Q4 2022 Trinity Industries Inc Earnings Call
Good day and welcome to the Trinity Industries' fourth quarter and 12 months ended December 31st 2022 results Conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal conference specialist by Christmas Starkey, followed by zero.
After today's presentation there'll be an opportunity to ask questions.
To ask a question you May press Star then one your touchtone phone to withdraw from the question queue. Please press star two.
Please note today's event is being recorded.
Before we get started let me remind you that todays conference call contains forward looking statements as 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 that are not historical facts are forward looking.
As parents 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 turn the conference Lyanne Mann, Vice President of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone. We appreciate you joining us for the company's fourth quarter 2022 financial results conference call. Our prepared remarks with comments from <unk> Chief Executive Officer.
And here the.
The company's Chief Financial Officer.
We'll have a Q&A session. Following the prepared remarks from our leaders during.
During the call today, we will reference slides.
By highlighting key points of discussion.
non-GAAP financial metrics and reconciliations for non-GAAP metrics to comparable GAAP measures are provided to me.
Hi, Peter.
That's a lot of our Investor relations website at Www Dot change dot net.
These slides can be found under the presentation portion of our website along with the fourth quarter earnings Conference call.
A replay of today's call will be available. After 10 30, a M. Eastern time through midnight on February 28, 2023 replay information is available under the events and presentations page on our Investor Relations website.
It is now my pleasure to turn the call.
Thank you Leann and good morning, everyone.
I hope your 'twenty two 'twenty three is off to a great start.
Before we begin with our prepared remarks, I wanted to take a moment and acknowledge the accomplishments of 2022, but don't always appear on financial statements that are central to all of our stakeholders.
Our company purpose is delivering goods for the good of all and then embedded in this purpose is our focus on environmental.
So show and governance excellence.
We have updated our operating model to embed the word sustainability is a core value further evidence that we view sustainability as a key focus for our business.
Last year, we continued our efforts to ramp up our ESG initiatives as a company.
This included naming a global head of ESG for Trinity to spearhead and lead our ESG initiatives.
We became the first railcar manufacturing company in North America, just certified the other existing EHS management system conforms to the international organization for standardization environmental standards, and occupational health and safety standards.
We hired a director to lead our D. N I initiative launched nine employee resource groups and employee networks and completed our first ESG roadshow with investors.
Additionally, in our core business, we are consistently working on new product development to support sustainability priority.
This includes improving efficiency and new railcar designs in programs like our sustainable conversion program.
Allow us to repurpose existing railcars and increase the longevity of their parts and components.
To date, our sustainable railcar conversion program has reached over 54 million pounds of steel.
Our ESG initiatives are ongoing and I look forward to keeping you updated on our progress through the year.
And now turn with me to slide three to talk about our key messages for today's call, which we will expand on later in our prepared remarks.
Our fourth quarter GAAP EPS from continuing operations was 46 and adjusted EPS from continuing operations was <unk> 44 cents.
10 cents sequentially and 36 cents year over year.
For the full year GAAP EPS was $1 two and adjusted EPS of <unk> 94 cents was up by 176% over 2021.
Given the unexpected labor supply chain and rail service challenges, we faced in 2022 that impacted our ability to deliver cars at the pace. We expected. We are proud of what we accomplished and the growth we achieved in 2022.
Furthermore, when we look ahead. We also have reason to be optimistic we ended the year with our future lease rate differential or F. L. O D at 25, 1%.
We view this as a good predictor of future rate growth in the leasing segment and the high MLR D is an indicator of continued broad based strength in the railcar leasing market.
Yeah, Phil already calculate the implied change in lease rate for railcar leases expiring over the next four quarters.
Applying the most recently transacted quarterly lease rate for each railcar type.
Yeah for a lot of D. Also accounts for current markets rate, which remained strong despite uncertain economic sentiment.
The key to remember is that industry supply has tightened and energy cost and supply chain planning have increase the importance of visibility and control and logistics planning for businesses.
Trinity has a unique advantage as both a producer of railcars and a beneficiary of solid leasing fundamentals.
The rest of the industry either does one or the other for the most part which can be challenging in periods of market volatility.
