Trinity Industries, Inc.

Good day and welcome to the Trinity Industries First Quarter Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. It includes statements as to estimates, expectations, intentions, and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for description of certain of the business issues and risks, a change in any of which could 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 the conference over to Jessica Greiner, Vice President of Investor Relations and Communications. Please go ahead, ma'am.

Thank you, Rocco, 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 first quarter 2021 financial results conference call. Our prepared remarks will include comments from Gene Savage, Trinity's chief executive officer and president, and Eric Marchetto, the company's chief financial officer. We will hold a Q&A session following the prepared remarks from our leaders. During the call today, we will reference slides highlighting key points of discussion. as well as certain non-GAAP financial metrics. The reconciliation of the non-GAAP metrics are provided in the appendix of our supplemental slides. The supplemental materials are accessible on our IR website at www.trend.net. These slides can be found under the events and presentations portion of the site, along with the first quarter earnings conference call event link. They are also available live during the webcast. It is now my pleasure to turn the call over to Jean.

Thank you, Jessica, and good morning to everyone joining us today. I hope everyone is staying healthy and looking forward to a brighter summer and year ahead. We certainly are, and are increasingly encouraged by the improving trends for our business and the economy as a whole. While the rail car market is showing signs of recovery in 2021, we are focused on the execution of strategic initiatives that are more within our control to position the company for an acceleration in our financial performance, many of which were detailed at our Investor Day last winter as part of our three-year strategic plan. To highlight the key themes from the first quarter, Trinity's results reflect the initial impact of implementing certain of these project initiatives on top of challenging pricing and declining volumes given the lower order volumes last year. Additionally, two significant weather events affected our productivity in the quarter, one of which will have a lingering impact on our business in the second quarter. Even so, I'm pleased with our progress toward the goals we laid out at our investor day and the tremendous effort our teams have put forth. We feel very good about how we are positioning our business for recovery, and the embedded value we are creating in the platform for long-term performance. While earnings were low given the reasons I just stated, Trinity's rail platform still generated a healthy level of cash flow in the first quarter. We also believe the investments made during the quarter align with our capital allocation framework for creating long-term shareholder value. Let's turn now to slide four and review our results. As I mentioned in my opening, we believe the rail car market is early in its recovery from the pandemic-related headwinds of 2020. However, our first quarter financials continue to show the impact of lower demand and pricing pressure in the market over the past year. Our first quarter revenue of $399 million was down 35% from a year ago, which was then our expectations but nonetheless not where we like it to be. The past quarter will be the most challenging year-over-year comparison for us, given that COVID-19 did not take a broader hold in the U.S. until the second quarter of last year. Lower deliveries also impacted our adjusted EPS of 7 cents, which was down compared to a year ago. While the overall financial results remained weak, Trinity's rail platform continues to drive solid cash flow relative to the level of earnings we achieve. In the first quarter, cash flow from operations totaled $70 million, and free cash flow, which is essentially our excess cash after all investments and dividends, was $90 million. Eric will go into more details on our cash flow results in a moment. What is difficult to see in the consolidated results are the encouraging internal and external trends we are seeing. I am pleased to report that our operational performance and railcar inquiries are turning the corner and trended positively as we progress through the first quarter. Let's first briefly address the railcar market. Turning to slide five, as mentioned, the rail market is still soft, but we are seeing signs of a recovery. Market uncertainty in the wake of COVID-19 pandemic remains the largest headwind. Our customers tell us they continue to refine their expectations for the North American economic recovery and what that will mean for their businesses. Their concerns are starting to ease with increasing vaccine distribution and government stimulus programs. Customer confidence and the economic outlook impacts their decisions regarding lease renewals, fleet expansion, and asset replacement. Looking at rail traffic, first quarter loadings were greatly impacted by weather events, but some positive momentum emerged in the last few weeks. Additionally, we've seen nine straight months of rail cars coming out of storage since the peak last summer. leading to industry utilization returning to pre-pandemic levels and trending around the five-year industry average. We see positive carload and storage trends for railcar types representing over 50% of the North American fleet. Previously, fleets serving the agriculture and consumer product markets were presenting the most opportunity based on improving carloads. With early signs of a recovery in the industrial economy, high steel prices, and increasing steel mill utilization, as well as potential infrastructure bill, we are also seeing positive benefits on rail cars within the construction and metals markets. The energy markets continue to lag, but we are seeing some recovery from the pandemic lows across commodities like coal, crude oil, and ethanol, likely associated with the reopening of the economy across the country. Utilization and pricing are firming within our lease portfolio, and railcar inquiries return to a more normal level of activity. Trinity's FLRD metric declined slightly during the first quarter to a negative 14.8%, as a result of difficult comps in the quarter for expiring lease rates. We expect lease rates to stabilize to slightly improve in many markets over the