Q3 2023 Trinity Industries Inc Earnings Call
Good day and welcome to the Trinity Industries third quarter and nine months ended September 30th 2023 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 includes statements as to estimates expectations intentions and predictions of future financial performance.
Statements that are not historical facts are forward looking.
Participants are directed to Trinity's Form 10-K, and other S E SEC filings for a description of certain business issues and risks.
<unk> 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 Leann Mann, Vice President of Investor Relations. Please go ahead.
Yeah.
Thank you operator, good morning, everyone. We appreciate you joining us for the company's third quarter 2023 financial results Conference call.
Our prepared remarks will include comments from Jean Savage, Trinity's, Chief Executive Officer and President.
The company's Chief Financial Officer.
If a hold a Q&A session following the prepared remarks from earlier.
During the call today, we will reference slides highlighting key points of discussion of certain non-GAAP financial metrics and reconciliations of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the supplemental slides, which are accessible on our on our Investor Relations website at www dot trend gotten it before.
They're under the events and presentations portion of the website along with the third quarter earnings conference call of that like a replay of today's call will be available. After 10 30, a M. Eastern time through midnight on November 7th 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 over to gene.
Thank you Anne and good morning, everyone I'll start my prepared comments on slide three with key messages, we want to convey during this morning's call.
Trinity's third quarter results reflect significantly stronger performance with revenue growth of 65% compared to a year ago.
We believe we are on a good path in 2023 with favorable financial performance and continued improvement.
In the quarter, we continued to experience strength in our leasing segment with fleet utilization of 98, 1%.
And have confidence that lease rates will continue to rise given that our teacher lease rate differential or SLR D. A 26, 6% and continuing favorable railcar supply fundamentals.
As previously disclosed border closures and congestion resulted in a 14% lower than forecasted delivery rate in the quarter with 4325 deliveries.
We will discuss the fourth quarter later in our prepared remarks, but we are lowering our 2023 adjusted EPS guidance to $1 20 to $1 35 to account for the deliveries law due to these border issues and other related supply chain inefficiency impact.
Please turn to slide four for a market update and commercial overview.
Starting with the top left graph overall rail traffic is improving.
We'll recall intermodal volumes are the most significant headwind to rail traffic this year.
But volumes have improved in recent weeks.
Carload volumes to remain up year over year as solid performance from motor vehicles minerals petroleum products and farm products offset declines in grain volume.
The industry population of railcars in storage has been shrinking due to improved utilization of covered hoppers, mostly for grain shipments this harvest season.
Moving to the bottom half of slide as I mentioned, our SLR D and utilization rates remained favorable in the quarter.
Our authority of 26, 6% shows our ability to continue to push rates upward, while maintaining a high fleet utilization 98, 1% in the third quarter.
On the bottom right the border closure and congestion impacted deliveries in the quarter.
Orders and inquiries support replacement level demand consistent with our expectations over the next few years.
Now, let's turn to slide five and talk about financial results in the quarter.
Revenue of $821 million is up 65% year over year, driven by a higher volume of external deliveries in the quarter.
We earned an adjusted EPS of <unk> 26 cents.
As a reminder, in the third quarter of 2022, we completed the large railcar sale, which benefited EPS last year.
Lease portfolio sale gains for the third quarter of 2023 were modest but.
But we are still targeting the fourth quarter for more meaningful railcar sales in 2023 and to achieve our net investment targets.
Cash flow from continuing operations was $76 million in the quarter.
And our adjusted free cash flow was a negative $31 million.
Eric will talk more about cash a little later in our prepared remarks.
Please turn with me to slide six to talk about our segments starting with leasing.
Leasing revenue was $223 million in the quarter up 14% year over year, driven by improved lease rates higher utilization and acquisition related revenues included in the current year period.
Renewal lease rates in the quarter with 32.5% above expiring rates on average trending.
Trending closely to the MLR D.
Thanks to favorable market conditions, we have delivered a double digit that's already for six consecutive quarters and we are seeing a noticeable impact as the over 30% of our fleet reflects the current robust lease rate environment.
To preserve these lease rates, we continue to push term with average renewal lease term of 55 months year to date.
Even with a strong lease rate environment, our renewal success rate in the quarter was 86% well above average and evidence that lessors are still have significant pricing power.
Leasing and management operating margin was 38, 4%.
This is slightly up year over year with improved lease rates, partially offset by increased maintenance expense depreciation expense and the margin profile of acquisitions in the segment.
Leasing maintenance was elevated primarily due to ongoing industry trend.
First more change of service modifications to position railcars for their best opportunity and.
