Q1 2023 Trinity Industries Inc. Earnings Call

Speaker 1: So P J.

Speaker 2: Good day and welcome to the Trinity Industries first quarter and 31st March 2023 results conference call. All participants will be in the listen only mode.

Speaker 2: Should you need assistance, please signal our conference specialist by pressing star, then 0 on your touch tone telephone keypad.

Speaker 2: After today's presentation, there will be an opportunity to ask questions.

Speaker 2: To ask a question you may press star then 1 on your telephone keypad. To withdraw your question please press star then 2.

Speaker 2: Please note, today's event is being recorded.

Speaker 2: Before we get started, let me remind you that today's 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.

Speaker 2: Statements that are not historical facts are forward-looking. Participants are directed to Trinity 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 defer materially from those expressed in the forward-looking statements.

Speaker 2: I would now like to turn the conference over to Lian Man, Vice President of Universal Relations.

Speaker 3: Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's first quarter 2023 Financial Results Conference call.

Speaker 3: A prepared remarks will include comments from Jean Savage, Trinity's Chief Executive Officer and President, and Eric Marquetto, the company's Chief Financial Officer.

Speaker 3: Today, we will reference slides highlighting key points of discussion as well as certain non- GAAP financial metrics. The reconcilations of the non-gap metrics to comparable GAAP measures are provided in the appendix of the supplemental slides, which are accessible on our investor relations website at www.trans.net.

Speaker 3: These slides are under the events and presentations portion of the website, along with the first quarter earnings conference call is on link.

Speaker 3: A replay of today's call will be available after 1030 a.m. Eastern Time through midnight on May 9, 2023. Replay information is available under the events and presentations page on our Investor Relations website. For more information, visit our website at www.fema.gov

Speaker 3: It is now my pleasure to turn the call over to Gene.

Speaker 4: Thank you, Leigh Ann, and good morning everyone.

Speaker 4: I'll start on slide three to talk about our key messages from today's call, which we will expand on later in our prepared remarks.

Speaker 4: Our first quarter-dap EPS from continuing operations was 9 cents and adjusted EPS from continuing operations with 7 cents, up 4 cents year-over-year. We ended the quarter with our Geacher-Least Rate differential or FLRD at 44.3%.

Speaker 4: The FLRD calculates the implied change in lease rates for railcar leases expiring over the next four quarters by applying the most recently transacted quarterly lease rate for each railcar type.

Speaker 4: and our lease fleet utilization improved this quarter to 98.2%.

Speaker 4: We are reconfirming our 2020-23 EPS guidance of $1.50 to $1.70.

Speaker 4: We expect to see segment operating margins up significantly as we take advantage of the operating leverage of the business, manufacturing backlog and strong rail car lease environment.

Speaker 4: And finally, in the first quarter, we completed our acquisition of our assigned logistics.

Speaker 4: movement solutions.

Speaker 4: I'll discuss the acquisition and how it fits into our digital strategy later on my prepared remarks.

Speaker 4: And now let's turn the fight for for a market update.

Speaker 4: Starting on the top left, despite intermodal pulling down rail traffic, car loads are up almost 4% year over year.

Speaker 4: We're encouraged to see that rail service issues appear to be improving with higher train speed and shorter dwell time.

Speaker 4: But overall performance still has room to improve.

Speaker 4: Nearsurin activities, trucking labor headlands, and heightened interest in the SG continue to foster, pince up demand for rail transportation.

Speaker 4: Even as railroad service continues to improve, the PINCE UP demand will continue to drive more rail volume despite uncertain macroeconomic conditions. Moving to the top right graph, the continued railroad service headlands are keeping populations of the North American Rail Car Fleet out of storage.

Speaker 4: and open hoppers for construction materials, metals, and coal have seen the greatest recent improvement.

Speaker 4: It's also worth noting that tank cars are at the lowest level of storage since this metric began in 2016. Moving to the bottom of this slide, positive commercial momentum continues for our lease fleet.

Speaker 4: I have already mentioned that our FLRD is above 44%, which is a significant step up from the last quarter.

