Trinity Industries, Inc.

Good day and welcome to the Trinity Industries 3 quarter and 12 months ended December 31, 2024 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 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. Statements that are not historical facts are forward looking. Participants are directed to Trinity's Form 10K and other SEC filings for a description of certain business issues and risks, a change in which 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 fourth quarter and full year 2024 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 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 .trend.net. These slides are 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 27, 2025. 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 Gene.

Thank you, Leigh Ann, and good morning, everyone. To begin today, I would like to extend my gratitude to all the Trinity employees for delivering strong financial results in 2024 and demonstrating the power and potential of the Trinity platform. Our full year adjusted EPS of $1.82 represents a 32% -over-year increase, driven by higher lease rates, significantly improved margin performance, and an increased volume of external repairs. We concluded the year with an adjusted ROE of .6% within our target range and cash flow from operations with net gains on lease portfolio sales of $645 million, reflecting a 65% increase over 2023. During our 2024 Investor Day last June, we emphasized that a less volatile operating environment combined with a reduced cyclotality of our platform would optimize our returns through the cycle. We believe our 2024 results provide solid evidence of our ability to consistently perform. I would also like to say a few words about our safety performance. Safety is a core value for Trinity, and we have continued to demonstrate incremental -over-year improvements in safety metrics in each of the last several years, achieving approximately half the industry average of incidents for manufacturing. As we look forward to 2025, we remain confident in the strength of our leasing business, especially in light of the balanced market conditions. While there are ongoing pressures on manufacturing driven by macroeconomic forces, this environment favors our existing assets. We believe that moderated additions to the industry rail car fleet will enable us to continue pricing our existing fleet upward, thereby improving returns for our business. Today, I will discuss current market observations, provide specifics from our business segments, and then pass the call to Eric to discuss financial results and provide our thoughts and guidance for 2025 expectations. Let's start with a market update. For the full year 2024, the industry delivered just under 43,000 rail cars and received orders for 25,000 rail cars. We believe 2024 attrition levels were just below 40,000 and expect to see these levels increase over the next few years with concentration in boxcars and covered hoppers. The industry backlog stands at approximately 34,000 rail cars, with Trinity's backlog comprising about 47% of the total, including our multi-year order. We continue to anticipate industry deliveries of about 120,000 rail cars for the planning period of 2024 through 2026. As Eric will discuss in our guidance section, we expect a step down in industry deliveries for 2025. However, as previously stated, we foresee this rail car build cycle being narrower than previous cycles, characterized by lower peaks and higher floors. We believe the muted order volume in 2024 was influenced by uncertainty surrounding the election and more recently tariff implications. Nevertheless, 2025 inquiry levels have been elevated and we anticipate an acceleration in orders as policy changes become more explicit. We have seen positive volume signals in the agricultural, chemicals, and intermodal segments. Additionally, we have visibility into replacement opportunities for vehicular flats, green cars, and small general service tank cars. The rail car industry