And second more scheduled compliance activity and the tank car fleet.
Moving to rail products I want to touch on the border issues in the quarter briefly.
On September 20th the U S customs and border Protection Agency suspended U S bound cross border rail traffic in Eagle pass, Texas. The primary border crossing we use for railcar deliveries from our manufacturing facilities in Mexico.
This action was taken to assist the U S border patrol due to the influx of migrants at the border.
Well real traffic operations resumed on September 23rd congestion and rail traffic challenges continued to evolve.
The third quarter impact was 685 fewer railcars delivered than expected.
Well, we have started moving railcars again, we still have railcars temporarily sitting in storage and that our facilities and we continue to evaluate available alternatives to rail and truck transportation between Mexico, and the United States.
We do not anticipate completing all of these deliveries before the end of the year.
While deliveries in the quarter were lower than expected they trended heavily toward external sales, which benefited the consolidated financials in the quarter.
Additionally, despite the efficiency loss due to the border challenges, we saw operating margin improvement sequentially and year over year to five 7%.
In the quarter segment results included gains from insurance recoveries.
Excluding those gains the segment margin is five 2%, reflecting meaningful labor and efficiency improvement.
In the quarter the peso remains strong at an average exchange rate of $17.07, but.
But we were able to mitigate further risk with our hedging program.
We expect to exit the year with a segment operating margin in rail products of 8% to 9%.
And the full year average of 5% to 6%.
Barring further substantial rail service issues at the border.
Additional congestion or closures will negatively impact our ability to get railcars across the border and may require for us to slow down or temporarily suspend production.
We are working with the railroads and the government agencies to do what we can to keep operations running smoothly for both inbound and outbound rail and truck trap.
The value of our new railcar backlog is $3 $6 billion.
And we have another $124 million related to sustainable railcar conversions.
Giving us production visibility into 'twenty 'twenty four and beyond.
Turn with me to slide seven I'll highlight a few more key accomplishments in the quarter.
Our loan to value is currently 64, 9%, which we view favorably.
Year to date, our net investment in our lease fleet is $238 million and our pretax army for the last 12 months is nine 6%.
And before I turn the call to Eric I want to highlight one of our sustainability accomplishment.
As of September of this year truly received a rating of double a and the MSCI ESG ratings assessment.
This rating demonstrates both our steady progress over the past four years and an acknowledgment of our ability to manage ESG risk relative to our peers.
Nowhere is this stronger than the emphasis on employee safety, where ISO 45001 certified program drives continuous improvement.
Improvement that is reflected in our safety incident rates.
Congratulations to our team on this accomplishment.
Safety is a core value and Trinity and are definitely rating chose the industry's recognition of our efforts.
And now I'll turn the call to Eric to review the financial statements and talk about the fourth quarter.
Yeah.
Good morning, everyone.
Art My comments on slide eight with the discussion of income and cash flow statements.
Total revenues of $821 million in the quarter reflected higher external railcar deliveries and improved lease rates.
Our GAAP earnings per share or 29 cents.
After adjusting out the $3 $7 million of insurance recoveries during the quarter, our adjusted EPS was <unk> 26 cents.
It's worth noting the games for the lease portfolio sales were $3 million in the quarter.
As I said last quarter, we expect to see higher games in the fourth quarter of the year.
Moving to the cash flow statement.
Year to date cash flow from continued operations is $216 million.
Adjusted free cash flow is $50 million after investments and dividends.
As gene mentioned adjusted free cash flow in the third quarter was a negative $31 million.
This was predominantly driven by modest railcar sales in the quarter as well as net repayments of debt.
Earlier this week, we paid our 238th consecutive dividend.
Which is a meaningful source of capital returns for our shareholders.
On slide nine our liquidity of $780 million reflects our cash.
Oliver and warehouse positions.
Because of the border closure and congestion.
We ended the quarter with higher inventory levels, driven by railcar sitting in finished goods and higher work in process due to other supply chain challenges.
And now, let's turn to slide 10, and talk about the final three months of 2023.
We continue to expect industry deliveries of approximately 45000 railcars, which implies fourth quarter deliveries relatively consistent with the third quarter.
We expect net fleet investment of $250 million to $350 million in 2023.
Expect it in the three year planning period within our target range of $500 million to $600 million.
Year to date investment is $238 million in the fourth quarter, we expect a more traditional mix of internal and external deliveries.
We expect manufacturing and general Capex of $40 million to $50 million.
We have invested $29 million year to date.
So we expect a similar run rate for the fourth quarter, we've realized this year.