We are introducing our 2023 EPS guidance of $1 50 to $1 70.
At the midpoint. This represents EPS growth of 70% over 2022 and reflects higher deliveries.
Lease rates and improved segment margins.
And finally in the fourth quarter, we completed our acquisition of holding America, our second acquisition of 2022.
Eric will discuss this acquisition and our general view on future acquisition.
And now, let's turn to slide four for a market update.
Well, we continue to feel the impact of railroad labor shortages on rail service and traffic there have recently been some improvements some rail service metrics that give us hope that we have seen the worst.
But the number of operating employees remains a key constraint for carriers heading into 2023.
Without significant hiring rail service improvements will be tough to maintain.
We saw 2022 rail carload volumes and the year, even with 2021.
Markets like grain in automotive carrying meaningful momentum into the new year, but in other markets such as chemical and metals experienced notable headwinds late in 2022.
At the same time, the number of railcars in storage ticked up consistent with normal seasonal trends and the volatility in carload traffic, but still remained well below the five year average.
We continue to expect the existing fleet of railcars to remain tight in 2023 and replacement needs to drive new railcar demand.
Moving to the bottom of the slide I already mentioned, our ethyl Rd is above 25%, which is a significant step up from where it was last quarter.
Our lease fleet utilization in the fourth quarter held steady at 97, 9%, which is the same levels. We saw pre pandemic and is evidence of a tightly.
We received orders for 3015 railcars in the quarter and delivered 4400.
We ended the year with a backlog of 32270 railcars valued at $3 $9 billion.
We expect to deliver approximately 49% of this backlog in 2023 and given the multiyear order we booked in the third quarter. We expect some of this backlog to extend as late as 2028.
Our backlog in recent inquiry levels represent replacement level demand and our customers need these cars for supply chain management, which gives us confidence and visibility into our delivery forecast.
Slide five shows the fourth quarter performance year over year.
Our quarterly revenue of $591 million was up 25% as compared to a year ago and our fourth quarter adjusted EPS of <unk> 44 was up 450%.
While our cash flow from continuing ops in the quarter of $62 million was down 69%, our adjusted free cash flow of $138 million was up 394%.
Slide six shows our full year 2022 performance as compared to 2021.
Our revenue just below $2 billion was up 30% from a year prior and our full year adjusted EPS improved by 176% as I previously mentioned.
Additionally, our railcar deliveries improved by 50% in 2022, and our ending backlog was $3 $9 billion.
For the full year cash flow was impacted by elevated working capital related to higher volumes of railcar deliveries and continued supply chain challenges.
When you look at the year over year cash flow variance. It is worth noting that 2021 benefited from collecting $438 million in income tax receivable.
Please turn with me to slide seven for segment results.
I've already talked about the strong ethanol or D and fleet utilization in the leasing segment.
But I also wanted to mention our renewal success rate in the fourth quarter of 85%.
Our success rate for the entire year was 82%.
The level, we have not seen since 2014.
This success rate shows that even as we are able to increase rates at renewal to match rising current rates customers continue to value holding the railcar and thus accept the higher rates.
In short the railcar fleet is still tight and we have a lot of visibility and stability on the leasing side of our business.
Leasing segment revenue of $197 million in the fourth quarter reflects improved rate and net lease fleet investment activities.
Our F. L. R. D has now been positive for six quarters, and we are starting to see those higher rates reflected in our financials.
Leasing and management operating profit margins were 38, 3% in the fourth quarter and were up sequentially due to net lease fleet investment activities.
Margins were down year over year, because of a general increase in maintenance, which tends to be cyclical in nature as well as higher depreciation expense, mainly due to our sustainable railcar conversion program.
And the rail products segment.
Revenue of $656 million was up sequentially and year over year, due to higher deliveries and favorable pricing and product mix.
Our pace of deliveries picked up as the year progressed, and we exited the year at a higher run rate.
In the first half of 2022, we delivered just under 5000 railcars, which improved to over 8000 in the second half of the year.
Our operating margins in the rail products segment came in at two 8% in the fourth quarter and two 8% for the full year.
We spoke at length in our third quarter call about the operating inefficiencies and supply chain issues pulling down margins in <unk>.
