Trinity Industries, Inc.

Good day everyone and welcome to the Trinity Industries 2022 fiscal year end and fourth quarter results conference call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 a description of certain of the business issues and risks, a change in any of which could cause actual results or outcomes that differ materially from those expressed in the forward-looking statements. I'd now like to turn the conference call over to Leanne Mann, Vice President of Investor Relations. Ma'am, please go ahead.

Thank you, Operator. Good morning, everyone. We appreciate you joining us for the company's fourth quarter and full year 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 reconciliations of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the supplemental slides. The supplemental materials are accessible on our IR website at www.trin.net. These slides can be found under the events and presentations portion of the website, along with the fourth quarter earnings conference call events link. A replay of today's call will be available after 1030 a.m. Eastern time through midnight on February 24th, 2022. The replay number is 877-344-7529 with an access code of 582-6703. A replay of the webcast will also be available under the events and presentations page on our investor relations website. It is now my pleasure to turn the call over to Jean.

Thank you, Leanne, and good morning, everyone. I hope 2022 is off to a safe and healthy start for all of you. We had a busy and successful end of the year, highlighted by the divestiture of our highway products business on December 31st, and we are excited about the year ahead. Our optimization efforts continued despite the supply chain and labor headwinds across the industrial economy. And our commercial team actively pursued new opportunities for existing products and services while exploring ways to expand our offerings. We believe we are through the worst of the cycle with strong metrics to support growth in both our rail products and rail car leasing and management segments. Furthermore, Considering both the supportive industry environment and our internal business optimization work, our management team and board firmly believe we enter 2022 poised for meaningful growth. We are entering the second year of our three-year plan we introduced at our investor day in late 2020, and we are on track to meet the goals we presented then. Needless to say, we're excited to sustain this momentum into 2022 as we seek to accelerate our growth. The timing for this acceleration appears opportune. In short, we think 2022 is going to be a good year. Let me summarize some key themes from our fourth quarter and the full year. Please turn to slide three. We remain encouraged by the improving macro conditions that affect our business, and we expect the North American economy to continue its post-pandemic recovery in 2022. One of the unique aspects of this recovery has been the accelerated rate of inflation for both consumers and producers. Our business is resilient in an inflationary environment, as we have the ability to reprice our lease assets and keep up with inflation. Inflation can also make existing rail cars more attractive to our end users as the price for new equipment tends to grow more quickly. Higher steel prices also make older assets more valuable to scrap, and significant retirement levels over the last few years, especially in key freight car markets like boxcars, gondolas, and grain-covered hoppers support increased demand for new rail cars. We expect 2022 rail traffic to be driven by agriculture, chemicals, and construction materials, and therefore be a freight car-led recovery. This cycle is differentiated from prior cycles as there is no single rail car driving increased rail traffic. which gives more opportunities for leased fleet utilization as well as increased deliveries. Consistent with our peers in the industry, we think 2022 will see railcar production at or slightly above replacement levels, and we are forecasting industry deliveries of 40,000 to 50,000 annually. Some highlights from our consolidated results for the quarter and the full year are highlighted on slides four and five. As a quick note, our high-weight products business has been retroactively included as part of discontinued operations and therefore not in our continuing operations. In the fourth quarter, Trinity generated revenue of $472 million up 31 percent from the fourth quarter of 2020. Our GAAP EPS from continuing operations for the quarter was 16 cents, and our adjusted EPS was 8 cents. For the full year, our GAAP EPS was 38 cents, and our adjusted EPS of 34 cents was up 18 cents over full year 2020. Eric will discuss the impact of the highway products business in a few minutes. Cash flow from continuing operations in the quarter was $197 million and $616 million for the full year. Free cash flow for the full year after investments and dividends was $539 million. This is evidence of our successful optimization efforts. We have proven that our business has the ability to generate substantial and stable cash, which gives us flexibility to further optimize our balance sheet and drive shareholder value through accretive capital allocation. Let's turn to slide six, and we can review the railcard market as a whole and where we are today as a business. Rail traffic in 2021 was a marked improvement over the lows of 2020. However, in the start of this year, we have seen rail traffic decline relative to 2021, largely due to the Omicron wave of the pandemic driving labor disruptions in the United States, as well as winter weather in Canada. We expect to see this improve as this near-term disruptions are resolved. Rail cars and storage continue to decline, with the storage rate falling below 20% in December for the first time since the summer of 2019. Storage rates are currently 7.4% down sequentially quarter over quarter. These supportive market conditions are translating into improved business fundamentals for Trinity as well. Fleet utilization is at 95.7%, which is back to pre-pandemic levels from two years ago. Additionally, after reflecting positively last quarter for the first time since we introduced the metric, our FLRD improved again in the fourth quarter to a positive 2.2%, which means current lease rates are higher than the expiring rates Trinity will encounter in the next 12 months. We like this metric because it is forward-looking and specific to the leases that are expiring. It's also worth noting that the FLRD is positive even after accounting for some tough comps on select car types, like pressure cars and general service tank cars. Supporting the upward trends in rates in the fourth quarter, renewal rates increased by 12.8%. In rail products, I noted our optimism for orders and deliveries improving in 2022 and beyond. In the fourth quarter, we received orders of 5,360 rail cars, which was 