Speaker 4: What we find especially encouraging is that we see improvement in virtually all rail hard types in our fleet.

Speaker 4: The highest increases are coming from our tank car fleet, which has lagged the freight car recovery in recent years.

Speaker 4: Our lease fleet utilization improved to 98.2%, and we remain optimistic about lease rate growth in the coming quarters given the tight existing rail car market, higher interest rates, and the current inflationary environment.

Speaker 4: Furthermore, as we lock in substantially higher lease rates, we are also increasing the term of the lease.

Speaker 4: which gives us confidence in longer-term revenue generation.

Speaker 4: We delivered 4,045 rail cars in the quarter and received orders for 2,690.

Speaker 4: We exited the first quarter with a backlog of 30,915 railcars valued at $3.7 billion.

Speaker 4: Inquiry levels remain supportive of replacement level demand over the next several years, especially in several key rail car fleets, including covered hoppers, gondolas, autoracks, and boxcars.

Speaker 4: We have been selected in our Go-To Market Strategy in order to maintain steady manufacturing performance through the cycle.

Speaker 4: Furthermore, this recovery has been supplied led.

Speaker 4: which has made trace stable market driven by replacement level demand.

Speaker 4: CLI-5 shows the first quarter performance year over year.

Speaker 4: Our quarterly revenue of $642 million would up 36% compared to a year ago, and our first quarter adjusted EPS of $0.7 was up 133%.

Speaker 4: While our cash flow from continuing operations in the quarter of $103 million was up 260%, our adjusted free cash flow of $36 million was down 24%.

Speaker 4: Many moving pieces drove these numbers and the timing of rail car sales create variability and pre-cash flow.

Speaker 4: I want to start by talking about segment performance and later Eric will discuss cash flow.

Speaker 4: Please turn with me to 5-6 for segment results.

Speaker 4: Starting at the top with the leasing segment.

Speaker 4: Leasing segment revenue in the first quarter of $204 million reflects improved renewal rates and higher utilization.

Speaker 4: Our renewal success rate of 80% in the quarter increased utilization and the high FLRD are evidence that market rates are rising and customers are holding on to their rail cars and understand the economics of a tight market with elevated interest rates and rising lease rates.

Speaker 4: Our FRD has been positive for seven consecutive quarters, and as we continue to raise these leaf rates, we expect continued revenue growth in this segment.

Speaker 4: Leasing and management operating profit margins were 35.4% in the first quarter. Marginns were slightly down sequentially due to increased maintenance expense as well as depreciation expenses because of higher sustainable rail car conversion activity.

Speaker 4: Remember, sustainable rail car conversions are a cash-appredive action for Trinity, as they extend the useful life of assets at a track of return on the domestic capital. We expect leasing margins to improve as least rates push upward and these expenses stabilize.

Speaker 4: In the rail product segment, quarterly revenue would slightly down sequentially due to a lower volume of deliveries compared to the fourth quarter. However, segment revenue was up 63 percent year over year, reflecting significantly higher deliveries and manufacturing.

Speaker 4: Our operating margins in the rail product segment came in at 4% in the first quarter, an improvement substantially and year-over-year.

Speaker 4: However, these margins are still lower than we would like and reflect a challenging education environment.

Speaker 4: The accelerated pace of hiring and onboarding has affected productivity given the volume of new employees and the needs for training. While these issues, along with continued rail service and supply chain issues, continue to affect us through the first quarter, we see improvement across the board. The first quarter, we see improvement across the board.

Speaker 4: We are optimistic that we are through the worst.

Speaker 4: All that to say, we expect to see operating margin improve substantially through the year and expect high single-pitch of margins in this segment.

Speaker 4: Turning to Site 7, we remain focused on our strategic initiatives. And this quarter, I want the highlight to work for doing to improve the rail supply chain. As I mentioned at the top of the call, we completed our acquisition of RSI logistics, a data-centered provider of proprietary software and logistics.

Speaker 4: our business.

