Q2 2019 Earnings Call
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Trinity.
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Thank you and your last name is fine.
And lastly, I will address our a and e.
And the first thing.
The high end.
Thank you, Kevin and the company you're calling from.
Era a high.
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He and I need a phone number as well.
Seven four to six 503 a two.
Two great, let's get you right into the call.
[laughter].
AIDS and create shareholder value.
From a financial point of view, we value the tax attributes that our leasing business provides during strong economic cycle, we definitely value the increased earnings our manufacturing businesses delivered.
The recurring revenues from our leasing and management services businesses player or a big plus because they occur throughout the demand cycle, when we originate leases and renewal leases our customers commit to provide lease payments throughout the term of the lease.
At the end of the second quarter, we had $2.6 billion of future committed lease revenues included in our railcar leases.
These revenues will be generated over the life of the leases each lease we originate and or renewed increases our recurring revenue pool recurring revenue and profit streams helped mitigate the effects of cyclical downturns associated with the railcar economy.
Several manufacturing companies thrive.
On receiving performance feedback from their customers for a product improvement purposes.
Leasing connects our manufacturing businesses with the lifecycle of our railcars, providing a conduit for direct feedback about the performance of our products.
We use this information to improve our services and develop new product features that make our railcars more productive.
Railcars within our lease fleet had the potential to provide a large amount of data and information.
For us.
I believe this is a key differentiator for our company.
In addition, the companies in our integrated platform specialize in designing manufacturing modifying and maintaining railcars to our leasing business has unlimited.
And direct access to all these resources.
Plus.
Great visibility of the entire supply chain and a reliable source of low cost premier railcar.
Frequently our customer's request quote quotes for both lease and sales pricing our integrated platform provides us the flexibility to respond to both request.
We never want to Miss out on an opportunity to provide products and services to our customers.
In summary, we believe our integrated platform works well for us doing business with our platform is like being a member of a club our customers have access to Trinity Rail's expertise as well as a wide range of premier products and services.
We have proven the value of our integrated platform over the past 40 years and continue to perfected.
Our platform differentiates Trinity rail in the marketplace today is designed to generate substantial benefits for our shareholders and is a great vehicle to curious.
Into the future.
As I stated earlier, we have a highly capable team that is excited about the opportunities for our company Im very confident in their ability to convert these opportunities into value for our customers and our shareholders.
In March in my experience when we set our minds on accomplishing something we deliver now I'll turn it over to Eric who will comment on our operations and commercial market.
Thank you, Tim and good morning, everyone.
Turning rail second quarter financial performance reflects the unique value of our rail platform.
Producing significant recurring revenues from our growing lease fleet.
While profiting from a healthy level of new railcar production and maintenance and compliance activities.
Our rail platform of products and services is a differentiator.
And fundamental to providing value to our customers and other stakeholders.
Our family of products available through our lease fleet and our manufacturing footprint insurers Trinity can deliver the right product when our customers need it.
Quickly adjusting to demand as market conditions evolve.
Our owned and managed lease fleet is now 124650 railcars at the end of the second quarter.
Our ability to leverage the views and service opportunities, we gain from a larger and more diverse fleet continues to expand.
We are adding over $565 million in new railcars to the lease fleet in the remainder of 2019.
We expect our lease backlog all with commitments from customers to earn Unlevered returns well in excess of our cost of capital.
This will bring investment of our lease fleet to over $8 billion.
Our fleet is young with an average age of nine years.
We have a customer base of over 700 shippers serving diverse markets.
With $2.6 billion of future committed lease payments.
The fleet's average monthly lease rate has been improving sequentially in 2019.
We expect a modest sequential improvements in pricing to continue in the second half of 2019 and compare favorably year over year by end of year.
Our team has been very successful renewing and assigning leases to maintain a high level of utilization and I'm very pleased with the service levels. The trimming rail teams continued to deliver which is differentiating our business.
During the second quarter, our railcar manufacturing business increased railcar deliveries by 17% sequentially. Following a change in the mix of railcars for earlier in the year.
Our manufacturing platform is scalable and flexible and our operations team doesn't incredible job, ensuring our footprint is appropriately sized for the market environment.
The segment margin of 9.5% during the quarter reflected higher volume better efficiencies and also bit benefited from better average pricing on railcars delivered.
We recently announced the geographic expansion of our railcar maintenance business during the second quarter with a new Iowa facility.
We expect this investment will increase our ability to service the maintenance requirements of approximately 50% of our lease fleet.
Meeting and another one of our strategic priorities, we discussed at our Investor day in 2018.
By increase our capacity to maintain our railcars, we expect to increase our service level to our customers, while earning a very attractive return on this growing part of our platform.
Managing the maintenance and compliance for our lease fleet will also enhance the productivity of our railcars.