And as Jim mentioned at the top of the call. We were lowering our 2023 EPS guidance to a range of $1 20 to $1 35 to account for the loss deliveries in the third quarter as well as related supply chain and efficiency challenges, resulting from the border closure and congestion.
And lower efficiency and margins than expected in the first half of 2023.
It is worth noting that railcar sales are not reflected in cash from operations.
What are a significant source of cash fraternity.
I am proud of the hard work of our team and navigating through the border challenge.
I'm confident that barring any further disruption we can end the year with strong financial results <unk>.
Solid operations and the ability to take advantage of the significant operating leverage of our business.
We look forward to sharing those results with you in 2000 2004.
And now operator, we are ready for our first question.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Allison pulling back with Wells Fargo. Please go ahead.
Hi, good morning.
First I just wanted to talk to Ya leasing the maintenance I know you talked of being still elevated is there a way to understand sequentially has stabilized you know what's your thoughts on you know how that kind of trend as we as we start to move into 24, just any color there.
Thanks for the question for the last several years, we discuss the heightened level of pink car compliance events are going to be required due to the strong bilgi or is it 2013 through 2015, when the industry built over 100000, new tank cars now.
I want to emphasize this is not the agent 251 modification work here, we're just talking about the required 10 year compliance for all take cars and we're in the midst of that way right now.
Okay. So he's obviously expected as just also go into 24 based on the numbers that were built in those years then yes.
And then just manufacturing you know challenges have persisted in Mexico could you maybe talk about your manufacturing flexibility I mean, even if some of that production back into North America are into the U S or the Costco don't really I'll set that and just any thoughts around that okay. So we do.
Some new cars in the U S in Longview, Texas, and we continued to do that.
The cars that are being built in Mexico, right now really from a cost standpoint and being competitive in the industry.
It would be not possible to bring all of those back to to handle that but we're really confident in our Mexico team and it's unusual to have these border issues, we've put in place of things to mitigate issues in the future.
The green materials across the border into Mexico to do the assembly, we have different routes in different entry points that we can now use to get that product in and then we're examining how we migraine or.
Finish railcars back into the U S. Two different entry point. So we are looking at how we might mitigate this in the future. So we don't have the same effect that we had in the third quarter.
Alright, thank you.
Thank you.
The next question comes from Justin Long with Stevens. Please go ahead.
Thanks, and good morning, Jean I think at one point you said, we're all products margins would be at an accident rate of 8% to 9% I I just wanted to clarify that that's what you would expect for the full quarter and four Q and then is there any way to quantify.
Hi.
When did you saw from Eagle pass as it relates to Brill product margins in the quarter.
<unk> when you look at the exit right fourth quarter, we do expect it to be 8% to 9% and when you look at that it's for the fourth quarter. Some of the headwinds were not breaking it down five basis points on the effect, but let me tell you what happens when they close the.
Border.
First the any of the cars are already sitting there stay any cars that were in route go insert. So it takes a while for that congestion too alleviate.
And at our production rates right now we're doing about 400 cars and so when you look at that 400, a week. When you look at that we would shut down the plant very quickly if they're not taking cars off the plant property and into storage. So there was a lot of congestion that built up very quickly.
In the third quarter, we started to see that dissipates through the first half of October and now see more normal operations occurring.
Okay got it thanks, and I guess, secondly, and this one's probably for Eric we've seen a lot of volatility and railcar sales. If you go back to the second quarter. The operating income impact was around $30 million that came down to $3 million.
The third quarter I know, you've got a big lease portfolio for sale in the fourth quarter, but is there any additional color you can give us in terms of the range of of expectations for for the impact from that and four Q.
You know Justin. Thank you you are right. There is some volatility mirroring as we talked about last quarter, we signals.
Real car sales would be in the fourth quarter, we really have very modest sales.
And the third quarter I.
I would just say.
To get to the guidance there is certainly a car sale member in there we've talked about it both getting to the net flew investment and the.
The elimination as being more of a normal level.
So you're gonna, we're gonna have car sales will be elevated levels, but not anything that we haven't seen before.
Okay. So would you expect to be closer to the <unk> number.
Yeah.
Like I said there'll.
There'll be larger it's larger but not anything that we haven't seen before.
Got it thanks for the time.
Thank you.
The next question comes from basketball majors with Susquehanna. Please go ahead.
Good morning.
As we look into next year.
About the lease rate momentum that you clearly have an from the F. L. R. D. 27% to go forward nature of that matrix should continue to have.