and the broader industrial economy are currently influenced by numerous macroeconomic forces. Despite these challenges, we remain confident in our internal projections for rail car production. More importantly, we are committed to maintaining the utilization and return of our lease fleet, driving value for shareholders. I would now like to provide some segment highlights, beginning with the rail car leasing and services segment, which includes our leasing business, maintenance business, and digital and logistics services businesses. Our leasing and services business continues to perform favorably and we anticipate this trend to persist in 2025. In the fourth quarter, the leasing and services segment generated revenues of $287 million and a segment operating profit of $121 million, with a margin of 42%. Gains on portfolio sales in the quarter amounted to $21 million. For the full year 2024, leasing segment revenue of $1.1 billion increased by $102 million year over year as we continue to reprice our lease fleet upward. We also observe favorable year over year results in our maintenance business, with an increased volume of external repairs. Our forward-looking metrics also remain favorable. We concluded the year with a future lease rate differential, or FLRD, of .3% and the leasing utilization rate of 97%. Our renewal success rate was 77% in the fourth quarter, which we believe indicates that the market remains balanced, allowing us to continue to push pricing upward. We have now repriced just over half our fleet in a double-digit FLRD environment, indicating that we still have ample runway for further pricing improvement. Full year lease portfolio sales were $361 million, with gains of $57 million. As expected, these gains were slightly lower than in 2023, but still represent a very healthy secondary market. Trinity's full year net lease fleet investment was $181 million, slightly below our guidance range of $200 to $300 million. Our volume of rail car sales exceeded expectations as the secondary market has remained favorable. Trinity delivered 3,760 rail cars in the fourth quarter, bringing the total for the year to 17,570. We received orders for 7,685 rail cars in 2024, resulting in a year-end backlog of $2.1 billion. As mentioned at the top of the call, we expect to see orders accelerate as certainty improves in the market around policy decisions and impact. I am proud of the performance in this segment. Despite relatively flat revenue, operating profit of $189 million increased by 68% compared to 2023. Our full year operating margin of .8% was at the high end of our guidance range of 6 to 8%, representing a 330 basis point improvement over 2023. Our parts business also performed exceptionally well in 2024. As previously noted, we are focused on expanding our parts business to support our lease fleet and maintenance network, and we continue to identify promising opportunities for growth and improvement in this business. Eric will provide guidance for 2025, but I wanted to share some high-level thoughts on our current operating environment. As you have heard from other companies this earnings cycle, our customers are deferring investment decisions until there is greater certainty and clarification regarding the regulatory environment, including tariffs. We remain engaged and informed about the potential impact tariffs may have on our manufacturing business. Given the uncertainty and resulting investment delays, our 2025 guidance includes a 30-cent EPS range to account for various scenarios and the timing of investment decisions. If the tariff uncertainty continues, resulting in further delays in rail car orders, there may be additional risk to our guidance. That being said, we also own or manage approximately 144,000 rail cars, and our primary focus is on improving the returns from these valuable assets. I will now turn the call over to Eric to discuss our financial statements, our performance against our longer-term targets, and our high-level guidance on expectations for 2025.