Fortunately these issues continue to impact us in the fourth quarter.
In addition to continued rail service disruptions supplier deliveries have not kept pace with our scheduled needs and railcar completion on several line fell behind.
Furthermore capacity of facilities has increased more slowly than expected to meet our original production schedule.
Labor was a challenge with higher attrition, requiring more hiring and onboarding the unexpected which was significant given the increase in hiring we needed to achieve to match and increased production level.
Physically in Mexico.
The impact of rail service supply chain and labor issues with over 400 basis points of efficiency loss and operating profit.
This means if our efficiency have performed as expected our quarterly margin in this segment would have been about 7%, which is in the high single digit range we anticipated.
We still expect to exit the planning period with rail products margins in the high single digits as we expect these issues to ease through 2023.
Finally, moving to slide eight I want to point out a few more key accomplishments.
In December we raised our quarterly dividend to <unk> 26 cents per share an increase of approximately 13%.
Delivering on our three year goal of double digit dividend growth.
Additionally, our board approved a new share repurchase authorization of $250 million with no expiration.
This gives us more flexibility on timing as we consider various methods of capital deployment.
Our net lease fleet investment for the year was $178 million slightly below our anticipated range of 250 million to $300 million.
This is due to both a stronger than expected secondary market driving higher than expected railcar sales.
And lower deliveries to the lease fleet, given some of the supply chain issues impacting our delivery rate.
Our pre tax ROE was 10, 4% for the full year.
We ended 2021 with a full year ROE of three 4%, so 2022 markets any significant and sustainable improvement towards our strategic goal of a mid teen Roe.
2023 marks a third year over a three year plan, we introduced at the end of 2020.
On our third quarter call, we modified our operating cash flow target to a range of $1 $2 billion to $1 $4 billion to account for the sale of our highway business higher working capital needs and geography of railcar sale.
Other than that adjustment we are on track to hit those three year targets and we continue to work toward hitting these metrics.
Before I turn the call to Eric I wanted to talk about a few things in our business.
First despite supply chain and rail service challenges, we continued to see strong inquiries and have great customer relationships, which gives us confidence in order flow in the near future.
In addition to EPS growth in 2023, I also want to emphasize that we are seeing a significant amount of operating leverage in our business and expect to continue seeing higher returns, which we think is a more impactful measurement of our business given the value of our lease fleet and the visibility we have.
Have into our business.
Okay.
We continue to make organizational changes and initiatives to focus on positioning our manufacturing and leasing businesses to maximize value creation through tough external headwinds.
The rail products group is a strategic asset that provides revenue diversity and competitive advantage, but tends to be more volatile given this exposure to market and labor issues in the short term.
Which has certainly been the case this year.
However over multiyear periods the business trends with the same railcar fundamentals as the leasing business and there is a significant return to be made.
In closing despite an unpredictable macroeconomic backdrop I am proud of what our team accomplished this year.
Operating any business does not come without challenges, but I have confidence in our ability to execute in 2023 on our three year goal given the strength of our business model and the team we have in place.
And now I'll turn the call over to Eric to review our financial results.
Yeah.
Good morning, everyone I would like to start by congratulating, Jim on BMA railcar woman of the year by the league of railway women for 2022.
I would also like to give a little more color on the whole of acquisition that Jim mentioned.
Poland is a manufacturer of market, leading multi level vehicle security and protection systems.
Gravity outlet gates and accessories for freight rail in North America.
We purchase hold them for an initial purchase price of $70 million with.
It was another $10 million minimums, we pay in installments over the next two years.
There is more information on this acquisition in our 10-K, which we expect to file later today.
This acquisition fits well with our strategy to increase exposure to less cyclical and higher margin aftermarket parts.
Give us more opportunities to serve our customers.
And diversify our revenue stream.
Furthermore, as we see automobile preference move more toward Suvs and heavier electric vehicles, securing systems will become even more critical and we look forward to being a market leading shock provider.
She needs a variety of quality and service that holdings customers have come to expect.
We completed two acquisitions in 2022 ways.
Quasar and holding.
We're in the process of integrating both of these operations into our platform.