358% higher than a year ago, and deliveries of 2,805 rail cars were 26% higher. Another testament to our optimization efforts has been the commercial team's ability to sustain traditional levels of market share while implementing a more aggressive pricing strategy. Although this is a freight car driven recovery, the lower margin on freight cars will be more than offset by the improvement in volume. Supply chain delays are impacting the timing of some near-term deliveries, but there are lasting demand dynamics driving 2022 optimism and likely beyond as well. It is also worth noting that in 2022, we have experienced labor shortages in North America due to absenteeism from COVID. While this has been a headwind of 10 to 15% of the workforce in some of our facilities, declining case rates from the latest wave of COVID-19 have us optimistic that our workforce can return to regular levels of productivity in the coming weeks. On slide seven, let's turn to Trinity's segment results for the quarter. In our leasing business, revenue and operating profit were slightly down from the last quarter. As already mentioned, renewal rates and the FLRD were both improved in the quarter, which is a leading indicator for revenue and margin growth in 2022. Our ability to renew expiring contracts improves through the year, with a 2021 renewal rate of 79%, the best rate we've seen since 2014. Now, looking at the rail products group, revenue and margin were both improved from last quarter, and booked a bill in the quarter was 1.9 times. As I mentioned earlier, although the supply chain disruptions and labor issues we discussed in the last quarter still persist, we have made significant progress, especially in terms of supply chain, toward improved results. Operating margins in the rail products group were 3.3%, up from negative 0.9% the prior quarter. Compared to last year, new rail car deliveries for the full year were down 23%. This is largely due to an order that needed to deliver at the first of this year, a supply chain issue that pushed some deliveries into 2022, and weakness in tank car demand. I'll move to slide eight with an update on a returns optimization initiative. The highlight of the quarter from an enterprise optimization perspective was the divestiture of our highway products business. So I'd like to take a minute to talk about that transaction with you. In the quarter, Trinity completed the sale of Trinity Highway products to a private equity fund, Monomoy Capital Partners, for an aggregate purchase price of $375 million. And we recorded a net gain of $131 million on the sale, which is reflected in discontinued operations. We had said previously that we were not the appropriate long-term owner, and this business was not core to Trinity. Therefore, completing this transaction represented the completion of our company's desire to be fully focused on rail-related industries. We were pleased with the terms of the sale and immediately deployed the $375 million of proceeds back to our shareholders with a two-pronged strategy. First, we directly purchased $250 million worth of stock, or 8.8 million shares, from Value Act in a privately negotiated transaction. Second, we used the remaining $125 million of proceeds to enter into an accelerated share repurchase, or ASR, agreement. The ASR is part of our existing authorization, so including shares previously repurchased After completing the ASR, we will have approximately 73 million left in the authorization that we expect to repurchase before it expires at the end of the year. All in all, our team did a phenomenal job getting this transaction completed and getting the proceeds immediately and effectively deployed. Looking at 2021 as a whole, we made substantial progress toward our strategic initiatives. Our TrendSight development was awarded Innovation of the Year by the Canadian Association of Rail Suppliers. And we're on target as far as cars online with TrendSight. Our sustainable rail car conversion program continues to grow with 1,150 cars in our backlog and 650 delivered in the full year. In the fourth quarter, we re-tanked approximately 80 cars and completed a heavy re-body on 210 cars. As a point of reference, for our conversions, we're able to reuse varying levels of components depending on the donor railcar. But generally, we can reuse anywhere from 10,000 to 25,000 pounds of material per railcar, which is a meaningful source of waste minimization. Additionally, we view the Watford transaction we completed in the third quarter as a major step toward lease fleet optimization. And the partnership is off to a great start. And for the full year, we returned $895 million to our shareholders, including $807 million in share repurchases. Before I hand the call over to Eric, I'd like to reinforce our purpose statement, which is delivering goods for the good of all. The challenges of the past few years have taught us all many lessons. And here at Trinity, we see the supply chain disruption and the subsequent ripple effects around the world as a good opportunity to revisit increased use of rail as part of an integrated supply chain. We continue to partner with railroads and shippers through programs like Rail Pulse to look for ways to improve rail for the greater good of the broader supply chain and overall North American economy. We are better positioned with our pricing and have made great strides in reducing costs, and we are focused on strong returns. We think the sustainability of rail as compared to other modes of transport provides a unique opportunity as our customers think about decarbonization. We are also committed to improving the efficiency of rail and are deliberate in our new product development process. On average, we spend about $10 million a year on new product development and plan to do so again in 2022. In 2021, our new products included a horizontal side-seam large covered hopper for the agricultural market, which optimizes the clearance envelope of the railcar through corrugated sides for strength and efficiency. The result is a railcar with more capacity and five feet shorter than a traditional covered hopper. This means more rail cars per train and less fuel per unit of commodity. We also developed a new composite floor for the refrigerated boxcar market, which allows for an easy transition from fresh food to frozen food service and improves the versatility and utilization of this car type. We believe the rail industry is poised for growth. and there are opportunities up and down the supply chain to increase efficiency and remove friction. We continue to look for opportunities to grow Trinity's presence in the supply chain, both organically and through acquisition. We know rail has room for improvement in terms of predictability and efficiency, but Trinity is committed to being part of the solution. With that, let me hand the call over to Eric for more detail on our results.