course of the year, as excess railcar capacity returns to service to meet increasing car loads. When looking at the potential for new railcar demand, we currently expect industry deliveries to be below replacement levels this year. but believe that current inquiries support railcar deliveries at or just above replacement levels in 2022. I want to make a quick comment on steel prices. Given the decline in industrial production the past few years, we are in a unique and dynamic environment as it relates to the supply of steel and the unprecedented rise in steel prices seen over the last six to nine months. Trinity typically uses contract-specific purchasing practices, existing supplier commitments, contractual price escalation provisions, and other arrangements with our customers to mitigate the effects of steel price volatility on their operating profits for the year. In general, we believe there is enough capacity in the industry to meet current production levels and that our existing contracts will meet our current production forecasts. If current steel prices sustain at least at these levels or trend higher, it could limit demand for new rail cars. Of similar importance, current steel pricing could create a profit headwind in some of our near-term deliveries as the supply chain ramps up to meet increasing demand. Turning to slide six, I'd like to provide a little further color on our segment results. For the leasing business, Trinity's lease revenue was slightly down compared to last year due to the continuation of softer pricing on lease rates and slightly lower utilization. The good news is, in addition to prices firming in the market as demand improves, we are seeing positive developments with leading indicators, such as high renewal success rates and lengthening terms. We are taking a disciplined approach to pricing on our lease rates, and we believe we are nearing an inflection point as available rail cars in certain markets are approaching full utilization. We are also closely monitoring our costs, but expect that maintenance and other operational expenses required to position the lease fleet for increasing demand will be a headwind to the leasing segment margin for the year. As part of our strategic initiatives, we will continue to work towards increasing the percentage of maintenance and compliance events handled internally within our shops. Over the last few years, we have increased our service capacity from roughly one-third to over half of our maintenance events, achieving a target we set out at the end of 2018. With our current footprint, we have the ability to get to 70%, which will continue to reduce the effective maintenance cost of our fleet and improve the serviceability of the rail cars for our customers. In regards to our rail car production operations, on the surface, rail segment margins are understandably still below our targets. We continue to work hard to right-size our operations and shift variable and indirect costs. During the first quarter, we reduced manufacturing headcount by another 25% to balance our production capacity with demand. We also experienced two significant weather events that disrupted our operations in the first quarter and impacted profit by roughly $4 million. First, The severe winter storms that impacted much of the country over the middle of February impacted critical utilities for several facilities, with some buildings sustaining minor damage. Second, very late in the quarter, a tornado damaged our Cartersville, Georgia, maintenance plant. Fortunately, no one was injured. The tornado damage is expected to have a minor impact on the rail products group's second quarter results, and we believe our insurance coverage is sufficient to cover property damage costs related to the event. Additionally, the company may be entitled to business interruption proceeds due to the work stoppage. Looking forward, we expect progress on our optimization efforts will translate roughly into break-even margins for the second quarter with continuous improvement through year-end. Approximately 55% of our backlog is expected to deliver in the year, resulting in declining year-over-year deliveries, although we do expect our delivery rate to build through the year to meet demand for new orders. Moving along to slide seven, in terms of progress on our initiatives in the first quarter, we executed against both our efficiency and our balance sheet goals. Over the quarter, we successfully launched various initiatives to enhance the value of our outsourced fabrication activities. I already mentioned the completion of further headcount reductions. In aggregate, we have made great progress to lower our break-even cost on railcar production, and we are starting to see tangible benefits from our efforts. Through the remainder of the year, we plan to continue lean initiatives and install additional automation throughout our rail operations to lower the overall cost structure. We are continuing to evaluate cost savings across the enterprise. We sold several idle facilities during the first quarter, and we expect to conduct a number of these transactions over the next couple of years to clean up our operational footprint and reduce the carrying cost of these facilities. On the balance sheet, we completed a small sale of lease rail cars as part of our portfolio yield improvement goals. This portfolio sale is a small step toward the goal. but we have a number of strategies in progress to improve our balance sheet. As you recall from our investor day, Trinity is committed to lowering our cost of capital by raising our leverage to a target of 60 to 65% LTV. Eric will speak more to our balance sheet optimization shortly. And finally, an update on Trendsight. which is our real-time digital tracking and fleet data service. We continue to have promising dialogue with customers and have moved to an active pilot program with a growing number of those customers. We look forward to updating you on the revenue opportunity and the potential for the market impact in the future. In summary, we are executing our plans well and with continued improvements and rail fundamentals, We believe our returns and financials will incrementally improve on the up cycle given the operating and financial leverage we are building in the business. It's always difficult to predict the exact timing of an inflection or the pace of a recovery, but we are encouraged by the momentum we can see both within our business and within the market. Eric, I'll hand it over to you for additional comments.