Is there anything unique about the number of expiring cars this year versus next or or maybe a mix issue. That's not captured by F. L. A R. D. Just anything you can help directionally for us to think about how much least momentum you have into next year from this based on where conditions are today. Thank you.
Thanks, Bask on what we're not giving guidance for next year until our T for call, which will happen in February and I will say that on a typical year, we see a fifth to a sixth of our fleet that expires in has to renew no real changes that we're looking at there and the F O R D at $26.
6% foreshadows strongly trade improvements over the next four quarters.
Thank you for that and.
To go back to.
Justin's question, maybe in another way.
B for businesses like yours, there's a tendency for people like us to just run right what you've done in the most recent quarter.
When there is not a ton of seasonality and understanding that that's 70 75 since you've applied for the fourth quarter is helped by games that were much larger than a couple of quarters this year, but.
Outside of the games number is there anything else that we should think about being unusual.
For the fourth quarter pace, when we think about go forward for the business certainly directionally not necessarily quantitatively here. Thank you.
Sure. So when you look at where Trinity setup fee ended the third quarter, we had about 50% of the industry backlog. So we have a good view and 224 and beyond.
Looking at the fourth quarter, we're seeing fewer changeovers, we've got better labor stabilization. So less turnover are tenure of our employees is increasing which is helping us with our efficiency along with some volume in the quarter.
We're seeing fewer supply chain disruptions and less headwind from the FX than we had anticipated. So all of those combined to give us confidence the teams had been ready. Unfortunately in the third quarter, we had the headwinds that popped up in affected us. So we're set and ready to go in the fourth quarter.
So is it fair to characterize the fourth quarter is one where.
Some of the things that have maybe been dragging you down below your potential that you've seen all along going away rather than some unusual things leaning towards the positive.
That is fair to say has come thanks.
Last one and I'll pass it on you talked about maybe doing a long term investor update sometime in the fourth quarter early next year.
Some of your thoughts there. Thank you we've not set the date yet for that Baskin, but I would expect it to be some time next year.
Thank you all.
Thank you.
The next question comes from that Alcott with T. D. Cowan. Please go ahead.
Good morning. Thank you, it's good to see the SLR D remaining elevated and utilization picking up a bit can you guys talk about the absolute market lease rates.
You know how they moved sequentially in the third quarter and if you think you know there is potential for more improvement.
Improvement or are we pretty much near peak as far as the absolutely streets.
Thanks, Matt sorry about that uhm year over year, our average lease rates for the consolidated consolidated fleet are up 8%.
And you're starting to see that flow through and the top line on the revenue number.
You combine that with a market conditions, which right now we don't see changing majorly and the F. L. O D $26, 6%, we still see room for the last horse to continue to raise the rate.
Okay. That's that's helpful. Jean and then on the order aside 3200 <unk>.
You know, it's it's a solid number but it seems a bit light relative to the industry and also given how.
Strong lease rates are and how tight some pockets of rail cars are I was just wondering what the order an inquiry activity for manufacturing is right now and if you've gotten orders after the third quarter.
So looking at inquiry levels, it's still supportive of our view of 40 to 50000 <unk> for the industry and we expect that over the next few years.
Matt you know that orders can be lumpy quarter to quarter, and we're sitting with 50% of the industry backlog and so we think we have a pretty good view into what's going on this year, there's only been where on the page for 36000 cars to come out of the industry. So attrition wise.
And we're still expecting that 40% to 50000 cars to be built.
Thank you very much I appreciate it.
Thank you.
The next question comes from Steve furniture, with Keybanc capital markets. Please go ahead.
Good morning, everyone.
Christians I long for C. Burger. Thank you for taking my questions.
First question could you just give us a sense on your thoughts on what the normal I saw both deliveries are just given the current demand environment in backlog.
So the normalized level for deliveries again, we will match up with what we think the industry Bill will be so 40% to 50000 cars in a year.
It can't be lumpy quarter to quarter, depending on what's going on and what the car types are so you can develop by four if you want but it does change a little bit so that.
Probably is the best answer I have for you on that question.
Got it and then just what percentage of your backlog is slated for 2024 production.
What how much for 25 and what is beyond that thank you.
So I think you know in third quarter of last year, we got a large multiyear order from G. T X and so our visibility as al for the next five years at least for some of those orders when you look at what we're gonna deliver next year, they're grabbing that number four.
For me right now so.
40% of the backlog will deliver next year.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to gene Savage for any closing remark.
Well. Thank you for joining us. This morning, we're proud of the third quarter results and the improvement we're seeing in our business, we expect to close a year with solid momentum and strong financial.
We look forward to sharing our progress with you then.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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