Trinity Industries, Inc.

Welcome to the second quarter results conference call. All participants are currently in a listen-only mode. 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, exceptions, intentions, and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of the certain 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. I would now like to turn it over to Jessica Greiner, Vice President of Investor Relations. Please go ahead.

Thank you, Brie, and good morning, everyone. I'm Jessica Greiner, Vice President of Investor Relations and Communications for Trinity. We appreciate you joining us for the company's second quarter 2020 finance results conference call. Our prepared remarks will include comments from both Trinity's chief executive officer and president, Dean Savage, and Eric Marchetto, the company's chief financial officer. We will hold a Q&A session following the prepared remarks from our leaders. During the call today, we will refer to a few slides highlighting key points of discussion. The supplemental materials are accessible on our IR website at www.trends.net. These slides can be found under the events and presentations portion of the site, along with the second quarter earnings call event link. It is now my pleasure to turn the call over to Jean.

Well, thank you, Jessica, and good morning, everyone. The pandemic and economic events of the second quarter created a very challenging operating environment for Trinity. Today, I'd like to share with you Trinity's responses to these challenges and our longer-term plans to become a return-focused company. In these difficult times, Trinity's leadership and employees remain focused on taking the right actions now to best position the company for future success. Our first priority remains the health and safety of our people. including the protocols we implemented to help prevent the spread of COVID-19 in our production facilities and offices, in alignment with CDC and WHO guidance. I want to thank the people of Trinity for their hard work and continued focus on safety. Together, we are ensuring Trinity's high quality rail cars continue to deliver essential goods across North America and the world. We experienced weak railcar demand in the second quarter due to the economic ramifications of the pandemic and the major energy price and demand decline earlier in the year. The major decline in crude oil prices led to a number of bankruptcies for frac sand providers in the second quarter. As a result, Trinity reduced the carrying value of our small tube covered hopper fleet in our lease portfolio. Eric will discuss more details about resulting actions we have taken in his prepared remarks. While rare car loadings have improved somewhat in recent weeks, increasing COVID-19 cases in the U.S. potentially threaten the resurgent economic and rail market activity. We are closely monitoring our supply chain and engaging with our customers to keep our production plans and lease fleet operations aligned with the demand for rail cars and related services. Industry metrics report that approximately 32% of the North American rail car fleet is underutilized. We expect the pricing environment for rail equipment, new and existing, to remain pressured as long as this number is elevated. In this type of environment, our commercial focus is to maintain the utilization of our lease fleet and then meet demand for newly manufactured rail cars as appropriate for our customers. Recently, rail car inquiries from strategic buyers have increased relative to last quarter. and I expect a number of these opportunities will convert to orders or lease contracts soon. I am proud of recent transactions in which we leveraged the full breadth of our platform. In one case, we provided a strategic customer existing railcars within our lease portfolio, modification services, and new rail equipment in one transaction. This carefully crafted solution created a differentiated experience that met the customer's business needs and will create a long-term value for our shareholders. The best near-term opportunity for demand improvement for new and existing equipment, we believe, will be in the agricultural market. Not only has agricultural traffic experienced relatively fewer headwinds during the pandemic, but a significant portion of the existing covered hopper fleet for grain is reaching the end of its useful life. We also see potentially large replacement needs in the boxcar and aggregate open hopper and gondola fleet in the coming years. Managing through a cyclical downturn is very challenging. Our leasing operations delivered a solid second quarter given the environment. Declarings in revenue from lease rate and utilization pressure were offset by effective cost management, among other items. Our lease operations team has continued to experience high levels of customer satisfaction as we've invested in the state-of-the-art tools and technology. These tools are an important element of our focus on customer experience, as well as driving operating efficiencies while maintaining a safe rail car fleet. In our products group, I also commend our plant leadership and employees for their continued focus on safely meeting production requirements. During the second quarter, Trinity delivered just under 3,000 rail cars and reported a 2% margin in the rail