Trinity Industries, Inc.

Good day, and welcome to the Trinity Industries' fourth quarter and 12-month-ended December 31, 2022 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal the 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 1 on your touch-tone phone. To withdraw from the question queue, please press star then 2. 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 and 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 would cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. I would now like to turn to Officer Lee Ann Mann, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone. We appreciate you joining us for the company's fourth quarter 2022 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, which are accessible on our investor relations website at www.trends.net. These slides can be found under the events and presentations portion of the website. along with the fourth quarter earnings conference call event link. A replay of today's call will be available after 10.30 a.m. Eastern Time through midnight on February 28, 2023. Replay information is available under the events and presentations page on our investor relations website. It is now my pleasure to turn the call over to Jean.

Thank you, Leanne, and good morning, everyone. I hope your 2023 is off to a great start. Before we begin with our prepared remarks, I want to take a moment and acknowledge the accomplishments of 2022 that don't always appear on financial statements, but are essential to all of our stakeholders. Our company purpose is delivering goods for the good of all, and embedded in this purpose is our focus on environmental, social, and governance excellence. We have updated our operating model to embed the word sustainability as a core value, further evidence that we view sustainability as a key focus for our business. Last year, we continued our efforts to ramp up our ESG initiatives as a company. This included naming a global head of ESG for Trinity to spearhead and lead our ESG initiatives, We became the first rail car manufacturing company in North America to certify that our existing EHS management system conforms to the International Organization for Standardization's Environmental Standards and Occupational Health and Safety Standards. We hired a director to lead our DE&I initiative, launched nine employee resource groups and employee networks, and completed our first ESG Roadshow with investors. Additionally, in our core business, we are consistently working on new product development to support sustainability priorities. This includes improving efficiency in new railcar designs and programs like our sustainable conversion program that allow us to repurpose existing railcars and increase the longevity of their parts and components. To date, Our sustainable rail car conversion program has reused over 54 million pounds of steel. Our ESG initiatives are ongoing, and I look forward to keeping you updated on their progress through the year. And now, turn with me to slide three to talk about our key messages from today's call, which we will expand on later in our prepared remarks. Our fourth quarter GAAP EPS from continuing operations was 46 cents, and adjusted EPS from continuing operations was 44 cents, up 10 cents sequentially, and 36 cents year over year. For the full year, GAAP EPS was $1.02, and adjusted EPS of 94 cents was up 176% over 2021. Given the unexpected labor, supply chain, and rail service challenges we faced in 2022 that impacted our ability to deliver cars at the pace we expected, we are proud of what we accomplished and the growth we achieved in 2022. Furthermore, when we look ahead, we also have reason to be optimistic. We ended the year with our future lease rate differential or FLRD, at 25.1%. We view this as a good predictor of future rate growth in the leasing segment, and the high FLRD is an indicator of continued broad-based strength in the railcar leasing market. The FLRD calculates the implied change in lease rates for railcar leases expiring over the next four quarters by applying the most recently transacted quarterly lease rate for each railcar type. The FLRD also accounts for current market rates, which remain strong despite uncertain economic sentiment. The key to remember is that industry supply has tightened, and energy costs and supply chain planning have increased the importance of visibility and control in logistics planning for businesses. Trinity has a unique advantage as both a producer of rail cars and a beneficiary of solid leasing fundamentals. The rest of the industry either does