Q4 2024 Trinity Industries Inc Earnings Call
Good day and welcome to the Trinity Industries
3 quarter and 12 months ended December 31, 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded.
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. Statements that are not historical facts are forward-looking.
Speaker Change: Participants are directed to Trinity's Form 10-K and other SEC filings for a description of the
Peace.
Speaker Change: certain business issues and risks, a change in which any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.
Speaker Change: I would now like to turn the conference over to Leigh Ann Mann, Vice President, Investor Relations. Please go ahead.
Speaker Change: Thank you operator. Good morning everyone. We appreciate you joining us for the company's fourth quarter and full year 2024 financial results conference call.
Speaker Change: Our prepared remarks will include comments from Gene Savage, Trinity's Chief Executive Officer and President, and Eric Marchetto, the company's Chief Financial Officer.
Speaker Change: We will hold a Q&A session following the prepared remarks from our leaders.
Speaker Change: These slides are under the events and presentations portion of the website, along with the fourth quarter earnings conference call event link.
Speaker Change: A replay of today's call will be available after 10.30 a.m. Eastern Time through midnight on February 27, 2025. 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 Jean.
Jean: Thank you, Leigh Ann, and good morning everyone. To begin today, I would like to extend my gratitude to all the Trinity employees for delivering strong financial results in 2024 and demonstrating the power and potential of the Trinity platform.
Jean: Our full-year adjusted EPS of $1.82 represents a 32% year-over-year increase, driven by high release rates, significantly improved margin performance, and an increased volume of external repairs.
Jean: We concluded the year with an adjusted ROE of 14.6% within our target range, and cash flow from operations with net gains on lease portfolio sales of $645 million, reflecting a 65% increase over 2023.
Jean: During our 2024 Investor Day last June, we emphasized that a less volatile operating environment combined with a reduced cyclicality of our platform would optimize our returns through the cycle.
Jean: We believe our 2024 results provide solid evidence of our ability to consistently perform.
Jean: I would also like to say a few words about our safety performance.
Jean: Safety is a core value for Trinity and we have continued to demonstrate incremental year-over-year improvements in safety metrics in each of the last several years, achieving approximately half the industry average of incidents for manufacturing.
Jean: As we look forward to 2025, we remain confident in the strength of our leasing business, especially in light of the balanced market conditions.
Jean: While there are ongoing pressures on manufacturing driven by macroeconomic forces, this environment favors our existing assets.
Jean: We believe that moderated additions to the industry rail car fleet will enable us to continue pricing our existing fleet upward, thereby improving returns for our business.
Eric Marchetto: Today I will discuss current market observations, provide specifics from our business segment, and then pass the call to Eric to discuss financial results and provide our thoughts and guidance for 2025 expectations.
Let's start with a market update.
Eric Marchetto: For the full year 2024, the industry delivered just under 43,000 railcars and received orders for 25,000 railcars.
Eric Marchetto: We believe 2024 attrition levels were just below 40,000 and expect to see these levels increase over the next few years with concentration in boxcars and covered hoppers.
Eric Marchetto: The industry backlog stands at approximately 34,000 rail cars, with Trinity's backlog comprising about 47% of the total.
including our multi-year order.
Eric Marchetto: We continue to anticipate industry deliveries of about 120,000 railcars for the planning period of 2024 through 2026.
Eric Marchetto: As Eric will discuss in our guidance section, we expect a step down in industry deliveries for 2025.
Eric Marchetto: However, as previously stated, we foresee this railcar build cycle being narrower than previous cycles.
characterized by lower peaks and higher floors.
Eric Marchetto: Nevertheless, 2025 inquiry levels have been elevated and we anticipate an acceleration in orders as policy changes become more explicit.
Eric Marchetto: We have seen positive volume signals in the agricultural, chemicals, and intermodal segments.
Eric Marchetto: Additionally, we have visibility into replacement opportunities for vehicular flats, grain cars, and small general service tank cars.
Eric Marchetto: The railcar industry and the broader industrial economy are currently influenced by numerous macroeconomic forces.