We see value in optimizing our business with strategic acquisitions and continue to look for the right opportunities.
We remain selective in our evaluation of potential targets.
If you turn to slide nine I'll start my comments with the income statement.
In the fourth quarter, our consolidated revenue of $591 million improved sequentially and year over year due to higher external railcar deliveries and improved pricing.
Our adjusted EPS of <unk> 44 per share in the quarter also a sequential and year over year improvement.
Benefited from $236 million and lease portfolio sales drive at a gain of $55 million.
Moving to the cash flow statement, our full year cash flow from continuing operations was $9 million and our adjusted free cash flow for the year was $138 million after investments and dividends.
As has been the case through the year, we continue to have elevated levels of working capital to support a ramp up in production and to mitigate disruptions in the supply chain.
Additionally, our operating cash flow was negatively impacted by a higher receivables balance associated with deliveries late in the year.
In 2021, our free cash flow benefited from collecting approximately $438 million of income tax receivables.
In line with our guidance, we ended the year with $38 million and investment in manufacturing in general Capex.
And we returned $154 million to shareholders through repurchases and dividends.
Secondary market sales remained strong all year.
According to some sizable gains on railcar sales.
As long as we are delivering real person or at lease fleet, we expect to complete secondary market sales as an ordinary course of business assuming market conditions remain favorable.
This shifts cash flows from operating activities cash flow from investing activities, even in a period of high deliveries.
This is because the cash is reflected in operation, we sell a railcar directly I never manufacturing, but the casualty, reflecting investments, we sell a real or out of the lease fleet.
As gene mentioned, our net lease fleet investment was $170 million for the year.
In 2022, approximately 36% of our manufactured railcars were delivered to our lease fleet to meet customer demand.
Which was a gross increase in the fleet of 920.
$929 million.
In keeping with our goal of modest fleet growth and aided by a strong secondary market, we sold approximately $751 million of railcars out of our fleet.
Which allows us to optimize the composition of railcars in our fleet to serve customer demand and keep utilization high.
Please turn to slide 10.
We ended the year with liquidity of $398 million, representing cash and equivalents revolver availability and warehouse availability.
Our loan to value of the wholly owned fleet was 65, 7% at the end of the year remain in line with our target LTV of 60% to 65%.
We expect liquidity to improve in 2023, as we lower our working capital with improved supply chain conditions and higher deliveries.
Our loan maturities at attractive rates, considering the market dynamics.
And now please turn to slide 11, let's talk about some of the expectations for 2023.
When we set our three year plan at the end of 2020, we stated we expected industry deliveries sustainable replacement demand level, which we viewed as approximately a 120000 railcars over the three years.
And the first two years of the plan the industry delivered just over 70000 railcars.
We expect 2023 industry deliveries of 40 to 45000, meaning we will and slightly below the 120000, we forecasted at the end of 2020 for the three year period.
This number excludes sustainable convergence, which have been significant over the pilot group.
Returning specifically, we expect to deliver at or near our historic market share of industry deliveries.
We continue to view this build cycle is rational which will benefit our lease fleet through the cycle.
Our three year plan in net fleet investment was $500 million to $600 million.
Which means we expect a net.
These investments of approximately $250 million to $350 million in 2023 to land in the forecast correct.
Included in this investment forecast is new railcar deliveries to the lease fleet as well as sustainable Revpar conversions and modifications on our existing fleet.
And secondary market conditions offset by sales in the secondary market.
This was slightly higher than what we have invested in recent years.
While a smaller percentage of railcars, we deliver will go into our lease fleet last year on an absolute basis, we expect similar in term deliveries and expect higher eliminations on a dollar basis due to a higher volume of deliveries at higher prices.
Our current backlog to the leasing group for new railcars as $459 million.
Not all of this will deliver in 2023 and.
Railcar sales will offset deliveries to the lease fleet and our full year net lease fleet investment.
Additionally, we expect manufacturing and other general capital expenditures of $40 million to $50 million similar to prior years.
We are introducing preliminary 2023, adjusted EPS guidance of $1 50 to $1 70.
Which represents substantial growth over 2022 results.
Well, we do expect some easing in the labor rail service and supply chain challenges in 2023.