one or the other for the most part, which can be challenging in periods of market volatility. We are introducing our 2023 EPS guidance of $1.50 to $1.70. At the midpoint, this represents APS growth of 70% over 2022 and reflects higher deliveries, higher lease rates, and improved segment margins. And finally, in the fourth quarter, we completed our acquisition of Holden America, our second acquisition of 2022. Eric will discuss this acquisition and our general view on future acquisitions. And now let's turn to slide four for a market update. While we continue to feel the impact of railroad labor shortages on rail service and traffic, there have recently been some improvements in rail service metrics that give us hope that we have seen the worst. But the number of operating employees remains a key constraint for carriers heading into 2023. Without significant hiring, rail service improvements will be tough to maintain. We saw 2022 rail carload volumes in the year even with 2021. Markets like grain and automotive carried meaningful momentum into the new year, but other markets, such as chemical and metals, experienced notable headwinds late in 2022. At the same time, the number of rail cars in storage ticked up, consistent with normal seasonal trends and the volatility in carload traffic but still remained well below the five-year average. We continue to expect the existing fleet of rail cars to remain tight in 2023 and replacement needs to drive new rail car demand. Moving to the bottom of the slide, I already mentioned our FLRD is above 25%, which is a significant step up from where it was last quarter. Our lease fleet utilization in the fourth quarter held steady at 97.9%, which is the same levels we saw pre-pandemic and is evidence of a tight fleet. We received orders for 3,015 rail cars in the quarter and delivered 4,400. We ended their year with a backlog of 32,270 rail cars valued at $3.9 billion. We expect to deliver approximately 49% of this backlog in 2023, and given the multi-year order we booked in the third quarter, we expect some of this backlog to extend as late as 2028. Our backlog and recent inquiry levels represent replacement level demand, and our customers need these cars for supply chain management, which gives us confidence and visibility into our delivery forecast. Slide five shows the fourth quarter performance year over year. Our quarterly revenue of $591 million was up 25% as compared to a year ago, and our fourth quarter adjusted EPS of 44 cents was up 450%. While our cash flow from continuing ops in the quarter of $62 million was down 69%, Our adjusted free cash flow of $138 million was up 394%. Slide 6 shows our full year 2022 performance as compared to 2021. Our revenue, just below $2 billion, was up 30% from a year prior. And our full year adjusted EPS improved by 176%, as I previously mentioned. Additionally, our railcar deliveries improved by 50% in 2022, and our ending backlog was $3.9 billion. For the full year, cash flow was impacted by elevated working capital related to higher volumes of railcar deliveries and continued supply chain challenges. When you look at the year-over-year cash flow variance, It is worth noting that 2021 benefited from collecting $438 million in income tax receivables. Please turn with me to slide seven for segment results. I've already talked about the strong FLRD and fleet utilization in the leasing segment, but I also wanted to mention our renewal success rate in the fourth quarter of 85%. Our success rate for the entire year was 82%, a level we have not seen since 2014. This success rate shows that even as we are able to increase rates at renewal to match rising current rates, customers continue to value holding the railcar and thus accept the higher rates. In short, The railcar fleet is still tight, and we have a lot of visibility and stability on the leasing side of our business. Leasing segment revenue of $197 million in the fourth quarter reflects improved rates and net lease fleet investment activities. Our FLRD has now been positive for six quarters, and we are starting to see those higher rates reflected in our financials. Leasing and management operating profit margins were 38.3% in the fourth quarter and were up sequentially due to net lease fleet investment activities. Margins were down year over year because of a general increase in maintenance, which tends to be cyclical in nature, as well as higher depreciation expense, mainly due to our sustainable railcar conversion program. In the rail product segment, Quarterly revenue of $656 million was up sequentially