Eric Marchetto: Despite these challenges, we remain confident in our internal projections for railcar production.
Eric Marchetto: More importantly, we are committed to maintaining the utilization and return of our lease fleet, driving value for shareholders.
Eric Marchetto: I would now like to provide some segment highlights, beginning with the rail car leasing and services segment, which includes our leasing business, maintenance business, and digital and logistics services businesses.
Eric Marchetto: Our leasing and services business continues to perform favorably, and we anticipate this trend to persist in 2025.
Eric Marchetto: In the fourth quarter, the leasing and services segment generated revenues of $287 million and a segment operating profit of $121 million.
Eric Marchetto: Gains on portfolio sales in the quarter amounted to $21 million.
Eric Marchetto: For the full year 2024, leasing segment revenue of $1.1 billion increased by $102 million year-over-year as we continue to reprice our lease fleet upward.
Eric Marchetto: We also observed favorable year-over-year results in our maintenance business with an increased volume of external repairs.
Our forward-looking metrics also remain favorable.
Eric Marchetto: We concluded the year with a Future Lease Rate Differential, or FLRD, of 24.3%.
and the lease fleet utilization rate of 97 percent.
Eric Marchetto: Our renewal success rate was 77% in the fourth quarter, which we believe indicates that the market remains balanced, allowing us to continue to push pricing upward.
Eric Marchetto: We have now repriced just over half our fleet in a double-digit FLRD environment, indicating that we still have ample runway for further pricing improvement.
Eric Marchetto: Full-year lease portfolio sales were $361 million, with gains of $57 million.
Eric Marchetto: As expected, these gains were slightly lower than in 2023, but still represent a very healthy secondary market.
Eric Marchetto: Trinity's full-year net lease fleet investment was $181 million, slightly below our guidance range of $200 to $300 million.
Eric Marchetto: Our volume of railcar sales exceeded expectations as the secondary market has remained favorable.
Eric Marchetto: Trinity delivered 3,760 railcars in the fourth quarter, bringing the total for the year to 17,570.
Eric Marchetto: We received orders for 7,685 rail cars in 2024, resulting in a year-end backlog of 2.1 billion dollars.
Eric Marchetto: As mentioned at the top of the call, we expect to see orders accelerate as certainty improves in the market around policy decisions and impact.
I am proud of the performance in this segment.
Eric Marchetto: Despite relatively flat revenue, operating profit of $189 million increased by 68% compared to 2023.
Eric Marchetto: Our full year operating margin of 7.8% was at the high end of our guidance range of 6-8%, representing a 330 basis point improvement over 2023.
Our parks business also performed exceptionally well in 2024.
Eric Marchetto: As previously noted, we are focused on expanding our parks business to support our lease fleet and maintenance network, and we continue to identify promising opportunities for growth and improvement in this business.
Speaker Change: Eric will provide guidance for 2025, but I wanted to share some high-level thoughts on their current operating environment.
Speaker Change: As you have heard from other companies this earnings cycle, our customers are deferring investment decisions until there is greater certainty and clarification regarding the regulatory environment, including tariffs.
Speaker Change: We remain engaged and informed about the potential impact tariffs may have on our manufacturing business.
Speaker Change: Given the uncertainty and resulting investment delays, our 2025 guidance includes a 30-cent EPS range to account for various scenarios and the timing of investment decisions.
Speaker Change: If the tariff uncertainty continues, resulting in further delays in railcar orders, there may be additional risk to our guidance.
Speaker Change: That being said, we also own or manage approximately 144,000 railcars, and our primary focus is on improving the returns from these valuable assets.
Eric Marchetto: I will now turn the call over to Eric to discuss our financial statements, our performance against our longer-term targets, and our high-level guidance on expectations for 2025.
Eric Marchetto: Thank you, Gene, and good morning, everyone. I'll begin by discussing our fourth quarter and full year financial statements, starting with the income statement.
Eric Marchetto: Fourth quarter consolidated revenues of $629 million reflect lower deliveries and higher eliminations as 36% of quarterly deliveries were added to our lease lease.
