Trinity Industries, Inc.

Good day and welcome to the Trinity Industries second quarter and six month ended June 30, 2023 results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this 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 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 Leigh 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 second quarter 2023 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 and 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.trend.net. These slides are under the events and presentations portion of the website, along with the second 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 August 8, 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. Our second quarter results reflect positive trends in our business despite some downside in our broader operating environment. We'll provide more details on how those factors impacted our financial performance. Still, we remain confident in our business's continued momentum and growth as we enter the year's second half. We have line of sight to higher revenues on both sides of our business, with increased deliveries, rising lease rates, and continued improvement in our operating margins. Please turn with me to slide three to discuss today's key messages. We are reporting second quarter consolidated revenue of $722 million, a 73% year-over-year improvement. Our second quarter EPS from continuing operations was 23 cents, up 16 cents sequentially, and nine cents year-over-year on an adjusted basis. Our leading indicators for our business, namely the FLRD on the leasing side and the manufacturing side backlog are favorable and give us visibility into strong revenues in 2023 and beyond. Despite these favorable indicators, we are reducing and tightening our 2023 adjusted EPS guidance to $1.35 to $1.45. This adjustment is primarily due to the outside impact of the strengthening Mexican peso on their manufacturing business, higher interest expense, and continued inefficiencies. Our revised guidance assumes a substantial improvement in the back half of the year from better efficiency. However, we do not have line of sight to our previously issued guidance range without a significant pullback in the strength of the Mexican peso, which we are not anticipating in 2023. Let's turn to slide four and discuss the rail market and a commercial overview. Like last quarter, overall rail traffic trends are negatively impacted by intermodal volumes. Through the first 26 weeks of the year, Railcar load volumes improved just 2% year over year, outperforming the 4% decline in total traffic shown in the slide. While the increase in railcar storage in the quarter is consistent with expected seasonal trends, the North American fleet ended June with the lowest active rate since early 2022. Fleet storage levels remain well below the five-year average. but improving network fluidity prompts some normalization. We're willing to take this trade-off as we believe a more efficient rail network will benefit from gaining modal share and driving longer-term sustainable growth. Moving to the bottom of the slide, we continue to see high fleet utilization and a very strong future lease rate differential, or FLRD. which are good predictors for rising lease rates in the future. Our fleet utilization was 97.9%, and the FLRD was 29.5%, with lease rate strength, especially in pressure tank cars and large covered hoppers. While rail traffic trends are important in our business, the critical driver is lease fleet utilization and rising lease rates. which have seen significant improvement. Put more directly, the strength in our business has been supply-led, which provides confidence in the durability of cash flows. On the manufacturing side, orders and deliveries were strong in the quarter. We delivered 4,985 rail cars in the quarter and booked orders for another 4,770. These numbers and new railcar inquiry levels align with expectations and are consistent with our view of replacement level demand. Our backlog of $3.6 billion and current inquiry levels give us confidence in our expectations well into 2024. Moving to slide five, I'll briefly discuss the cash flow with Eric providing more details later in the call. Our quarterly cash flow from continuing operations was $38 million, up $128 million year over year. Additionally, our adjusted free cash flow was $45 million, up $50 million year over year. Our business can consistently and predictably generate a lot of cash. which is evident in today's results as we see the effect of increased production and higher lease rates flowing through our cash balance. Let's turn to slide six and talk a little bit more about the drivers of our business segments. Starting with leasing, I've already talked about our FLRD and fleet utilization, which indicate momentum and increasing lease rates and revenues. Because it takes a while to reprice the fleet, revenue increases are slower but more durable. We are starting to see several quarters of increased rates take effect, and we are encouraged to see the top line rising. Our renewals are coming in about 30% higher than expiring rates year to date. And when considering the whole fleet, our average lease rate for the quarter was the highest since 2018, and 9% higher than a year ago. It's worth noting that we have only repriced about 30% of our fleet since the FLRD had double digits in the second quarter of 2022. So we expect to see this number continue to rise as we reprice more of the fleet upward. While lease rates are still growing, the growth rate is starting to moderate. Our renewal success rate was an impressive 91% in the quarter, the highest since 2018, showing a sign of a healthy and balanced lease fleet. And year to date, our average renewal term is 55 months, which allows us to hold on to higher lease rates longer. Our leasing and management operating margin was 39.7% in the quarter. up 430 basis points sequentially, but down year over year due to increased maintenance expense and depreciation expense. Additionally, as we have begun integrating some of our recent acquisitions, those businesses have a different margin profile and slightly decrease the overall leasing margin. Overall, we are incredibly pleased with the performance of our leasing business. and expect to see continued strength in both revenue and margin through 2023. Moving to rail products at the bottom of the slide, quarterly revenue was up sequentially and year-over-year due to a higher volume of railcar deliveries. Our operating margin of 3.3% in the second quarter was down slightly, which was disappointing. In the second quarter, foreign exchange, persistent rail service issues, and efficiency negatively impacted our rail products margin. Rail products efficiency has not gotten where we want it as quickly as we'd like. We are seeing improvement in the metrics we track, but we still plan to continue the improvement. Supply chain issues have eased, but there are still negative surprises more frequently than we have expected. The strength of the Mexican peso impacted rail products operating margins by approximately 90 basis points in the quarter. Although we had a portion of our peso spending, our revenue is in the U.S. dollar, but we pay our Mexican workforce and several suppliers in pesos. We are evaluating options to reduce our exposure to the peso. Still, a persistently high exchange rate will be an ongoing drag on the rail products margins until we can adjust our pricing and cost structure. While the challenges persist, many indicators give us optimism. Labor attrition has reached a much more manageable level in Mexico. and the second half of the year requires fewer and less complex changeovers. This will lead to the resumption of production more quickly, with the additional benefit of longer runs. To give some context on the progression of improvement, our rail product's June operating profit was above 5% in the segment, the highest this year. This included the foreign exchange impact. As we said on the call last quarter, we can still expect to exit the year with a rail products margin in the high single-digit range, even after accounting for the impact of exchange rates. This has been a focus of mine, and we have been aggressive in taking the necessary steps to improve the business's overall efficiency and financial results. I'll conclude my remarks on slide seven and turn the call to Eric. Trinity's pre-tax ROE for the last 12 months has improved to 10.6%, progressing toward our long-term goal of a mid-teen ROE. We announced our third acquisition last quarter and are focused on integrating these businesses into Trinity. Across the board, we're pleased with the performance of our acquisition. Holden continues to outperform our expectations with solid demand for Otterac, and supporting parts. We are early in the integration of our recent acquisition of RSI Logistics. By combining our equipment expertise and innovation with RSI's customer-centric, well-respected logistics services, we can make rail a more approachable mode of transportation. These integrated service offerings will be an important step in our strategy to position the industry for modal share growth with our railroad partners. And before I turn the call to Eric, I wanted to quickly congratulate the team for successfully completing the financing of our senior notes and our TRL 2023 term loan this quarter. I'll let Eric provide more details on these events. Eric?