024.
We continue to believe that our ability to provide railcars for shippers railroads and other leasing companies give us the broadest view and the trends and dynamics in the industry and ultimately drive strong returns for our shareholders.
The G T X multiyear order demonstrates the strength and the long tenured relationships, we maintained in the industry.
With this renewed supply agreement, we expect to deliver a mix of 15000 newly built tank and freight railcars over a six year period.
We look forward to continuing this partnership which provides a base load of orders over the next six years.
Moving to Florida, five our revenue for the quarter with $497 million up 18% year over year and our adjusted earnings per share of <unk> 34 cents was up 16 cents year over year.
Our cash flow in the quarter was $9 million and free cash flow was a negative $42 million.
Eric will cover our cash flow in more depth, but in short. This is what we expected for the quarter as we continue to grow our working capital to prepare for the increased pace of deliveries and mitigate as much supply chain risk as we can.
Please turn with me to slide six for segment results.
Our leasing segment revenue of $195 million remained consistent compared to last quarter.
And we ended with a slightly smaller fleet.
We saw renewal rates up over the expiring rates in the quarter and the renewal success rate of 82%.
This is our fifth quarter with a positive F. L. R D and as we continue to reap.
Reprice, our fleet, we expect to see revenue growth in the segment, which flow straight to the bottom line.
Revenue was also impacted by the change in fleet composition as a result of net lease fleet investment activities.
Excluding car sales operating profit margins in our leasing and management segments slightly declined sequentially due to higher fleet operating costs as well as higher depreciation levels in support of our sustainable railcar conversion program.
Total operating profit margin for this segment benefited from the $25 million gain on the railcar sale to work for us.
Continue to view gains on railcar sales as a normal and recurring part of our business.
Lead optimization is an ongoing process.
Having the dual levers are production and owning a fleet gives us several options to decide how best to allocate our capital.
Looking at rail products, our revenue of $597 million was up 39% sequentially and 76% year over year, driven by a large increase in deliveries in the quarter as well as better pricing dynamics.
Our operating margin of four 4% also improved sequentially up 120 basis points due to better pricing dynamics and railcars delivered.
In the quarter, we booked a gain of $1 $1 million due to insurance recoveries.
This is excluded from our adjusted consolidated result, but included in the rail products group.
Removing this gain our rail products operating profit margin would be four 2% in the quarter.
While supply chain issues have been improving across the network our production and deliveries in the quarter were negatively impacted by rail service issues and congestion at the U S Mexico border.
I'm proud of the way our operations team has adapted to this changing environment to meet the needs of our customers.
This flexibility has come out of cost.
<unk> operating margins by 300 basis points in the quarter.
Finally, moving to slide seven I'd like to highlight a few additional activities, we undertook during the quarter and support of our longer term strategic initiatives.
We amended and renewed our revolver for a new five year term and the mid and both our warehouse and revolver facilities to be indexed to chauffeur in anticipation of the upcoming phase out of LIBOR.
We repurchased $14 million worth of shares and now have $34 million remaining on our current authorization.
Year to date, our net investment in the lease fleet is $176 million, which went down in the quarter due to our large portfolio sale to offer more than offsetting additions to the fleet.
Our sustainable railcar conversion program continues to have good results and the current conversion backlog is 2000 and 420 railcars.
Finally, I am proud to report that Trinity completed its first ESG roadshow.
The presentation is available on our website, if you're interested in reading about some of the great initiatives our team is pursuing.
I'm impressed by Trinity's focus on improved sustainability, both for our business and for the industry as a whole as we fulfill our company's purpose of delivering goods for the good of all.
And now I'll turn the call over to Eric to review our financial results.
Thank you, Jamie and good morning, everyone.
I'll start my comments on slide eight.
Starting with the income statement, our total revenues of $497 million reflects higher external railcar deliveries.
Our adjusted earnings per share from continuing operations of 34 cents and exclude the gain from the insurance recovery.
As gene mentioned, we benefited from a $254 million lease portfolio sale to walk through in the quarter.