Eric Marchetto: For the full year, 20% of deliveries were delivered to our lease fleet.
Eric Marchetto: As Gene noted, operating profit significantly improved in 2024, driven primarily by margin improvement in the rail products group, partially offset by lower full-year gains on railcar sales and higher eliminations.
Eric Marchetto: would benefit in the quarter from a lower than expected tax rate.
Eric Marchetto: For the full year, our effective tax rate was 22.7 percent.
Eric Marchetto: Fourth quarter adjusted EPS was $0.39, and full year adjusted EPS was $1.82, representing a 32% improvement over 2023 and reflecting strong operating performance.
Eric Marchetto: I would like to reiterate Gene's earlier point that this significant earnings improvement occurred despite a flat delivery and revenue environment.
Eric Marchetto: This is encouraging as it demonstrates that our platform has the ability to generate strong returns in a flat economic cycle.
Eric Marchetto: Moving to the cash flow statement, full year cash flow from continued operations was five hundred and eighty eight million dollars.
Eric Marchetto: Net fleet investment for the year was $181 million, which included $542 million of fleet additions and enhancements, offset by $361 million in secondary market sales.
Eric Marchetto: We returned $114 million to shareholders in 2024, comprising $93 million through dividend payments and $21 million in share repurchases.
Eric Marchetto: In December, we announced a $0.02 increase to our quarterly dividend, which is now $0.30 per share.
Eric Marchetto: This represents a dividend yield of approximately 3.4% based on the year-end stock price and reinforces our commitment to dividend growth.
We have consecutively paid a dividend for over 60 years.
Eric Marchetto: At our Investor Day in June, we provided longer-term guidance for the period of 2024 to 2026.
Eric Marchetto: Having completed the first year of this planning period, I would like to provide an update on our progress against our Investor Day targets.
Eric Marchetto: First, we set a three-year goal for net fleet investment of $750 million to $1 billion.
In 2024, our net fleet investment was $181 million.
Eric Marchetto: As Gene mentioned, the secondary market proves stronger than expected, and we capitalized on this in 2024.
Eric Marchetto: Our 2025 guidance of $300 million to $400 million aligns us with the three-year run rate.
Eric Marchetto: Second, we introduced a cash metric that encompasses cash flow from operations with net gains on lease portfolio sales, with a three-year target of $1.2 billion to $1.4 billion.
Eric Marchetto: In 2024, cash flow from continued operations was $588 million, and we recorded gains on railcar sales of $57 million.
Eric Marchetto: Combined, cash flow from operations and gains on lease portfolio sales amounted to $645 million for 2024.
Eric Marchetto: Cash flow was strong in 2024, and gains exceeded initial forecasts. Therefore, we believe we are in a favorable position to achieve this three-year target.
Eric Marchetto: Finally, we stated that we expected our adjusted return on equity to be in the range of 12 to 15 percent over the three-year planning period.
Eric Marchetto: We concluded 2024 with an adjusted ROE of 14.6%, a significant increase from our 2023 adjusted ROE of 11.2%.
Eric Marchetto: In 2023, we significantly improved our asset turnover and balance sheet optimization.
Eric Marchetto: In 2024, we improved our net profit margin driving our adjusted ROE up by 30% compared to 2023.
Eric Marchetto: We expect adjusted ROE to remain within the target range in 2025.
Overall, we are on track to meet our longer-term targets.
Eric Marchetto: We continue to believe these three targets highlight where we can create value as a business.
Eric Marchetto: investment in our fleet, durable cash flow generation, and optimized returns throughout the economic cycle.
Speaker Change: Moving to 2025 guidance. As Gene mentioned, we have observed delays in ordering decisions due to uncertainty around tariffs and a relatively flat U.S. industrial production.
Speaker Change: Given these realities, we expect 2025 industry deliveries of approximately 35,000 railcars, which is about 20% lower than 2024 deliveries.
Speaker Change: We continue to believe that industry delivers over three-year period will be around 120,000 railcars.