and year over year due to higher deliveries and favorable pricing and product mix. Our pace of deliveries picked up as the year progressed, and we exited the year at a higher run rate. In the first half of 2022, we delivered just under 5,000 rail cars, which improved to over 8,000 in the second half of the year. Our operating margins in the rail product segment came in at 2.8% in the fourth quarter and 2.8% for the full year. We spoke at length in our third quarter call about operating inefficiencies and supply chain issues pulling down margins. Unfortunately, these issues continue to impact us in the fourth quarter. In addition to continued rail service disruptions, supplier deliveries have not kept pace with our scheduled needs, and railcar completion on several lines fell behind. Furthermore, capacity at facilities has increased more slowly than expected to meet our original production schedule. Labor was a challenge, with higher attrition requiring more hiring and onboarding than expected, which was significant given the increase in hiring we needed to achieve to match an increased production level, specifically in Mexico. The impact of rail service, supply chain, and labor issues was over 400 basis points of efficiency lost in operating profit. This means if our efficiency had performed as expected, our quarterly margin in the segment would have been about 7%. which is in the high single-digit range we anticipated. We still expect to exit the planning period with rail products margins in the high single digits as we expect these issues to ease through 2023. Finally, moving to slide eight, I want to point out a few more key accomplishments. In December, we raised our quarterly dividend to 26 cents per share an increase of approximately 13%, delivering on our three year goal of double digit dividend growth. Additionally, our board approved a new share repurchase authorization of $250 million with no expiration. This gives us more flexibility on timing as we consider various methods of capital deployment. Our net lease fleet investment for the year was $178 million, slightly below our anticipated range of $250 million to $300 million. This is due to both a stronger-than-expected secondary market, driving higher-than-expected railcar sales, and lower delivery to the lease fleet, given some of the supply chain issues impacting our delivery rate. Our pre-tax ROE was 10.4% for the full year. We ended 2021 with a full-year ROE of 3.4%, so 2022 marks a significant and sustainable improvement towards our strategic goal of a mid-teen ROE. 2023 marks the third year of our three-year plan we introduced at the end of 2020. On our third quarter call, we modified our operating cash flow target to a range of $1.2 billion to $1.4 billion to account for the sale of our highway business, higher working capital needs, and geography of rail car sales. Other than that adjustment, we are on track to hit those three-year targets, and we continue to work toward hitting these metrics. Before I turn the call to Eric, I wanted to talk about a few things in our business. First, despite supply chain and rail service challenges, we continue to see strong inquiries and have great customer relationships, which gives us confidence in order flow in the near future. In addition to EPS growth in 2023, I also want to emphasize that we are seeing a significant amount of operating leverage in our business and expect to continue seeing higher returns, which we think is a more impactful measurement of our business, given the value of our lease fleet and the visibility we have into our business. We continue to make organizational changes and initiatives to focus on positioning our manufacturing and leasing businesses to maximize value creation through tough external headwinds. The rail products group is a strategic asset that provides revenue diversity and competitive advantage, but tends to be more volatile given its exposure to market and labor issues in the short term, which has certainly been the case this year. However, over multi-year periods, the business trends with the same railcar fundamentals as the leasing business, and there is a significant return to be made. In closing, despite an unpredictable macroeconomic backdrop, I am proud of what our team accomplished this year. Operating any business does not come without challenges. but I have confidence in our ability to execute in 2023 on our three-year goals, given the strength of our business model and the team we have in place. And now I'll turn the call over to Eric to review our financial results.

