Half Year 2024 Trinity Industries Inc Earnings Call
Good day, everyone and welcome to the Trinity Industries' second quarter ended June 30th 'twenty 'twenty four results conference call.
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After todays presentation, there will be an opportunity to ask questions.
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Please also 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 participants are directed to each and any Form 10-K, and other SEC filings for a description of certain.
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.
At this time I'd like to turn the floor over to young men Vice President of Investor Relations.
Please go ahead.
Thank you operator, good morning, everyone. We appreciate you joining us for the company's second quarter 2024, and insurance conference call.
Our prepared remarks, Sean could comment turn genes habits Trinity.
Executive Officer.
And Eric Mcafee, the company's Chief Financial Officer.
Speaker Change: People, who hold a Q&A session. Following the prepared remarks from earlier.
During the call today, we will reference certain non-GAAP financial metrics, a reconciliation of non-GAAP metrics to comparable GAAP measures are provided in the appendix of our quarterly investor slides, which are accessible on our investor relations website at Www Dot Chang.
Speaker Change: These slides are under the events and presentations portion of the website along with the second quarter earnings Conference call I think Mike.
A replay of today's call will be available. After 10 30, a M. Eastern time through midnight on August eight 2024.
Replay information is available under the events and presentations page on our Investor Relations website.
Before I turn the call to gene I wanted to remind you that Trinity completed our 2020 for Investor Day on June 20 <unk>.
A replay of that webcast is also available under the events and presentations page on our Investor Relations website. It is now my pleasure to turn the call over to Jean.
Thank you Leann and good morning, everyone.
Some of you in person for our Investor day in June with Great.
Encourage you to watch the webcast as it lays out our longer term priorities over the next several years and our progress since our last event in 2020.
Speaker Change: We believe we have an unmatched rail platform that provides a full suite of customer solutions and will ultimately drive higher shareholder returns.
Speaker Change: We are a premier railcar leasing company with a platform of integrated rail capability to support our lease fleet and serve our customers.
One of the messages we wanted to convey at their Investor day was our ability to optimize lifecycle return due to a less volatile operating environment combined with a reduced cyclicality of our platform.
Our strong performance in the second quarter highlights visibility and showcase a significant improvement and durability of margins across our business.
Here are a few key points before we get into the detail.
First we earned GAAP EPS of <unk> 67.
And adjusted EPS of <unk> 66.
Which is up 33 sequentially and 43 year over year on an adjusted basis.
Second revenues are up 16% year over year and operating profit is up 43% year over year.
This reflects improved lease rates higher external deliveries and improved labor and operational efficiencies.
Third our cash flow from continuing operations in the quarter with $243 million driven by higher external deliveries and working capital improvement.
Speaker Change: And finally as we discussed at Investor Day, we are moving to a more traditional post tax definition of ROE as a key performance indicator.
Using this updated metric <unk> last 12 months adjusted ROE was 16, 8%.
<unk> strength and operating results and balance sheet positioning.
In short our team delivered strong financial results in the second quarter, giving us confidence in the second half of the year.
As Eric will discuss in his prepared remarks, we are raising our annual guidance by 20.
Eric: Two a 2024 full rate full year range of $1 55 to $1 75.
Which implies steady performance in the second half of the year.
Before discussing <unk> performance I'd like to update you on the railcar market.
Demand for existing railcars remained strong with continued steady carload volumes expected in the back half of the year.
Consistent with normal seasonal trends, we have seen railcars in storage tick up slightly but we view the overall state of the railcar market favorably.
The North American railcar fleet has grown somewhat in the last 18 months as railcar users look to optimize scrapping decisions as replacement cars are delivered.
Eric: As we mentioned at our Investor day, there are still large pockets of 18 railcars that will need to be replaced in the coming years.
Furthermore, train speeds are favorable and dwell times are down which is a good sign for the overall longer term conversion of modal share to rail so.
So it reduces the demand for railcars in the short term.
Eric: Carloads are down slightly year over year, primarily due to a slowdown in coal carload.
Eric: Removing coal carloads were up slightly year over year.
Over the last few weeks North American rail originations of construction in metals, agriculture, and downstream and chemical products were up about 9%.
Combined railcars in these segments represent over 75% of our fleet net book value.
We expect industry deliveries of around 40000 railcars in 2024.
And the 120000 railcars over the next three years.
Trinity: The builders, including Trinity are demonstrating great market discipline.
Keep the industry fleet, well utilized and diversified.
The railcar build cycle is expected to be less volatile than prior cycles with lower peaks and higher floors.
Trinity: Trinity business has two main segments leasing services and rail products.