Thank you, Gene, and good morning, everyone. I'll start with the financial summary on slide eight and provide a few more details. Trinity's first quarter results are a combination of the challenging post-pandemic market environment and our efforts to position the business for an acceleration in financial performance. While the earnings results are lower than the first quarter of 2020, we believe we are making the necessary changes for improved profitability in 2021. And as Gene said, we are seeing green shoots from our efforts within the business. Gene has highlighted several business drivers of our financial performance, including lower overall deliveries and challenging lease and new car pricing compared to prior quarters. During the quarter, our earnings results were impacted by approximately $4 million of direct costs and lost production time associated with two distinct weather events. As we look through 2021, we expect modest earnings improvement in the next quarter with further acceleration in the back half of the year, resulting in year-over-year earnings improvement in 2021. In regards to cash flow, First quarter cash flow from operations primarily reflects the lower level of operating income. Our working capital was substantially unchanged during the first quarter, resulting in $70 million in operating cash flow for the period. For 2021, we continue to expect cash flow from operations of between $625 million and $675 million. Our investments in the quarter included approximately $108 million in leasing CapEx for new railcars and betterments and $9 million in manufacturing CapEx following the completion of our Midwest maintenance facility. For the year, our expectation for net leasing CapEx and manufacturing CapEx remains the same at $300 million to $350 million and $45 million to $60 million, respectively. We anticipate completing additional portfolio sales from the fleet during 2021 as we execute on our initiative to improve lease fleet returns. Total free cash flow after investments and dividends total $90 million in Q1. The improvement from cash flow from operations is a result of the timing and the financing of our lease fleet growth for the quarter, offsetting the equity capital required. Trinity also completed the previously announced acquisition of a rail car cleaning technology company for approximately $17 million. We expect to leverage this new technology and build the capability as part of our automation efforts in rail maintenance operations. We continue to return meaningful amounts of capital to shareholders through our dividend and share repurchases. which combined for approximately $60 million during the quarter. Our share repurchase authorization has $145 million remaining through the end of the year. As we look across our opportunity set for deploying capital, we're committed to taking a returns-based approach and do right by the shareholder. Turning to slide nine, Trinity remains in a strong financial position with a balance sheet capable of opportunistic deployment. We're also making steady progress on our leverage target goals and lowering our cost of capital. During the first quarter, Trinity expanded the size of our leasing warehouse. The increased size of the warehouse gives Trinity the ability to lower our overall interest expense while gaining exposure to floating rate debt. Our liquidity at the end of the quarter at the end of the first quarter was $772 million. We expect to continue taking advantage of the low interest rate environment to reduce our overall cost of capital. One of these nearest term debt maturities primarily relate to our partially owned subsidiaries, which were financed in a much different interest rate environment. Rail asset-backed securities have continued to attract new investors creating a very deep market and compelling environment for completing new debt deals. The announcement of our green financing framework for lease securitizations is also potentially opening new pools of capital. We are taking a disciplined approach to matching the increased leverage on the balance sheet with the ability to deploy that capital to create shareholder value. Near term, Our capital allocation priorities remain a modest investment in our lease fleet for growth, a normalized level of manufacturing capex, which includes implementing new cleaning technology into our maintenance business, as well as small tuck-in acquisitions for both secondary market portfolios and other services. Our loan-to-value ended the first quarter at 61%, which leaves us positioned to take advantage of attractive market opportunities, including returning capital to shareholders. In closing, we believe that the strategic plan we laid out to investors is taking hold. And while the true success of our efforts will take time to come to fruition within our financials, we are focused on executing upon initiatives that are more within our control and will accelerate our financial performance as the market recovers. After a year of major change in a worldwide pandemic and big down payments towards restructuring the company in 2020, the first quarter of 2021 was another example of our people rising to meet a challenge. Our platform continues to prove its resiliency, delivering a healthy level of cash flows against an otherwise low earnings number. we remain committed to a disciplined approach for allocating capital to build long-term shareholder value. We are encouraged by the continued positive trends we're seeing across the railcar industry and believe outside of a pandemic setback, that we're on the road to recovery. Rocco, you may now take us to questions from our participants.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on a touch-tone phone. If you're using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Allison Palimiak with Wells Fargo. Please go ahead.