These issues did not go away overnight and thus are reflected in our guidance.
We expect the pace of deliveries through the year to be relatively consistent.
The quarterly consolidated financial results will be lumpy.
Driven by timing of planned maintenance expense and net lease fleet activity.
In closing, we have taken actions to optimize the balance sheet and improve the operating leverage of our business over the last several years.
As we enter 2023 I am confident in our company's ability to outperform in a challenging environment.
Realized cash generation and high returns and ultimately higher shareholder value.
And now operator, we're ready for our first question.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the keys.
To withdraw from the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from tourists Allison <unk> with Wells Fargo. You May now go ahead.
Hey, good morning.
Morning.
And I just wanted to go back to your comment on well related to the lease side, you know storage levels still a little bit. They are ticking up just wanted to get a little bit more color on your side.
I know you mentioned seasonal but is there any worry that we're actually seeing some incremental storage because of some of the weakness out there and then with that lease renewal success rate. What's a good range to think of as we look at 'twenty three.
Okay, well, thanks, Allison when we look at 85% success rate on renewals, we havent seen that since 2014.
The market is still very tight out there and so what we're seeing go into storage is more some of the seasonal and.
Docker and cars are not meeting its mean grain cars consumer side, there's a little bit of weakness there that types of cargo in and so we expect the market to stay tight, especially as you look at overall, what's going on or expected to happen with attrition and then the new railcars going back into the system.
Got it and then within real manufacturing you know you've highlighted a number of headwinds to the emerging this past quarter.
I'm trying to reconcile if you were looking for a sequential improvement there with deliveries remaining stable.
Or are you limiting sort of that capacity addition, just because of the labor side that you're seeing just trying to understand what what drives that that margin higher here just with the level of deliveries at this point that you guys are indicating.
Great question. So when you look at it some of the things that we've learned this past year. Yeah. There's we've got a really strong backlog that allows us to have good visibility, we're extending the time or the view that we get to the supply base to be able to see that.
We still have seen at the end of last year, I think we've talked about fewer rail suppliers to provide product and they're still having issues as we went into the fourth quarter and went to ramp our production.
Their ability to deliver on time went down so it went the opposite direction. They have stabilized at a lower run rate. So now they've got a good view for the year of what we need.
And we're expecting them as the year goes on to get better at delivering on time for US. We took some actions in the fourth quarter as far as labor goes and we've seen that actually come back down so get a little bit better on our ability to attract and then maintain or keep those.
Please so.
So we're not at the level of our employees, we need for the full year production, yet, but we're getting a lot closer.
Great. Thank you.
Our next question will come from Matt Alcott with Cowen You May now go ahead.
Good morning, Thank you.
So at first glance, it looks like maybe you're expecting lower deliveries in 2023, but because the high end of your delivery guidance for the industry is lower and the low end.
It's actually lower than the actual 2022 number.
But then Erik based on the remarks, you made I think you mentioned you expect your share to be consistent with 2022, and I think that was.
34%, so if I take the midpoint of your one of your delivery guidance for the industry.
I'm coming up with just over 14000 cars for 'twenty three so that's up about six 5% is that math, okay, no Matt sorry.
If it wasn't clear what talks about historical.
Market share ranges, so in that 30% to 40% range. So if you take the 40 to 45 and apply a 30 to 40, then you'll get the.
You'll get a band and.
Our deliveries will be up.
More than what you are.
It's more than what you're calculating so last year remember we had 5000 cars delivered the first half and 8000 in the second half and I just said that we're not at the number of employees, we need for the full year production to help you a little bit on where we're expecting to go.
Okay got it that's that's helpful. And then my next question and I know you had some benefits I guess from a storm recovery last year that affected the margins positively.
But you also have the supply chain disruptions. This year your deliveries were up year over year by 36%, but your margin was down can you help us understand how much was it how much weather the storm recovery benefit part of that versus the supply chain disruptions this quarter.
So the storm benefits, we adjusted out and so that's the big difference between the 94 cents in the.
One or two and so.
In the slides there is more color on the in the rail segment around especially in the in the quarters.
Those recoveries will receive you'll see that on their merits in terms of the.