I'll start my comments on the leasing and services segment, which includes our leasing maintenance and logistics services businesses.
Trinity: And our leasing business, we are proud of our lease fleet continued strength and momentum.
With future lease rate differential, whereas all R&D is a positive 28, 3%.
This metric has stayed consistently high as market rates maintain their strength.
During the nine quarters in which we have seen this metric and positive double digits, we have re priced about 44% of our fleet.
Our renewal lease rates were 32, 5% above expiring rates and leasing and management revenues were about 9% higher than a year ago.
In the quarter, we had a renewal success rate of 72% and the utilization rate of 96, 9%.
Trinity: Our strategy is to evaluate the best market for our railcars to maximize long term return, which can mean shifting railcars at the end of expiring contracts to best position our fleet for long term value creation.
Trinity: Given the market car types and customers with explorations in the quarter, we feel good about our fleets current positioning and utilization.
We completed a portfolio sale of 1315 railcars and related leases for an aggregate sales price of approximately $143 million.
Trinity: And we recognized gains of $23 million on all leaf portfolio of sales in the secondary market this quarter.
Trinity: Our maintenance business as part of our leasing segment and as volume shifts between internal and external repairs the margin in that business can vary significantly.
However, having a strong maintenance network and the ability to service our own fleet is a competitive advantage and makes us a better railcar owner and partner.
Moving to our rail products business, which supports our lease fleet and includes railcar manufacturing and our aftermarket parts business.
Trinity: I'm pleased with our substantial progress.
Trinity: Especially in labor and operational efficiencies.
Trinity: Our operating margin of seven 9% in the second quarter is up significantly both sequentially and year over year and is at the higher end of our full year guidance of 6% to 8%.
Trinity: We received orders for 2000, and 495 railcars in the quarter and delivered 4755 railcars.
Inquiries remain supportive of a replacement level demand and customers continued to efficiently placed deliveries into service.
Trinity: A narrower railcar build cycle allows for more consistent operations and smoother labor and supply chain planning.
Trinity: This helps support consistent or modest margin growth in this business without volume growth in the near term.
Trinity: Before I conclude I want to note that at the end of June we published in the interim update to our corporate social responsibility report.
Trinity: Which is available on our website.
Trinity: I encourage you to review the report to get a timely update on our company's sustainability initiatives.
Trinity: I'll now turn to Eric to discuss the financial statements and update our views on the rest of the year.
Eric: Thank you gene and good morning, everyone.
Eric: Don will walk through some highlights from our financial statements and then I'll close with some thoughts on our expectations for the rest of 2024.
Don: Starting with the income statement.
Don: Quarterly revenues of $841 million reflect higher external railcar deliveries.
Don: Crude lease rates.
Don: GAAP earnings per share from continuing operations was <unk> 67 cents and.
Don: Adjusted EPS was <unk> 66.
Speaker Change: As Jim noted this represents significant growth both sequentially and year over year.
Jim: We benefited in the quarter by lower eliminations and lease portfolio sales. We also saw a consistently better performance of our business and improved operating margins for both segments of our business.
Don: Moving to the cash flow statement we.
Don: We generated cash flow from continuing operations of $243 million in the quarter and $300 million year to date.
Don: As Youll remember, we ended 2023 with a higher working capital balances driven by year end issues at the border.
Don: Those railcars have now been delivered and converted into cash, which you can see in our lower working capital balance of $699 million down approximately $92 million from the first quarter.
Don: The combined result of a $163 million in leased railcar sales and fewer deliveries to the lease fleet in the quarter as a net fleet investment of a negative $77 million.
Don: Our net fleet investment guidance range for the full year remains unchanged.
Don: Secondary market activity is often lumpy and we expect to see net investment increase in the back half of the year with more deliveries in the lease fleet and fewer railcar sales in the secondary market.
Don: The <unk> sale in the second quarter marks the fulfillment of our original program agreement.
Don: We expect to continue selling leased railcars to our RV partners.
Don: We currently have liquidity of $985 million.
Don: Our loan to value for the wholly owned lease portfolio is 68, 3% within our new target range of 60% to 70%.
Don: In the second quarter, two significant debt and capital market transactions strengthened our balance sheet and optimized our loan to value.
Don: First in May we issued $432 million.
Speaker Change: Of Green secured railcar equipment those material 2024 notes the.
Don: The proceeds from this issuance were used to repay warehouse borrowings and redeemed the outstanding the ABS debt of <unk> seven.
Speaker Change: Second in June we issued an additional $200 million of principal on our unsecured senior notes.