Moving to the cash flow statement.
Cash from continuing operations was $9 million.
And our free cash flow was a negative $42 million for the quarter.
This is mainly due to a year to date working capital increase of $226 million, which is a function of multiple factors.
First as we prepare for higher deliveries.
We've increased our inventories in anticipation of the accelerated pace of production.
Inventories have also been affected by rail service issues at the border that gene mentioned.
And finally in the current environment, where raw materials are more expensive.
As we deliver the railcars currently in production.
We expect to see our cash flow improve.
Our net lease fleet investment year to date is $176 million.
The third quarter included $217 million in new railcar deliveries to our lease fleet.
As well as a small secondary market portfolio purchase.
In addition to the Walker car sale, we sold additional leased railcars in the quarter for total proceeds of $300 million and a gain of $34 million.
Secondary market valuations remained strong reflecting assumptions of Verizon lease rates and increased input costs and new railcars.
We remain disciplined in our secondary market transactions and view these transactions as an effective way to optimize our fleet and take advantage of any opportunities we see in the market.
Continuing our conversation on liquidity, please turn to slide nine.
Our liquidity is currently $465 million.
And the current rising interest rate environment.
Our debt profile contains a favorable mix of fixed to floating rate debt.
Relatively low interest rates.
No maturities until 2024.
This debt profile combined with the strength of our lease fleet and a robust manufacturing backlog provides us with good visibility of our cash flow over the coming quarters as we continue to optimize our business.
While we're not prepared to give commentary on 2023.
We think railcar demand will bring strong and we expect to exit this year with good momentum and visibility.
Please turn to slide 10, where I'll talk about our expectations for the rest of 2022.
We continue to think industry deliveries for the year will be between 40050 thousand railcars.
Which is predominantly driven by replacement demand.
Our views have not changed as we have progressed through the year despite macroeconomic headwinds.
We are revising our guidance on net lease fleet investment for the year to a range of $250 million to $300 million.
Due to lower internal deliveries and higher railcar sales.
Given the nature of the macro economy, we are managing our cadence of investment as some deliveries have moved into next year.
We've also been able to take advantage of an attractive secondary market and I haven't had the higher railcar sales than previously forecasted.
Year to date, our net lease fleet investment is $176 million and includes $532 million of fleet additions, both through internal deliveries and secondary market additions and <unk>.
$159 million of fleet modifications and conversions.
Offset by $515 million in railcar sales.
We're still on target for our three year net lease fleet investment forecast.
And finally with nine months of the year complete.
We are reinforcing our adjusted EPS guidance range of 90.
To a dollar churn for continuing operations.
Our fourth quarter results will rise sequentially due to higher expected external deliveries.
However, we want to acknowledge that any further rail service issues other or other supply chain challenges may delay some deliveries into 2023.
We believe we have good line of sight into fourth quarter deliveries have been working all year to mitigate risk in our supply chain.
And while we are insulated from higher interest rates, we are not immune from their impact.
Our full year guidance reflects much higher interest expense in the year than we expected.
Before we take questions I did want to briefly talk about our three year targets. We introduced in November of 2020.
2023 will be year three of our plan.
And despite a challenging and unanticipated operating environment over the planned period, we remain on track to meet all but one of the objectives that we put forth.
In 2020, we projected cash flow from operations of $1 five $2 billion over three years.
Through seven quarters, we have generated $563 million and with our visibility into 2023, we are revising our target.
We believe our three year cash from operations will come in between one two and $1 4 billion.
Our initial assumption included cash flow from our highway business, which has removed in this update.
Additionally, significantly higher working capital in geography of railcar sales is impacting our forecast for cash flow.
With a partial offset due to the timing of cash received from our income tax receivable.
We believe we're still on track for the rest of our three year targets. Despite a lot of unexpected headwinds in the market.
And we will continue to update you if our expectations change over the next year.
Put it all together I want to reinforce gene's comments from the start of the call we.
We think our third quarter results are proof of our ability to execute on our goals.