Our experienced internally servicing our own railcar maintenance requirements has led to reduce turn times of approximately 40% for maintenance event compared to third party providers.
On the commercial front macroeconomic headlines have hindered the railcar markets demand momentum at various times so far this year.
Declining railcar loadings due to weather global trade and inventory pull forward at the end of last year.
As well as customer uncertainty for GDP growth rates hesitancy, a challenge in railcar equipment planning.
It seems that just as clarity has recently emerged recently, new information or public comments reinject uncertainty in the key business plan decisions.
Despite this opaque market, our commercial activities spanning new and existing railcars as well as secondary market transactions totaled 9900 railcars in the second quarter.
As an integrated railcar provider is our first priority to protect the utilization of our lease fleet and the residual value of 50 year asset.
As a result, Trinityrail received orders for 2100, new railcars.
We're not surprised by our share of new railcar orders.
There were a few larger transactions and new railcar market did not fit well either because of low lease rates unacceptable economics or contract terms in crude oil markets.
Simply put that did not meet our criteria and we held firm.
Over the last several years Trinity rail has worked purposely to harness the power of its rail platform with the goal of providing an unparalleled customer experience through superior service and innovative solutions.
Rail is the most efficient land based mode of transportation.
However, there are service gaps in the railroad industry.
Our focus is to optimize the ownership in usage of railcars to make rail transportation more economically attractive and compelling.
We believe this is key for the long term success of the rail transportation industry.
And is the guiding principle for our strategic business objectives.
As a leading provider of railcar products and services Trinity rail is focused on building our platform of products and services to address the complete spectrum of the rail transportation needs for industrial shippers.
Railcars carry commodities.
Our railcars and services are not commodities.
Yet the industry tends to compete on price.
Trinity rail is moving towards a differentiated value proposition.
Whether it is a service differentiation or product differentiation and we're seeing the financial benefit of our rail platform through our pricing and our ability to integrate new services with our traditional product offerings.
This business strategy will grow our existing base of recurring revenue from long term leases and add high margin services revenue that enhance our return metrics.
As Tim mentioned, our vision is to be the premier provider of railcar products and services.
Turning we will continue to build on this foundation of market leadership innovation and quality that has enabled us to serve our customers in the rail industry for more than 50 years.
The rail transportation Ecosphere.
His extensive with over 1.7 million railcars.
That gives us incredible room to grow.
Trinity's integrated platform is in a strong position to capitalize on the evolving rail transportation landscape and create substantial value for our shareholders.
We are built to deliver.
I will now turn it over to Wendy.
Thank you Eric and good morning, everyone I'd like to start by reviewing the financial highlights for the second quarter.
Yesterday following market closed the company reported second quarter revenues and earnings per share from continuing operations of $736 million.29, respectively.
The year over year improvement in our second quarter revenue and operating profit was primarily due to stronger pricing in our railcar deliveries as well as a more favorable product mix.
Higher sales of railcars from our lease fleet.
And lease fleet growth.
Lower year over year corporate related expenses of approximately $10 million, resulting from our cost optimization efforts.
Operating profit improvements were partially offset by profit eliminations at $42 million, resulting from the investment in newly manufactured railcars from our lease fleet. This is an increase of $17 million year over year.
Our net interest expense increased by approximately $15 million year over year.
Reflecting the additional leverage on our balance sheet as part of our efforts to optimize our capital structure.
All in all the company delivered solid financial performance for the quarter.
Regarding litigation progress.
We're pleased that we've reached an agreement to settle the shareholder class action lawsuit for $7.5 million of which our insurance will pay $5 million. The settlement is subject to final documentation and court approval.
This case was filed after the jury verdict in a Harman federal false claims act lawsuit, which the fifth circuit later reversed and the Companys favor.
While the company denies the allegations and the shareholder lawsuit we're pleased to put this matter behind us.
For additional information regarding this case and the company's litigation. Please see note 14 to the financial statements in the company's Form 10-K , which will be filed today.
Moving into guidance.
In yesterday's press release Trinity reiterated annual earnings per share guidance from continuing operations of one dollar and 15 cents to one dollar and 35 cents for 2019.
Resulting in growth at 64% to 93% year over year.
We continue to expect segment profit from continuing operations to increase throughout the year as we add railcars to our lease fleet and ramp up railcar deliveries.
At the consolidated level, our operating profit eliminations from sales to leasing will also move that as we add cars to the lease fleet.
While our earnings guidance for the company did not change there were slight adjustments to the business and the corporate forecast.
We have revised our revenue expectations for the railcar leasing and management services group as a result of timing of railcar deliveries to the lease fleet and it is expected to be between $760 million and $775 million for the year.
We are holding our operating profit guidance for the segment in a range of $320 million to $330 million for the year due to improving operating expenses.