Speaker Change: Increasing the aggregate principal amount to $600 million.
Speaker Change: We used the proceeds from this transaction and cash on hand.
Speaker Change: We pay our Trinity unsecured 2024 senior notes.
Speaker Change: And now let's talk about what we expect in the second half of 2024.
Speaker Change: As gene mentioned, we still expect about 40000 industry railcar deliveries in 2024 to support replacement level demand.
Gene: We expect to invest between 300 and $400 million in our fleet on a net basis.
Speaker Change: Yeah.
Gene: We expect a higher percentage of deliveries going into our lease fleet in the second half of the year.
Speaker Change: This is in support of our fleet investment goals and our conviction and the returns we will achieve by leasing these railcars instead of selling them new.
Speaker Change: When we added railcar into our fleet the associated revenue and profit for manufacturing are eliminated.
Speaker Change: Therefore, a higher percentage of railcars go into our fleet on the same number of deliveries will reduce quarterly earnings per share, but where would generate better long term returns on the railcar and provide multiyear visibility in forward cash flow through lease contracts.
Speaker Change: As we discussed at our Investor Day, we expect 2020 for operating margins between 38, and 41% and our leasing segment and.
Speaker Change: And between six and 8% in our rail products segment.
Speaker Change: While we expect margins to average at these rates over the years there can be some variability throughout the year.
Speaker Change: Leasing segment operating margins can move due to secondary market activity maintenance volume and mix <unk>.
Speaker Change: Your first question today comes from basket majors from Susquehanna. Please go ahead with your question.
basket majors: Good morning.
From a little shaping you were very clear on the internal versus external sales dynamic and and and and how that would impact the second half.
Can you talk a little bit about the margin progression, which has been really strong for several straight quarters and you know if in the OE side of the business if that keeps moving up would potentially put us in the higher end of your range by by year end, but also we understand that there may be some absorption issues with more of that revenue and profit being eliminate.
Speaker Change: And trying to balance you know the the underlying trend with the accounting of it. Thank you.
Speaker Change: Well, that's can be summarized it really well.
When we look at the second half with the products created as Eric mentioned in his prepared remarks.
It depends on the next up cars that were producing the number of line changeovers that are occurring during that time period, and then the efficiency different car types have different efficiencies that go along with them.
Speaker Change: About a fairly stable environment overall, there could be a little bit of lumpiness year to year, but that's fairly stable and so it's going to take these initiatives coming through to continue to improve that margin.
The last one from me.
Speaker Change: Can you talk a little bit. So I think you said that youre through 44% of your fleet repricing since lease rates really.
Speaker Change: Took off a few years ago.
Can we talk about how long the runway is to get to a 100%.
I think people just kind of assume maybe 15% a year as a proxy but.
Speaker Change: If lease rates on an absolute basis stay where they are how much runway do you have an to repricing the existing fleet.
Meaningfully better returns as we get through that without needing to see sequential strengthening or increases in the lease rates on an absolute basis. Thank you.
Speaker Change: Tabasco.
Yes.
Speaker Change: Okay got it thanks for that second one for me.
Your first half orders averaged 2200 per quarter versus a delivery average more than twice that at 4700. So my question is if that pattern persists in the second half my math suggest backlog would end around 16000 cars.
Speaker Change: Is there any thought to slowing down production or do you have firm delivery schedules for everything that's in the backlog right now.
So I'll take that one when you look at the order entry. So the builders are getting quicker on delivering cars. So in the past when supply chain.
Speaker Change: Had issues with.
We will get the orders earlier, because everything filled up quicker, we're pretty much sold out for 2024 and when you look at.
The makeup of those as they are.
Erik said, it's still freight car led with tank cars starting to improve on it.
Erik: As reflected in our data.
And our beat in the second quarter, we had fewer eliminations the gains were a little higher than we expected as one of the one of the deals got done in the second quarter, but we're holding our game outlook for the full year, our elimination outlook for the full years held the same so overall, we're real happy with it and the last thing I'd just say.
Erik: Is remember we had some deliveries.
We're hung up at the border in the fourth quarter.
Erik: Those have now all delivered and converted to cash. So we got the benefit of that roughly 1000 units in the first half who won't have that in the second half.
And to your comments about being happy with better performance than we expected in both the second quarter and with that carry into the second half is.
If we really wanted to drill down into that is that mostly about manufacturing efficiency or margin or I mean, what are the one or two things you would point to on were you surprised yourselves versus the budget you had in April thank you.
Yes, I would say.
Erik: <unk>.
Speaker Change: Margins on rail group, we did.
Specifically.