Good morning, everyone. I would like to start by congratulating Jean on being named Railcar Woman of the Year by the League of Railway Women for 2022. I would also like to give a little more color on the Holden acquisition that Gene mentioned. Holden is a manufacturer of market-leading, multi-level vehicle securement and protection systems, gravity outlet gates, and gate accessories for freight rail in North America. We purchased Holden for an initial purchase price of $70 million, with another $10 million minimum to be paid in installments over the next two years. There is more information on this acquisition in our 10-K, which we expect to file later today. This acquisition fits well with our strategy to increase exposure to less cyclical and higher margin aftermarket parts, giving us more opportunities to serve our customers and diversify our revenue stream. Furthermore, as we see automobile preference move more toward SUVs and heavier electric vehicles, securement systems will become even more critical, and we look forward to being a market-leading shock provider and continue to provide the quality and service that Holden's customers have come to expect. We completed two acquisitions in 2022, Quasar and Holden, and are in the process of integrating both these operations into our platforms. We see value in optimizing our business with strategic acquisitions and continue to look for the right opportunities, but remain selective in our evaluation of potential targets. If you turn to slide 9, I'll start my comments with the income statement. In the fourth quarter, our consolidated revenue of $591 million improved sequentially and year-over-year due to higher external railcar deliveries and improved pricing. Our adjusted EPS of 44 cents per share in the quarter, also a sequential and year-over-year improvement, benefited from $236 million in leased portfolio sales, driving a gain of $55 million. Moving to the cash flow statement, our full-year cash flow from our continuing operations was $9 million, and our adjusted free cash flow for the year was $138 million, after investments and dividends. As has been the case through the year, we continue to have elevated levels of working capital to support a ramp-up in production and to mitigate disruptions in the supply chain. Additionally, our operating cash flow was negatively impacted by a higher receivables balance associated with deliveries late in the year. In 2021, our free cash flow benefited from collecting approximately $438 million of income tax receivables. In line with our guidance, we ended the year with $38 million in investment in manufacturing and general CapEx. And we returned $150.4 million to shareholders through repurchases and dividends. Secondary market sales remained strong all year and we recorded some sizable gains on railcar sales. As long as we are delivering railcars into our lease fleet, we expect to complete secondary market sales as an ordinary course of business, assuming market conditions remain favorable. This shifts cash flows from operating activities to cash flow from investing activities, even in a period of high deliveries. This is because the cash is reflected in operations when we sell a railcar directly out of our manufacturing, but the cash is reflected in investments when we sell a railcar out of the lease fleet. As Gene mentioned, our net lease fleet investment was $178 million for the year. In 2022, approximately 36% of our manufactured railcars were delivered to our lease fleet to meet customer demand, which was a gross increase in the fleet of $929 million. In keeping with our goal of modest fleet growth and aided by a strong secondary market, we sold approximately $751 million of rail cars out of our fleet, which allows us to optimize the composition of rail cars in our fleet to serve customer demand and keep utilization high. Please turn to slide 10. We ended the year with liquidity of $398 million, representing cash and equivalents, revolver availability, and warehouse availability. Our loaned value of the wholly owned fleet was 65.7% at the end of the year, remaining in line with our target LTV of 60 to 65%. We expect liquidity to improve in 2023 as we lower our working capital with improved supply chain conditions and higher deliveries. Our loan matures at attractive rates considering the market dynamics. And now please turn to slide 11. Let's talk about some of the expectations for 2023. When we set our three-year plan at the end of 2020, we stated we expected industry deliveries to stay in the replacement demand level, which we viewed as approximately 120,000 railcars over the three years. In the first two years of the plan, the industry delivered just over 70,000 railcars. We expect 2023 industry deliveries of 40 to 45,000, meaning we will end slightly below the 120,000 we forecasted at the end of 2020 for the three-year period. This number excludes sustainable conversions, which have been significant over the planning period. For Trinity specifically, we expect to deliver at or near our historic market share of industry deliveries. We continue to view this build cycle as rational which will benefit our lease fleet through the cycle. Our three-year planned net fleet investment was $500 to $600 million, which means we expect a net fleet investment of approximately $250 to $350 million in 2023 to land in the forecasted range. Included in this investment forecast is new reference deliveries to the lease fleet, as well as sustainable railcar conversions and modifications on our existing fleet and secondary market additions, offset by sales in the secondary market. This is slightly higher than what we have invested in recent years. While a smaller percentage of railcars we deliver will go into our lease fleet than last year on an absolute basis, we expect similar internal deliveries and expect higher eliminations on a dollar basis due to a higher volume of deliveries at higher prices. Our current backlog to the leasing group for new rail cars is $459 million. Not all of this will deliver in 2023, and rail car sales will offset deliveries to the lease lead in our full year net lease lead investment. Additionally, we expect manufacturing and other general capital expenditures of $40 to $50 million similar to prior years. We are introducing preliminary 2023 adjusted EPS guidance of $1.50 to $1.70, which represents substantial growth over 2022 results. While we do expect some easing in the labor, rail service, and supply chain challenges of 2023, these issues do not go away overnight and thus are reflected in our guidance. We expect the pace of deliveries through the year to be relatively consistent. but quarterly consolidated financial results will be lumpy, driven by timing of planned maintenance expense and net lease fleet activity. In closing, we have taken actions to optimize the balance sheet and improve the operating leverage of our business over the last several years. As we enter 2023, I am confident in our company's ability to outperform in a challenging environment and realize cash generation and higher returns, and ultimately, higher shareholder value. And now, operator, we are ready for our first question.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Doris Allison Polianak with Wells Fargo. You may now go ahead.