Thank you, Jean, and good morning, everyone. Though the operating environment over the last two years has been challenging, we made significant progress at Trinity in 2021. We completed financing activity of approximately $1.6 billion, which conformed to our green financing framework and took advantage of historically low interest rates, lowering our aggregate borrowing costs by approximately 100 basis points. We launched a joint venture program with WAPRA, targeting up to $1 billion in rail car lease investments. We divested our highway business, we raised our quarterly dividend, and we returned $895 million to our shareholders through repurchases and dividends. In short, We have made a lot of progress on our strategic initiatives and are poised to take advantage of the operating leverage of our business. Gene spoke about the market improving. This is certainly evident in key industry metrics. Orders are up, backlog is up, scrapping remains strong. Lease rates are rising and we anticipate easing of the headwinds coming from supply chain and labor disruptions in the quarters to come. These market metrics are positive, but I also want to reinforce my optimism about Trinity specifically being well positioned to capitalize on these market dynamics. With the fourth quarter sale of our highway products business and the work we have done to optimize our balance sheet, we are focused on optimizing returns in our business. I will begin on slide nine with a summary of the quarter, starting with the income statement. Fourth quarter consolidated revenue from continued operations totaled $472 million. For the quarter, GAAP earnings per share were 16 cents. Adjusted earnings per share of 8 cents declined sequentially due mainly to the gain from the WAPR sale in the third quarter. but improved from a negative 2 cents year-over-year. Full-year adjusted earnings per share from continued operations of 34 cents were compared to full-year 2020 adjusted EPS of 16 cents. Turning to the cash flow statement, full-year cash flow from continued operations totaled $616 million, with $197 million in the fourth quarter. We collected $189 million of our income tax receivable in the fourth quarter related to the CARES Act, which was excluded from our guidance of $450 to $475 million. Our cash flow was slightly down from our expectations because we made the decision to increase our working capital. The increased working capital positions us to mitigate some of the impacts of supply chain disruptions. In the quarter, we invested $183 million in our lease fleet, bringing us to a full year total of $547 million. After proceeds from car sales, our net lease fleet investment for the year was $93 million. Manufacturing capex for the quarter was $7 million, which brings our full year manufacturing capex to $24 million. Total free cash flow after investments and dividends was $28 million in the fourth quarter, which brings the full year total to $539 million. As Gene noted, we returned $895 million to shareholders this year through share repurchases and dividends and increased our quarterly dividend by two cents or approximately 10% in the fourth quarter. We finalized the divestiture of Trinity Highway Products on the last day of the year, and we moved its financial results, which was the bulk of what we previously called the all-other segment, to discontinued operations, and now report our operating results in two reportable segments, the Railcar Leasing and Managed Services Group and the Rail Products Group. Our results are now excluded from continuing operations in both the current and prior periods. Any results I discuss today, as well as any forward-looking statements, will exclude highway products unless otherwise noted. Historical financials, recasts, and our reportable segments are available in the 10-K that we'll file today. Our 10-K also details an accrual we booked in the fourth quarter in regards to the Highway Missouri class action lawsuit. We are focused on avoiding the uncertainty and further expense of this lawsuit and putting the highway litigation behind us. For clarity and to help you compare today's numbers with what we previously reported, slide 10 provides the view of 2021 results, including highway products. Highway products earnings per share excluding the gain on sale and the Missouri class action litigation charge, were $0.05 in the fourth quarter and $0.28 for the full year. Therefore, adding Trinity Highway Products adjusted EPS to our adjusted EPS from continuing operations yields 2021 EPS of $0.13 in the fourth quarter and $0.62 for the full year. which is the comparison to past results. Future results, including the 2022 guidance we are providing today, will compare to the $0.34, which is 2021 adjusted EPS from continued operations. Turning to slide 11, let's review our capitalization. We ended the year with a quiddity of $782 million. Going forward, we plan to continue prioritizing returns, but are also pursuing disciplined investment in our business, whether through lease fleet investment or acquisitions. Our cash flow gives us the flexibility and the ability to make investments in the business. We believe the work we have done to optimize our capital structure gives us the right to grow, and we are excited by the opportunities we see. I wanted to provide some high-level guidance for 2022 on slide 12. As Gene mentioned, we are forecasting industry deliveries of 40,000 to 50,000 railcars in 2022, and we expect Trinity to maintain a similar market share of railcar orders and deliveries as we have historically. We are not including sustainable railcar conversions in our industry delivery projections. We expect net lease fleet investment for the year of $450 million to $550 million, which is significantly higher than 2021. This includes sales from our lease fleet into our RV program and the secondary market. Fleet investments and proceeds from these transactions will be expected through the year as we actively optimize our fleet. We expect Trinity's manufacturing CapEx to be $35 to $45 million, which consists of investments in safety, efficiency, and automation. Given better visibility into our business and a more predictable operating environment, we are providing EPS guidance of $0.85 to $1.05 for continuing operations. which represents growth of approximately 179% at the midpoint over 2021 adjusted EPS of 34 cents. We expect our earnings to improve throughout the year. Most of the year over year improvement should come in rail products due to strong orders and deliveries along with recovery from labor and supply chain disruptions. In leasing, a rising FLRD forecast increasing revenue through the year with remarketing rates above expiring rates. Additionally, we continue to proactively manage our lease fleet to optimize returns. We are optimistic about the year ahead as we see positive momentum around the industry, but also acknowledge lingering uncertainty around COVID-19, supply chain disruption, and labor impacts. Furthermore, we are now delivering orders that were taken at the bottom of the cycle, which we anticipate will create an overhang on our margins in the first half of the year. Despite the unprecedented challenges of the last few years, Trinity has been able to leverage its platform to deliver returns even at the bottom of the cycle. With market conditions improving, We look forward to continuing to demonstrate the power of our platform and our ability to create and sustain value over the long term. As always, we thank you for your support. Operator, you will now take us to questions from our participants.

