Trinity Industries, Inc.

Good morning and welcome to the Trinity Industries Q2 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 remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. 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 second quarter 2025 financial results conference call. Our prepared remarks will include comments from Gene Savage, Trinity's Chief Executive Officer and President, and Eric Martetto, 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 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 7, 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, Leanne. Good morning, everyone. Our second quarter results underscored the solid performance of our leasing business and Trinity's strong ability to generate substantial cash flow. The North American rail car fleet remains in balance with ongoing improvements in pricing. Although customers have delayed their capital expenditure plans and new rail car decisions due to evolving trade and tax circumstances, they continue to retain their current rail cars. Additionally, we are starting to see a recovery in new rail car demand as sequential order improved and we generated a book to bill of 1.3 times. As detailed in our prepared remarks today, we expect an increase in deliveries from second quarter levels and continued improvement across the business in the second half of the year. Before discussing our quarterly results, I would like to provide a brief market overview. Inquiry levels remain healthy and these inquiries are translating into increased order activity. Albeit at a slower rate than initially anticipated. We are encouraged by sequential pick up and orders in the second quarter, both for Trinity and for the broader industry. The industry fleet has experienced a modest contraction considering lower year to date deliveries for 2025, coupled with ongoing fleet attrition through scrapping. Given current production levels and improving order environment, the industry is on pace for full year industry deliveries in the range of 20,000 to 33,000. Within the existing rail car market, car loads have improved in the second quarter, primarily driven by strength in the energy and agriculture markets. Rail cars and storage have picked up slightly consistent with normal seasonal trends. We continue to monitor recent tax legislation and ongoing trade developments and remain generally optimistic about their impact on our business. I will now highlight segment performance for the quarter. Rail car leasing and services segment, which includes leasing, maintenance, digital and logistics services. Our leasing business continues to perform exceptionally well. Segment revenues have increased both sequentially and year over year, primarily due to higher lease rates, reflecting our strategic efforts to reprice the fleet. The maintenance business has benefited from favorable pricing and a positive mix, contributing to a 21% year over year increase in quarterly maintenance services revenue. The future lease rate differential for FLRD stands at an impressive .3% for the quarter, marking 13 consecutive quarters in double digits, during which 63% of our fleet has been successfully repriced. Renewal rates in the quarter were .9% of bought expiring rates and our renewal success rate was 89%, demonstrating our ability to continually drive lease rates while sustaining a high fleet utilization of .8% during the second quarter. Indicating a well-balanced fleet. During the quarter, we completed $29 million in lease fleet portfolio sales with gains of $8 million. We remain active in the secondary market as both a buyer and a seller and anticipate this trend will continue in the second half of the year. The cost of revenues in the segment increased by .7% year over year, primarily due to higher maintenance and compliance expenses for the lease fleet, as well as a change in the mix of external repairs and our maintenance services business. Turning to the rail product segment, which includes our manufacturing and parts businesses, second quarter results were in line with our expectations. Due to lower order volumes in preceding quarters, we adjusted production to match the pace of customers delayed decisions, delivering 1,815 rail cars in the quarter. This resulted in a segment operating margin of 3%, which is inclusive of costs associated with workforce reductions. We are encouraged by sequential improvement in orders. In the quarter, we received orders for 2,310 rail cars and achieved a book to bill ratio above one times for the first time in ten quarters. We believe this positive order momentum will continue, supported by inquiry levels consistent with replacement level demand, favorable tax policies, and increased trade certainty expected in the near future. We are well positioned to respond to further market improvement as the year progresses. I would like to commend the Rail Products Group for their strategic initiatives over recent years, including optimizing manufacturing operations, investing in automation, and lowering the business breakdown point. Your hard work is evident in this low order volume environment. We are maintaining our full year operating margin guidance in the 5 to 6% range for the segment. This outlook is underpinned by our expectations of stronger deliveries in the latter part of the year, better fixed cost absorption, a streamlined workforce, and continued efficiencies through automation. As we enter the second half of the year, we remain confident in our ability to deliver strong performance across our business. We will continue our efforts to reprice a leaflet and capitalize on favorable conditions in the secondary market. We anticipate an increased pace of quarterly deliveries, benefiting both revenues and margins. Additionally, we expect our backlog to increase as pent-up demand translates into orders, driving momentum through the latter half of the year and into 2026. 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 will begin by discussing our second quarter financial statements, starting with the income statement. Revenues of $506 million and GAAP EPS of $0.19 in the second quarter are consistent with our expectations, keeping a slower delivery pace in the second quarter. As Jean mentioned, lease portfolio sales proceeds were $29 million in the quarter. Our effective tax rate in the quarter was 15.8%. In the quarter, we purchased $40 million in transferable tax credits at a discount, which benefited our quarterly tax rate. These credits were used to offset the company's federal tax liability for 2024. We have incurred approximately $8 million of severance expense -to-date, split between rail products group and corporate. We are expecting full-year severance expenses of $15 million, with remaining severance costs to be incurred in the rail products group. Given the workforce reductions, as well as lower incentive-based compensation, we expect to realize about $50 million in savings across the enterprise in 2025. Net gains on lease portfolio sales are $14 million -to-date, $8 million of which was in the second quarter. As I said last quarter, we expect gains on sales to be weighted to the second half of 2025. Moving to the cash flow statement, our business continues to demonstrate its cash generation potential. -to-date cash flow from continuing operations is $142 million. As we go forward, we expect the effects of recent legislation to benefit our cash from operations. -to-date, our net lease fleet investment is $233 million. We remain active in the secondary market, both as a buyer and a seller. Secondary market purchases have allowed us to improve the yield on our fleet, while also growing our lease fleet. Our fully-older guidance for net lease fleet investment reflects higher originations and consistent secondary market ads offset by significantly higher secondary market rail car sales in the second half of the year. In keeping with our capital allocation framework, we increased share repurchase activity to $31 million in the quarter. -to-date, we have returned $90 million to shareholders through dividends paid and share repurchases. Finally, our -to-date investment in operating and administrative capital expenditures is $18 million. Our balance sheet positioning remains strong, providing us with significant flexibility. With $792 million in liquidity through our cash reserves, revolver, and warehouse availability, we are well positioned for a variety of market conditions. Our loan to value of .4% on our wholly-owned fleet aligns with our target range. In the second quarter, we successfully refinance and up-size our TRL 2023 notes, further optimizing our debt portfolio and positioning our balance sheet for continued value creation. As we look ahead to the remainder of 2025, we are maintaining our industry delivery forecast to a range of 28,000 to 33,000 railcars. While railcar orders have recovered more slowly than anticipated, we remain confident that demand will further materialize, with some demand shifting into 2026 based on customer conversations and market insights. We are adjusting our net lease fleet guidance to a range of $250 to $350 million, with approximately 35% of our 2025 deliveries expected to be added to our lease fleet. This slight reduction in fleet investment is due to lower originations and continued utilization of our robust secondary market. We anticipate gains on lease portfolio sales for the full year to be between $50 million and $60 million. Our operating and administrative capital expenditures guidance remains steady at $45 million to $55 million. Finally, we are maintaining our full-year 2025 EPS guidance at a range of $1.40 to $1.60. This projection indicates a significantly stronger performance in the second half of the year, which aligns with our expectations. Included in the annual guidance is severance expense of approximately $0.14 per share. Additionally, we are maintaining our segment margin guidance with an improved performance in the rail product segment expected in the latter half of the year, primarily driven by higher deliveries, partially offset by severance expenses. The resilience of our business is on full display this year against a backdrop of low industrial growth and macroeconomic uncertainty. Anchored by our leasing business, we have seen improved performance in our fleet. In the manufacturing segment, our people have responded to changing customer demand and position training to perform in a period of lower demand. As we move forward, we are poised to realize additional operating leverage across our platform. 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 touchtone phone. If you are using a speaker phone, 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 assemble our roster. Our first question comes from Basco Majors from Susquehanna. Please go ahead.