Hi, good morning. Good morning. Jean, I just want to go back to your comment, you know, well, related to the lease side, you know, storage levels still low, but they are ticking up. Just want to get a little bit more color on your side. Like, I know you mentioned seasonal, but is there any worry that we're actually seeing some incremental stored because of some of the weakness out there? And then with that lease renewal success rate, what's a good range to think of as we look at 23? Thanks.

Okay. Well, thanks, Allison. When we look at 85% success rate on renewals, we haven't seen that since 2014. The market is still very tight out there. And so what we're seeing go into storage is more some of the seasonal not grain cars or not needing some grain cars. Consumer side, there's a little bit of weakness there, that type of car going in. So we expect the market to stay tight, especially as you look at overall what's going on or expected to happen with attrition. And then the new rail cars going back into the system.

Got it. And then within rail manufacturing, you know, you highlighted a number of headwinds to the margin this past quarter. I'm trying to reconcile, you're looking for a sequential improvement there with deliveries remaining stable. Are you limiting sort of that capacity addition just because of the labor side that you're seeing? Just trying to understand what drives that margin higher here just with the level of deliveries at this point that you guys are indicating.

Great question. So when you look at it, some of the things that we've learned this past year is we've got a really strong backlog that allows us to have good visibility. We're extending the time or the view that we get to the supply base to be able to see that. We still have seen at the end of last year, I think we talked about it, fewer rail suppliers to provide product, and they're still having issues. As we went into the first quarter and went to ramp our production, their ability to deliver on time went down. So, it went the opposite direction. They had stabilized at the lower run rates, So now they've got a good view for the year of what we need, and we're expecting them as the year goes on to get better at delivering on time. For us, we took some actions in the fourth quarter as far as labor goes, and we've seen that actually come back down, so get a little bit better on our ability to attract and then maintain or keep those employees. So we're not at. the level of employees we need for the full year production yet, but we're getting a lot closer.

Great. Thank you.

Our next question will come from Matt Elcott with Cohen.

You may now go ahead.

Good morning. Thank you. So, at first glance, it looks like maybe you're expecting lower deliveries in 2023, but because the high end of your delivery guidance for the industry is lower and the low end is actually lower than the actual 2022 number uh but then eric based on the remarks you made i think you mentioned you expect your share to be consistent with 2022 and i think that was um 34 so if i take the midpoint of your own of your delivery guidance for the industry I'm coming up with just over 14,000 cars for 23. So that's up about 5%. Is that math okay?

No, Matt, sorry if I wasn't clear. I talked about historical market share ranges, so in that 30% to 40% range. So if you take the 40% to 45% and apply a 30% to 40%, then you'll get a band. And our deliveries will be up more than what you're – It's more than what you're calculating.

So last year, remember, we had 5,000 cars deliver the first half and 8,000 the second half. And I just said that we're not at the number of employees we need for the full year production. So to help you a little bit on where we're expecting to go.

Okay, got it. That's helpful. And then my next question is, I know you had some benefits, I guess, from storm recoveries last year that affected the margins positively, but you also had the supply chain disruptions this year. Your deliveries were up year over year by 36%, but your margin was down. Can you help us understand how much was the storm recovery benefit part of that versus the supply chain disruptions this quarter?

So the storm benefit, we adjusted out. And so that's the big difference between the 94 cents and the 102. And so in the slides, there's more color in the rail segment around, especially in the quarters that those recoveries were received. You'll see that in there, Matt. In terms of... you know, the headwinds outweighed the storm recoveries by a wide margin. Gene mentioned that for our basis points in the fourth quarter, that's much more than the storm recoveries.

