Trinity Industries, Inc.

Good morning and welcome to the Trinity Industries Inc. first quarter 2025 earnings call. All participants will be in 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 a star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Leanne Mann, Vice President, Investor Relations. Please go ahead.

Thank you, Operator.

Good morning, everyone. We appreciate you joining us for the company's first quarter 2025 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 www.trin.net. These slides are under the events and presentations portion of the website, along with the first 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 May 8, 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 Jean.

Thank you, Leanne, and good morning, everyone. Before we begin with financial and operational results, I would like to congratulate our Jonesboro Maintenance Facility on achieving a significant milestone in March. This facility has gone five years without a lost time incident. Safety is a core value at Trinity, and this achievement is certainly worth acknowledging. As you may have heard from other companies this earnings cycle, 2025 is a year of uncertainty. While we are not immune to the current macroeconomic challenges, we are operating with agility and adaptability to respond to customers and market conditions appropriately. The rail car manufacturing industry has always had a cyclical element to it. And while we continue to believe the fundamentals of the industry have changed, and this cycle is being led by the replacement level demand, The current environment gives us the opportunity to prove the resiliency of our platform. In the first quarter, GAAP earnings per share for Trinity Industries were 29 cents on revenues of $585 million. Our work to lower the break even on the rail cars and improve the rail products group margins through the cycle is reflected in this environment. Despite 38% fewer external deliveries year over year, our EPS was only down 12%, highlighting the strength and resilience of our platform. I am proud of our team for that work. Furthermore, our last 12 months adjusted return on equity was 14.2%, showing we continue efficiently deploying our capital to generate returns. The current environment will benefit our lease fleet of 144,000 owned and managed rail cars. Our customers need the rail cars they have in their fleets, and higher costs and interest rates have been and continue to support lease rate expansion, improving our businesses' overall returns. The forward-looking metrics for our lease fleet remains favorable, with fleet utilization at 96.8%, and our future lease rate differential, or FLRD, at 17.9%. In summary, we expect macroeconomic forces in 2025 to have some effect on us, whether through inflation, recession, or other economic conditions. But we also expect to continue to be opportunistic as a railcar lessor, disciplined as a railcar builder, and innovative with our customers. Moving to a market update, market uncertainty in the first quarter continued to slow conversions of inquiries to orders. Inquiry levels at the beginning of 2025 were the highest they've been in several years. But customers are taking longer to make capital decisions. We think industrial production is the best predictor of growth for our business. And while macro sentiment and confidence are trending negatively due to market uncertainty, Industrial production remains positive. Over the next several quarters, decisions by our customers for new railcar orders will allow us to manage our production lines efficiently. Our current expectations for industry railcar deliveries this year are 28,000 to 33,000 railcars. While we cannot control the volatility in the current market, As an organization, we are focused on making prudent decisions to support the long-term investment in our fleet and growth of our business. Currently, we expect minimal direct cost pressures from current policy proposals. However, we have seen an impact to demand and subsequently revenue. Based on industry data, we saw the North American rail car fleet contract for the first time in about two years. This is further evidence that builders and lessors are remaining disciplined, limiting speculative purchases, and responding to replacement needs. We did see attrition outpace deliveries in Q1, and we would expect that to continue as long as customers delay buying decisions. Railcar activity stepped up in March with less than 19% of the fleet in storage. The relatively low level of rail cars in storage is consistent with a healthy utilization and renewal rate increases we have sustained. I would now like to provide some segment highlights for the quarter, beginning with a rail car leasing and services segment, which includes our leasing, maintenance, and digital and logistics services businesses. As noted at the top of the call, our leasing business continues to perform at or above our expectations. Our FLRD has been double digit positive for 12 quarters, and in that time, we have repriced about 58% of our fleet. In the first quarter, renewal lease rates were 29.5% above expiring rates, and fleet utilization remained favorable at nearly 97% with a renewal success rate of 75%, demonstrating that customers are holding onto their existing equipment, and we continue to renew leases upward to market rates. We expect these positive trends to continue as lower railcar deliveries this year continues driving tightness in the market. Looking at the first quarter results, revenues were flat year over year, as higher lease rates were partially offset by a lower volume of external repairs. Furthermore, weather impacted our first quarter results for the maintenance business, with lost weeks in January and February. We are also in a heavy tank car compliance year, which increases maintenance costs to our fleet. In summary, Leasing segment operating margin was up year over year due to higher lease rates and higher gains on lease portfolio sales, partially offset by lower volume of external repairs in our maintenance services business. In the quarter, we completed $34 million of lease portfolio sales and achieved gains of $6 million. Our quarterly net lease fleet investment was $87 million, in line with our full year guidance. The hard assets of our leasing business provide stable returns, which makes for a compelling investment thesis in an uncertain market. Moving to rail products group, which includes our rail car manufacturing and our rail car parts businesses. Our results in this segment reflect the current operating environment. We delivered 3,060 new rail cars in the quarter and received orders for 695 rail cars. Evidence of the delayed investment decisions I have previously acknowledged and the lumpiness of orders quarter to quarter. As a result, quarterly revenue was down due to lower deliveries. Operating margin of 6.2% is down both sequentially and year over year. This margin includes costs associated with workforce rationalization. Our backlog at the end of the quarter was $1.9 billion. and we have seen order activity improve in the second quarter. In a minute, Eric will provide updated guidance for the full year, but I wanted to acknowledge our guidance assumes that some of the inquiries we are seeing begin to convert to orders in the next few months, which will allow us to efficiently run our production line. We believe in the power of our leasing business and in the competitive and economic advantages our manufacturing and services businesses give to our lease fleet. Although short-term volatility is outside our control, we are focused on making decisions that support the generation of long-term economic value. I'll now turn the call over to Eric to talk through financial results as well as our updated guidance for 2025.

