Trinity Industries, Inc.

Good day and welcome to the Trinity Industries third quarter ended September 30, 2024 results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a comfort 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 one on your telephone keypad. 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. The 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... 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, Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone. We appreciate you joining us for the company's third quarter 2024 financial results conference call. Our prepared remarks will include comments from Jane 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 leader. During the call today, we will reference certain non-GAAP financial metrics. The reconciliations of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the quarterly investor slides. which are accessible on our investor relations website at www.tren.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, 2024. 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. Trinity's third quarter results once again demonstrate strong performance across our business. Our quarterly adjusted EPS of 43 cents represents a 17-cent increase year over year, and operating profit has risen by 22% compared to the previous year. These impressive results are driven by steady progress and consistent performance throughout 2024, which we expect to continue in the fourth quarter. Consequently, we are raising and tightening our full-year EPS guidance to a range of $1.70 to $1.80. Eric will provide more details on fourth quarter expectations in his prepared remarks. Before talking about Trinity's segment results, I'd like to provide an overview of the current market conditions. With just two months remaining in the year, we are confident in our forecast of roughly 40,000 industry deliveries in 2024. Car loads increased in the third quarter as compared to the third quarter of the previous year, primarily driven by the agriculture and chemical end markets. We expect a large corn and soybean crop harvest, which is also contributing to this carload growth. Plate expansion and improvements in railroad service have been key themes in 2024. Rail service continues to trend positively, and as the railroads sustain this type of performance, it should encourage shippers to incorporate more rail shipments in their supply chain management. And now let's pivot to the performance of our business in the third quarter. Trinity's business consists of two main segments, the Railcar Leasing and Services Group and the Rail Products Group. I'll start my comments in the Leasing and Services segment, which includes our leasing, maintenance, and logistics services businesses. I'd like to note that we are particularly pleased with the benefits of aligning our leasing and maintenance businesses into the same segment. This move has resulted in better performance with lower costs. For the segment, revenues increased by approximately 11% compared to the previous year, driven by favorable pricing and a higher volume of external repairs, as well as improved lease rates and net additions to the lease fleet. Additionally, segment operating profit is 20% higher than a year ago. Segment operating margin, including gains, was 39.8% in the quarter, which aligns with our forecasted guidance. Complete utilization remains favorable at 96.6% for the quarter. We have observed an improvement in utilization so far in the fourth quarter and anticipate concluding the year with a higher utilization rate. We completed $67 million of lease portfolio sales in the quarter, resulting in gains of $11 million. Our quarterly net fleet investment was $41 million, and year-to-date, we have invested $87 million in our lease fleet. The future lease rate differential, or FLRD, was 28.4% for the quarter, marking 10 consecutive quarters of double-digit positive FLRD, During these 10 quarters, we have repriced 48% of our fleet, and the impact of the repricing is becoming more evident in our top-line results. We expect this trend to continue as we are consistently repricing our fleet upward to market rates, and the North American fleet remains in balance supporting these rates. The renewal success rate was 78% for the quarter, highlighting that railcar demand remains high and in-market economics are supportive of higher lease rates. As we continue to expand our service offerings, we are encouraged by the progress we are making. Our efforts are gaining traction with our customers as they recognize the value our services bring to their operational efficiency. Moving to the rail product segment, Our third quarter operating margin of 8.1% reflects year-over-year improvement in labor and operational efficiencies and favorable railcar mix. Revenues in the segment were $603 million. This quarter, we observed a slight shift toward tank car deliveries, though production still continues to be significantly led by freight cars. Additionally, as we expected, we shifted more of our production into our fleet as compared to the second quarter. We anticipate these trends to continue in the fourth quarter. We expect to finish the year with an operating margin in the high end of the forecasted range of 6% to 8% in the rail product segment. During the quarter, we successfully delivered 4,360 new and received 1,810 new grab car orders, ending the quarter with a backlog of $2.4 billion. In the third quarter, we saw several customers deferring their order decisions to the fourth quarter. As a result, we are experiencing strong order activity in the fourth quarter to date. Additionally, customers are expanding their existing orders with tap-on orders. In conclusion, I'm pleased with our business performance this quarter and throughout 2024. Our leasing business continues to operate consistently and favorably, bolstered by a more efficient production operation, a robust maintenance network, and a growing parts and services business that supports our fleet of 144,000 owned and managed rail cars. I will now turn to Eric to discuss the financial statements and provide an update to our outlook for the remainder of the year.