Ladies and gentlemen, at this time, we'll begin the question and answer session. In order to ask a question, please press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and two. Once again, that is star and then one to ask a question. We'll pause momentarily to assemble the roster. And our first question today comes from Matt Elcott from Cowen. Please go ahead with your question.

Good morning. Thank you for taking my question. If I take the midpoint of your industry delivery guidance and assume the same market share as 2021, I'm coming up with about 13,600 cars. Gene, Eric, is that what you're expecting for deliveries this year?

Well, let me start by saying we expect the industry deliveries to be closer to the higher point of our range of 40 to 50,000. And I do want to bring up that that number does not include our sustainable conversions. And we're expecting for the industry that to be from 6 to 7,000 cars for this year. And then when you look at it, we're expecting to be in the historical range. of market share. Hopefully that helps.

Yeah, that's very helpful. And then can you give us a bit more insight into where you expect the margin to go? I know the first half will be a bit lighter because of the low price cars, but how much differential from the first half or the second half and where do you think the margin will shake out for the full year for manufacturing?

So you hit it very correctly. We're going to be delivering the first half of some of the cars we took at the bottom of the market. And so we'd expect improvement in the second half. And I'm going to take you back to our investor day where we're expecting mid to high single digits. And I would expect us to be in that range.

Got it. So just one last follow-up, Gene. You know, if the delivery... Outlook is better than that $13,600 I mentioned, given you're at the higher end of the range for the industry. And then you have the other cars and a fairly healthy margin. I mean, the guidance does seem a little light. Is there something I'm missing here for the earnings guidance?

Sure. There's still a number of headwinds and uncertainty in how the year will play out. We want to give you as much guidance as we can where we feel confident.