Speaker 4: Please turn the flight A.

Speaker 4: Our proprietary transit platform was enhanced with our acquisition of Puega last year.

Speaker 4: These businesses give us access and insights into unique data and analytics about rail cars, including asset health, shipment condition, location, and yard management.

Speaker 4: The RSI logistics acquisitions added at full suite of logistics capabilities to our digital portfolio, including ship and execution software and services, to efficiently manage rail logistics, transloading, and we're housing solutions.

Speaker 4: Our goal is to help our customers optimize their supply chain by making shipments more visible and data real-time and easily accessible. We are creating an end-to-end platform to help our customers safely, efficiently and predictably bring their products from the Porta of Origin to the point of use. We are working with industry leaders and channel partners.

Speaker 4: We look forward to continuing the integration of this business into Trinity as we work toward a better digital solution for rail shippers.

Speaker 4: We significantly ramped up hiring in the fourth quarter of 2022 and the first quarter of 2023, and our spending time training those employees. We believe labor has largely stabilized and we expect substantial efficiency improvement with a more experienced employee base in the second half of the year. The rail services issues that plagued us in 2022, specifically around the border, have largely been resolved.

Speaker 4: And while there's still some variation in our supply chain, we have learned to operate through it and do not view this as a significant issue in the future.

Speaker 4: We expect revenue to improve on both sides of our business with higher deliveries and lease rates.

Speaker 4: We expect margin improvement on both sides of our business with better efficiency and moderators maintenance expenses.

Speaker 4: While our first quarter results were dampened, the fundamental strength in our industry is evident, and we are excited about the year ahead as those trends persist, and we see an easing of the headwinds.

Speaker 4: And finally, since the last spoken February , I'm proud to report that Trinity has released our 2022 and a report and will soon file our 2023 Corporate Social Responsibility Report.

Speaker 4: Regarding our CSR report, we made progress as a company, and I wanted to preview a few highlights on the report with you today.

Speaker 4: First, we've achieved our third-party limited insurance of SCOPE 1 and SCOPE 2 greenhouse gas metrics. Also, for the first time, we are trying executive compensation to environmental metrics like year-over-year energy reduction and water usage. Diversity, equity and inclusion metrics will continue.

Speaker 4: by 27% over the last three years.

Speaker 4: I'm proud to say that by putting safety first and always focusing on continuous improvement, we are now 40% better than the industry.

Speaker 4: And now I'll turn the call over to Eric to review our financial results. Good morning everyone. Please turn to slide 9, where we will discuss consolidated financial results. In the first quarter, revenue of $642 million improves sequentially.

Speaker 5: year over year due to higher external road for deliveries and improved pricing.

Speaker 5: Our adjusted earnings per share of $0.7 was up year over year, but down sequentially due to lower lease portfolio sales in the first quarter.

Speaker 5: Least portfolio sales are $57 million in the first quarter with a gain of $14 million. Our earnings were aided by a 217 percent tax benefit.

Speaker 5: In our trip leasing subsidiary, we released stranded tax assets previously recorded in AOCI and recorded an income tax benefit of $11.9 million. $7.5 million of which relates to non-controlling interest. This results in a net $4.4 million positive impact on that income. Our tax rate also benefited by $4 million change in valuation allowances.

Speaker 5: These items were partially offset by a read measurement of net deferred tax liabilities due to the RSI acquisition, resulting in an increase in deferred tax expense at $3.2 million in the quarter.

Speaker 5: Moving to the cash flow statement, our cash flow from continued operations in the quarter was $103 million and adjusted free cash flow was $36 million after investments and dividends.

Speaker 5: We did not repurchase any shares in the quarter, but paid $21 million in dividends.

Speaker 5: In terms of investing activity, our fleet additions totaled $192 million, including deliveries, modifications, and second-day market additions.

Speaker 5: Offset by least portfolio sales at $57 million, bring our net fleet investment in the quarter to $135 million.

