Trinity Industries, Inc.

Good day and welcome to the Trinity Industries third quarter and nine months and in September 30th, 2023 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, 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 a description of certain business issues and risks, a change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. I would now like to turn 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 third 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-gap metrics to comparable gap measures are provided in the appendix of the supplemental slides, which are accessible on our investor relations website at www.trends.net. These slides are under the events and presentations portion of the website, along with the third quarter earnings conference call event link. A replay of today's call will be available after 1030 a.m. Eastern time through midnight on November 7th, 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, Leigh Ann, and good morning, everyone. I'll start my prepared comments on slide three with key messages we want to convey during this morning's call. Trinity's third quarter results reflect significantly stronger performance with revenue growth of 65% compared to a year ago. We believe we are on a good path to end 2023 with favorable financial performance and continued improvement. In the quarter, we continue to experience strength in our leasing segment with fleet utilization of 98.1% and have confidence that lease rates will continue to rise given that our future lease rate differential, or FLRD, of 26.6% and continuing favorable rail car supply fundamentals. As previously disclosed, border closures and congestion resulted in a 14% lower than forecasted delivery rate in the quarter, with 4,325 deliveries. We will discuss the fourth quarter later in our prepared remarks, but we are lowering our 2023 adjusted EPS guidance to $1.20 to $1.35 to account for the delivery's loss due to these border issues and other related supply chain and efficiency impacts. Please turn to slide four for a market update and commercial overview. Starting with the top left graph, overall rail traffic is improving. As you will recall, intermodal volumes are the most significant headwind to rail traffic this year, but volumes have improved in recent weeks. Car load volumes remain up year over year as solid performance from motor vehicles, minerals, petroleum products, and farm products offset declines in grain volume. The industry population of railcars in storage has been shrinking due to improved utilization of covered hoppers, mostly for grain shipments this harvest season. Moving to the bottom half of the slide, as I mentioned, our SLRD and utilization rates remain favorable in the quarter. Our SLRD of 26.6% shows our ability to continue to push rates upward while maintaining a high fleet utilization, 98.1% in the third quarter. On the bottom right, the border closure and congestion impacted deliveries in the quarter. Orders and inquiries support replacement level demand consistent with our expectations over the next few years. Now let's turn to slide five and talk about financial results in the quarter. Revenue of $821 million is up 65% year over year, driven by a higher volume of external deliveries in the quarter. We earned an adjusted EPS of 26 cents As a reminder, in the third quarter of 2022, we completed a large railcar sale, which benefited EPS last year. These portfolio sale gains for the third quarter of 2023 were modest, but we are still targeting the fourth quarter for more meaningful railcar sales in 2023 and to achieve our net fleet investment targets. Cash flow from continuing operations was $76 million in the quarter, And our adjusted free cash flow was a negative $31 million. Eric will talk more about cash a little later in our prepared remarks. Please turn with me to slide six to talk about our segments, starting with leasing. Leasing revenue was $223 million in the quarter, up 14% year over year, driven by improved lease rates, higher utilization, and acquisition-related revenues included in the current year period. Renewal lease rates in the quarter were 32.5% above expiring rates on average, trending closely to the FLRD. Thanks to favorable market conditions, we have delivered a double-digit FLRD for six consecutive quarters, and we are seeing a noticeable impact as over 30% of our fleet reflects the current robust lease rate environment. To preserve these lease rates, we continue to push term with average renewal lease term of 55 months year-to-date. Even with a strong lease rate environment, our renewal success rate in the quarter was 86%, well above average, and evidence that less orders still have significant pricing power. Leasing and management operating margin was 38.4%. This is slightly up year over year with improved lease rates partially offset by increased maintenance expense, depreciation expense, and the margin profile of acquisitions in the segment. Leasing maintenance is elevated primarily due to two ongoing industry trends. First, more change in service modifications to position rail cars for their best opportunity. And second, more scheduled compliance activity in the tank car fleet. Moving to rail products, I want to touch on the border issues in the quarter briefly. On September 20th, the U.S. Customs and Border Protection Agency suspended U.S.-bound cross-border rail traffic in Eagle Pass, Texas, the primary border crossing we use for railcar deliveries from our manufacturing facilities in Mexico. This action was taken to assist the U.S. Border Patrol due to the influx of migrants at the border. While rail traffic operations resumed on September 23rd, congestion and rail traffic challenges continued to evolve. The third quarter impact was 685 fewer rail cars delivered than expected. While we have started moving rail cars again, we still have rail cars temporarily sitting in storage and at our facilities. And we continue to evaluate available alternatives for rail and truck transportation between Mexico and the United States. We do not anticipate completing all of these deliveries before the end of the year. While deliveries in the quarter were lower than expected, they trended heavily toward external sales, which benefited the consolidated financials in the quarter. Additionally, despite the efficiency loss due to the border challenges, we saw operating margin improvements sequentially and year-over-year to 5.7%. In the quarter, the segment results included gains from insurance recoveries. Excluding those gains, the segment margin is 5.2%, reflecting meaningful labor and efficiency improvements. In the quarter, the peso remained strong at an average exchange rate of $17.07. But we were able to mitigate further risk with our hedging programs. We expect to exit the year with a segment operating margin in rail products of 8% to 9% and a full year average of 5% to 6%, barring further substantial rail service issues at the border. Additional congestion or closures will negatively impact our ability to get rail cars across the border and may require us to slow down or temporarily suspend production. We are working with the railroads and the government agencies to do what we can to keep operations running smoothly for both inbound and outbound rail and truck traffic. The value of our new railcar backlog is $3.6 billion, and we have another $124 million related to sustainable railcar conversions, giving us production visibility into 2024 and beyond. Turn with me to slide seven to highlight a few more key accomplishments in the quarter. Our loan-to-value is currently 64.9%, which we view favorably. Year-to-date, our net investment in our lease fleet is $238 million, and our pretax ROE for the last 12 months is 9.6%. And before I turn the call to Eric, I want to highlight one of our sustainability accomplishments. As of September of this year, Trinity received a rating of AA in the MSCI ESG Ratings Assessment. This rating demonstrates both our steady progress over the past four years and an acknowledgement of our ability to manage ESG risk relative to our peers. Nowhere is this stronger than the emphasis on employee safety, where our ISO 45001 Certified Program drives continuous improvement. improvement that is reflected in our safety incident rates. Congratulations to our team on this accomplishment. Safety is of core value at Trinity, and our AA rating shows the industry's recognition of our efforts. And now, I'll turn the call to Eric to review the financial statements and talk about the fourth quarter.