The headwinds the headwinds outweighed.
The storm recoveries by a wide margin, Jim mentioned up four basis points in the fourth quarter.
But there's much more than the storm recoveries.
Got it and then just one last industry related question do you guys foresee any potential changes to like class a class two flammable liquids regulator shows when it comes to tank cars or any other type of cars are similar to what we saw horror.
Code regulations after Lake Mcgann click.
So there's a lot of discussion going on a lot of phone calls.
Thank God, we got to wait for the NTSB to come out with their findings on what happened, but I I would expect movement in some sort of either on safety.
How do they ensure that the trains are shaped going through on manifest sharing other things like that but we'll have to wait and see we're discussing right now.
Great. Thank you Jean Thanks, Eric.
Thanks.
Okay.
Our next question will come from Justin long with Stephens you May now go ahead.
Thanks, and good morning, I wanted to ask about rail product group margins gene. It sounds like you expect to be in that high single digit range by the time, we exit this year, but can you help us think through the cadence of margins assumed in the guidance and how you are.
Expect that 400 basis point headwind you called out to fade over the course of the year.
So we're not giving quarterly guidance, but I will tell you that you know as Eric mentioned, we don't expect those headwinds to go away overnight.
We expect them to improve and go way throughout the year. So I would just say take that into consideration as you're looking at the overall year over quarters.
And Eric you did mentioned there would be some lumpiness I think in profitability. So is there any color you can give us around that comment as we think about modeling the quarters. This year.
I think the achievement on the rail segment side.
You mentioned the improvement the Lumpiness would come more from eliminations and car sales this year.
You have more or fewer of our deliveries will go to the lease fleet this year.
Which will.
I mean there is.
Fewer.
The investment in the fleet will be is in that $250 million to $350 million, but the.
The car sales, especially when you think about the wall for transaction historically, we've done that in the second half of the year. This is year three of that three year program agreement and so that there will be some.
Lumpiness from the gains on sale.
Okay and last question I had was on cash flow I was curious if you could share any expectation for 2023 I know, there's some moving pieces with working capital that you mentioned and also on the buyback with the new authorization could you comment on what's getting factored into that.
EPS guidance for buybacks.
Yes, so when you look at.
Buybacks specifically.
We've returned a lot of capital to shareholders over the last few years.
Certainly and we did finish our last authorization and start a new authorization in December .
I'd characterize our share buybacks. This year in terms of based on the earnings guidance to be more.
Our produce opportunistic and a modest in terms of the amount of capital will be returned via share buybacks that we've just raised the dividend in the fourth quarter.
<unk> 26 per quarter, so that more of our capital to shareholders will come through that mechanism at least.
As we're sitting here today and then.
I'm sorry, the first part of your question was our own cash flow cash flow expectation. Yeah. So you know when you go back to our three year Uh Huh.
Investor Day.
Plan, we lowered that.
Last quarter slightly.
We're still we're still in that range.
With the items that happened in the fourth quarter, and where we're sitting today, where maybe in the lower range lower part of that range, but our cash looks like.
This platform can generate a significant amount of cash and we expect that to continue in 2023.
Okay, great. Thanks for the time.
Yeah.
Okay and if you have a question. Please press Star then one our next question will come from Gordon Johnson with G. L. J you May now go ahead.
Hey, guys. Thanks for taking the question.
So maybe this one for Jean just just taking a step back looking at the U S economy.
You know looking at retail sales you know the engine that drives the U S economy now down three of the past four months real disposable income saw the sharpest fall in 2022 dating back to the <unk>.
19, thirties, Great Depression real consumer spending on services was flat in December or their worst monthly reading in nearly a year no real average weekly earnings are now down a record 21 months in a row, our auto sales growth slowed in January and in 2022 was the worst in nearly a decade and home sales last year.
Were the lowest since 2014, I know a lot of data points, but it just seems like we're taking that into account and also looking at you know Midwest region average truck rates or other delivery rates. It seems like things are looking pretty bad not to sound too dire, but if the guidance you guys have given backend loaded.
And if it is do you see some risk to that and then I'll follow up thanks.