product segment. Volumes sell quicker than our ability to reduce costs as we manage the impacts of the coronavirus. The impact of having higher risk and potentially exposed employees shelter in place did have an impact on our ability to align some of the costs to the volumes. Pricing was more aggressive also. Since the beginning of the year, we reduced our manufacturing workforce by 35%, which has resulted in almost $40 million in overhead cost savings. Additional efforts are underway to align our cost structure with production levels for the rest of 2020, while we simultaneously work to move lower value-added fabrication to the supply base. This will allow us to reduce our cyclical risk by reducing the internal labor required through a cycle. For the remainder of my remarks, I want to focus on additional actions Trinity is taking to improve the performance of our platform going forward. Our focus on cash flow in the current environment, our optimization progress to accelerate the company's financial performance, and our longer-term strategic planning to continue creating shareholder value. Trinity's unique rail platform, strong balance sheet, and cash flow generation enable us to manage through the COVID-19 pandemic from a position of strength. The scale of our leasing business and the long-term nature of the lease contract protect the company from short-term market disruptions and are critical to the relative stability. Right now, we are highly focused on managing the effects of the coronavirus to minimize the disruption of our business and maximize our cash flow. Our financial position is sustained by committed future lease payments of $2 billion our products backlog of $1.3 billion, our solid liquidity and approximately $1.6 billion of unencumbered rail assets. I'd also like to highlight our efforts to accelerate the company's longer-term financial performance through platform optimization, which has been a key focus for management and the board in the last year. We are addressing optimization in all areas of our organization, including our operations and our balance sheet. Trinity's business leaders have made difficult people-related decisions in recent months. Organizationally, we have restructured the company from Trinity's former holding company model to a more effective and efficient operating model aligned around our customers and markets. When combined with our actions from the first quarter, the results of these efforts revealed a total annualized cost savings of $30 million in SENA and cost of sales, which achieved the $25 to $30 million target we set at the beginning of 2020. Slide four of the supplemental materials provide a few details of our cost activities. As we work through the process flows for various production and service functions with the implementation of our new organizational model, we are establishing additional structural savings goals that will be part of our near-term focus. The management teams are reviewing aspects of our business operations, including our supply chain costs, idle facility carrying costs, and various service fees. Looking specifically at our balance sheet optimization efforts, we delayed our plans to access the capital markets in the second quarter to allow the pandemic-related volatility around interest rate spreads to slow. Subsequent to quarter end, we are pleased to complete the upsizing of PRL 2017 with an additional 225 million of promissory notes with fair interest at LIBR plus 1.5%. We also maintained our dividend during the second quarter, highlighting our commitment to shareholder returns as part of our capital allocation strategy and our confidence in the strong cash flow generation capability of our platform. In addition to the shorter-term initiatives to accelerate our financial performance, we are actively engaged in our longer-term strategic planning process. We are evaluating both further platform optimization initiatives as well as growth opportunities. These efforts are aimed at improving the performance of our lease fleet, reducing the cyclicality of our platform of businesses, continuing our operational improvements, and evaluating growth into the rail transportation services space. We believe Trinity's position as a provider, servicer, and owner of rail car assets ideally position us to engage with our customers on innovative products, services, and solutions that increase the attractiveness of moving freight by rail. Our analysis is ongoing and we look forward to sharing the results and decisions from this work at Trinity's Investor Day in the near future. We aim to be the premier provider of rail products and services and are motivated to drive freight onto the North American rail network. We see Trinity's purpose as moving goods and commodities by rail for the good of all, an integral part of our commitment to sustainability. We have a strong financial position to weather the current economic storm and be opportunistic when attractive value propositions arise. Trinity's rail platform is built to deliver, to deliver essential goods to society, deliver innovative solutions and high-quality products to our customers, and deliver high-quality earnings and returns to shareholders through the rail car cycle. I'll now turn the call over to Eric to discuss specific financial details for the quarter.