And, Matt, let me just add, Matt, when you look at slide 10 in our earnings deck, when you strip out the discontinued operations from the divestiture of the highway business, the Trinity business, the go-forward business, was $0.34 in the for 2021. If you just take the midpoint of our guidance range, I mentioned on our script, that's 179% improvement year over year. And taking the volume, that just demonstrates the operating leverage of this business. And it's not going to be smooth improvement, but we're confident that we're going to get improvement throughout the year.

Yeah, no, that makes sense. I mean, it's unclear how many of the consensus estimates include or exclude the highway business, so it makes the comparison a bit tough. Eric, just one last question on the leasing side. Despite increases in fleet size and utilization, your lease revenue decreased quarter over quarter. So how much of this may have to do with the timing of the increases in utilization and fleet size, but that can't explain it all. It was the management and services revenue decline.

Yeah, I think I can help you. And so if you just go back throughout the year from the fourth quarter of 2020, each quarter going forward, remember in the first part of 2021, there was still a headwind in our lease rates. And those turned positive really in the third quarter. We talked about it late in the second quarter that lease rates started to turn positive in terms of renewal activity. And so what you have in the fourth quarter is two or three quarters of decline on lease rates, offset by two quarters of improvement. And then you get into the timing of... The timing of... The fleet ads that we did, we made some secondary market purchases. Those were very back-end loaded in the fourth quarter, so that really didn't impact revenue to speak at all. In terms of the services, there's a little bit of services revenue, but I would really, in terms of decline in the fourth quarter relative to the third quarter of last year, but I would really point to the changes in renewal rates and the timing of fleet additions. We had a large sale in the third quarter, and so that would have been a headwind to the revenue in the fourth quarter.

Got it. Thanks very much.

Thank you.

Our next question comes from Justin Long from Stevens. Please go ahead with your question.

Thanks, and good morning. Good morning. circling back to the question on margins so looking at the first half do you think margins for the rail products group will take a step down sequentially versus the 3.3 percent that you just put up in the fourth quarter and then you know second half we're getting to that mid to high single digit range i just wanted to make sure i was thinking about that the right way

Well, first, Justin, we're not going to give quarterly guidance. We're trying to give you annual. We're trying to help you out a little bit talking about the fact that we do have the orders taken at the bottom of the market still coming out in the first and second quarter. So I don't know that we're going to go a whole lot deeper than that, except we said that at the end of the year, I'd expect us to be in the range that we gave you in investor day.

Okay, and that comment at the end of the year, you're saying, you know, by the time, it's kind of the exit rate will be in the mid to high single digits. What are you saying for the full year 2022 will be in the mid to high single digit range?

I'm saying that the exit rates will be in the mid to high single digit range.

Got it. That's helpful. And then I guess on rail car sales and gains on sale this year, anything you can share on what's getting factored in? And then maybe we could talk about the share count as well and where you exited the year, because I'm guessing you'll see a pretty big step down here in the first quarter.

Yeah. And so the first part of your question in terms of the fleet sales, we are expecting more investment in the lease fleet. We talked about $450 million of net fleet investment that's after the car sales compared to just around $90 million in the 2021. So that means we're signaling a lot more eliminations, certainly. In terms of the car sale activity, we plan on doing... continuing our wafer transaction that we started in the third quarter last year. In my script, I talked about that both the ads and the sales from the fleet will be throughout the year. So we're expecting to be less lumpy. And so it'll be through the year because it's just as part of what we do. So let me pause there. Does that answer what you needed on fleet additions?

That's great, and I guess maybe just touching on the share count.

Yeah, so when you look at the share count, a lot of the return to capital we did, we mentioned we did it on the last day of the year. So you have very little impact in our average share count in the fourth quarter. When you see our 10K that we'll file later today, you'll see a share count of about 83 million shares 83.3 to be exact. And so that's kind of what we're going into the year with.

Okay. And then you're assuming that you execute on the rest of the repurchase authorization as well. That's assumed in the guidance.

Yeah. In that share count, you have the impact of the ASR, which, you know, that's three-quarters of that, and it was reflected in our 21 results. And then you have about 73 million after we complete the ASR. And we talked about the ASR being completed. We expect it to be completed in the third quarter of this year.

Okay. Great. That's helpful. I appreciate the time.

Yes.

Thank you.

Our next question comes from Allison Poliniak from Wells Fargo, please go ahead with your question.

Hi, good morning. Good morning. Just turning back to the supply chain and labor challenges, not unique to Trinity here, is there a way to help us understand in terms of what you planned in Q4 that you weren't able to execute because of those challenges essentially getting pushed in? And then the second part of that would be supply chain. I know Eric mentioned increasing working capital to kind of smooth some of that. But are you starting to circle outside of the existing supply chain or people that you've worked with to sort of firm up, just given some of the challenges that are out there today? Just so many thoughts around that.