Regarding railcar sales from the lease fleet.
Our expectations for proceeds from sales of leased railcars to our railcar investment vehicle partners in the secondary market remains at approximately $350 million.
The timing of railcar sales from the lease fleet is always difficult to predict but we expect the back half of the year to be relatively even between the third and the fourth quarters.
Our margin on railcar sales year to date reflects the younger maturity on the railcar assets sold from our lease fleet.
As a reminder, we have sales type leases in our earnings guidance, which are required to be accounted for as sales from the lease fleet in accordance with accounting rules.
We expect this to add an additional $160 million in car sale revenue for the year with $34 million of this revenue being recognized year to date in 2019.
The gain on sales from the lease fleet fleet will be attributed to total it too cutesy total leasing segment profit and our EPS guidance range incorporates our assumptions.
Moving to the rail products group, we are revising our railcar delivery guidance range to 23000 to 24500 railcars for 2019 as our production schedule has solidified for the balance of the year.
The adjustment is a combination of firming customer.
Firming customer requirements and a higher product mix are requiring specialty lining.
Rail products group revenue is now expected to be 3 billion to $3.2 billion and we're maintaining our profit margin expectation of 9% to 9.5%.
We expect our year to date margins to be relatively consistent throughout the remainder of the year.
Our business and corporate teams continue to work collaboratively to identify cost saving opportunities and rightsize corporate costs.
As a reminder, our corporate expenses include transition and stranded costs related to the spinoff and separation of our Casa.
Additionally, our legal team has made good progress and reducing highway related cases.
Following the favorable Supreme Court ruling.
As a result, we have again lowered our corporate expense guidance range to $105 million to $115 million.
We're maintaining our guidance for revenue and profit eliminations of $1.5 billion and and $175 million respectively.
As a reminder, the revenue and profit associated with these transactions reflect the market based transfer pricing for intercompany transactions between our railcar leasing and products business segments, primarily for newly manufactured railcars.
Regarding our lease fleet investment, we now expect total net lease fleet investment of point $9 billion to $1.1 billion for 2019 with fewer railcar deliveries and secondary market purchases planned.
In addition to our planned leasing capital expenditures, our manufacturing and corporate capital expenditures forecast is revised to $120 million to $140 million.
The increase is primarily driven by capital planned for the new Midwest railcar maintenance facility.
Regarding progress on our 2019 financial goals as a newly focused rail products and services company. We've shared with you specific goals and objectives to improve our earnings and returns and unlock shareholder value.
Our financial priorities include reducing trinity's cost of capital through a more optimized balance sheet.
Using a dip a disciplined capital allocation framework to deploy capital to high return accretive business investments and delivering meaningful and steady return of capital to shareholders.
Our operational priorities include scaling the lease fleet with discretion and utilizing a disciplined tax and capital efficient approach to fund our growth.
Growing our maintenance services business to improve service level, and and reduced fleet maintenance costs.
And aligning our overall corporate costs to Trinitys go forward business needs.
Since the spin off and continuing through the second quarter. We've made good progress against these priorities.
Financially we completed the previously disclosed $528 million rail asset backed securitization with a coupon rate of 3.82%.
When combined with our short term borrowings on our leasing warehouse.
The loan to value of our wholly owned lease fleet is at approximately 53% at the end of the second quarter.
We continue to expect a loan to value range on the fleet of 57% to 59% by year end.
Optimizing our capital structure has our weighted average cost of capital at approximately 6.5% today.
We made a number of investments during the quarter, including a net lease fleet investment of $157 million and $23 million in capital expenditures for our manufacturing platform.
Turning to also completed $44 million of share repurchases, bringing our year to date total to $133 million.
At the end of the second quarter, we had a remaining authorization of $287 million for a maximum of 10.7 million shares.
Specific to our operational priorities and as Eric mentioned, the new Midwest maintenance facility will increase our capacity to internally service approximately 50% of the maintenance requirements of our owned and managed fleet.
We anticipate the new facility will be operational by the end of 2020 and will be accretive to consolidated financial results by the end of 2021, including anticipated startup costs.
All of these inc. accomplishments and our investments in the quarter.
Our aligned with management's near term goal.
To deliver 2019 earnings growth and to improve our pretax return on equity to an initial target range of between 11 and 13% by year end 2021.
We are confident in our teams ability to execute our plans to meet these goals.
In closing.
You've heard from Tim and Eric about the commercial and operational advantages of Trinity's integrated rail platform and how we are positioned to leverage the platform for growth and improved financial performance.
Going forward, we'll be highlighting the financial advantages of the platform, including stable recurring revenues strong free cash flow generation of valuable commercial channel for organic growth.
Cost advantaged railcar equipment sourcing and tax advantaged lease fleet investment.