Thank you, Jean, and good morning, everyone. In the third quarter, our last 12-month adjusted ROE was 18.3%. Above our target range introduced at our investor day in June. This reflects consistent operations driving strong net income balanced with a disciplined approach to managing our balance sheet. I will begin my quarterly comments with the income statement. In the quarter, we earned revenues of $799 million. External deliveries were slightly lower both sequentially and year over year, but this was partially offset by favorable pricing and mix of maintenance work, improved lease rates, fleet growth, and a favorable mix of railcar deliveries. Quarterly gap EPS was 44%, and adjusted EPS was 43%. We maintain a positive outlook on our balance sheet position. Our loan-to-value ratio stands at 68.2%, within our target range of 60% to 70%. Additionally, we benefit from a favorable average cost of debt, with our next debt maturity scheduled for late 2025. This strategic positioning allows us to increase the spread of our cost of capital as we continue to reprice our leased assets. Moving to the cash flow statement, the year-to-date cash flow from continued operations was $384 million, and we currently have liquidity of $924 million. Trinity's ability to generate significant cash flow is evident in our 2024 cash performance. Year-to-date, we have returned $77 million through dividends paid and share repurchases, reflecting our commitment to returning capital to shareholders. We continue to believe that our best use of cash is the investment in and optimization of our lease fleet. Year-to-date, we have added $340 million of new road car bills, secondary market additions, and modifications to our lease fleet. Conversely, we have taken advantage of a strong secondary market to optimize our fleet and have sold $254 million out of our fleet to improve its composition. This includes a $143 million sale in the second quarter to an RIV partner, and those railcars remain under our management. We remain active as a buyer and seller in the secondary market, and we believe we have capitalized on favorable market conditions, to optimize our business returns. I will conclude my remarks for their expectations for the last quarter of the year. As Gene mentioned, we expect industry deliveries of approximately 40,000 railcars in 2024. Given my prior comments on net fleet investment, we are lowering our net fleet investment guidance by $100 million for the year to a range of $200 to $300 million. The secondary market has proven more attractive than initially expected, and we realize strong returns from secondary market sales. Consequently, we expect to end the year with approximately $55 million in gains on lease portfolio sales, up from our prior full-year expectation of about $40 million. Some of these secondary market sales come from our partially owned fleet, which will result in elimination of gains due to minority interest. We anticipate the impact to minority interest to be about $4 million over the third quarter run rate. We continue to expect about 20% to 25% of our new railcar deliveries to go into our lease sleep for the full year, which implies higher eliminations in the fourth quarter. Our outlook for operating and administrative capital expenditures remains unchanged at $50 to $60 million. Finally, with nine months of results now in, we are raising and tightening our EPS guidance. We anticipate ending the year with EPS from continuing operations of $1.70 to $1.80. In February, we introduced our 2024 initial guidance of $1.30 to $1.50. We exceeded our starting expectations with the current midpoint of guidance being $0.35 higher than initially projected. This improvement is attributed to our rail products group operating margins, which has ramped well this year due to enhanced operational and labor efficiencies, a more favorable mix of maintenance work, higher than expected gains on retro sales, and a consistently performing core leasing business. In summary, we are pleased to have driven favorable outcomes across our lines of business and expect to conclude 2024 on a positive note We look forward to updating you during our year-end call in February and providing guidance for 2025 at that time. Operator, we are now ready to take our first question.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Again, it is star then one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Bascom Majors with Susquehanna. Please go ahead. Thanks and good morning.

On the OEM margin guidance that you gave, you talked about, I believe, ending the year at the high end of your range. Was that specific to the fourth quarter, or was that suggesting your full year margin would be at close to 8%, which would imply maybe above 8% in the fourth quarter?

We're talking about high end of the range for the year. So it'll be in that 6-8% and closer to the 8%.

Okay.

And I mean, that would put you in the fourth quarter above where you've sort of suggested the margin range for next year could fall out in that 7% to 9% from your investor day. Can we walk through, you know, how you've maybe lifted the margin faster than you thought you could earlier this year and shared it your investor day? And Maybe what risks, be it mix, production rates, other things that we can't see on the cost side that suggest that that could pull back a little bit before it continues to move forward to the range you set for 2026? Sure.

So when you look at it, first, the team has done a great job getting the labor efficiency and operating efficiency up. Some of the things they've done is worked on fixtures to help us with families of cars that go through a plant and lessen the setup time that has to occur during that. Other things is just we're getting the workforce is getting much more experience, so over a year. And so before we had a lot of younger employees, which tends to lead to lower efficiencies. So all of that plays into a thin mix of cars and how many setups that you're going to do within a month or within a quarter. will also affect those. So you will vary. It won't be a linear number that you're going to see, depending on the mix, depending on the number of setups we're doing in that term or in that time frame.

And last question on the manufacturing side, but you did have another quarter of below book-to-bill orders, but you also said that there was some slippage in the 4Q and the order quarter uh sorry the orders this quarter are are going to be much stronger i mean do you think will they be strong enough to support a stable to growing backlog from where you sit today one month in the quarter and you know you know what's the management strategy around you know managing the production schedule if if orders remain you know at a rate that that doesn't necessarily support the current production rate for for you guys in the industry thank you

Thanks, Baskin. So we still firmly believe in our 120,000 industry deliveries over the three-year time period that we introduced at the investor day. And when you look at that, we talked about having higher floors. And as we look at 253,000 cars left in the network that are over 40 years old, we're still looking at replacement demand driving. the demand for the new rail cars. The other thing I'm going to point out there is scrappage rates. So far through the third quarter, about 28,000 cars have been scrapped. We're expecting just under 40,000 for the full year, which is very much in line with the new car production that we talked about for this year at 40,000. And I guess the last thing I'm going to say there is rail cars and storage has dropped, and it's The normal seasonal rate, it's down to 19% right now in storage. So all those combining together still say that we have a tight market. It's supply-driven demand that we're seeing, and we expect that to continue.