Hi, good morning. I just want to talk about, you know, really positive comments in terms of the railcar builds, you know, in 22 sort of reaching that replacement level. You know, and I understand you're not giving specific car guidance, but any thoughts on how you guys are viewing that cadence? Is it a stronger inflection in the second half that we could see this year, or is it more of a gradual build in your perspective? Just some general thoughts.

Okay. Well, thanks, Allison. As we look at the trends that we're seeing into the second half, we believe those will continue. It's a combination of supply and demand. Last year, we had over 50,000 cars that were tritted out of the industry, and we're expecting to see 50,000 or maybe a little bit more trit out this year based off the run rate from the first quarter. So if you look at those dynamics, you would expect to see higher pickup. One thing I do want to point out is in this recovery, the mix of car types is much different than in the last one. So freight cars are coming back much quicker than the tank cars. And so that's just a little nuance into what we're seeing.

Got it. That's helpful. And then you had mentioned margin and rail products, you know, improving throughout the quarter. Any color you can provide to help us understand that exit rate? And then I guess in line with that, you know, you've continued to do some headcount reductions there. Should we anticipate that to stabilize here going forward?

Sure. Thanks, Allison. So when you're looking at the headcount, I'll start there. You should expect to see that to start to stabilize as we've gotten the headcount ready or in place for the demand that we had for the first part of the year. And we had said that we would expect to see the demand increase through the second half. So you might see a little bit of a change there on what's going to happen. So it's... So it is basically in line for right now. If you look at the margins, a couple of things to look at there is we have been actively taking actions. We talked about the improvements we were going to make in both outsourcing some of the lower value-added fabrications. That is starting to take hold. We have done some initiatives with supply chain overall where possible to lower cost of input materials coming in. That's foregoing the steel prices. You know that is going up and going in the wrong direction there. But we've also spent time on automation and lean events within our factories. We're starting to see that pull through with better efficiencies coming out of the factory. So all of that coming to fruition gave us a better run rate coming out of the quarter that we see sustaining through the year. Perfect. Thanks. I'll pass it along.

And our next question today comes from Matt Olcott with Cowan. Please go ahead.

Good morning. Thank you. Jane and Eric, maybe, did you guys say what your definition of replacement demand is? Is it $35,000, $40,000?

So you're looking at anywhere between $40,000 and $50,000 cars is what we would say replacement demand is.

Okay. Got it. And Eric, I think you mentioned year-over-year improvement this year in earnings. Can you help us just narrow that down a bit? Is it modest improvement? Is it meaningful improvement?

Okay, Matt, this is Eric. So we did say we were going to have improvement. We did not put any other adjectives around it besides it was improvement year-over-year. But when you look at where we are in the first quarter, you know, obviously it was low. Gene commented we expect things to get modestly better in the second quarter and really more back-end weighted. So I think that's what, you know, that's what we expect and that's what you can expect to see from us.

Got it. And then maybe a bigger picture, longer-term question about the manufacturing footprint right-sizing. Okay. You guys have been doing that for a while now, and you did some more this quarter, and I believe that you're not ruling out even more in the future. How much of this is due to the current weak environment, and how much of it is long-term strategic, meaning maybe not coming back? And if we take a three- to five-year view, what will the company as a whole look like from a manufacturing perspective? Are we talking about a much smaller manufacturing footprint that's there in large part to support leasing? Or can we expect you guys to move back up as a percentage of the manufacturing backlog to the 40% plus that you once had as recently as a couple of years ago?