Speaker 5: Least portfolio sales were low in a quarter and we expect this number to be fairly lumpy through the year. But we are on track for our net fleet investment full-year guidance of 250 to 350 million dollars. Our investment of $7 million in manufacturing and general capital expenditures is also on pace for our full-year guidance.

Speaker 5: Turning to slide 10, we currently have a quiddly of $451 million, which includes cash and equivalence, revolver availability, and warehouse availability.

In the first quarter, we have minted our evolving credit facility to increase the total facility commitment from $450 million to $600 million to enhance our liquidity and flexibility. We are maintaining higher working capital, which will view necessary to support higher levels of deliveries and the current supply chain landscape.

Higher interest rates have impacted our debt profile. Our debt remains approximately 80% fixed rate, but the impact of higher short-term rates along with higher debt balances has increased our interest expense over the last year. In the first quarter, net interest expense of $62 million was up $19 million your year, and we have headwinds for our earnings this year.

And finally, our loan to value for the Holy-owned lease portfolio is 65% in line with our target range. I've concluded my prepared remarks on slide 11 with our Outlook and Guidance.

Our outlook remains relatively unchanged from our fourth quarter call.

We view North American industry deliveries in the range of 40,000 to 45,000 rail cars.

representing replacement level demand. We expect a net lease fleet investment of 250

million to $350 million for the year.

into $350 million for the year in line with our three-year target.

We expect manufacturing and general capital expenditures of 40 million to 50 million for the year.

representing investments in safety, efficiency, and automation.

We expect to achieve a revised three-year cash flow from operations target of $1.2 to $1.4 billion. And finally, we are affirming our 2023 Adjusted EPS from continued operations guidance of $1.50 to $1.70 per share.

Given that we reported seven cents in the first quarter, we believe that this guidance shows that we expect meaningful improvement in our rail group margins in the second half of the year and continue to release rate increases in the recent second.

In conclusion, as we have increased deliveries over the last several quarters, we have not been able to achieve the necessary efficiency levels to get the margins we expect.

As more of our employees are on board in the train, we expect to see that efficiency improve and financial results reflect that as the year progresses. As we said last quarter, improvement does not happen overnight, but the work we have done to attract, train and retain our workforce.

will be visible in our results as a year progresses, and we look forward to sharing our progress with you. And now, our reporter, we are ready for the first question.

Thank you.

We will now begin the question and answer session to ask a question you may press star then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys.

If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

At this time we will pause momentarily to assemble our roster.

Our first question comes from the line of Justin Long from Stephens. Please go ahead.

Our first question comes from the line of Justin Long from Stephens. Please go ahead. Thanks and good morning. Thanks.

and

morning, Jean, maybe to start with the question on real product group margins. Jean, I think you said that the guidance was for high single digit margins. I wanted to clarify that that was a full year 2023 guide. And if so, maybe you can help us think about the quarterly cadence. Eric moment ago.

I think you made a comment that margins would improve in the second half. So I just wanted to understand, are you expecting sequential improvement in margins in the second quarter and then maybe where we go in the second half in order to get to that high single-digit target?

Great question, Justin. Let me talk a little bit about the progression of the year to help you understand what we're seeing. So in the first half of the year in rail product, we have two thirds of the year's change over occurring.

First quarter we had about a third of those. So we also talked about being able to hire finally in the first quarter. That was really great. We have the people we need now to get the throughput we need, but it also presented the training headwind.

If you look at our top two or largest plants for manufacturing, 20% of the workforce has less than six months, typically they're in training for three months and then you're ramping on the efficiency for at least the next three months.

So we expect to see that continue into the second quarter as some of those people will stay in training or getting up to speed.

You know, in the first quarter, good news. We saw some rail service and supply chain improvements, which is great. We expect that to continue into the second quarter.

And again, on the first half, we expect more cars to deliver into our fleet, and you'll see more of that in the second quarter. Looking at the second half of the year in real product.

We're going to have the remaining one-third of the changeovers. And it's a few less than the third quarter of the fourth, but fairly even there on that.

We're also looking at the maintained better rail service, the supply chain continuing to improve, and more importantly, that training complete in the efficiency still ramping up.