These combined financial advantages of the integrated rail platform enable Trinity Trinity to meaningfully invest in high return growth opportunities.
Including our lease fleet, while also returning substantial capital to shareholders.
We will now transition into the Q and a session.
Operator will you please give our listeners the instructions.
I would like to ask a question today. Please press the star and one keys on your telephone keypad keep in mind, you may or move yourself from the question queue at any time by pressing the pound key.
And we'll take our first question from Matt Alcott with Cowen. Please go ahead. Your line is open.
Good morning, Thanks for taking my question I have a question on the transactions that you guys said you chose not to participate in.
In the quarter I was wondering if this is specific to this.
Order or if it's reflective of a change in philosophy, maybe or.
Strategy on what kind of order is to target and.
What to focus on strategically for the business.
Eric You Hey, Matt is there ill take that so im not sure. Its a change in strategy I think we've always been deliberate about what we've done in the distressed when it comes to originating leases.
There were a few transactions in the market, where we were where they were shorter lease terms that the.
Perspective, what's the one or two.
Acquirer.
A significant number of crude oil tank cars.
And when we looked at our fleet and the residual exposure in the threat of pipelines, we chose not to.
To do that and so that's one case that I'm looking at.
There are other that's not the only transaction that was in the market, but we are.
Being very deliberate about what we put in our fleet and what markets. We go after as we mentioned we have very good visibility of our production backlog and therefore, we don't feel.
We feel very confident and picking our spots and the right returns picking the right deals for that fit our business.
And as you guys.
Focus on growing the lease fleet.
I know historically, you've had about 40% of the manufacturing backlog.
Do you care about maintaining that percentage or.
If you can grow the lease fleet through.
In the secondary market.
Does that number mean anything to you guys.
Maintaining our share of the backlog.
Your math is there for you Jim.
We've always said, we don't run our business on market share.
That has not changed.
As we compete for.
Business.
As I mentioned in my comments, we're going to we want to differentiate our products.
And our services, we want to create we believe our products are better than the others. We don't believe our products are commodities and our servicer commodities.
And we keep pushing and talking to our customers about that and we're confident that our customers will see the value in that.
And that will be successful if that means 40% the market or some other share it will it'll it'll fall there will be an outcome of what we do some units, yes. This Tim I'll add that.
We also don't really focus on the percentage of cars that are going to come out of our manufacturing there are going to go to leasing.
That's just a mathematical equation.
We're more interested in the quality of the cars when we're looking in our leasing business. We look at it that we're investing in markets and industries and companies that participate in those markets and the industries and sometimes we make a decision based on the market, sometimes we make a decision on what's happening in that industry and sometimes we make a decision on a particular company. That's involved there and then it gets down to the diversification of our fleet and the amount of investment we want to have in these markets industries and companies.
That's very helpful and just one last question.
Tim You you mentioned in your prepared remarks something about.
Product features as it relates to VSR and I was wondering if.
Yes, you see a more compelling.
No need to invest more in R&D for.
New railcar designs as a way of kind of countering the impact of CSR and giving.
The users of the given the railroads and the shippers a reason to replace some of the existing.
Existing railcars, whether it's.
Higher capacity cars are lighter cars are more interchangeable cars. So I was wondering if within.
Saar, we could have some.
Opportunities for new innovative product designs that could.
Hello.
Equipment demand.
Yes, I mentioned PSR as an example of.
Productivity improvements enhancements thats occurring in the rail transportation industry.
As far as our product features and our product development goes.
It's really not related to PSR, it's related to information that we receive on the performance of our products and information we receive from customers and our commercial people are actively involved with their customers looking for opportunities that we can develop features this going to make our customers more productive in their business and that's that's the real key in the business to business transactions of being able to bring features that optimize the customers use of the product and our products group.
He has a number of different initiatives on the drawing board and they have some prototypes out running and then we even have some new cars out there Eric.
Tell them a little bit about.
The auto rack and what we've done on in that area.
Sure Matt.
This is Eric we introduced a new product earlier this year server in the auto industry and there was a new auto rack that we call. It the hour glass auto rack and in their rack, we think its very innovative it's gotten very good.
Response from.
The auto manufacturers and the class ones.
And Thats, a proprietary product for us and in that it's it gives more room for people to load and unload the cars and so we think it was a creative innovative product that of the industry is responding very well to.
Im from feedback came from it came from talking to our customers and B it out with our field service team win in the market and identifying challenges that impede the efficiency of rail transportation and we solve problems and Thats really when we talk about product development, it's about bringing efficiency to the rail market, which always doesn't go hand in hand, but we won.
We think there's opportunities to bring more efficiency. The rail industry that will then allow the rail industry to capture more modal share and we've received orders for that product in the form of leases.
That we have so we're we're introducing that railcar into through our leasing company and then that gives us great feedback like I said.