Sure. So when you look at it, for the deliveries at the end of the year that got pushed into this year, there were basically a couple things that happened. We had a large order that needed to deliver in January, so the first of the year, so we had to build those and then hold them until January. We also had some hatch covers that supply chain issue that was going on third quarter, still something we're working through right now that caused us to delay some delivery of some cars in the fourth quarter that will happen first quarter of this year. When we look at the overall supply chain, on some of the items we were having problems with, hatch covers, valves, a few other things, we did decide to try to go a little bit longer on some of those to try to make sure we had those to not disrupt the line during the year. Not saying that everything's completely covered. It seems to be improving, but we'll continue to work to stay ahead of that.

Got it. Helpful. And then those sustainable rail car conversions, I know that backlog of just over 1,000. Are we assuming those get delivered this year, or is it a multi-year? I'm just trying to understand the cadence there.

Okay. So when I was talking about the industry number for this year, it was 6,000 to 7,000 that would get delivered this year.

And related to our backlog, those will get delivered this year, Alice.

They will. Okay. Perfect. Perfect. And then just one last question. I know a lot of rationalization happened, you know, in this latest downturn geographically. You know, as we think about, you know, us coming, you know, the industry coming back to replacement level, is, you know, within your footprint, is there any, I would say, reopening of facilities that you need to do? Or could you manage the capacity influx with your current, you know, geographical footprint today in terms of manufacturing?

We're confident we can handle the upturn to the replacement level with our current manufacturing space. Perfect. Thank you. Thank you.

And our next question comes from Gordon Johnson from GLJ Research. Please go ahead with your question.

Hey, guys. Thanks for taking the question. I guess just a few, I guess, more macro questions from me. Can you guys talk about the trend first in car storage? I think the high we reached prior was $500,000. I didn't hear you guys talk about kind of where we're at now and kind of how you expect that to trend and then have a follow-up. Okay.

So right now there's about 312,000 rail cars in storage. About 81% of those are still active. So that leaves 19% that haven't moved in the last year. around uh so the other ones are really just on the last 60 days sorry last 60 days um that means the other ones are just in and out they've got to do maintenance they're switching service there's other things going on with them so the 19 we've had 19 straight months of reduced storage of rail cars and i would just add that when you look at uh

train speeds and some of the issues that the railroads have had whether it's weather i think clearly one of the things that's happened is cars are coming out of storage to serve that uh serve those uh that demand which isn't ideal long term we'd like the rail system be much more efficient but in the near term that is one of the things that's uh making the supply tighter and also uh allowing lease rates to increase and so um you know i think the railroads as they um figure out some of their own supply chain constraints. We think the demand is there for rail car loads to kind of grow into the fleet.

Okay, that's helpful. And, you know, there's been a trucker shortage for the better part of the past decade, yet I would argue that the railroads haven't fully capitalized on that. Do you guys have plans to address that? And then lastly, you know, I recently spoke to one of the bigger skeptics in the industry, and I was surprised to hear him say we're in the best spot we've seen in the rail car industry over the past six years. But then he caveated that by saying he hopes that the industry doesn't build more than 40,000 cars this year, adding the overbuild. And it seems like you guys are suggesting 50. I don't know if 10,000 cars moves the needle, but can you address those two questions? Thanks for the time that I have.

Sure, and I'm going to start out with your second question. Just to say over the past three years, approximately 150,000 cars have been scrapped, so taken out of the system. So when you look at that, some people pulled forward the scrapping because of the high scrap rates that they could get for those cars. That led for a need to get back in that range of 40,000 to 50,000 cars. And even if you look at the beginning of this year, It started at a pretty hefty pace. We think that's going to start to slow down, especially, as Eric just mentioned, it's getting a lot tighter out there to find the cars. So until there's some replacements in the industry, they're going to have to delay at least, we believe, the second half, delay some more of that scrapping. So we think it's very reasonable to look at the next few years, two or three years, being in that $40,000 to $50,000 range. At least that's our look at what's going to happen. We don't see a super cycle coming in.

And Gordon, let me just add to that. We are a large manufacturer. We have a large lease fleet. I believe we have very good visibility in the commercial activity in the North American market. We don't see a lot of speculative ordering. And when we look at our lease fleet, the returns, to add something to our fleet, to book space, It's got to meet returns, and we have a big residual position. And so I think I would expect to see more discipline in this market this cycle than what we've seen in the past just because of where we are. There's demand that matches what we're building.