Got it. And then just one last industry-related question. Do you guys foresee any potential changes to, like, you know, Class II flammable liquid regulations when it comes to Tank cars or any other type of cars similar to what we saw for crude regulations after Lake Megantic?

So there's a lot of discussion going on and a lot of phone calls. I think we got to wait for the NTSB to come out with their findings on what happened. But I would expect movement in some sort. either on safety, how they ensure that the trains are safe going through, on manifest sharing, other things like that. But we'll have to wait and see. We're just guessing right now.

Great. Thank you, Jean. Thanks, Eric.

Thanks. Our next question will come from Justin Long with Stevens.

You may now go ahead.

Thanks, and good morning. I wanted to ask about rail product group margins. Gene, it sounds like you expect to be in that high single-digit range by the time we exit this year, but can you help us think through the cadence of margins assumed in the guidance and how you expect that 400 basis point headwind you called out to fade over the course of the year?

So we're not given quarterly guidance, but I will tell you that, you know, as Eric mentioned, we don't expect those headwinds to go away overnight. So we expect them to improve and go away throughout the year. So I would just say take that into consideration as you're looking at the overall year or quarters.

And Eric, you did mention there would be some lumpiness, I think, in profitability. So is there any color you can give us around that comment as we think about modeling the quarters this year?

Yeah, I think as Gene mentioned, on the rail segment side, you see Gene mentioned the improvement. The lumpiness would come more from eliminations and car sales. This year, fewer of our deliveries will go to the lease fleet this year. which will mean there's fewer, the investment in the fleet will be, is in that $250 to $350 million. But the car sales, you know, especially when you think about the law for transaction, historically we've done that the second half of the year. This is year three of that three-year program agreement. And so there will be some lumpiness from the gains on sale.

Okay, and last question I had was on cash flow. I was curious if you could share any expectation for 2023. I know there's some moving pieces with working capital that you mentioned. And also on the buyback with the new authorization, could you comment on what's getting factored into the EPS guidance for buyback?

Yeah, so when you look at buyback specifically, You know, we've returned a lot of capital to shareholders over the last few years. Certainly, we did finish our last authorization and start a new authorization in December. I would characterize our share buybacks this year in terms of based on the earnings guidance to be more opportunistic and modest in terms of the amount of capital we're returning via share buybacks. You know, I think we just raised the dividend in the fourth quarter to 26 cents per quarter. So that, you know, more of our capital to shareholders will come through that mechanism, at least as we're sitting here today. And then, I'm sorry, the first part of your question was on cash flow. Cash flow expectations. Yeah. So, you know, when you go back to our three-year investor day program, uh plan we lowered that uh last quarter slightly um the cat we're still you know we're still in that range uh with the with the items that happened in the fourth quarter and where we're sitting today we're maybe in the lower range lower part of that range but uh our cash looks like it with this this platform can generate a significant amount of cash and we expect that to continue in 2023. okay great thanks for the time yep thank you

Again, if you have a question, please press star then one. Our next question will come from Gordon Johnson with GLJ. You may now go ahead.

Hey, guys. Thanks for taking the question. So maybe this one for Gene. Just taking a step back, looking at the U.S. economy. Looking at retail sales, the engine that drives the U.S. economy, now down three of the past four months. Real disposable income saw the sharpest fall in 2022, dating back to the 1930s Great Depression. Real consumer spending on services was flat in December, or the worst monthly reading in nearly a year. Real average weekly earnings are now down a record 21 months in a row. Auto sales growth slowed in January, and in 2022 was the worst in nearly a decade. And home sales last year were the lowest since 2014. I know a lot of data points, but it just seems like when taking that into account and also looking at, you know, Midwest region average truck rates or other, you know, delivery rates. It seems like things are looking pretty bad. Not to sound too dire, but is the guidance you guys are giving back-end loaded? And if it is, do you see some risk to that? And then a follow-up. Thanks.