Thank you, Gene, and good morning, everyone. I'll begin by discussing our fourth quarter and full-year financial statements, starting with the income statement. Fourth quarter consolidated revenues of $629 million reflect lower deliveries and higher eliminations, as 36% of quarterly deliveries were added to our lease lease. For the full year, revenues were $3.1 billion, representing a slight improvement over 2023. For the full year, 20% of deliveries were delivered to our lease lease. As Gene noted, operating profit significantly improved in 2024, driven primarily by margin improvement in the rail products group, partially offset by lower full-year gains on rail car sales and higher eliminations. We benefited in the quarter from a lower than expected tax rate. For the full year, our effective tax rate was 22.7%. Fourth quarter adjusted EPS was $0.39, and full-year adjusted EPS was $1.82, representing a 32% improvement over 2023, reflecting strong operating performance. I would like to reiterate Gene's earlier point that this significant earnings improvement occurred despite a flat delivery and revenue environment. This is encouraging, as it demonstrates that our platform has the ability to generate strong returns and a flat economic cycle. Moving to the cash flow statement, full-year cash flow from continued operations was $588 million. Net fleet investment for the year was $181 million, which included $542 million of fleet additions and enhancements offset by $361 million in secondary market sales. We returned $114 million to shareholders in 2024, comprising $93 million for dividend payments and $21 million in share repurchases. In December, we announced a 2-cent increase to our quarterly dividend, which is now $0.30 per share. This represents a dividend yield of approximately .4% based on the year-end stock price and reinforces our commitment to dividend growth. We have consecutively paid a dividend for over 60 years. Our wholly-owned lease fleet -to-value ratio was .6% in the fourth quarter, within our target range of 60-70%. At our investor day in June, we provided longer-term guidance for the period of 2024-2026. Having completed the first year of this planning period, I would like to provide an update on our progress against our investor day targets. First, we set a three-year goal for net fleet investment of $750 million to $1 billion. In 2024, our net fleet investment was $181 million. As Gene mentioned, the secondary market proved stronger than expected, and we capitalized on this in 2024. Our 2025 guidance of $300 million to $400 million aligns us with the three-year run rate. Second, we introduced a cash metric that encompasses cash flow from operations with net gains on lease portfolio sales, with a three-year target of $1.2 billion to $1.4 billion. In 2024, cash flow from continued operations was $588 million, and we recorded gains on rail car sales of $57 million. Combined, cash flow from operations and gains on lease portfolio sales amounted to $645 million for 2024. Cash flow was strong in 2024, and gains exceeded initial forecasts. Therefore, we believe we are in a favorable position to achieve this three-year target. Finally, we stated that we expected our adjusted return on equity to be in the range of 12 to 15% over the three-year planning period. We concluded 2024 with an adjusted ROE of 14.6%, a significant increase from our 2023 adjusted ROE of 11.2%. In 2023, we significantly improved our asset turnover and balance sheet optimization. In 2024, we improved our net profit margin, driving our adjusted ROE up by 30% compared to 2023. We expect adjusted ROE to remain within the target range in 2025. Overall, we are on track to meet our longer-term targets. We continue to believe these three targets highlight where we can create value as a business. Investment in our fleet, durable cash flow generation, and optimized returns throughout the economic cycle. Moving to 2025 guidance, as Gene mentioned, we have observed delays in ordering decisions due to uncertainty around tariffs and a relatively flat U.S. industrial production. Given these realities, we expect 2025 industry deliveries of approximately 35,000 railcars, which is about 20% lower than 2024 deliveries. We continue to believe that industry deliveries over a three-year period will be around 120,000 railcars, meaning we expect to see backlogs grow this year as the industry plans for more deliveries in 2026. Our fourth quarter results reflect decisions made late in the year to prepare for a lower delivery environment. In addition to making changes to the corporate cost structure, our facilities also improved their cost structure with enhancements in efficiency, productivity, and supply chain management, as well as a continued focus on automation. We expect lower SC&A costs in 2025 as compared to 2024 split among the segment results in corporate cost reductions. The total effect will be approximately $40 million of SC&A cost savings, including lower incentive compensation. In 2025, we expect net lease fleet investment of $300 to $400 million in support of our three-year targets, and reflecting a higher percentage of deliveries going into our fleet and fewer secondary market railcar sales. We expect manufacturing capital expenditures of $45 to $55 million this year. Finally, we are introducing our 2025 EPS guidance at a range of $1.50 to $1.80 per share. In the leasing and services segment, we expect segment operating margins inclusive of gains between 38 and 41% to reflect continued strength in lease rates. We expect gains on lease portfolio sales between $40 to $50 million. In the rail product segment, guidance assumes lower new railcar deliveries and approximately 30% of deliveries going in our lease fleet with a full year segment margin between 7 and 8%. We expect a tax rate of approximately 25 to 27% for the full year. In conclusion, we are confident that 2025 will be a year of continued strength for our leasing and services business. Our focus remains on enhancing returns from our lease fleet while carefully managing production activity to ensure the fleet remains in balance. Leveraging our unique position as both a lessor and a manufacturer, we are attuned to the market needs and are maintaining flexibility to adapt swiftly to changes in the market. We look forward to sharing our progress with you and appreciate your support. 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 2. Again, it is star then 1 to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Vasco Majors with Susquehanna. Please go ahead.