And we feel positive about the progress we're making.
With strong forward looking metrics, we expect to end 2022, when a lot momentum into 2023.
And now operator, we're ready for our first question.
We will now begin the question answer session.
A question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And our first question here will come from Allison Pollinia with Wells Fargo. Please go ahead.
Hi, good morning.
It was certainly lease rate metrics today are pretty solid you know as you look at whether the renewal of that and the pricing and so forth macro concerns are certainly weighing on them certainly the sentiment here.
Could you maybe give a little bit more color just on an absolute basis, what youre seeing in terms of stabilization is there any vertical that maybe you're a little bit more incrementally worried about just any more color on how we should be thinking through that market over the next couple of months.
Sure when you're looking at the different markets all of a sudden it really is pretty broad broad base as far as the demand as you can tell from our utilization we still have some small pockets of tank cars that arent being used.
But as we look at the possibility of going into a mild recession, you know the markets that are closer to the.
Consumer and the consumer spending are probably the most at risk that's going to be automotive and then some of the products that they're going to move by intermodal.
If you're looking at the chemical market North America strong performance there.
Probably going to insulate that somewhat.
And energy and agriculture, typically move independent of what's going on with the economy.
And that leaves construction. So you will see some pressure from the housing market going down, but the infrastructure Bill that was passed should give us.
Some movement or support there, especially when it comes to things like aggregates or asphalt.
Great. Thank you that's helpful and then on the rail manufacturing sizable headwinds from the transport side of it.
He mentioned the U S and Mexico issues.
I would say it appears you know delivering some ramp up again in the second quarter.
The fourth quarter, how should we think about that headwind does it start to dissipate a little bit or does it even accelerate just given the level of deliveries you're expecting.
Of the year, just any thoughts so the nice thing Alison as we'd not experience the same headwinds this quarter else yet.
Last quarter, though we had a 20% loss in production days at our highest volume manufacturing plants and 10% at the next highest volume. So it was a pretty big impact we were able to offset some of that with some overtime and some weekend work but.
It was a major headwind for us of between 501000 cars in the quarter.
We're already in process of being built.
That could not be delivered so we've got to get past that we again, we're seeing improvement we're just hoping that maintained.
Perfect. Thank you I'll pass it along.
Our next question will come from Justin long with Stephens. Please go ahead.
Thanks, and good morning, just to follow up on that last question. Jean I think you mentioned that the cross border issues were about 300 basis point headwind to margins I just wanted to clarify if you were referring to the rail products group margins on that and then.
Eric when you look at the net lease fleet investment guidance came down by 175 million at the midpoint.
It sounds like Thats a combination of.
The higher level of railcar sales and a lower level of investment in the lease fleet, but is there a way to break down.
Those two buckets and what drove that $175 million reduction.
Sure I'll answer the first one Justin yes that 300 basis points was where the rail products margin that I was talking about and the cause with what I, just talked to Alison or answered Allison on yes.
Yes, Justin this is Eric.
So youre right.
Ed.
The driver in the reduction in our net fleet Capex, our net fleet investment.
Is a combination of lower deliveries some of that as the deliveries that are pushed out of this year that Jim just referenced.
In fact, the third quarter some of those will fall out of the year.
Then.
We certainly see a very strong secondary market right now.
And.
With the railcars that we've delivered and with our along with our three year outlook on net fleet investment. We just think it's a good time to.
Execute on that.
Increased car sales as a result, the market's there.
And so that combination of those two things gets you that fleet investment it's more led by.
Pushed out deliveries when car sales, but it is a combination of the two.
Okay got it and my second I wanted to follow up on the commentary about the secondary market. It sounds like it's still pretty strong today, but obviously interest rates are moving higher I'm curious if you have any initial expectations for how the secondary market trends into 2023.
And.
Honestly, there has been a higher level of railcar sales in recent year.
Any thoughts around what a normalized level of gains on railcar sales could look like.
So arguably.