So, I would expect improvement through the year. I would expect the second half to be much greater than the first half.

Does that answer the question, Joseph? That's a lot of helpful detail. And given the first quarter was roughly 4% to get to that high single-digit full-year target, it suggests the exit rate might be above the high single-digit. Is that fair?

So, I would say with high single digits overall for the number that we're looking at to access the year with.

Okay, okay, got it. And then maybe if my follow up for Eric, there was a lot of noise on the tax rate and you walk through some of the puts and takes there. But I guess one, I'd like to know why you felt that should be included in the adjusted number. And then maybe any...

Of it and.

While those were not included in our forecast for the year, and our guidance, we did include them in our, we did not adjust them out. We felt that they were related to our core business, and so we didn't adjust them out. In terms of, and also note, because a lot of the benefit came from the pandemic.

in the first quarter. You know, reminder we still have year three of our law for a program in place.

which likely would be in the second half of the year. The market for the second-year market still remains relatively good. We're active in the market both as buyers and sellers and we see opportunities. We see opportunities both on the buy side and the sell side.

And so I would characterize this as pretty healthy. You know, you might think because of higher interest rates that would have cooled off the market. I think what we see is that buyers are pricing in future lease rate increases, and therefore you're assuming that lease rate inflation continues.

And so that has supported valuations, valuations recently that we have seen their support going forward.

Got it. That's very helpful. I appreciate the time. Yep.

Thank you. Our next question comes from the line of basking measures from the screen up. Please go ahead.

Good morning. You're talking about getting your labor force slowly up to speed and your desire productivity, but you're facing off against a moderately weakening rail car order environment. So I just wanted to walk through the contingency or the ability to...

to the recorders.

So as we look at the workforce right now, basketball, what we're seeing is we've got the majority of all of our space still for this year, taking orders into next year.

So the people we have will help us one reduce overtime as they come in and are more efficient. So that will lessen that headwind. And as we get them trained, we're still seeing inquiry levels consistent with our belief of replacement demands for the rail cars.

that are going to be needed. So even though you might see some fluctuation, we don't believe you're going to see the high peaks and valleys that we've seen in previous cycles. We think this is going to be a little platter, which will help us maintain that workforce and not have to go through the cycle of retraining again. Okay, so it sounds like at least into early next year, you have very good visibility into a fairly simple.

Okay. The next work will be stronger than the entry rate. Yeah. Understood. And lastly, the lease rate differential number was considerably strong. I want to bring some more attention to that. You mentioned tank cars in the prepared remarks. Can you walk us through in a little more granular detail? How is that?

Sure. So when we look at this recovery, it's really supplied driven. And we're seeing increases in interest rates, new car costs are higher. And we don't see that coming down anytime soon. The interest rates or even the car prices because it's really stabilized. So those will support the higher rates for longer. Some of the reasons we believe that is the FLRD is the 44.3%. The fact that the utilization went up to 90.2%. And the fact that our lease term actually extended in the first quarter.

In 2022, we averaged about 47 months and the first quarter of this year it extended out to 61 months. So what's that's telling us that market's still tight, that they still really want those cars that are out there existing. And when we look at new car prices as compared to our existing cars, they're still a fraction on the lease pricing. So there's a lot of headroom between the new car price and that new price rate and the existing car rate.

Thank you. Thank you. Thank you. Our next question comes from the line of Mac Elkord from TD Coven. Please go ahead. Good morning. Thank you. My first question is on the demand environment. Please.

Are you guys seeing any signs that the railroads might be contemplating somewhere, steps with rail cars as locomotives, as their traffic remains stubbornly low?

Okay, well Matt, I'm going to start out with the non-intermodal volumes are still up year over year and really being driven with automotive, agriculture, energy still there. The headwinds are really the intermodal and pinnacle. I think you know that we are not exposed on the intermodal for a lease fleet at all.

And that is definitely helping us. We've not heard or seen actual requests to return. We're actually still seeing very strong inquiries and the railroads are a big part of that. That's helpful, Jean. And then this thing on the demand front.