Speaker Change: Meaning we expect to see backlogs grow this year as the industry plans for more deliveries in 2026.
Speaker Change: Our fourth quarter results reflect decisions made late in the year to prepare for a lower delivery environment.
Speaker Change: In addition to making changes to the corporate cost structure, our facilities also improved their cost structure with enhancements in efficiency, productivity, and supply chain management, as well as a continued focus on automation.
Speaker Change: We expect lower SCA costs in 2025 as compared to 2024 split among the segment results in corporate cost reductions.
Speaker Change: The total effect will be approximately $40 million of SCNA cost savings, including lower incentive compensation.
Speaker Change: In 2025, we expect net lease fleet investment of $300 to $400 million in support of our three-year targets, reflecting a higher percentage of deliveries going to our fleet and fewer secondary market railcar sales.
Speaker Change: We expect manufacturing capital expenditures of $45 to $55 million this year.
Speaker Change: Finally, we are introducing our 2025 EPS guidance at a range of $1.50 to $1.80 per share.
Speaker Change: We expect gains on lease portfolio sales to be between $40 to $50 million.
Speaker Change: We expect a tax rate of approximately 25 to 27 percent for the full year.
Speaker Change: In conclusion, we are confident that 2025 will be a year of continued strength for our leasing and services business.
Speaker Change: Our focus remains on enhancing returns from our lease fleet while carefully managing production activity to ensure the fleet remains in balance.
Speaker Change: Leveraging our unique position as both a lessor and a manufacturer, we are attuned to the market needs and are maintaining flexibility to adapt swiftly to changes in the market.
Speaker Change: We look forward to sharing our progress with you and appreciate your support.
Operator, we are now ready to take our
We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Again, it is star then one to ask a question.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Vascom Majors with Susquehanna. Please go ahead.
Vascom Majors: Good morning. Can you talk a little bit about the backlog coverage for the year and any shaping and how that looks differently in the first half versus the second half or maybe even the fourth quarter? Thank you.
Speaker Change: Sure, Beth. Great question. So, as we said in the prepared remarks, we're expecting industry deliveries for 2025 to be down about 20% to $35,000.
Speaker Change: What we've seen in 24 was uncertainty around the election. We saw inquiry levels pick up and then the tariff question came in.
Speaker Change: Right now, the tariff question has people deciding or customers delaying decisions on placing some of the orders until they know what those impacts are going to be.
Speaker Change: So, you know we don't give quarterly guidance, but based off of the macroeconomics and the uncertainty out there, I would say that we're comfortable in letting you know that we believe second half will be better.
Speaker Change: and higher than the first half of the year. A lot of that is going to depend over the next couple months as we get clarity on what's going to happen with those tariffs or other regulations that do go into place.
Speaker Change: And just to clarify, when you say second half better than the first half, are you talking about deliveries and earnings or are you talking about the order cadence?
Speaker Change: I'm talking about both in that. So we do expect deliveries and backlog to pick up as the year goes on, because if you look at the three years, we still strongly believe there'll be about 120,000 cars delivered between 24 and 26.
which means we're expecting 26 to tick back up.
Speaker Change: And to the tariff uncertainty piece, I appreciate the color you've given throughout your guidance on that.
Speaker Change: The buyer who might pay more or your margin that might get eaten up by something that changes before a car is delivered. I just want to understand the risk sharing in that and how that's evolving and if you have a plan to maybe share that in a way that one side doesn't take the full hit if something changes.
Speaker Change: Sure, when you look at the tariffs overall, the majority of our contracts have escalation in them, which would allow us to pass those tariffs on. That being said, we have a really good team in supply chain and also in our compliance who are working to mitigate.
Marchetto, Leigh Mann
Speaker Change: And last one, just a similar question but for the lease business. When you're originating leases but holding the car on your own balance sheet, is there a similar escalation cause if the cost of that car changes materially from what was anticipated at lease?
Speaker Change: Yes, there is escalation in that too, and as you know, with interest rates staying higher for longer, we're still bullish on what we can do with our lease rates, right?