Matt, I'll start on that and then we'll hand it over to Eric if he wants to add anything. So when you look at our manufacturing footprint, one thing that I want to point out is some of the properties that we're selling have been not utilized. So they were there for potential future growth or other types of businesses. We're cleaning those up and we still have numerous facilities left that fall into that category. So when we talk about selling those types of properties, that's what I'm talking about for the next few years. When we look at demands in the industry and what we're setting up for, we really think that the industry will be at industry or replacement levels through possibly 2024. So we would make sure that we're sizing for that type of environment and what we believe our share is. And then the next part of it is, Even as we have taken some of our capacity out or offline, we've also taken some of the work outside. Those lower value added fabrications going outside opens up floor space in existing buildings that would actually allow us to produce more cars. We would just be doing more of a high value add and assembly in our facilities. Hopefully that answers your questions.

That's very helpful. Thank you very much.

Our next question today comes from Gordon Johnson with GLJ Research. Please go ahead.

Hey, guys. Thanks for taking the question. I guess on the operating cash flow, the guidance for the year is a bit higher than what we see in the first quarter. Is there anything out of, it seems like, what you guys are expecting, an improvement of business in the back half, anything additional to that you guys are doing that's going to help that cash flow number that we should know about.

Yes, Gordon, and I didn't point it out today, but I have pointed it out previously. Recall, we have a rather large tax receivable on our balance sheet, and we are expecting at least the portion related to our 2019 tax year to come into this year, and that's approximately $245 million. So that will flow through our operating cash flow number when that receivable is converted to cash. So that's the other piece of it. The other piece you're going to see is obviously our cash flow, as our earnings improve, then we would also expect our cash flow from operations to improve.

Okay. That's really helpful. And then, you know, we expect in some of our other industrial sectors for things to improve in the back half. It seems like you guys do, too. Is there something that we should look to, a metric, maybe something out of the ordinary or maybe something in the ordinary we should look to, I guess, just kind of gauge how things are trending versus your expectations?

So the normal metrics that you look at as far as car loads that you're seeing, overtime, what you're seeing for the industry production rate, that are going on, overall signs that the economy is opening back up will all lead to good recovery or potential recovery for our rail industry.

Yeah. I mean, Gordon, the weekly rail car loadings are a great indicator of the health of our industry. And so that's the beauty of it is that you get that real-time information every week. And so if there's one metric that I'd point you to for our industry, it's going to be that one. Excellent. Hey, thanks a lot for the questions, guys.

Thank you. And our next question today comes from Justin Long with Stevens Inc.

Please go ahead. Hey, good morning. This is George Sellers on for Justin Long. So I guess to start on your long-term ROE target, it sounds like the replacement demand levels for rail cars that you're expecting to reach in two years are a little bit lower than maybe what you were expecting when you gave that longer-term ROE target. So just wondering if there's anything that's changed with the timeline there.

So, George, this is Eric. I would say that, generally speaking, from what we said last November at our investor day, that our outlook for the industry really hasn't changed, and it's kind of moving as we would have expected. So that longer-term goal, that 11%, 13% goal that's out there, that still remains. We talked about that being a replacement-level demand over the cycle. Obviously, this year is a bit below replacement cycle, or we would expect it to be. and then getting back to replacement levels. So without splitting hairs, I would say that the level of nothing has really changed for our industry outlook over the near term.

Gotcha. Okay, that's helpful. And then could you give us an update on the secondary market for rail cars in terms of where valuations are and just the level of activity there?

So the secondary market is better than it was last year, definitely more robust. As you saw, we had a small deal in the first quarter. And remember, we can be both a buyer and a seller in this market and continue to look. I think it's strong and will remain strong through the year.

Okay, great. I'll leave it at that. Thank you all.

Thank you. And our next question comes from Baskin Majors with Susquehanna. Please go ahead.

Thanks for taking my question. I wanted to dig into the encouraging commentary on the inquiry levels and what sounds like maybe some increased conviction that the manufacturing market will recover towards mid-cycle levels next year. You've just taken down capacity. Labor markets have been challenging in a lot of industries here. costs and materials and, you know, steel and beyond and just general supply chains have been kind of gummed up in a lot of industries as well. Like, you know, can you talk about the conviction that, you know, when your customers want the cars that you'll be able to ramp that capacity back up the 50 to 100% you would need to to get to mid cycle and, and, you know, you know, how you're confident that you'll be able to deliver kind of a historical Trinity margin as you get to that run rate. Thank you.