On the use of the railcar and Thats important to us when we come up with new design features that we stay connected.
To the product so we can work out any.
Little problems that might be there or we can add enhancements on the next generation.
Thats great. Thank you very much.
We'll take our next question from Justin Long with Stephens. Please go ahead. Your line is open.
Thanks, and good morning.
So to start I wanted to ask about the new Aro, we target to see if there is any additional color you can provide around the assumptions behind that path to 11% to 13% is that assuming a normalized industry railcar build rate and normalized gain on gains on sale and could you just talk about what you view as the key items that should drive that improvement in the ROI as well.
Good morning, Justin its melendy.
Let me first talk you through our considerations in setting the 11% to 13% pre tax are are we target and.
That is our goal our goal by the end of 2021. So what we did is we evaluated our own historical our OE performance as as post spin Trinity and we also look at competitors performance on on those measures as well.
We modeled several different scenarios to validate that debt. The goal is a stretch goal for us, but it's also achievable.
And our current cost of equity, which is around 10.5% was also a consideration.
So.
As far as more specifics around industry deliveries and other detailed assumptions of our scenarios.
We weren't planning to go into the details around those but I can tell you that based on our 2019 guidance. We expect our progress this year to be around we expect to be at around 9.5% pre tax our early by the end of the year and.
Once we get to the end of 2021 and see how we perform versus that 11% to 13% near term goal. We will continue to set our goals to improve beyond that date.
Okay. That's helpful and then.
Secondly, I wanted to see if there is any color you could provide on a quarterly cadence of railcar deliveries as we look into the back half of the year and also would love to get your view on mix and you noted that it was favorable in the quarter.
But looking into the back half and 2020 do you think car type mix gets better or worse versus where we are today.
Sure Justin this is Eric.
We talked about a step up and our rate of delivery in the back half of 29 to 2020 2019 of about 30, 35%.
And that will.
Obviously, we can't just flip a switch and instantly do that so that will that will continue throughout the second half of 2019.
In terms of mix and.
Favorable mix and things like that when you look at the industry backlog and where we're seeing demand I think thats still a very favorable mix for us.
As it's it's generally a tank car product mix and a lot of specialty freight cars. So from a from a mix standpoint.
Based on the industry backlog, and where we're seeing inquiries, but expect that to continue into 2020.
Okay, Great I'll leave it at that for the time.
We'll take our next question from Nessco majors with Susquehanna. Please go ahead. Your line is open.
Yes, good morning.
If you do the math on the backlog and as of June in the second half delivery guidance. It looks like fears 9000 give or take a few hundred cars in the backlog today for delivery in 2020 and beyond.
Can you give us a sort of directional look about how much of that is slated for 2020 and watch and multi years that might go beyond that.
Okay, great. So bascome, you're asking about the backlog in how much of that is be in 2020 and beyond.
How much visibility do you have into the 2020 delivery schedule based on the backlog you reported as of June .
Okay. So we have.
Good visibility no I think with our backlog it will it continues obviously sequentially quarter over quarter.
And it would the firm commitments that would have would would decline throughout there is a multi year order and our backlog that runs further than that but that's relatively small compared to the size of our backlog. So I would consider most of our backlog delivering either in 2019 or 2020.
Okay and.
I mean with the order environment.
Creating some opportunities that you felt werent a great fit for Trinity.
How are you managing production capacity to protect margins and what looks like at some point in 2020 metre it'd be made year later in the year you on the market could potentially see a downturn if orders will improve pretty dramatically.
So I mean, obviously, yes, we are managing our production footprint. We believe it is very flexible footprint.
And we will.
That's kind of the nature of the rail manufacturing business.
You're always.
You always have a.
Point in the future, where you don't have where you're having to have an inflection points and the good news is we're seeing inquiry levels that are still very healthy.
In that area car types that fit our production plan.
And so I think.
Thats further out than it is near term.
Okay. So it sounds like we shouldn't just extrapolate the order total we saw this quarter and I think thats, where the market is.
Each day.
Yeah, I mean as I've said this is Erik again as I've said.
In previous conference calls orders are lumpy and there was a lot of uncertainty this quarter that we think Paul that cause pauses.
Whether it be global trade tariffs.
The.
Threat of tariffs on Mexico.
Interest rates everything everything in between so there were all of those things caused people to pause on decisions.
We still like the inquiry levels.
GDP looks like it will continue to be favorable.
Railcar loadings, we expect to start to improve all of that should bode well for demand.
Thank you very much on the air and maybe I want to follow up on on Justin's questions on our retail going to clarify couple of things is the simple math on that just pre tax income over average equity for the whole company or is this a leasing specific target or are there. Some other adjustments can you help us with just how you get there.