Sure. So, if you look at manufacturing stats, November and December have seen a tick down, but they just came back up in January, so we saw a bounce there. The consumer areas are absolutely the ones that are seeing the most softening. So, intermodal would be in that range. But overall, we're still seeing very high utilization of cars. We're seeing traffic flat to 2021. And we're still seeing customers who are wanting to move more by rail. So we think we can survive or we would be resistant to a mild recession. And if you look at our backlog, we got $3.9 billion in backlog sitting there, which gives us really good visibility into this year.

Thanks for that. And then just lastly, on the pre-cash flow, I know a question was asked there, but the burn this quarter, I think, just looking at operating cash flow, less CapEx, roughly $900 million. Is there any plans with respect to capital decisions? Thanks for the questions.

Yeah, Gordon, this is Eric. You're back out. You're $900 million. I think you're looking at all the lease fleet investment. And I just refer you to our adjusted cash flow in the disclosure where we kind of walk through You know, the fleet investment is certainly the headline is a big number, but once you finance it, it doesn't require a lot of cash. Also a reminder, that's pretty tax-effective capital investment. And so from a cash flow standpoint, it's a relatively good answer. And I just refer you to our disclosure on that.

Thanks again. Yep.

Our next question will come from Steve Barger with KeyBank. You may now go ahead.

Thanks. Gene, you said Trinity is generating good operating leverage, and to that point, incremental margin came in around 20% for 2022. As you think about mix for 2023, do you expect incremental contribution margin to come in above that?

So Steve, when you look at the earnings guidance that we've given and also some of the color around fewer car sales and some of the color around deliveries, that would imply a pretty healthy incremental margin. And so it kind of depends on where in the range you are, but I would expect the incremental margin to be in a very good clip in 2023 as we're sitting here. I don't know that we're gonna get into the specifics, but your math is correct. When you look at just the volume that we're talking about and the step up in earnings of 70%, that's gotta be a lot of that come from incremental margin.

Right. Well, and it has to come from the rail group, right? Because you put up a huge incremental margin on lease in 2022. Correct. Okay. And you said when you ramped production, on-time delivery went down. Why is that? Could they not get material? Are they having their own labor issues? Or are these diversified suppliers who are prioritizing capacity to other industries? Just what happened with the supply base?

So, a lot of the supply base had labor issues just like everyone else in North America. You know, we have over 95% of our materials we build our rail cars with come out of North America. So it was one, they got used to the run rate everyone was going. They figured out how to make that work for them. And then when we tried to step it, they fell backwards. So they are working on it. We've seen some improvement, but we still have pockets that pop up every once in a while for different components. And remember, I think I mentioned a little bit ago earlier that we're trying to give them more visibility to that signal. So typically you give them 60, 90 days. We're trying to go out farther, especially with the backlog we have.

Got it. And I've been jumping around on the call, so sorry if I missed this. But Eric, I think you said you're prioritizing more dividend versus buyback in 23. First of all, did I hear that right? And well, I guess we'll just start there.

Yes, Steve, you did hear that right. The question earlier was how much share buybacks are baked into the guidance. And my answer was modest. More of the capital allocation is shifting to the dividend.

Is that going to be sustainable? You've obviously taken out, what, 45% of the shares in the last six years or so. Is this a shift that we should be thinking about on a go-forward basis that more cash will be allocated to dividend?

I think it's more of a phenomenon for this year. You know, we had our three-year plan, and our three-year plan, we talked about significant share repurchases and a dividend growth. I think by all accounts, we've accomplished that. And as we As we think forward to the next three years or the next planning period, we will provide more information on that, but we're not doing it this time.

Understood. Okay, thanks. Thanks.

This concludes our question and answer session.

I would like to turn the conference back over to Jean Savage for any closing remarks.

Well, thank you, and thank you again, everyone, for joining us this morning. We believe we are well positioned for a strong year in 2023. Our guidance reflects higher lease rates, higher deliveries, and efficiency improvement driving higher margins and generating cash flow. I want to thank our team for their hard work this year and their ability to execute in a challenging environment. Thank you again for your continued support.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.