Speaker Change: recently gone over 50% of our lease being, lease rates being repriced in that double-digit positive SLRD range so we still see room to continue to raise those rates.
Thank you for the time.
Thank you.
Speaker Change: Once again, if you have a question, please press star then 1.
The next question comes from Justin.
Bregner with Cabelli Funds. Please go ahead.
Good morning, Gene.
Eric and Leigh Ann, thank you for taking my questions.
You bet.
Speaker Change: Just first off, you mentioned that Incentive Comp was going to come down this year.
in How You Framed Guidance.
Speaker Change: As part of the SG&A decline, could you maybe quantify sort of how much that is contributing, I think, to the $40 million or so lower SG&A cost, just to get an idea as to how much, you know, it might be set back upward to $26 million?
Sure, Justin. And effectively...
Speaker Change: We had a good year in 2024, so our incentive compensation was up.
Speaker Change: and then less than half of it is the incentive compensation, but it's a meaningful number, that's why we called it out.
Speaker Change: Okay, just to understand that, I mean, it's not that you're forecasting a lower-than-normal incentive comp, it's just more of a reset off of a good year in 2024.
Speaker Change: could and hopefully does go up in 26. It's not going to go up by that.
Speaker Change: on our short-term incentive and so we've set our guidance, you know we have we have our targets that we've set and we're planning that target and the guidance is based off the target.
Speaker Change: Great. Secondly, just to confirm, some of these numbers came at me a bit fast. So the rail products margin 6% to 8% and tax rate 25% to 27%? Did I hear correctly? Or please correct me if I didn't.
Speaker Change: On the rail group margin for the guidance, you heard seven to eight percent.
Okay. In the text, you got it right.
Speaker Change: All right, thank you. And then just lastly, help me understand in the quarter what...
Speaker Change: Weighed down leasing and services margins, X gains on sale, I guess the press release talks about higher maintenance and compliance costs.
Is that persisting into 25?
Speaker Change: Yeah, so when you look at the maintenance, Justin, we've been talking about a compliance interval that's come up on the cars that were built in the last 10 years.
We expect those maintenance costs to be elevated.
Speaker Change: for 2025 and the next couple of years after that until that compliance event is over.
Speaker Change: That's some of the weight that you're seeing on the leasing segment margins, staying between 38 and 41 percent. It's increased maintenance costs for that compliance interval, plus lower secondary market sales.
Speaker Change: I realize there's no normal to secondary market sales, but do you think the 40 to 50k in secondary market sales reflects
You know as best as one could
Speaker Change: Do you estimate a new normal in the current environment for secondary rail car sales, or do you think the 54 this year is more?
Speaker Change: So if you look, if you go back to last year, our guidance was about, was about $40 million of secondary market gains. And so this year, 40, 50 kind of reflects that similar activity. Included in our guidance is we have increased our Netflix.
Speaker Change: And so our net fleet in CapEx is, last year in 24, was a little bit lower than we had projected. This year, for 25, we're back to that $300 to $400 million range, and that reflects
Speaker Change: that we think leasing's a good investment. We see the nice returns there, and so it's a choice to invest in the fleet rather than sell more out of the fleet, but we think long-term it's the right value creation choice.
Got it. Thank you for taking my questions.
Speaker Change: The next question comes from Andre Tomczyk with Goldman Sachs. Please go ahead.
Speaker Change: relative to the industry expectation would you expect Trinity's deliveries to fall roughly in that range the relative to the 18% or should we think higher or lower?
Speaker Change: So, Andre, we are expecting industry to be down around that 20%, and we're expecting to be in our normal range, which is between 30 and 40% of deliveries during the same time frame. So, we typically fall there and have been there.
Speaker Change: Got it. And just for the the margin though in manufacturing, I think you mentioned the 7 to 8 percent full year. Is there any way we could think about how that trends through the year, maybe starting off in the first quarter?
Speaker Change: So typically, we're not given a margin range quarter by quarter because again, it can vary depending on what's going on in that quarter, the mix of cars, the number of setups.