Good morning. Can you talk a little bit about the backlog coverage for the year and in any shaping and how that looks differently in the first half versus the second half or the third quarter? We are now ready in the fourth quarter. Thank you.

Sure, Vasco. Great question. As we said in the prepared remarks, we are expecting industry deliveries for 2025 to be down about 20% to 35,000. What we have seen in 2024 was uncertainty around the election. We saw inquiry levels pick up and then the tariff question came in. Right now, the tariff question has people deciding their customers the lane decisions on placing some of the orders until they know what those impacts are going to be. So, you know we don't give quarterly guidance, but based off of the macroeconomics and the uncertainty out there, I would say that we're comfortable in letting you know that we believe second half will be better and higher than the first half of the year. A lot of that is going to depend over the next couple months as we get clarity on what's going to happen with those tariffs or other regulations that do go into place.

And just to clarify, when you say second half better than the first half, are you talking about deliveries and earnings or are you talking about the order cadence?

I'm talking about both in that. So, we do expect deliveries and backlog to pick up as the year goes on. Because if you look at the three years, we still strongly believe there will be about 120,000 cars delivered between 2024 and 26, which means we're expecting 26 to pick back up.

And to the tariff uncertainty piece, I appreciate the color you've given throughout your guidance on that. Given how fluid that still is, have you been able to maybe adjust some of the terms of your new purchase contracts? How is that uncertainty shared between the buyer who might pay more or your margin that might get eaten up by something that changes before a car is delivered? I just want to understand the risk sharing in that and how that's evolving and if you have a plan to maybe share that in a way that one side doesn't take the full hit if something changes.

Sure. When you look at the tariffs overall, the majority of our contracts have escalation in them, which would allow us to pass those tariffs on. That being said, we have a really good team in supply chain and also in our compliance who are working to mitigate what some of those tariffs could be. So we can avoid passing all of that on to a customer, but we're not taking risk on the tariffs. It is a pass through. We're just working between all of our different groups to see how we can minimize that effect.

Last one, just a similar question, but the lease business. When you're generating leases but holding the car on your own balance sheet, is there a similar escalation cause if the cost of that car changes materially from what was anticipated at lease?

Yes, there is escalation in that too. And as you know, with interest rates staying higher for longer, we're still bullish on what we can do with our lease rates, right? We've just recently gone over 50% of our lease rates being repriced in that double digit positive FLRD range. So we still see room

to continue to raise those rates.

Thank you for the time.

Thank you.

Once again, if you have a question,

please press star, then one. The next question comes from Justin Brigner with Gabelli Funds. Please go ahead.

Good morning, Gene, Eric and Leanne. Thank you for taking my questions.

You bet.

Just first off, you mentioned that incentive comp was going to come down this year in how you framed guidance as part of the SG&A decline. Could you maybe quantify sort of how much that is contributing, I think, to the $40 million or so lower SG&A cost just to get an idea as to how much it might set back up for 26?

Sure, Justin. Effectively, we had a good year in 2024, so our incentive compensation was up. As we reset our guidance, we kind of put everything back to target. When you look at the magnitude, more than half of the $40 million cost savings is coming from kind of other cost takeout, whether that's headcount or other spending cost. And then less than half of it is the incentive compensation, but it's a meaningful number. That's why we called it out.

Okay. Just to understand that, I mean, it's not that you're forecasting a lower than normal incentive comp. It's just more of a reset off of a good year in 2024. So while it could and hopefully does go up in 26, it's not going to go up by that.

That's correct. It's just all about, you know, we have a large variable compensation program on our short-term incentive. And so we set our guidance. We have our targets that we've set, and we're planning that target, and the guidance is based off the target.

Great. Secondly, just to confirm, some of these numbers came at me a bit fast. So the rail car products, or sorry, the rail products margin 6 to 8% and tax rate 25 to 27%. Did I hear correctly, or please correct me if I didn't?

On the rail group margin for the guidance, you heard 7 to 8%.

Okay.

And the tax, you got it right.

All right. Thank you.

Yep. And then

just lastly, help me understand in the quarter what weighed down leasing and services margins, X gains on sale. I guess the press release talks about higher maintenance and compliance costs. Is that persisting into 25? Yes.

So when you look at the maintenance, Justin, we've been talking about compliance interval that's come up on the cars that were built in the last 10 years. We expect those maintenance costs to be elevated for 2025 and the next couple years after that until that compliance event is over. That's some of the weight that you're seeing on the leasing segment margins, staying between 38 and 41%. It's increased maintenance costs for that compliance interval plus

lower secondary market sales.

Gotcha.

All right. And then do you think, I realize there's no normal to secondary market sales, but do you think the 40 to 50K in secondary market sales reflects as best as one could estimate, like a new normal in the current environment for secondary rail car sales, or do you think the 50 for this year is more?

So if you look, if you go back to last year, our guidance was about $40 million in secondary market gains. And so this year, 40 to 50 kind of reflects that similar activity. Included in our guidance is we have increased our net fleet capex. And so our net fleet capex is last year in 24 was a little bit lower than we had projected this year for 25. We're back to that three to $400 million range. And that reflects that we think leasing is a good investment. We see the nice returns there. And so it's a choice to invest in the fleet rather than sell more out of the fleet, but we think long term, it's the right value creation

choice.

Got it. Thank you for taking my

questions.

The next question comes from Andre Tomczyk with Goldman Sachs.

Please go ahead. Hi, morning. Thank you for taking my questions. First question I just had on the deliveries for 2025, I think implied down roughly 18% versus 2024. Relative to the industry expectation, would you expect Trinity's deliveries to fall roughly in that range, the relative to the 18% or should we think higher or lower?