Thank you, Jean, and good morning, everyone. I'll begin by discussing our first quarter financial statements, starting with the income statement. In the first quarter, we generated revenues of $585 million, reflecting lower external deliveries. Furthermore, 29% of our rail products revenues were eliminated as it went into our internal lease fleet. Our gap EPS from continued operations was 29 cents in the quarter. We benefited in the quarter from lower corporate interest and tax expenses. Moving to the cash flow statement, our quarterly cash from contingent operations was $78 million, and our net gains on lease portfolio sales were $6 million in the quarter. We invested $9 million in operating and administrative capital expenditures. We returned $33 million to shareholders in the quarter, $25 million through our quarterly dividend, and $8 million in share repurchases. Our balance sheet is positioned for value creation and provides flexibility in an uncertain market. We have $920 million of liquidity through our cash, revolver, and warehouse availability. Our loan to value of 66.2% on our wholly owned fleet is within our target range of 60 to 70%. Now I want to talk about the expectations for the rest of 2025. As Gene noted, there is uncertainty in the market. We know the demand for railcars is out there given the aging profile of the fleet and solid inquiries we continue to receive from our customers. The pace at which these inquiries are converting to orders is slower than expected. We are lowering our full-year industry delivery guidance to approximately 28,000 to 33,000 railcars. Our full-year guidance assumes additional orders are received for delivery this year. Based on what is currently in our backlog and being manufactured, we expect the second quarter to be a low point for the year, but expect production, deliveries, and subsequently earnings to pick up as we move into the back half of the year. Real products group margins will be impacted by lower volumes and margin compression on new orders. Our current view is segment operating margin will be between 5% and 6% for the year. We are leaving our capital expenditure guidance for the year unchanged, $45 million to $55 million for operating and administrative cabinets, and $300 million to $400 million for net fleet investment. Net fleet investment guidance assumes a pickup in demand in the near term. The operating performance and cash flow generation of lease fleet remains strong. We see opportunities for lease fleet investments and expect continued strength in our fleet utilizations. Lease rates are driven by many factors, but the most important is a balanced fleet, meaning there is not an excess of supply. This allows for rational and higher lease rates. In the current environment, the North American railcar fleet is in balance, evidenced by fleet utilization, rising lease rates, and renewal success rates. Furthermore, general inflationary pressure will drive new railcar prices upward, which will allow less sores to raise lease rates. And finally, we're refining our full year EPS guidance to a range of $1.40 to $1.60 per share. Our lease fleet continues to perform favorably and our customers are holding on their existing fleets as they continue to need the rail cars in their fleets. This provides a predictable base load of cash flow and earnings. The long-term fundamentals of our franchise remain intact. Our platform has the ability to generate significant cash and above average shareholder returns based on the strength of the hard assets in our lease fleet and a value proposition to our customers that is unmatched. Operator, we are now ready to take our first question.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to attend our roster. The first question is from Bascom Majors with Susquehanna. Please go ahead.