To that point, the market structure and supply-demand dynamics that you're discussing make a ton of sense. I'm curious... How do we reconcile that with your customers just being a bit skittish to place a more significant amount of orders that support that replacement rate in recent quarters? I mean, when you talk to your customers, is there a common thread or a theme as to, why there's been a bit of a pause in the last few quarters, and do you see anything in their psychology or access to capital or view of the rail market or the economy that could unlock this in the next two to three quarters?

Sure, and I'm going to start by saying you're probably hearing a lot of companies talk about this. The election has caused many people to delay making some of the decisions. in regards to capital. But we're having lots of really good conversations with customers about what their needs are. We're seeing inquiry levels come in, but they are delaying those decisions somewhat to see what happens during the election. The other thing I'm going to say is we've got 45% of the industry backlog sitting on our books right now. And the fact that the supply chain has improved allows us to go back to more normal lead times for rail cars and placing orders. You know, during COVID, it extended out, and you had about a year to get a car once you ordered it. It's back down in that three to six months now. So you're going to see those dynamics change a little bit.

And I would just add, this is Eric, What we are seeing our customers do, especially the industrial shippers, is they're holding on to their rail cars. As Gene mentioned in the prepared remarks, we had a 78% renewal success rate. So that gives you some idea that customers are confident they're going to need these rail cars, and they're preparing for growth while they're not ordering rail. new rail cars at the pace that we're delivering rail cars, I think that does send a signal in terms of confidence and outlook going forward.

And to that point, you came into the year on the leasing side with maybe a more conservative view on how the secondary market would play out. And, you know, clearly it's been... persistently robust. I mean, you just raised the P&L gains guidance and the cash in from real car sales guidance. How do you feel about that continuing to have some durability here? I mean, are you seeing any change in the makeup or depth or interest of clients that look either from your core RIV partners or It may be more of a traditional putting books out and taking a number of other bids. Just in any picture of how the secondary market looks today and your conviction and how long that can continue would be helpful. Thank you. Yeah, sure.

This is Eric again. I think part of that's just the beauty of our platform. We play in the rail market in all aspects, whether it's building new rail cars, leasing existing rail cars. And certainly in the secondary market, we've been very active. To your point, the breadth and depth of the market have been quite good. We're seeing road cars remain an attractive investment for both operating lessors and for passive equity investors. And so we're seeing strong appetite. We're seeing that the market still expects lease rates to continue to improve based on their assumptions and their underwriting assumptions when they're bidding on deals. So, yeah, we've been very satisfied with the secondary market. In getting to our fleet investment, that's one of the drivers why we lowered our fleet investment. We haven't been as successful in buying secondary market rail cars. we've been more successful in selling them. And that's just the speaks to the pricing dynamics.

Last one. Um, I mean, your FLRD measure remain pretty steady. You know, that's consistent with some of the adjacent room metrics reported by your peers. Um, I can't recall if you said that some repair remarks, but I think you're about halfway through repricing your, your lease books and lease rates really took off, you know, two and a half, three years ago. Um, Do you see anything on the horizon that changes that dynamic now? I mean, it seems like the drop in steel prices hasn't really had an impact. You know, the drop in interest rates doesn't seem to be having an impact, although that's reversing a little bit here more recently. Any thoughts on the pricing power and supply dynamics that are really fueling your ability to drive greater returns from that lease fleet existing assets? And, you know, is this another two and a half, three years to get to the rest of the book? That will be a rising time for Trinity and your peers. Thank you.

So you were right. We've repriced about 48% of our fleet in the last 10 quarters since the FLRD turned double-digit positive. And so when we look at that, we're still seeing sequential improvement in those lease rates. If you look at third quarter versus second quarter, we went up 26.9% on the rates. So it's still very strong dynamics. Why is that? It's a really balanced fleet. Right? It's supply-driven. We have the number of cars getting scrapped are really in line with the number of cars being built. So it's keeping those dynamics in the market tight, which allows us to continue to have room to work and raise those lease rates. So we're really happy for the position we're at with the lease lease and the rates and where we can see that going.

Gene, Eric, Leanne, thank you very much. Thank you.

Thank you, Beth.

This concludes our question and answer session. I would like to turn the conference back over to Jean Savage, Chief Executive Officer and President, for any closing remarks.

Thank you. And I'd like to extend my gratitude to the Trinity team for their hard work in driving these outstanding results for our business. I am encouraged by our performance, and I look forward to speaking with you again in February where we'll report on our full year 2024 results an outline of plans and guidance for 2025. Thank you all for your continued support of Trinity.

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