Sure. So if you look at manufacturing stats November and December had seen a tick down but they just came back up in January . So we saw a balance there the consumer areas are absolutely the ones that are seeing the most softness.
So intermodal would be in that are in that range, but overall, we're still seeing very high utilization of cars were seeing traffic.
Flat to 2021, and we're still seeing customers, who are wanting to move more by rail. So we're.
We think we can survive or we would have a.
Will it be resistant to a mild recession and if you look at our backlog we got three nine.
<unk> billion dollars and backlog sitting there, which gives us really good visibility into this year.
Hey, Thanks, a lot and then just lastly on the free cash flow I know a question was asked there, but the burn this quarter I think arno.
Just looking at operating cash flow less capex roughly $900 million is there any plans with respect to capital.
Capital decisions thanks for the questions.
Yes, Gordon this is Eric.
When you back out.
Sure.
Your 900 million I think youre looking at all the lease fleet investment and I would just refer you to our adjusted cash flow and the.
Disclosure, where we kind of walked through the fleet investment is certainly the headline is a big number but once you finance it.
It doesn't require a lot of cash or also a reminder, that's pretty.
Tax effective capital investment and so from a from a cash flow standpoint.
It's a relatively good answer and I'll just refer you to our disclosure disclosure on that.
Thanks again.
Our next question will come from Steve Barger with Keybanc you May now go ahead.
Thanks.
Jean You said Trinity has generated good operating leverage and to that point incremental margin came in around 20% for 2022 as you think about mix for 'twenty. Three do you expect incremental contribution margin to come in above that.
So Steve.
When you look at the.
Earnings guidance that we've given and also.
Some of the color around.
Fewer car sales and some of the color around deliveries.
That would imply pretty healthy.
Incremental margin and so it kind of depends on where are the right. We're in the range you are but.
I would expect the incremental margin to be at a very good clip in 2023.
We're sitting here I don't know if we're in a given the specifics, but but your math is correct. When you look at just the volume that we're talking about Uh huh.
Step up in earnings.
70%.
Sure.
It's got to be a lot of it come from incremental margin.
Right well and it has to come from the rail group right because you put up a huge incremental margin on rice and towards me too yeah correct. Okay.
And you said when you ramp production on time delivery went down why is that could could they not get material are they having their own labor issues or are these diversified suppliers, who are prioritizing capacity to other industries, just what what happened with the supply base.
So a lot of the supply base had labor issues, just like everyone else in North America.
We have over 95% of our materials, we built our railcar fleet.
Outside of North America. So it was one they got used to the right run rate to everyone. That's going they figured out how to make that work for them and then when we tried to step it up.
They fell backwards. So they are working on it we've seen some improvement, but we still have pockets that pop up every once in a while four different components.
And remember I think I mentioned, a little bit ago earlier that we're trying to give them more visibility to that signal. So typically you give them 60 90 days, we're trying to go out farther, especially with the backlog we have.
Got it and I've been jumping around on the call. So sorry, if I missed this but Eric I think you said, you're prioritizing more dividend versus buyback in 'twenty. Three first of all did I hear that right and well I guess, we'll just start there.
Steve you did hear that right. When we look the question earlier was how much share buybacks are baked into the guidance.
<unk> was modest.
More of the capital allocation is shifting to the dividend.
Is that going to be sustainable is it.
You've obviously taken out what a 45% of the shares in the last six years or so is is this a shift that we should be thinking about on a go forward basis, the more cash will be allocated to dividend.
I think it's more of a phenomenon for this year.
We are we had our three year plan and our three year plan, we talked about significant.
Share repurchases and a N a.
And dividend growth.
I think by all accounts, we've accomplished that and as we.
As we think forward to the next three years or the next the next planning period we.
Will.
Provide more information on that but we're not doing at this time.
Understood. Okay. Thanks. Thanks.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Jean Savage for any closing remarks.
Well, thank you and thank you again, everyone for joining us. This morning, we believe we are well positioned for a strong year in 2023, our guidance reflects higher lease rates higher deliveries and efficiency improvement dry driving higher margins and generating cash flow.
I want to thank our team for their hard work this year and their ability to execute in a challenging environment.
Thank you again for your continued support.
Okay.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.