Thanks for taking my questions. The FLRD measure is still quite high, but has come down from, I think you were at 24 last quarter and a few points higher than that, the quarters before that. Could you help us bridge between what's happening in the expiring lease rate comps as we move forward to make that fall and what's happening in the sequential sort of spot lease rate? And then on that second question, if there's any delineation between what you're seeing in tank and freight, that would be helpful as well. Thank you.

Sure. Thanks for asking a great question. As we look at the FLRD, it's really affected by the mix of car types coming up for a renewal in the timeframe. But still overall very positive. As we mentioned in the prepared remarks, the renewal rate versus expiring rate in the quarter was 29.5%. If we look at our average lease rate, It's up both sequentially, quarter over quarter, and year over year. So still very positive, especially with 42% of our feet yet to be renewed in the higher lease rate environment. So we're feeling good about that. Again, it can vary quarter to quarter more on the mix of car types coming up during that 12-month period.

Just to clarify, 29.5%, can you articulate how that's different than the FLRD at 18% and what's driving such a gap between two supposedly similar measures?

Sure, it's going to be the car types that expired and got renewed in that quarter versus the car types that are coming up for renewal in the next 12 months. So we're giving you the rates from the quarter that happened, and the mix or the change in the cars in the next 12 months could be different, and based off the increased amount for those car types, it can change that overall number from the 29.5 to the 17.9.

Okay, that's helpful, and I would assume that just looking out 12 months in the FLRD would probably be more representative of the overall mix of the fleet with more time there.

It's representative of the expirations in the next four quarters. It's not necessarily representative of the fleet. It's a forward-looking metric on what our expirations are weighted by revenue for the next four quarters. So that's where you get the difference. So it's a little more indicative of future changes in revenue. But as Gene mentioned, the 29.5%, that's just what the change was for this current quarter.

That's a great number, and thank you for reconciling and clarifying that. Just one more from me, and I'll hop back in queue. You made some comments on cadence, Eric. I think 2Q on both deliveries, I believe you said margin and overall earnings would probably be the weakest in your expectation. Can you walk through that in a little more detail of what's driving that cadence in terms Maybe bridge to sort of where you exit the year in 4Q. Why do you think there is some improvement from the 2Q trough? What do you have visibility into to drive that improvement? And ultimately, anything else that gives you conviction that we kind of go down and then go up from here? Thank you.

Yeah, I'll start with leasing because there's probably a lot more certainty around that. When you look at the leasing performance, as Gene mentioned, with both the FLRD and where we're currently renewing rail cars, we expect revenue to continue to increase there through our renewals and also through our fleet growth. And so the leasing revenue should continue to improve along with the leasing margins. And then when you look at gains on car sales, those are back and weighted for the year in terms of the gains. If we got into the $40 to $50 million, we had relatively low gains this quarter. And so those are in the back half of the year. When you look at the rail group, We talked about the deliveries here and the deliveries that we're expecting with – we expect the deliveries to be lower in the second quarter relative to the rest of the year. So it's kind of all those things that are contributing to that second quarter being lower and improving further out.

I think there was a comment in that discussion in the prepared remarks about pricing on the rail cars and rolling them through. I don't want to pick that out of context. Can you expand on that a little bit, and then I'll pass it down the queue? Thank you.

Yeah, so I'll go ahead and take that one, Baskin. When you look at the pricing on the new rail cars, we expect input costs, so the material costs, some of the rates you need to finance those cars to remain higher. and those are all good for us on the overall price of that car. Where there is some competition on the lower volumes that we're projecting for industry deliveries, you see some of the margin compression from the pricing between competitors out there. So we've seen that come into play, and that's affecting mainly volume, but then pricing compression for competition.

Thank you both. Thank you.

The next question is from Andre Tomczyk of Goldman Sachs. Please go ahead.

Hey, good morning. Thanks for taking my questions. I just wanted to start with the point that you mentioned earlier. Guidance assumes some of the inquiries turning to orders in the next few months. Can you just talk about how customer conversations have sort of developed through the quarter and here into April and what's leading you to believe the inquiries will turn to orders. Thanks.

Thank you. Well, great question. As we look at what's going on in this quarter, you know, we mentioned that inquiry levels were the highest we've seen in the last couple of years. And we are currently finalizing several orders that are approximately $100 million. So we're starting to see some of that convert more. I guess the other thing I would say there is, that as you look at it, the brunt of the delays more in freight than tank cars.

Got it. Okay, and maybe when just when we think about sort of orders versus deliveries, when can we expect orders to outpace deliveries? Would it be safe to say that that might not occur until 2026, or could we see an inflection still this year?