So Andre, we are expecting industry to be down around that 20% and we're expecting to be in our normal range, which is between 30 and 40% of deliveries during the same time frame. So we typically fall there and have been there.

Got it. And just for the margin though in manufacturing, I think you mentioned the 7 to 8% full year. Is there any way we can think about how that trends through the year, maybe starting off in the first quarter?

So typically we're not given a margin range quarter by quarter because again, it can vary depending on what's going on in that quarter, the mix of cars, the number of setups and all that we have there and then also the volume. We did indicate that we expect the second half to be better than the first half. So I would expect to see improvement from that standpoint. And Andre, it may be helpful. I'm going to ask Eric to go ahead and just give you a bridge walk from 24 to 25 if that's okay.

Sure, Andre. Hey, Andre, welcome to the coverage team. Appreciate you doing the work on Trinity. Thanks

for having me. Yeah.

So when you look at just look at 24 to 25 and you just kind of you kind of are on the right path when you kind of frame it. We're seeing railcar deliveries down in that 20% range. We see we've talked about our gains on sale being down about 20% as well. If you look from last year to the midpoint of our guidance and then when you take you take our earnings guidance, if you go to the midpoint, it's down about 9%. So when you just frame that when you look at, you know, long lower deliveries on the manufacturing side, which is leaving a little bit lower margins on the 78% side versus our three year plan. That's volume related. But we're really excited about the performance of this platform when you take that macro context into consideration. We look at just headwinds and tailwinds. So the lower deliveries, as I mentioned, also work planning on more fleet ads. So we have higher eliminations with about 30% of our deliveries going to our fleet. We also, as I mentioned, lower gains when car sales. Gene mentioned a higher maintenance due to compliance events. And then as Justin referenced on his question earlier, we are expecting the tax rate to go up above 400 basis points. So those are kind of headwinds. The good guys are we're still we're still in a very good lease pricing environment. And so we're expected as we repriced a little more than 50% of our fleet, 54% of our fleet in a double digit F R D environment. We expect that to continue as the fleet is in is nicely in balance. And so we still have pricing power on renewing assets to reiterate the fourth quarter. We repriced we renewed about 77% of our leases up 24%. And so with four year renewal terms, so really lock it in those contracts of cash flows longer and up environment. And then as I mentioned, we're going to see fleet growth of 340 million, 300 to 400 million dollars. And then we've taken some cost savings, the 40 million dollars that we referenced earlier. So you take all that in account, we feel real good about the performance that we're expected 25. We're focused on improving the return on equity to business. The balance sheet is, you know, as we think in a good spot and the earnings from the platform should be fairly resilient in a in a flattish economic environment.

Appreciate the color there. Maybe just just to close off two final questions from my end. You mentioned, I think the order inquiries were picking up into 2025. If you could just unless I heard that wrong, and then is that tank car led or freight car specific? So that's the first question. And the last question would just be if there's any update on the parts business, you know how that's doing how that's expected to perform in 2025. Thanks. Thanks for taking my question. Thanks,

Andre. So when we look at the inquiry, they have picked up. We've got some strong ones there. This is still a freight car led recovery, still more of a replacement demand. But I will say tank cars have been fairly consistent on the level of inquiry there. So that is nice for us to see overall when you're looking at that. When you go to the parts business, you know, we're really pleased with the work that they're doing both for internal and external sales. As we look at our acquisition we did with Holden, it's proved out very well with the automotive increase. The outer racks that we see go in and performed extremely well in 2024. Our traditional business has also picked up in new areas and they continue to look for either other agreements or ways that we can provide more parts to our own fleet and to the external fleet that's out there. So good improvement there. We'll continue to look for other areas that

we can grow that business. Okay, was there a follow up, Andre? That's it from my end. Thanks very much. Appreciate it. Thank you.

I'll

go ahead and go to the close.

I want to thank everyone for your time today. You know, while there's still a lot of uncertainty around government policy and how it impacts our business, we believe that our 2025 performance will demonstrate the strength of our platform and our ability to generate strong returns and consistent margin performance. So we look forward to sharing our first quarter progress

and results with you on our next earnings call.

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