Good morning, Baskin, Yes. It is a consolidated Trinity number so it's at the Trinity level and the simple math is as you said net net income before taxes over an average equity the one exclusion that we're making from the average equity is the AOCI Hcl and we made the decision to exclude that since it's not an operating measure.
Okay I appreciate that.
No profit profit before tax over our average equity without the AOCI ISO AOCF.
All right I appreciate that that's that simple and we can certainly replicated on Iran.
And back in one more one more thing to consider the minority interest remember needs to be adjusted for Trinity, 38% ownership.
In the partially owned fleet, so we make that adjustment as well.
And we'll follow up a bit more on some of the details after the call.
At the last thing to get there in the point and a half.
To get into that range over the next couple of years do you need to see lease renewals return positive I know you don't want to give all of your modeling in sensitivity assumptions, but.
Does that have to happen to get there.
We have we have certainly modeled in.
Profit before tax improvement over the planning period and that would be both from our lease rate expectations as well as.
Our delivery expectations Weve also mentioned that we're exploring additional services opportunities that would increase the recurring revenue of our platform and these would be services related to.
Our lease fleet and.
Providing services related to the usage.
And ownership of railcars.
Thank you both for the time.
Thank you.
Our next question from Matt Brooklier with Buckingham Research. Please go ahead. Your line is open.
Yeah, Thanks, and good morning.
You talked about the cars that you passed on in the quarter from an.
Order perspective that Didnt.
Your.
Your return criteria can you talk about the the the types of equipment.
That are included in orders that you did take in the quarter.
Sure Matt This is there.
It's fairly broad based as we mentioned already we there was auto rack orders in that business. There was also some.
Obviously tank cars, and plastics and and other covered hoppers, such as larger covered hoppers would serve the agriculture market.
Fairly diverse both with lease.
Leasing customers and.
Sales too.
Railroads and shippers.
Okay, and then Eric Eric earlier in the call you talked to.
You know your lease revenue.
The.
Revenue per car.
Sequentially, improving and into the second half of this year, we we know that lease rates per one of your competitors is kind of trending flattish.
Right now but.
Trying to get a sense for what's going to drive.
That improvement.
As we look into the second half Im assuming mix is a big part of that but if you could give a little bit more color I think that'd be helpful sure Matt.
Yeah, you're right mix is a big impact.
What I was describing as the average lease rate in our portfolio.
So the three things that would directly impact that would be.
Renewals at assignments of existing cars and then the.
Additions to the fleet minus any cars that we sell out of the fleet and all of those measures. We expect will have a slight improvement on average lease rates. When you take all those an account.
In terms of drilling down into the next layer. Your question in terms of what we're seeing on renewals and.
And just in car front.
So we are seeing improvements or stabilization of lease rates, it's not across the board.
We are seeing more car types with improvements sequentially than declines.
We're seeing improvements in some freight car types and many tank car types, but not all.
But generally speaking we're seeing.
Flat to improvement in existing car rates and what we layer in a new cars will help that as well.
And then just my last question you talked about in the past, but one of the initiatives you have on the on the lease side of your business is to.
In source more more than the maintenance on the lease fleet you talked about.
Getting to a.
The percent number could you talk about.
You may have but what's the timeframe for.
Servicing 50% of.
Lease fleet cars internally.
You know what are you what is it right now and then.
It's possible to talk to maybe a sensitivity how much.
Savings maybe from a from a dollar perspective per car or do you think you achieved by servicing the maintenance side of your lease fleet cars in house.
And when should that start to.
Trickle into the piano.
Okay, Matt This is Erik again.
Great question and.
Very.
A detailed question the.
Well I'll start with is we're currently around a third of our of our maintenance isn't using our captive network.
The Iowa facility, we expect to come online in late 2020, So really you won't start seeing the benefits of that facility until 2021.
And so that will take it there are some of the benefits that we see and.
Having our own network, yeah, they're kinda threefold first its customer experience, we have a much more predictable.
Throughput and on time delivery when we're using our captive network and that's important for our customers as they're planning their business.
Too so we think theres, a nice return from a maintenance standpoint of.
The investment in that network and that were able to make a return on that work that's attractive some of that will flow through the rail segment and so that will flow through leasing and then third.
As just more about availability of the cars better turn times all of that which will the leasing company benefits from better turn times.
And so all of those factors kind of come in.
We have those benefits on on the portion that we do now and we see we would see that benefit increasing as we capture more of the share that workers internal.
At the time.
Thank you. Thank you.
Take our next question from Allison Poliniak with Wells Fargo. Please go ahead. Your line is open.
Hi, guys good morning.
Hi, good morning.
I want to follow up on Baskin, and just kind of line of questioning on the return and I know you don't want to go into specifics and you know your 20 assumption.
But you know obviously, you're getting back you mentioned that you know we're facing somewhat of an uncertain macro.