And we'll go back to your first question. And we stated in the prepared remarks that we want to be part of the solution to solving the inefficiencies that are currently going on in the rail system. One way that we're looking at doing that is rail pulse. I know you've heard about that. But if you can get a way for the shippers to have more visibility of where their cars are to allow them to control their supply chain better, I think you're going to see much more of the traffic or carloads move to rail car instead of off the highway. But that's just one way that we're trying to work within the system to make the whole industry better. This is not just something for Trinity. It's an industry effort.

Thanks again for the questions.

Thank you.

And our next question comes from Ascom Majors from Susquehanna. Please go ahead with your question.

Yes, good morning. You know, you've triangulated some of your, you know, standing long-term outlooks with your view this year already on both industry deliveries and manufacturing margins. I was hoping we could look a little bit about the net portfolio lease investment. I believe you had said $500 million to $600 million over three years, and this year plus what you did last would get you well within that range. I'm just curious if there's maybe some conservatism in modeling sales before you have that deal inked, or if you think that investment is just going to rise above that range. Just anything you could share to help us calibrate that over this year and next would be helpful. Thanks.

Hey, Baskin. It's Eric. Very good question. You're right in your assumptions that when you take our guidance and what we did last year, that would get us basically a three-year plan. And, you know, there is a lot of activity still to happen. And so I'd say a lot of it is timing. I don't think our outlook over a three-year plan has changed. You know, with the Wofford transaction, we plan on selling about a billion dollars in rail cars over the three-year period. We are projecting based on our projections include assumptions about what will be leased and what will be direct sale. And the timing of when those ads are, you can't just add a car on lease and sell it the same day. And so I think when you think about over the three-year period, I would say that I'm still comfortable with our three-year guide and it gets in the timing. I am encouraged by lease pricing. And the lease pricing has improved. And that, you know, as we look at our capital allocation framework, you know, investing in leasing is much more attractive than it was last year, for example. And so that's a good problem to have, and it's something that we'll continue to evaluate. If we change our outlook on that, we'll let you know.

Well, I mean, to triangulate that, just want to follow up because on Justin's comment earlier, I believe you talked a little bit about having a steadier sort of gains on sale in both investment and dispersion cadence as far as the lease fleet goes. But, you know, those comments there suggest there might be some lumpiness and, you know, year to year and kind of getting to that net $500 million to $600 million over a year. Can you just, you know... Consolidate those two and just make sure that we're hearing the consistent message here. Thank you.

Yeah, I think there will be timing of when you add a railcar to our fleet and when we might sell it out of the fleet. And so it's hard to model a railcar sale when you don't have a railcar order, especially as part of a syndication plan. And you do have to make sure everything delivers and everything like that. So I do think when you triangulate, as you said, all of our assumptions against a one-year assumption, you are going to have some lumpiness year to year in terms of those three-year assumptions. I do think that our ads and our sales will be much smoother this year than they were last year. Last year, we did basically... most of it in the third quarter. When you compare it to 21, we would expect 22 to be smoother. It's not going to be straight line by any stretch, but it should be smoother.

All right. Thank you for that. And lastly, you talked a little bit about the operating margin on an exit rate back within the range that you had guided, I believe it was mid to high single digits. Do you feel better or worse about where this thing is going as far as the manufacturing cycle and margins on that quote unquote mid cycle, whether that's 2023 or beyond, or just curious, you know, versus six, 12 months ago, how you feel about where the cycle is heading today? Thank you.

Thanks. I'll take that one. So we feel much better about where the cycle is heading versus the last couple of years. You know, we just hit the bottom. We inflected and started seeing orders third quarter of last year. So definitely a different feel. We did a lot of heavy lifting during that first year and a half, too, where we were going through and closing some facilities, making sure that we right-sized everything in those facilities. We moved supply chain. all of them we put in some automation some new technology all of that cost us some money to get that done we were doing that at the bottom of the cycle now what we're looking forward to as the cycle starts to recover we should see the benefits from that and that's why we're saying as the volume comes up it's going to be better for us and especially if it stabilizes hopefully that helps all right uh you know and last one you know i i won't ask for

numbers you can't guide. I understand you're still anchored to your three-year outlook and there's not an EPS number in it, but you know, what needs to happen to get to a point where you'd like to kind of update that a little more crisply about where this is heading in year three. And is that really a, you know, Jan fab 2023 event, or is there a point where you get through some things you'd like to see happen this year where maybe an investor day type meeting and a little more visibility on year three might be, uh, might be appropriate. Thank you.