Thank you, Jean, and good morning, everyone. Trinity's performance in the second quarter reflects the steps we are taking to create liquidity in the near term while improving our returns through disciplined capital allocation. We are not providing specific financial guidance given current uncertainty. but we believe the company will continue to generate significant cash flow due to the resiliency of our platform of businesses and their inherent financial synergies. Referring to page five of the supplemental material, we are focused on maximizing the cash flow of the businesses and maintaining a strong level of liquidity. As of the end of the second quarter, the company had liquidity of nearly $710 million. Our liquidity position is further enhanced by the recent $225 million financing noted in our press release. We continue to expect over $300 million of cash refunds of prior year tax losses by year-end, resulting from tax provisions in the CARES Act. Our June 30th balance sheet also reflects our expectation for an additional $150 million of cash tax refunds to be received in 2021 associated with our 2020 tax year, demonstrating the value-enhancing tax attributes of our platform. Furthermore, Trinity has unencumbered assets of approximately $1.6 billion as dry powder, which will be available for monetization through additional leverage for secondary market transactions. We believe our balance sheet and financial strength enable Trinity to navigate the COVID-19 pandemic and capitalize on opportunities that may emerge for value creation. We work diligently to maintain a diversified portfolio of railcars, manage the credit profile of our customers, and stagger our portfolio expirations to maximize risk-adjusted returns. On our last call, we referenced challenges faced by many of our FracSan customers as a result of the one-two punch from the structural changes within the FracSan supply chain and the drastic fall of energy prices, including increased pressure related to the COVID-19 pandemic. We have been closely monitoring the structural changes in the FracSan market and working aggressively with our customers as appropriate to restructure lease arrangements to maintain associated cash flows and keep these assets utilized. Ultimately, in the second quarter, four of Freddie's Braxan customers filed for bankruptcy, while others remain financially vulnerable, changing the expected recoverability of cash flows from the lease contracts for this railcar type. As a result, these filings necessitated the company estimate the fair value of these railcars. Our analysis concluded with a $369 million pre-tax non-cash charge against the small cube-covered hopper fleet within Trinity's railcar portfolio, which reflects our estimates of the fair value of the assets based on the cash flows that have been stressed by continued pressure on the lease contracts and the future salvage value of the assets. This impairment charge does not impact It does not have an impact on our liquidity position, nor does it affect our compliance with the debt covenants within our rail securitizations. A portion of the impairment charge affected rail cars in our partially-owned portfolios and thus has been apportioned to the non-controlling interest on our balance sheet. Following the impairment charge, our small cube-covered hopper fleet represents 3% of the net book value of our owned and partially-owned portfolio. During the second quarter, we sold the portfolio of railcars to one of our RRV partners. The total proceeds of the portfolio were $74 million with a gain of 6%. These high-quality, lower-yielding assets were a good risk-adjusted fit for our partner's portfolio. This allows for us to deploy capital to higher-yielding investments while we continue to earn fee income by managing these assets. This sale highlights our ability to leverage our platform to create mutually beneficial transactions for ourselves and our partners, as well as our renewed focus on a disciplined capital allocation framework to drive long-term value creation. As we evaluate the future growth of our lease fleet, we are highly focused on the returns of the portfolio as part of our plan to drive the performance of the company to admit change pre-tax ROEs. We believe we are taking the necessary actions to position the company for accelerated performance as the market recovers, with heightened focus on the levers within our control. Turning to page six of the supplemental materials, in lieu of guidance last quarter, we presented base case and stress case scenarios as guideposts that managers would use in determining our actions and capital allocation considerations. While the market uncertainty continues to cloud our ability to predict the timing of a rail recovery, our actions and our performance from the second quarter have improved upon some of the assumptions in the scenarios we provided. The 2020 production plan is essentially sold with approximately 41% of our backlog value to be delivered by year-end. Given the North American railcar loading trends and our success in renewing railcars in the quarter, We expect our lease fleet utilization will remain above 90% in a downside case. Our prior stress assumption for limited railcar sales would also improve following the small portfolio sale in the second quarter. Furthermore, we have additional line of sight on potential smaller railcar portfolio sales and the balance of the year. Our cost initiatives will also yield savings, achieving our target set for the year with more actions to come. Of the $70 million in annualized savings actions year-to-date that Gene mentioned, approximately $30 million is structural and will result in decreases in SMA and other overhead-related items in the future. Regarding capital allocation, our net investment in LEEDS LEEDS will now likely fall between $350 and $450 million as a result of RIV and secondary market activity. We've also deferred some manufacturing CapEx projects. However, we do still plan to complete the expansion project for our new maintenance facility in Iowa. Our expectations for the year now include approximately $90 to $100 million of manufacturing CapEx for the year. We did not repurchase any shares during the quarter in order to preserve our liquidity and bolster our financial position. but this tool is available as we continue to optimize our balance sheet. In May, the company announced our 225th consecutive dividend, maintaining the dividend at 19 cents per share for an annualized yield of approximately 3.5% as it closed the market yesterday. Trinity is in the middle of a very exciting transformation. While combating the economic ramifications of the pandemic, we are putting the building blocks in place for the trinity of tomorrow. We expect to share specific insights into our operational strategy and long-term performance expectations at an investor day in the weeks following our third quarter conference call. We will ask that you stay tuned for further details as we look forward to sharing these plans with you very soon. In closing, Management is aligned in our expectation that the financial and commercial synergies of the rail platform enable both meaningful investment in the business and substantial return of capital to shareholders. We are demonstrating these results even in a sharp economic downturn. We believe our platform has the ability to generate positive cash flow even in down cycles, and we remain committed to investing in our rail car lease fleet through the cycle. with a focus on returns for the portfolio. As we manage through COVID-19 environment, we are committed to a prudent capital allocation strategy and strong liquidity to maintain our position of strength. Through it all, we believe Trinity Rail's platform is built to deliver. Operator, you can now take us in the Q&A.