Not normalize I'm not going to give you a normalized level of gains, but I would say there is going to be activity. Some of thats dependent on how much lease origination activity we do.
Obviously, the more lease origination activity the more that would flow through.
The gain line.
But it's kind of dependent on the market and what our customers choose to do.
Going back just to the secondary market.
You are right.
Net interest rates are higher I would tell you that.
What we're seeing in our experiences in the secondary market is that.
There is certainly an expectation that lease rates will continue to improve.
As.
Buyers or assuming higher lease rates have commented a little bit of that in my script.
Ed.
That's.
Providing attractive valuations in the secondary market. So while interest rates are going up and that does affect funding costs.
The revenue line or the assumptions on on lease rates are also going up in line with that which speaks to the overall tightness in the market and the outlook for rail going longer term.
Okay got it thank you.
Yeah.
Our next question will come from Matt Alcott with Cowen. Please go ahead.
Good morning. Thank you so based on your guys outlook for doubling.
Rivers in the second half I think I come up with like 6000 cars in the fourth quarter.
I was wondering if you can comment on that piece of.
That delivery quarterly delivery number going forward into 2023, and do we see a step down in the first half or do you continue at that pace.
So Matt we will come back in February of next year and give you our guidance for 2023 as we look at the fourth quarter. We have now hired all of the manpower that we need to produce the product for this year and so that that is a good sign so we should be finishing.
The acceleration of that ramp very shortly and then b.
Being able to do some things like I mentioned in my prepared remarks, we're already starting to take orders into 2024. So that's the one tidbit I'll give you besides we'll be back in February .
Yeah.
Yeah, I'm, sorry, let me say one more thing Matt. The other thing is our inquiry levels still remain in line for the industry to have 40 to 50000 railcars deliver next year.
Okay. That's helpful. But is there typically kind of Ah is there anything structural about any first quarter typically that would cause deliveries this stepped down a bit or or not necessarily given the fact that you guys have been ramping up resources I'm, just trying to kind of get a sense of how the.
The Lumpiness could play out in 2023.
There is no structural issues that would change anything.
Okay got it and then just one.
Quick question on lease rates, it's good to see that the lease rate momentum is continuing.
I think the improvement on a quarter over quarter basis sequentially has been somewhere in the.
High single digits to mid to high teens for the industry for you guys maybe can.
Can you talk about the magnitude of the percentage increase in the third quarter over the fourth quarter and.
Do we naturally see that moderate going forward given the fact that it's been going on for two years now.
Yeah.
What are you are you asking us to project the <unk> for the fourth quarter is over here is that the nature no well, Eric just for that for the third quarter first what are what is if we take what the average lease rates on renewals.
Our renewals and the.
Actually I actually my question was on spot rates.
On the spot market, what's the percentage improvement in the third quarter versus the fourth quarter. If you take like a cross section of asleep.
So yeah, I don't know that might get into all the details on that I would tell you that sequentially lease rates continue to improve.
And when you look at both the combination of interest rates.
Asset new railcar asset prices and the tightness in the market.
Lease rates should continue to improve.
And so we would expect lease rates to continue to improve sequentially from where they were in the third quarter two to continue to improve into the fourth quarter into next year.
I don't think Daniel clearer than that.
Yep.
That's helpful and then.
So there is somewhat of a bifurcation between 3000 and phone calls I don't think so.
Lots of phone calls are coming up for scheduled maintenance in the next few years can.
Can you talk about how that's going to impact the utilization number for the industry for tank for tank cars, optically and effectively if theres a real impact.
So I think you're referring to two things one is.
The phase out of the flammable tank cars, which for ethanol hits in May of 2023, and then next 2023 is just naturally a higher year for tank car compliance for.
For tanker compliance for tank cars are built in 2000.
<unk> 2014 et cetera.
Both of those will have an impact on on terms of the phase out I would tell you. The industry has done a very good job of.
Getting hitting that.
Getting to that point.
Most of those cars in ethanol service are compliant.
And we see line of sight for the ones that are not compliant today that there was already going to be modified.