Well, thanks for clarifying that. We would expect as we get closer to the third year that we would start updating some of our assumptions and be able to tell you what we think is going to happen, where we're at overall in completing the three-year plan, but starting to talk about the next few years in that cycle. So look for that coming, and your timing sounded about right. Thank you.

Thank you. And our final question today comes from Steve Barger from KeyBank Capital Markets. Please go ahead with your question.

Good morning, everyone. Good morning. Based on customer conversations, do you expect that conversion activity accelerates or realistically do you think you deliver more than the 1150 this year?

So I think it's going to be accelerating. There's a lot more appetite for it now as people are starting to see those go out, start running, and see the utility of doing that. So it helps with utilization of what you have, and it also helps overall with some of the rates.

And with the contribution from conversions growing, can you talk about how we should think about revenue and margin contribution from that?

So, actually, it's pretty consistent with the new products. Remember, this is really a freight car-driven market, but margins overall for the conversions are very similar to what you would expect to see on new cars.

And should we think the revenue is half of an average new car, 70%?

It varies depending on what's going to happen. If it's a heavy modification, it's about half, half to 70%, yes.

and as you think about the margin profile you've talked about and that fleet additions, how are you thinking about working cap this year and more broadly, just what do you expect for operating cashflow in 2022? Yes, Steve.

So, um, as I mentioned, we did see working capital build in the fourth quarter, uh, and I would expect it will continue to build this year as our production rates increase. Um, and so, um, You know, we did not provide guidance on operating cash flow. Obviously, when you look at 2021, we are aided by significant tax refunds. That is behind us, so you will not have that. So it's really going to be more of a traditional operating cash flow, which this business will produce significant operating cash. And so there will be a headwind in terms of working capital and what we provide. what we produce in operating cash flow.

Right. So those two things will reverse. You don't have the tax benefit, and then you'll have a working cap build as you go through the year relative to 21.

Right.

And sorry if I missed this. Do you expect the delivery cadence is equally spread across the quarters for whatever the number is that you deliver?

No. If we look at through the year, I would expect to see it grow quarter over quarter.

Okay. And then just last one for me, you know, earnings have been pretty constrained over the past four years. The 2022 guide came in below consensus. And since 2017, we've seen a really significant reduction in shares outstanding. Do you think if 2023 deliveries are up again and lease rates continue to improve, that earnings can start to look more like 2017 again? Or just, I guess, how are you thinking about the progression? Because it just feels like that This has been, you know, obviously industry conditions have been tough, but this has been a very slow kind of ramp in recovery.

Real quick, I'll start and let Eric go ahead and add, but when you look at it, we knowingly in 2020 during the pandemic and the fall off of orders made the choice to go ahead and make some radical changes within the company to set it up for the recovery phase. Even though those actions continue, the majority finished 2020 and 2021, which would hamper the EPS. If the market continues to recover, we finish all of the initiatives that we have, which we do intend on doing, I think it will get you into our range, and then we'll start talking about, once that's done, what you should expect on an ongoing basis from the EPS. But remember, the purpose of doing all that work in 2020 and 2021 was to help us on the next down cycle. So we wanted to ensure that manufacturing did not take away during the bottom of a normal cycle and then was accretive as the cycle went up. And the dynamics are just starting to happen on that. So this year, you're going to finally see volumes start to go up. Again, we're predicting volumes to at least stay between the 40 and 50 the next couple years after that. So I think you'll see how our platform performs much better in that type of an environment.

And, Steve, I would add, I think your underlying, I'm not going to comment on how it compares to 2017, but your underlying thesis, I think, is correct in that this business has a lot of operating leverage. And post- Highway divestiture, you know, the business is much simpler in terms of it is a pure rail business. Railcar manufacturing, railcar leasing, railcar maintenance services. And we do have a lot of operating leverage in the business. I think when you go back over the last few years, you know, I think since then our share count is down significantly. Probably 40, 45, 50 million shares that it's gone down. And so... I think once the earnings start, you are going to see more leverage in terms of earnings per share. Just the math says it will be.

Yep. Be good to see. Thanks.

Thank you.

And ladies and gentlemen, at this time, we'll conclude today's question and answer session. I'd like to turn the floor back over to Gene Savage for any closing remarks.

Well, thank you for joining us this morning. We're now in the second year of the three-year strategic plan and are on track to meet the goals presented at our analyst day in late 2020. 2021 was a year of optimization at Trinity, optimization of our balance sheet, our lease fleet, and our overall enterprise. We are confident that our execution to date and through the remaining strategic plan positioned Trinity to drive significant growth in the years ahead. especially in an improving rail car market. So thank you again, and we look forward to updating you on our progress on our next conference call.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.