Service is improving. I mean by many measures it's so below 2019 levels, but it looks like it's heading in that direction and the right direction for the rails. And I know that's a tailwind. That's a good thing for you guys long term, but we all know that in the, you know, intermediate term, it can be a headwind to equipment demand.

You couple that with the fact that traffic in general is down.

I mean, are you surprised that at least rates are holding up as well as they are? Just any kind of, you know, sense you have on what demand might look like going forward. Okay. Well, we still believe there's enough demand for the rail traffic loads that want to go on to rail that have not been able to.

shift towards growth. I think you're hearing that talk a lot more and we don't think that'll come to fruition overnight but we think that will help in the long term. And when you look at overall the pricing for leasing we're not surprised. Again, when we look at the cost of a new car...

And what those rates will be still a lot higher, a lot of headroom from the existing lease rate prices. So we expect that delta to continue to come down and those prices to get closer.

Okay, and now one last follow up on the secondary market front. I think Eric you talked about the market continuing to be strong. Given the liquidity issue in the banking sector and the banks trying to boost their balance issues, do you think?

Some of the bank owned flea to whether large or small may be more likely to go for sale in the next couple of quarters I I don't know you there's certainly been rumors of Deals in the market At the end of the day it comes down to you need a willing buyer willing seller

And I think when you look at those assets in the bank on portfolios, I think generally you're going to see those assets are improving and the yield on those assets are improving. So the need to, you know, the ability to wait it out is probably there because.

they're going to benefit from the same things we're talking about in terms of higher lease rates. And so I think, you know, it depends on what they decide to do, but in the meantime I think they're going to benefit from higher yields of those assets.

But do you guys have like a sweet spot as to how big of a sleep you might go? You might be interested in or is there a size and not necessarily? We don't have any stated goals. I think we have scale. Our fleet is roughly 110,000 reparsals.

on our balance sheet provides scale and it comes down to allocate their capital and

improving the returns of the business. I think when we've talked over last several years about modest fleet growth, I think that's still what we're looking to do. If there was something that came along that doesn't mean we're not interested, it's gonna be the right return.

Great. Thank you very much. Thank you. Ladies and gentlemen, if you wish to ask a question, please press star 1.

Our next question comes from the line of Steve Bargel from Keybank.

Hey, good morning. This is J. Gimor on First-E of this morning. My first question just as a sort of a follow-up to a previous question. We saw first quarter industry orders yesterday annualized around 33,000. So I'm just curious, as you sit here about a month in, how would you compare two Q to a date to one Q in terms of order inquiry and activity?

So the inquiry activity still remains consistent with our belief of replacement demand. And a lot of that is driven by certain card types. And I will say that certain customers or some customers are delaying the decision to go ahead and place the order as they look at the macroeconomic uncertainty.

But again, overall, the inquiry would support the replacement demand for us. Okay, got it. Thank you. And then for the second question, going back to the hold and acquisition, if I read the 10K correctly, there wasn't much in the way of physical assets in that acquisition, maybe some backlog. Okay.

So my question is what assets did you buy and could you or would you be willing to provide us with trailing 12 months revenue in EBITDA? So, Jacob, you're right, there are not a lot of assets on the business that was a capital-like business that had some...

very attractive proprietary products supporting the auto rack market in terms of breaking out individual performance at this time we're not going to break out the individual performance. It was a relatively small acquisition.

But we think it's something that will complement our parts business and continue to grow and as it becomes more meaningful than we'll talk about it more.

Okay, understood. Thanks for taking the questions. Thanks, Jacob. Thank you. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Gene Savage for any closing remarks.

Well, thank you and thank you again everyone for joining us this morning. We believe 2023 is going to be a great year for Trinity with significant improvements through the year in terms of revenue and operating profit in both our operating segments.

We do have a talented and motivated workforce and we look forward to sharing our progress review through the year. Thank you again for your continued support. Thank you. The Conference of Trinity and Richtees has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Thank you.