At this time, if you would like to ask a question, please press star and 1 on your touch-tone phone. You may withdraw yourself from the question queue by pressing the pound key. Again, that is star and 1. We'll pause a brief moment to allow questions to queue. And we'll go first to Steve Barger with KeyBank Capital.

Hey, good morning, everybody.

Good morning.

So first, I just want a big picture question. One of your leasing competitors talked about how just years of strong deliveries have resulted in overbuild that's going to take a while to unwind by building below replacement. So first, can you tell us how you think about that, both in the context of your position as a leading OEM and then from your perspective as a lessor?

This is Jean. I'll go ahead and start, please. Thanks for the question. When you look at it, it's really going to vary by the different markets that you're looking at and different car types that go into those. So on some of the car types, we're already seeing pickup and momentum there. Agriculture is one of those. Flat cars and also vehicular flats. And boxcars are already seeing the upswing, and you don't have as much of the newer feed in there or oversupply maybe to absorb. If you look at some of the harder hit areas, say energy right now, They will be absorbed. It may be a little bit slower for that absorption to happen. But over time, you'll see some of those cars start to age out and need replacement, or you'll see them go out because of HM251 or other requirements to upgrade that car type.

Right. And so I guess to that point about the various car types, you mentioned in your prepared remarks that you have inquiries that you expect to convert to orders or lease contracts. Can you talk about the size of any of that in terms of units?

So I can't talk about the size, but I will tell you they are substances well above what we had in the last quarter.

Okay. And so, you know, and you said that slots in the back half are basically sold out. Is the 2Q run rate a reasonable way to think about production for the back half just for our models?

So coming out of Q2, we are holding some people for the opportunities that are in front of us. If those do close shortly, we will have to start production in the third and fourth quarters to be able to meet the delivery timeframe for those orders that are out there. And so I would say that if those don't come to fruition, we will have additional downsizing in the third and fourth quarter.

Steve, this is Eric. I just added my comments. I mentioned that 41% of our backlog value we expect to deliver by the end of the year. So that will give you a little more insight on run rates.

Perfect. And just one more, and I'll get back in line. Just a similar question on revenue per car. Is the mix that you expect in the back half, similar to what you saw in 2Q in terms of revenue per car?

Yeah. You know, our mix is going to continue to change as it slows down, so I'm not sure it'll be an exact one-for-one. Just as the mix, it'll become a little less tank car weighted as we move on, so that'll have a bit of an impact on the ASP.

Perfect. Thanks.

Thank you.

We'll go next to Matt Elcott with Cohen.

Good morning. Thank you. Can you guys talk about the manufacturing margin outlook in both the base case scenario and the stress case scenario? Just trying to gauge how much more operating manufacturing margin pressure we could see while we deal with this environment.