Speaker Change: and all that we have there, and then also the volume. We did indicate that we expect...
Speaker Change: The second half to be better than the first half, so I would expect to see improvement from that standpoint. And Andre, it may be helpful. I'm going to ask Eric to go ahead and just give you a bridge walk from 24 to 25, if that's okay.
Great.
Speaker Change: Sure. Hey, Andre, welcome to the coverage team. Appreciate you doing the work on Trinity. Yeah, thanks for having me. Yeah, so when you look at, just look at 24 to 25, and you just kind of, you kind of are on the right path when you kind of frame it. We're seeing railcar deliveries down, and that...
Speaker Change: 20% range. We've talked about our gains on sale being down about 20% as well if you look from last year to the midpoint of our guidance.
Speaker Change: And then when you take our earnings guidance, if you go to the midpoint...
Speaker Change: which is leaving a little bit lower margins on the 78% side versus our three-year plan that's volume related.
Speaker Change: But we're really excited about the performance of this platform when you take that macro context into consideration.
Speaker Change: We look at just headwinds and tailwinds, so the lower deliveries, as I mentioned, also we're planning on more fleet ads, so we have higher eliminations, about 30% of our deliveries going to our fleet. So we're looking at that.
Speaker Change: We also, as I mentioned, lower gains on car sales. Gene mentioned the higher maintenance due to compliance events. And then, as Justin referenced on his question earlier, we are expecting the tax rate to go up about 400 basis points.
Speaker Change: So, those are kind of the headwinds. The good guys are...
Speaker Change: We're still in a very good lease price environment, and so we're expecting as we reprice.
Speaker Change: a little more than 50% of our fleet, 54% of our fleet.
Speaker Change: in a double-digit FLRD environment. We expect that to continue as the fleet is nicely in balance, and so we still have pricing power on renewing assets to reiterate in the fourth quarter.
Speaker Change: We renewed about 77% of our leases, up 24%, and so with four-year renewal terms, so really locking in those contractual cash flows longer in an up environment. And then, as I mentioned, we're going to see fleet growth to $300 to $400 million.
Speaker Change: And then we've taken some cost savings, the 40M dollars that we referenced earlier. So you take all that into account.
Speaker Change: We feel real good about the performance that we're going to expect in 25.
Speaker Change: We're focused on improving the return on equity of the business. The balance sheet is, you know, as we think, in a good spot, and the earnings from the platform should be fairly resilient in a flattish economic environment.
Speaker Change: I appreciate the color there. Maybe just to close off, two final questions from my end. You mentioned, I think, the order inquiries we're picking up into 2025. If you could just...
Is that tank car lead or freight car specific?
Speaker Change: asks, how that's doing, how it's expected to perform in 2025. Thanks for taking my questions. Thanks, Andre. So when we look at the inquiries they have picked up, we've got some strong ones there. This is still a freight car-led recovery, still more of a replacement demand, but I will say tank cars have been fairly consistent.
Speaker Change: on the level of inquiry there. So that is nice for us to see overall when you're looking at that.
Speaker Change: When you go to the parts business, you know, we're really pleased with the work that they're doing both for internal and external sales.
as we look at
Speaker Change: Our acquisition we did with Holden, it's proved out very well with the automotive increase, the outer racks that we've seen go in and performed extremely well in 2024. Our traditional business has also picked up in new areas and they continue to look for either other agreements or ways that we can provide more parts both to our only fleet and to the external.
Speaker Change: Okay, was there a follow-up, Andre? Oh, that's it for my end. Thanks very much. Appreciate it. Thank you.
Speaker Change: I'll go ahead and go to the close. I want to thank everyone for your time today. While there's still a lot of uncertainty around government policy and how it impacts our business, we believe that our 2025 performance will demonstrate the strength of our platform and our ability to generate strong returns and consistent margin performance.
Speaker Change: So we look forward to sharing our first quarter progress and results with you on our next earnings call.
Thanks for watching!
Speaker Change: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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