What kind of assumptions are you kind of baking in there we sort of just flat here or is this more of a self help story in terms of the investments that you guys are making.
Good morning, Allison its melendy as I mentioned, we looked at several different scenarios as we were setting the targets and certainly we stress tested those.
We talked a lot today in our prepared comments about the integrated rail platform and its ability to grow and to deliver strong financial performance.
It's certainly the the market as you know has an impact on what our performance can be however, our goal is to stabilize is to stabilize our earnings and returns to to have them be be more steady through the cycles. As a result of growing our lease fleet and adding services to our platform. So again, we we looked at several different scenarios, we certainly stress tested those the 11% to 13% pre tax our only goal is a it's going to be a stretch goal for us to accomplish and we are considering both financial and operational levers in and looking at what actions, we can take to achieve those goals and we're confident.
Great and then any I think Eric you had mentioned a pause and that's certainly what we're hearing from the industrial world, but one of the industrial call. Today did note obviously, a pause in June but a pretty sharp snap back in July and are you seeing that in the end the inquiry levels as well, that's giving you some confidence out there.
Allison This is Eric I think that's a fair fair assessment we are.
The inquiry levels.
Well, we never went down just the quality of the inquiries, we feel pretty confident and we have good line of sight.
In the commercial activity this quarter and for the remainder of the year. So yes, I do I do sense that.
Snap back as you call it.
Great and then just not to pick on leasing utilization. It was certainly still high but it does step down from the quarter was that just sort of a timing issue.
Any color there leasing utilization was that your question yes.
Yes, it did step down we did have.
Mainly two car types that really influence that.
We're moving we have in the coal market, we're moving some cars from one customer the other women opportunity improve rates. Unfortunately in the quarter those they were off lease.
Yes, we expect that to be temporary in nature.
And we do have some small cube covered hoppers that came back this quarter, obviously that market's a little more challenged we do see that market. We think it's bottomed out we were seeing.
Slow improvement there but that.
Impacted our utilization for the quarter.
Okay, great. Thank you.
We'll take our next question from Steve Barger with Keybanc capital. Please go ahead. Your line is open.
Hey, good morning, everybody.
Good morning.
Yeah.
I have talked a lot about how you differentiate it and you're pushing customers to understand that the integrated platform is not a commodity but I'm. Just curious what is the specific pitch to convince people to pay a premium price in a lower demand environment. When you have competitors that are willing to get more aggressive on price.
Well. This is Tim when you have differentiated products that have features on them that enhance the productivity of the user.
A lot of times they'll pay for it because and that's what our overall goal is to end up with features and what Eric and I was describing earlier on this.
Auto carrier.
That we have it's a feature that.
The isn't out there in the marketplace.
And we are able when we hand features to demonstrate to our customers the value proposition that's associated with.
The feature and then they can put their pencil to it and then come back and they'll say, okay. We see benefit sometimes the benefits are tangible benefits and sometimes it benefits, our intangible benefits and and the auto rack that we were talking about is a matter of.
There is a safety issue.
As an example.
When they're loading I think its pickup trucks on a.
Auto rack.
What they've had to do in the past is the loaders.
I have had to take the rear window.
The pickup truck out and climb through yet to be able to.
Get inside of the car I mean inside of the truck to load it.
With our auto rack I think the feedback we've received is that they're able to go through the door and not go through the.
That we're window right and so this is this is a good example of optimizing the usage of a rail car.
And because the people that have received has these railcars have sent back messages to it to us of the value that they are placing on that.
Not just productivity, but if you can imagine if your employees are out there climbing through the windows the back windows, a pickup trucks on a day in day out basis.
There's a higher probability for.
Safety problems and things like that on one of our tank cars on our tank cars we.
We have a valve at the bottom of the car and we extended the valve to where they can operate that valve on both sides of the car where in the past. They it was just set to be used on one because the handle wasn't there but.
We we did quite a bit of research in that particular area. It sounds like something simple.
But it really does get down to what we can do to load and unload a railcar efficiently what we can design area.
So I mean those are those are good examples what percentage of your product offering do you think has a differentiated feature like that and have you considered making those only available via the lease fleet, rather than just selling them to third parties.
Out in the market.
Like I like I said.
We normally launch new product features and have done this for years through our our leasing company because it gives us that connection with the usage of the rail car and we try to get that back Eric you want to comment yes. Steve. This is Eric let me just add a couple of things.
One.
When you talk in customer terms at a high level, we're looking to solve their problems.
And we think in down markets in up markets, especially in down markets customers are looking for service alternative that will create value for them. So.
We think its.
It resonates with our customers.
It will not resonate on.
Product differentiation will not resonate with all products and all customers.
But service certainly does in service differentiation, whether we're dealing with railroads industrial shippers for leasing customers service differentiation does does.
Resonate with our customers.