Sure, Matt. This is Jean. I'll take that one. So as we look at the year, as I just mentioned, with the deal that we're currently negotiating, we are holding on to some headcount to make sure that we can meet that production if necessary. If those do not happen, we have additional optimization or rationalization that we have to do. We also have some work to do where we'll be taking out some of our higher cost footprints. We're going to be reducing our manufacturing support functions and administrative overhead costs. As you work through that, you're going to have a few bumps and bruises along the way in that transformation to get you to the point where you need to be long-term. So, I would expect that as we finalize those, you may have some pressure, but if we close those deals, you may have some tailwind coming in.

Okay, that's fair enough. And Gene mentioned potentially looking at some high-cost manufacturing footprint to rationalize or convert or get rid of. I think historically in the last several years, you guys have manufactured most of your cars in Mexico. First of all, how has the split between Mexico and the U.S. been during the pandemic, and would the facility that could be eliminated, would they be in Mexico or in the U.S.?

So when you look at it, we have manufacturing for new cars in both the U.S. and Mexico, and we see ourselves continuing to have both of those. One area that we have recently closed is our wheel shop that was here in the U.S., and outsource that product. We're also looking at outsourcing some additional fabrications that are lower value for us that would give us, one, the ability not to have to have as many people to produce a car, and two, to look for some opportunities to reduce those overall costs. So that's the direction that we're heading.

Okay. Okay. And just one more follow-up on the uptick in orders question. I think you mentioned an uptick in inquiry as of late. Can you give us an idea on how much of that is financial buyers looking for cars with leases attached to deploy capital to? How much of it is shippers with underlying freight needs looking to lease cars or potentially shippers looking to buy cars that are new manufactured.

So I'm going to start and then let Eric jump in on this one. We're really seeing the opportunistic buyers come out. We're in a down cycle right now. Pricing is getting aggressive, and those who have some aging fleets that want to replace them or have some additional demand are coming out and looking for those opportunities. So that's where we're seeing it happen, and Eric, if you want to add to that?

Sure. Matt, when we're talking about converted inquiries to orders, we're not talking about portfolios of rail car leases. We're talking about users of the rail car equipment that have demand. And as we mentioned earlier, replacement is still a big driver, and I think replacement demand will be a larger driver rather than growth demand over the next several quarters, and that's where we're seeing opportunities as users of rail equipment that have some discrete replacement opportunities that they're looking to take advantage of the current market.

Okay. That makes sense. Just a quick follow-up on the order question. I think you guys got 40% or just over 40% of the industry orders this quarter. That's slightly above, meaningfully above what you've done in the last several quarters where it seemed like you were less aggressive with orders. Are we reading too much into this? Is there any change of strategy? Are you willing to take more 50 orders here, 50 orders there during the downturn, or is it just an anomaly?

Yeah, Matt, so those numbers just came out as we were preparing to kick off the call, so I haven't had a chance to look at a lot of them. When you're talking about quarter orders for the industry of 1,900 units, it's probably too small a number to really get a lot of trends from. I would say that the orders that we took in the quarter were a little more leasing-weighted than we had been running, and they're more specialty rail car related. The nice thing about specialty rail cars is they tend to have a little higher margins than some of the other rail cars, so we're real happy with the level of orders that we took. The fact that it was 44% of the market is more of an outcome. I wouldn't say it was anything deliberate on our part in terms of that.

Great. Thank you very much.

So next to Gordon Johnson with GOJ Research.

Hey, guys. This is James Bardowski in for Gordon. Thanks for taking my question. Just had a question on your capital allocation. Now, you guys didn't have any stock buybacks last quarter, the first time in a while. Now, I know that you have a lot of liquidity on hand, but your relative price-to-book valuation is now currently above your peers in the leasing group. So, you know, effectively, one of your targets has reached. Another target you guys had, more internally, of course, is your leverage targets. I believe it was between 60% and 65% loan-to-value. So if you look at last quarter, At 57.1, it should be a bit higher with the 225 million facility you just closed, correct? So that said, you're now even closer to your 60% to 65% target. So question is, should we expect the lack of stock buyback to be the new normal, or are you raising your leverage targets?

So I'm going to say that in the last quarter, the reason we weren't in the market actively buying was we had stated that we wanted to ensure that our liquidity and cash were good. We're still trying to see what was playing out with COVID-19 and what that meant for the market and for the future of what was going to happen. So that was the pause. Eric mentioned in his script that we still have $90 million available. to us for stock share repurchases. And that will go into our future thinking for the capital allocation.