Okay, well, I'll go ahead and start on that one. When you look at our management team, they are very strong and experienced, and they've gone through these cycles many times, and they're really capable of reacting very quickly to the change in demand. And what we shuttered or idled in facilities, we're offsetting with efficiencies, enhanced supply chains, some of that outsourcing of those low-value-added fabrications. So that also helps us. The ability to ramp the production is more dictated by the ability to get the labor force in. It's not the manufacturing space. We're fortunate that we have very qualified people in the plants. We have our own welding schools inside of our own plants. So if we need to go in and bring new people into the industry and train them, we have that capability. So we're feeling pretty comfortable with our ability to ramp up for the demand.

Thank you for that. And, you know, just one more on the capital allocation. You talked about the returns-based approach. You talk about your near-term priorities. You know, with the stock at, you know, $28 to $30 instead of in the low $20s, can you give us some thoughts on, you know, how you prioritize, you know, the buyback versus the dividend on a go-forward basis in terms And maybe beyond that, we've talked a little bit about acquisitions in your core North American rail car market. Is there an opportunity to maybe be a rail car owner in some overseas markets that may offer some more growth midterm? Thank you.

Thanks, Baskin. This is Eric. So when you get into capital allocation, obviously it is dynamic. Our share price has changed from last year. It's improved quite a bit. And so that certainly does change the equation, but so have the returns and everything else that we expect going forward. So, you know, it's a very dynamic process. We look at each investment decision. And in the end, we choose what's the highest return. And when you look at what we have ahead of us and what our opportunities are, I think you can expect acquisitions, dividends, share buybacks. You're going to see a combination of all those things. from us. And in the end, we're going to do right by the shareholder.

And on the idea of potentially investing capital in overseas rail car markets, whether it be Europe or India or somewhere else, just any thoughts on whether that's in the potential sort of decision tree as you generate cash going forward?

Sure, Bascom. I'll take this, Gene. So we are looking at M&A in different areas, and we will also look for markets that can provide the returns that we need or we're expecting in our business. So have we considered or will we consider in the future? Yes. We just have to, again, find the right market and the right price to be able to enter into some of those.

Thank you. Thanks, Beth.

Thanks. And our next question today comes from Steve Barger with KeyBank Capital Markets. Please go ahead.

Thanks. Good morning. Can you go back to your comments on steel prices and supply chain constraints? Did you say the current backlog could have some margin pressure due to steel prices?

What I was talking about on the steel prices is we do a lot of different actions to mitigate any of those pricing headwinds. There could be something that comes up that we're unaware of that may cause some pressure, but for the most part, we are covered. in our mitigation efforts for orders that we have in place.

But you do think that higher steel prices, if they were to persist, could cause some demand destruction?

We do. So customers have been already delaying making some decisions. We think some will continue to delay until they have more confidence in their business and where it is in the recovery. But as you look at that, steel prices in our new car production even though it ranges depending on the type of the car, have gone up 10% to 20% for a car. So that does change the dynamics and the decision-making. So where you're going to see people placing orders are those that you don't have cars that are available anymore for them to take and use.

They're going to have to buy new. And, Steve, that will make existing rail car assets more attractant. That's one of the things we like about our platform. The demand goes through our existing fleet and then to the new manufacturing builds. And so, you know, that will leave our existing – that will leave existing assets a little more room to run in terms of increased lease rates because the replacement costs have gone up. And so, I mean, that's – we see that. We expect to see that in the future, and that's why we're confident in our outlook.

Makes sense. And just in terms of supply chain, I think you said something about component prices. Any comments on price and availability from a disruption standpoint?

We've been very fortunate throughout this pandemic. We've had very few, if any, supply disruptions. Most of our supply chain is in North America, so above 90%. So we've not been experiencing the same disruptions others may have.

And are you protected contractually on manufactured components that go into your rail car production?

So just like other businesses, you have escalation clauses in there sometimes for the changes in material input costs. And so that's where we talk about our contracts. We also pass those through to make sure that there's coverage.

Yeah, for specialty components, it generally comes through what we call scrap surcharges in our contracts. contemplate those.