So when you're looking at that, I don't know that we can give you the exact answer. When you're looking at this year, the macro uncertainty has the volumes down, if you go to the midpoint basically of our guidance for industry deliveries, about 30%. But it's still a supply-led recovery. And the fleet is very tight. In the first quarter, we saw that even get tighter with the cars that were scrapped or removed from service. being higher than what was added back in. So we're confident that it's got to come back, that they need those cars. But that gives us strength in our main business, which is leasing. So the lease utilization remains high. Our lease rates remain high. So overall, we think the setup there is good while we wait for the overall new car orders to come through.

Okay. Maybe just to clarify, do I have it right that I think 17% of the deliveries went to internal fleet in the first quarter if I just take your own leasing fleet change quarter over quarter? Just seeing if that's correct. And then do you still expect the 25% to 30% of the full-year deliveries to go to the internal fleet this year, implying sort of the larger internal deliveries and eliminations for the remainder of this year relative to the first quarter?

Andre, we may have to talk later, but eliminations for the first quarter were around 27%, sorry, 29%. And for the year, we were expecting them to be over 30% of eliminations. So I think we'll have to go back and look. That really hasn't changed.

Got it. So the deliveries to the internal fleet, In the first quarter, we're closer to like 1,000, if that's correct?

Yeah, more or less.

Got it. Okay, makes sense. That does clarify that. So how do we think of, I guess, total deliveries sequentially through the year relative to the 3,100 that you did in the first quarter? I know you said it's going to, I think, step down potentially into the second quarter and then sequentially improving from there. Do I have that right?

You know, Andre, we gave you a little bit on second quarter to try to help you understand what we saw happening short-term there. But we don't give quarterly guidance. We expect to be within our normal range, 30% to 40%, just like we were deliveries in the first quarter for the year. And so I would use that as a basis.

Okay, it makes sense. And then one more question just on the manufacturing side. If the industry deliveries were closer – to down to 28,000 this year, down 34% versus 2024 for the industry. How should we think about margins for Trinity in that scenario? Should that be closer to the 5% level? And then conversely, if industry deliveries were at the higher end, we'd be closer to the 6%? Just trying to think about the margins this year.

Yeah, the volume is the biggest driver in the change in the operating margins that you're going to see. So I would say what you're saying makes sense and is reasonable.

Okay, thanks. And then last for me was just any more share repurchases to think about this year or just to think opportunistically there?

You know, that share repurchases, we did buy back some shares in the first quarter, and we still have our authorization to outstanding. You know, we said we're going to be opportunistic around share repurchases, and so we're going to be opportunistic.

Got it. Appreciate the time, everybody. Thank you. Thank you.

The next question is a follow-up from Bascom Majors with Susquehanna. Please go ahead.

Eric, you talked a little bit about the term loan and the refinancing of the ABS. Can you just talk a little bit about what you're seeing in having recently gone to the credit market, why you chose to go with the term loan instead of an ABS structure, and why and any impact to either, you know, that you want to call on the balance sheet or interest expense from that refi going forward. Thank you.

Yep, thanks, Baskin. You're noting that we did close a $1.1 billion bank term financing yesterday. That was, we had a term loan that was maturing later in the year, so we refinanced that. So that was one of the reasons why we stayed with the bank term market is that was the capital that we were repaying. And we were able to merge that with another bank term loan that we had and combine it and upsize it. So we really are happy with the execution. The spreads were, in my opinion, attractive. The ABS market is still an attractive market for us. And so in the future, I'm sure we'll be accessing the ABS market as well. But we really took advantage of the bank's appetite for funded loans, and so we think we got really good execution there.

Any impact on that interest short term?

You know, the rates are – the spread is lower, so that's good. But you're increasing the leverage a little bit, so, you know, the effect is – There'll be a little bit more debt, but I think nothing material changing from our trend line.

Thank you. Yep.

This concludes our question and answer session.

I would like to send the conference back over to Jim Savage, Chief Executive Officer and President, for any closing remarks.

Well, thank you for joining us today. And as we stated today, although customers are taking longer to make order decisions, which will impact our short-term performance, we remain confident in the long-term fundamentals of the business. Our platform is unparalleled, and we have implemented necessary changes to our business to ensure we can generate strong returns through the cycle.

We look forward to sharing our progress with you next quarter. The conference has now concluded.

Thank you for attending today's presentation. You may now disconnect.