Yeah, James, I'll just add that the financing that we just did doesn't necessarily – isn't necessarily just additive to leverage. Some of that will – some of those proceeds will be used to pay down our revolver and our warehouse. But as Gene meant, you know, we look at – for our capital allocation, we're going to still generate a significant amount of cash flow. and the share repurchases are one of the things that we'll look at in terms of what to do with that cash that we're going to generate.

All right. Gene, Eric, thank you. That is very helpful. And I just have a real quick follow-up. I think I saw $70 million mentioned in the press release that you're having cost savings currently underway. Just quickly, how much of that is cyclical or variable versus fixed, and how is that allocated amongst segments? Thank you.

So, James, one thing, if you look at slide four, it does talk about executed year-to-date, we've got 58 million, total identified 70 million. When you look at cyclical, it's showing 38 million executed and 40 million identified. But one thing that I want to draw your attention to is the fact that we are looking at outsourcing some of the lower value fabrication items, which will also change some of that cyclical reduction to a more permanent status. So when you're asking for the percentages, I'm going to throw that to Eric. I've not looked at it that way, and I don't know that we have that answer.

Yeah, I think that's enough.

Yep. Thanks.

Okay. Thanks a lot, guys. Appreciate it.

And along with Stevens? Please go ahead.

Thanks, and good morning. So I wanted to ask about the secondary rail car market and what you're seeing out there. How has that market progressed, you know, 2Q and I guess quarter to date as well? And maybe you could speak about both the level of activity and what you're seeing in terms of competition on any deals that are out there today.

Well, I'll start and let Eric jump in. So, Justin, right now the secondary market is still open. It's available. You know, it's not as deep as it was last year. But the buyers are out there looking for some good deals. And we're also out there, and we could be out there as a buyer or a seller, depending on what we see available and how good the deals are. Eric, I don't know if you'd add.

I think that's covered. Justin, there's still deals. There's a few participants that would have been participating in the last couple years that may be on the sideline. But for the most part, the market is still there, and you're able to get deals there. deals transacted either buying or selling.

Okay, great. And then on the lease rate trends, I was wondering if you could comment on how you've seen lease rates progress here over the last few months. And I know it's going to vary significantly by car type, but just from a high level, would love to understand how much of a pullback we've seen. And as you think about the market going forward with rail volumes getting a little bit better sequentially, do you think there's an opportunity for the lease rate environment to bottom at some point later this year, or do you think it's going to take longer than that?

Okay, Justin, I'll start with that one. If you look at the lease rates, we have seen the market get more aggressive there. If you're comparing us with the LTI that others talk about, we've not nearly seen the reduction in rates that they have, but we are still seeing that headwind come in. When we look at what's going on with new cars going into our fleet, we typically have a higher lease rate there. So, even though we're seeing some headwinds, it's not been significant for us overall. As far as when we would see them going back up, we would hope for it to be very soon. But with COVID-19, we're really not sure what to expect on that. But you hit the right metric. As car loadings continue to go up, we would expect to see the lease rates starting to rise.

Okay, great. And last question, just quickly. You know, Jean, it sounds like we're going to hear more about the strategic plan you know, after the third quarter. But I did want to ask, just from a high level, if you could speak to your commitment to continue operating an integrated platform. Is that something that still has the support of management and the board, or is there any openness to evaluating your strategic alternatives on that front?

Okay. Okay. Sure will, Justin. I'll talk to that. So the board and management are aligned on the platform that we are operating in. We believe we can bring the best value to the company and to our shareholders with our rail platform. Some of the benefits of that is the cost advantage rail car equipment sourcing, tax advantage lease fleet investment, offsetting manufacturing taxable income, and then the lower relative admin costs. And then commercially, it gives us direct engagements with the customers over multiple touch points. We get actionable rail intelligence through this and valuable sales channels. So with all of that said, you know, our move forward is looking at the platform in total. But as always, as a board and as a company, when new things arise, we'll take a look and see if we still have the right perspective or if we need to reevaluate.

Okay. Great. I appreciate the time.

Thank you. Thanks.