Placed with new tank cars, so I don't think theres any kind of.
Dramatic supply changes from that standpoint, we will see more compliance next year and years to come.
And so that that could have an impact in the what you see in the air numbers because railcar at those tank cars. It hits shops won't move for potentially six days or longer so that could have an impact that makes it look.
Yes.
Artificially low the other side of it is going to put pressure on existing tanker fleet will make that will make the fleet a little bit.
Later, and so we do think that that is factoring in the shippers.
Fleet planning decisions as they go into 'twenty three 'twenty four.
Well. Thank you Eric Thanks, Joe appreciate it.
Yeah.
Our next question will come from basketball majors with Susquehanna. Please go ahead.
For the fourth quarter can you talk a little about the higher interest expense or give us a range of what's embedded in the guidance.
As far as you know the 40% to 60% implied for this quarter I know you aren't going to work that into next year, you've been pretty clear about that but if there are any pieces of that guidance or big levers to pull where you do have visibility and want to make sure that.
Sell side and the buy side are cognizant that if if you would give us a little qualitative look at pieces of that that would be helpful. Thank you.
I'm going to start with the second piece and then Eric will come back on the interest. So some of the pieces that I would put together is we've been talking for a while now about our belief that the industry deliveries will be 40% to 50000, and we said that for this year, we talked about the next couple of year.
Years team there.
When you look at the industry as a whole with that kind of stability and the number of cars that need to deliver it should help all players get better on their efficiency, because you're not going through the ramp up or ramp down that we typically do.
You do when you have either a higher inputs are higher lift in the cycle or when youre going down. So those things should help stabilize what's going on and give companies the ability to maximize our efficiency to iron out any of the problems that they've seen as they've gone through their ramp up.
And I'll, let Eric goes to interest so basket.
Well I'm not going to provide line item.
Guidance I will tell you that.
Reminder, that our fixed to floating rate debt, we're about 80% to 20 fixed to floating but thats still you did see the interest expense step up.
Kind of throughout the year as the floating rate market, so as the benchmarks of increase.
When you were not projecting any significant changes in the mix of debt or the levels of debt with the fleet investment guide that we have so I would tell you that the third quarter is a pretty good proxy for the for the.
The run rate.
Thank you both for those thoughtful answers and maybe we could take it a step back to some of the cost of capital discussions earlier can you talk.
No.
As far as a incremental lease that you're underwriting today.
At a market level cost of capital could you talk about the returns that you think you're getting and how attractive you feel those are and whether that incremental leases in line with your long term goals.
And so maybe a little bit about Trinity and anything you'd like to add about the sense of the market participants participants that are buying this equipment and leases also view off of you and and how they're underwriting targets or behavior has changed in the last three to six months. Thank you.
Sure basket.
So I would tell you that.
Yes.
We're very focused on our weighted average cost of capital and when it comes to lease originations in our underwriting process.
I feel that we are very disciplined in setting our hurdle rates based off of the markets that we're serving.
And what we've seen in lease pricing.
Even in light of higher interest rates and.
Changes in our hurdle rates, we have seen market lease rates support.
Those.
Higher valuations on new railcars and support.
The yields and the return targets that we have for the copper that we laid out three years ago. So when we look at the lease originations that were adding to our fleet.
Both that we're adding the fleet in the current quarter and what's in our lease backlog. We believe those will be accretive to our margins and supportive of our long term return targets.
In terms of how the market has changed.
I think the market has shifted.
People have reacted differently in terms of higher interest rates.
The dollar inflation I think theres a lot less speculative.
And in the market today, which provides.
A lot more disciplined and.
And Revpar is less likely to have to find a home in a in a desperate sort away. So from that standpoint, I feel really good it feels like a rational market.
Uh huh.
That's supportive.
Were things.
Maybe more aggressive is in the secondary market because youre not speculators as much and that's taken known deals.
A little bit more of an auction processes that may have a little less.
Lower hurdle rate and some of the lease originations have received.