Got it. And last one for me. I know you've been really focused on digital platforms and data analytics, and the analysts, they talked about a $20 to $25 billion addressable market opportunity for those services. Any update on how that platform or how those commercial initiatives are coming along and maybe any early read on TrendSight?

I'll go ahead and take that one. So I mentioned in my prepared remarks that we were seeing more and more customer interest. Most of the time, the customer now is bringing that up in our conversations when we're talking to them about their needs. We have approximately 50 customers right now who are in process of going into pilot stages for these, and we've seen an increase in the number of cars that are already paying or coming onto that platform. So it's still the beginning, it's still initial results, but very favorable recognition from the customer and demand from them.

Got it, thank you.

Thank you. And our next question today comes from Barry Hames with Sage Asset Management. Please go ahead.

Thanks so much. I had a couple questions here. One is, I think you mentioned that the FLRD was down 14.8% in the quarter in part due to a tough comp on cars coming off lease. Could you talk about how that comp looks for the second, third, and fourth quarter? So as we go through the year, does that comp stay at a similar level or does it start to get a little bit easier? That's the first question.

Okay, so remember our FLRD is the forward-looking rate for the next 12 months that we're seeing based off of the renewals that we've had recently. But let me talk a little bit about lease rates and see if I answer the question. So remember, there's many different markets, and they're all recovering at different rates. Forty percent of our markets are seeing sequential increases in rates already. Other markets still have cars in storage and availability from other lessors. Those will continue to have rate pressures until they're put back into service. Scrapping plays a role in this. So if you're scrapping 50,000 plus cars a year, the supply and demand metrics will give you higher lease rates. So what we're seeing is that everything that underpins that lease rate is trending in the right direction.

Got it. Okay. Let me follow up. and ask one related question to maybe try to give a little bit more clarity. If you could take one or two of the car types perhaps that are starting to get better, could you talk about where the lease rate would have been at the end of the year, where it is now, but more importantly, with the higher price of steel, where the lease rate would need to be for you guys to build a car and put it into a lease fleet? You know, theoretically, where does it have to get to to justify new bills, if you will?

So in terms of car types, you know, where you've seen improvement, generally, I'm not going to get into a lot of details on different car types, but generally we've seen a little more as the slack has tightened on the freight car side, specifically cover hoppers for grain, agricultural products. We've seen a little more tightening there. and less so on some of the tank side, specifically energy-related tank cars. There's still excess rail cars serving those markets. Getting into your question on what does investable levels, so Gene mentioned 10% to 20% material cost increases. That statement, with no other changes, would mean lease rates would need to go up 10 to 20%. Now, I'm not saying we've seen lease rates go up by 10 to 20%, but that fundamentally, if you're going to hold the same hurdle rate on your investment, then they would need to go up. And that's why we think the existing car rates will come up because, you know, the alternative is invested in a new rail car. A new rail car, you know, oftentimes provides a ceiling on lease rates for existing rail cars. They have similar utility. And so those capital costs on the new rail cars going up will give lease rates a little room to run. And so that takes time. The market's not perfectly efficient, so it doesn't just happen at once. Information in our market is less than perfect. And so as people start to see that, uh, over the next quarter, two quarters, maybe even three quarters, you'll start to see that trend pick up and continue.

Thanks. Uh, that's very helpful. One more very quick one. Um, what is steel as a percentage across the consult for you guys approximately?

Yeah, we really don't get into a lot of detail on that. Um, you know, obviously, uh, when you look at, uh, there's different types of steel. We have steel plates, steel coil, and all of our components, um, all of our components are generally steel, which are cast products. So when we're talking steel in terms of today, we're talking more about the raw steel going in, coil steel, and plate steel. When you get into the overall, all the componentry in a rail car, then basically the material cost of our entire rail car is steel. So the only other point on that is our labor and overhead piece. When you put all of it together, it's a very high mix. When you just look at the oil steel and the plate steel, then it's much lower than that. Great. Thanks very much.

Thank you.

And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to Jessica Griner for any final remarks.

Thank you, Rocco. A replay of today's call will be available after 10.30 a.m. Eastern Standard Time. through midnight on April 29, 2021. The replay number is 877-344-7529, with an access code of 101-52017. A replay of the webcast will also be available under the Events 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.

Thank you, ma'am. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.