We'll go next to Allison Polanek with Wells Fargo.

Hi, guys. Good morning. Morning. I want to go first to the rail products profitability, just go back to that question to make sure I understand it. I guess two pieces to it. One, it does sound like you're hanging on to some incremental capacity based on sort of the order activity you're seeing in the market. I guess with that, you know, could we assume maybe some level of increased pressure into Q3, depending on timing of those orders? And I guess how quickly would the conversion rate be from, you know, orders to production? And the second part of that profitability question would be around COVID. I think you mentioned some costs that sound like they could be more one quarter in nature, hopefully, you know, assuming we're getting out of this. Was that impactful or, you know, I was sitting material to the quarter in terms of the headwind?

I'll start with the COVID and then move on, Allison. So for the COVID-19, my estimates are between 4 to 6 million impact and operations for the quarter. And that was related to not only additional cleaning that we had to do, it was also related to employees that were high risk sheltering at home or those that were exposed and had to shelter at home until we were sure they were not affected by this. Do I think that will be as high in the future if the COVID-19 Positivity rate goes down? No, but it's really going to depend on what happens with COVID-19. We do have a lot of our management's time in the facility spent ensuring people are following rules, that they're working safely, and that takes a toll over time. So we are hopeful that that will go down, but can't say absolutely that it will. For the third and fourth quarter, as far as the production, we will know, we think, shortly if those orders will close. And we would be able to convert and start producing those very quickly in the third quarter. So we are holding for a short amount of time. If they close, we'll start that operation. Like I said, have some tailwind for us. If they don't close, we'll take the appropriate actions and make the reductions that are needed.

Great. And then I just want to go back to the commentary around the orders, trying to reconcile orders with sort of the storage that's out there. You know, it sounds like there's clearly some verticals that are interesting, which makes sense. And then you certainly have a level of replacement needs over the year. I guess if we look at that storage number, and I know it's an elusive question in terms of what's normalized storage here, but it sounds like most of these are either storage indifferent, meaning it's a vertical or it's just equipment that wasn't going to come back anyway. Any color that you can provide around that?

When you look at the 32% in storage, I can't give you a lot of details, but there are two major markets. that are driving that storage. And Eric, if you want to add more color.

So, Allison, you know, certainly the small cube covered hopper fleet related to the frac stand fleet is adding a lot of cars in storage. I'd say that's 55,000 to 60,000 cars of that total number. And then, you know, you've got open cover hoppers, coal cars, and there's still some tank cars in that number as well. When you look at the opportunities that are out there, one, that number, you called it, it is elusive. You can still get demand in those categories because the market's not completely efficient. But as I mentioned, replacement demand will still drive that. It's going to drive a lot of order activity in the next few quarters. And then there are still pockets of growth in the petrochemical space. We're still seeing growth there that you're going to have. So, you know, there's not one rail car market. There's markets of rail cars, and you're going to continue to see pockets of demand, even when the macro numbers look like they shouldn't be.

Great. Thanks so much for the color.

Yep. We'll go next to Bascom Natures with Seth Kohana.

Eric, can you hear me? Yeah, now we can. Okay, thank you. Sorry, that was on mute. It's unusual to see an asset write down for operating less or particularly mid-year, but You know, what's happened in the fraxing industry with this state of bankruptcy filings and distress and all that is also quite unusual here. So, you know, I was hoping you could give us a little color on, you know, after the write-down of the covered hopper fleet, how much book value remains on the books for Trinity and whether this assessment that you guys did on impaired or not impaired was specific to that fleet. or if you also considered other pockets where there are sub-sizes of distress, just not as necessarily as acute here. Thank you.

Sure. Sure, Baskin. You know, the impairment charge that we took is complicated. I'll refer you to page 5 and 14 of our press release to see how some of the mechanics go through, how they flow through our financials. In terms of other car types, we're always monitoring our fleet. for those situations. So it's not just an annual thing that we're doing. We look at that all the time in terms of monitoring our fleets. You mentioned some of the unusual changes and extraordinary changes that we had this quarter that really made us, that triggered that impairment around the bankruptcies and around our outlook that those cars were going to remain overbuilt. That industry has 125,000 small cube covered hoppers. As I mentioned earlier, I think 55 to 60,000 of them are underutilized with our outlook for domestic drilling and specifically Wisconsin white sand being used in the Permian. We don't think that's going to come back to the degree that it was. And so, you know, we really looked at it and the change in the committed cash flows because of the bankruptcies triggered that impairment. And so, you know, Other car types, I believe that the credit profile of the rest of our portfolio is significantly better than the credit profile of our same customers. And therefore, those committed cash flows have a much higher likelihood to be converted to cash. And that really, you know, looking at the impairment, we don't see it at this time anywhere else.