Thank you for for both of those angles in just one clarifying piece on next year. If you could share does the denominator of the expiring lease rate you know based on how the portfolio is constructed today does that go down again next year or is that starting to stabilize when we think about the renewal.
<unk> and the inputs of both the current rate and the expiring rate. Thank you.
There's always a mix to the <unk> D in terms of.
Changes each quarter that we add each quarter that would come up.
So.
I'm not sure I can give you a good answer on that.
Detailed.
So I think I'm just going to have to.
Leave it at that.
Thank you Paul if I could follow up.
Our next question will come from Steve Barger with Keybanc capital markets. Please go ahead.
Thanks, Good morning.
Jean <unk>.
You expect some industry resiliency to a modest recession, but we've seen ocean freight decelerate I think theres been some comic cautious commentary from some of the truck companies and historically of course railcar orders and traffic are affected by GDP. So could you just talk a little more about why you're confident the industry could sidestep a slowdown.
Sure when you look at the balance of supply and demand that's going on right now in the industry and the fact that Eric just mentioned that in this cycle everyone's been a lot more disciplined without the speculative orders.
That is very.
Prominent in my rationale ESG is being discussed much more at the tables and the benefits of rail over trucks and what that can mean, along with the cost differential.
If the service levels continue to improve on the road.
We see this as an opportunity to finally start moving some of that modal share back from highway over to the rails.
Yes, the last point I'm, just going to make is that we talked about the fact that we're already starting to take orders into 2024, and the fact that our customers are making over the long term decisions and investment. So we still don't believe that short term blip or change is going to affect that.
Okay.
Well the low interest rate environment, we lived with for the past 10 years drove a lot of lease fleet investment. Obviously do you expect higher rates will have the opposite effect, meaning rather than having a long stretch of deliveries well above theoretical replacement will will see under investment in the fleet.
Okay.
Yes.
Steve I would say that.
Capital.
Lease capital railcar leasing is still attractive from a capital standpoint, and it's more on a risk adjusted basis. So it's all relative value and I do think that railcar leasing has relative value and the more we can make it.
A stable market.
That has less cyclicality of the more attractive that will be long term, but these are long lived assets that have attractive return characteristics.
So I think it will still be attractive for capital.
Long term.
Well I know you're focused on improving pre tax Roe, but if we get into a better part of the cycle why is that the right metric to manage to as opposed to EPS growth rate or maybe some more directly cash flow based metric that that may resonate more with investors.
So.
I think thats, an important question and I think when you look at.
How we measure our business.
We think return on equity.
The economic profit as long term the best way to measure our business in measured success other companies have different incentives to drive different behaviors.
We believe that the measures we have in place will.
We will drive disciplined long term value creation that we think aligns with our shareholders.
And that's that's how we view it.
Yeah and this is my last question.
I guess the reason I ask if if deliveries are up next year, you should see good earnings leverage, but if you grow the lease fleet at the same time it can mask EPS upside. So I guess you know.
Echoing an earlier question what should we be expecting as we think about you levering leveraging production growth into EPS growth.
So in the prepared remarks, Eric mentioned, the fact that there is only one of the metrics that we gave you on the Investor day in November of 2020 that were not going to hit. So if you go back and look you're going to be able to see where we are now and our investment in leaf tea and where we expect to be at the end of three years also it gives you the.
Ro.
E P S.
Give you the metrics I think that you need to look at to see where we're heading and I mean, we're really proud of the team they've taken a lot of headwinds in the last two years and the majority of all of those metrics, we still see line of sight to hit.
Okay. Thanks.
Thanks, Steve.
This concludes our question and answer session.
I'd like to turn the conference back over to Jean Savage for any closing remarks.
Well, thank you and thank everyone for joining us this morning, as you've heard on our call today, our third quarter results show progress and improvement in our business.
Despite continued headwinds in the rail network I am extremely proud of our dedicated team and how they've managed these unexpected challenges and I continually Trinity will perform well in the coming years.
And again for your support.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.