And an example of a service that would be tied to a product is the flexibility of our production line absolutely for customers to be able to come in at the last minute and request either space or request large capacity or request.
That we move and change something and we like to think of ourselves as kind of like the old.
Ringling brothers Barnum of Bally Circus to where we have something going on in one circle and something else going on and the other circle and were quick change artist. So.
Our people thrive on that and Paul in the manufacturing people have done a great job and then Brian in the leasing business is has a lot of feedback coming back from customers. We we were watching something the other day, where a customer said it was an internal.
Piece that they said they like to do business with this for our end to end solutions that we provide them on their on their products. They said, we'd like to just be able to come to.
Trinity leasing and tell them, what our problem is and then they'll go and work. So we're we're also working towards having something that you would think of as kind of an industrial concierge.
Service that any of our customers and I mentioned to it earlier is a it's like a club any of our customers that come to us with a problem or challenge or an idea we want to be able to provide solutions and opportunities for them to improve and the performance of their company by using our rail products.
Understood. That's that's great color. Thank you and you also talked about how in soft markets you want to take a contrarian position to buy cars seems like new car pricing was soft in the quarter for some car types as that translated into you starting to see secondary deals that are attractive to you as a buyer or are there still more nonstrategic buyers willing to pay a premium out there.
Steve This is Eric in terms of the secondary market.
We are seeing a lot of portfolios being offered in the market.
We're bidding on those we also obviously we did some transactions in the second quarter were selling.
Cars, not only to our RV partners going into the third party market.
I would describe the market is still.
Healthy, it's not as deep as it was say a year or two years ago.
And but it's still a relatively healthy market. We do think there will be opportunities I think there are.
Some of the new entrance that.
And some of the bank money that's entered the market over the last decade.
May.
It's probably pausing on future investments and they'll probably make decisions on whether they want to sell or hold based on what they can do.
So this isn't a link Steve This is Lenny I mentioned in my comments that based on the secondary market portfolios that that we've seen in the valuations that we understand those are going at we've dialed back our expectations as the number of those transactions that we would be successful in completing for the year.
Right.
Andy This Tim.
I'll respond just a little bit we also with our platform and the.
The breadth of it and.
The.
Bandwidth so to speak people do come to us when they have railcars and they need to.
Liquidate them in a hurry because we can make quick decisions and we've been able to do that over the years and so we're very opportunistic in that area, where we may be saying today.
We're not liking the right.
Alright cues that.
We're receiving but we may end up having a a customer.
Come to as quickly because they need some liquidity.
And we can help in that area.
One more on just industry conditions.
And going back to your order and inquiry comments based on what you see out there for fleet growth versus traffic levels or replacement requirements. Do you think one Q industry orders, which were just under 10000 for the industry is the low point for the year or do you think it's possible as we go into the back half that we could have a print lower than that.
So a forecast and orders isn't.
Something I'd like to do but I would say that the levels that were operating that in terms of industry orders are probably.
In line with replacement demand, we do see growth elements in the market. So not all the orders are replacement, but just the level of orders I would say would you characterize as replacement demand, we do see markets that we expect to grow over the next few years. So you know I I would expect.
Take it I'll leave it at that.
So and just Theres a lot of different definitions for replacement demand, but does that suggest a 40000 car market or something.
We're in round numbers I think Thats fair.
All right and then one last one melendy you highlighted strong free cash flow generation as part of the integrated platform, but on prior calls Youve also talked about dramatically growing the size of the lease fleet if that's organic.
We're probably unlikely to see free cash flow in the near term. So just to be clear is the priority lease fleet growth or is it free cash generation.
Yeah. Appreciate the question and Thats, something Thats, certainly a balance that.
That we're working through that we're working towards and when I talk about strong free cash flow generation, we often think of that before our lease fleet growth because that lease fleet growth is it's market dependent because those are those are leases that that those are cars that have a lease attached to them.
For a customer so to to a large extent our lease fleet growth is going to be market driven a you know another way that we're looking at our free cash flow generation is what is our discretionary free cash flow.
If we if we consider what do we have to invest in order to keep our.
Earning sources, our cash flow sources running what's left over after that discretionary.
After those what is our discretionary cash flow after those investments. So those are a couple of different ways that we're looking at it and we certainly will provide some more detailed information for you in the future.
Understood. Thank you.
And there are no further questions on the line at this time I'll turn the program back to Jessica Greiner for closing statements.
Thank you David that concludes today's conference call a replay of today's call will be available. After one o'clock eastern standard time through midnight on August Onest 2019. The access number is four zero to two 207 to three seven a replay of the webcast will also be available under the events and presentations page our Investor Relations website located at Www Dot trend dot net.
We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.
This does conclude todays program. Thank you for your participation and you may now disconnect.
Oh yeah.
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