Thank you for that. And can you add how much book value is – Oh, yes.

Yes, I'm sorry. And I think I mentioned it. About 3% – after the write-down, the book value of our small cube-covered hopper fleet, which is not just our sand fleet, it's the whole – it's our small cube-covered hopper, which would cover other commodities, is about 3% of the net book value of our fleet at the end of the course.

And, you know, I believe we addressed this at least directionally last quarter, but could you remind everyone, you know, who's trying to really assess the book value and what to pay for that, how much book value might be left in some of the larger tank cars exposed to crude oil and or the coal market? And that's all for me. Thank you.

So I'd refer you to our investor deck that has those breakouts. Now, unfortunately, when you get into the crude oil, that tank car goes across. We don't necessarily have crude oil tank cars. We have tank cars that carry crude along with other commodities, and those markets are able to move. For example, we just had a large deal where we converted – crude oil to other refined products that we just closed at the end of the quarter. That was all for existing rail cars. But I would refer you to our investor deck. We'll be updating that in the days to come as well, which will have the updated net book value percentages in the breakout and all the different categories that they have.

Thank you for that. I'll refer back. I know I said that was the last one, but, Eric, I thought of one more. You were giving me that answer. No problem. You said in the slide deck, and I know there will be more disclosure on this in the 10Q when it's out, but you said you had $1.6 billion of unencumbered rail cars. It looks like that went up $100 million, $150 million quarter over quarter, but that happened with the $370 million write-down and you guys adding – $225 million in debt after quarter end. How did the unpledged collateral go up? Can you just help us unscramble that and whether or not that's pro forma or not for the debt you added after quarter end? Thank you.

It does not include the debt we added afterwards, and we can get into all the mechanics in a follow-up, but effectively the changes would be the adds to our fleet. There were no financings that would have affected that in the quarter end. and then the small cars that we sold in the quarter. So those are the ins and outs, and we'll be happy to walk you through it. Thank you. Thank you.

Next to Barry Hunts with Sage Asset Management. Please go ahead.

Hi. Thanks for taking my question. I had a question related to the $350 million to $400 million investment investment in the lease fleet. Any feel for how much of that, in effect, is replacement? So, you know, keeping the fleet size constant, but you've got certain cars that you need to scrap, versus how much of it is actually increase in the fleet in terms of new units? Thanks.

Sure. Thank you, Barry. So, with the average age of our fleet of nine years, we don't have a lot of attrition in our fleet of 110 30,000 rail cars. So really, when you think about our ads to our fleet, that'd be additive to our fleet. There's not much in the way of replacement. And when we talk about those numbers, that's net of any assets we sell for the year. And they're also all on firm committed leases with customers. So those are kind of, you know, there's no speculative ads in those numbers as well.

Great. That makes sense. But just one quick follow-up. Sure. Nine years is the average age, but if you look at, you know, what's the oldest tranche, you know, how old are the relatively oldest cars on the lease fleet?

So without getting into handfuls of cars, really most of our lease fleet – has been originated since 1979 when we started. And so our oldest cars are generally – there's still some of those that are in there. We don't have much in the way of – I think it's about a half percent that's over 35 years of age. So it's a very small number. It's definitely skewed to the lower end of the range.

Got it. Thanks so much. Appreciate the help.

Yep. Thank you.

And there are no further questions at this time. I'll turn it back to Jessica for any closing remarks.

Thank you, Bree. That concludes today's conference call. A replay of today's call will be available after 1 o'clock Eastern Standard Time through midnight on July 30, 2020. The access number is 402-220-6088. A replay of the webcast will also be available under the event and presentations page on our investor relations website, located at www.trend.net. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

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