Thanks for taking our questions here. Congratulations on getting production aligned with orders. It's encouraging to hear that you continue to think that goes up from here. Can you talk a little bit about the production plans for the second half and how the build rate should probably be? Is that a trend versus where you were in the quarter? Ultimately, are you aligning that to where orders are now or where you think they're going as the economy improves? Thank you.

Thanks and good morning, Basco. I want to start off by talking a little bit about the cycle. Remember we told you that we were working to optimize our products group to be able to perform through a cycle. At the bottom of the cycle, we wanted them to at least be break even. And when you were in the mid to upper part, they would be creative to our overall earnings. We're saying that the weekly second quarter was the bottom of that cycle. So we're proud of what the products group was able to do in delivering the 3% margin. We did have lower deliveries in the second quarter. And that was mainly due to resetting the line to the pace of production that we're expecting for the second half of the year. You heard us say that we're still expecting margins to be 5 to 6% for the products group, which means we're expecting volume to increase for the second half of the year for those deliveries. And that aligns real well with the level of inquiry levels we're seeing and the customer positive customer sentiment that's

starting to come through.

And to the cadence of deliveries and margins, do you expect it to be fairly stable through the next two quarters? Or will there be some lumpiness as you continue to build in the new configuration?

So we expect it to improve through the year.

Margins and deliveries or was that a margin comment?

That's both.

Thank you. You're

welcome.

Can we go to taxes? You talked about purchasing some federal tax credits to reduce the tax rate. My understanding was as a leasing company, the cash tax burden is pretty light to start with. And then you've gotten this big, beautiful bill, full expensing, which I'm guessing is improving that framework for you. Can you talk a little bit about tax management, why that made sense for Trinity? And ultimately, do you have a run rate estimate of the cash tax saving from the full expensing deduction versus where you were before?

Yeah, that's a great question. Pick it up on that. So the tax credits we purchased were $40 billion of tax credits, and they related to the 2024 tax year, which is when you had a much lower bonus depreciation rate. You also had limitations on interest expense deductibility, section 163J. So last year, we were expecting to be a cash taxpayer. Now, with the new tax bill, you're right in that we, with the full bonus depreciation and the fix on 163J, that will significantly reduce our tax burden and improve our cash flow from operations, which I mentioned in the script. So you're definitely seeing that. You know, the other thing I would say on the tax bill is the bigger piece of it is not only what it does to us, but what it does to market demand. So what I mean by that is when you think about underwriting investment decisions, you didn't have clarity on the tax bill. You didn't have clarity on regulatory reform. We haven't had clarity on tariffs. Now we have clarity on the tax bill and we're gaining more clarity on the regulatory environment and, you know, businesses being able to do deals. And then with the flurry of announcements on tariffs, you know, while it's not clear yet, I think it's safe to say we're not going to have a lot of more 90-day extensions and we're getting clarity. And so that will help businesses underwrite investment decisions. And we're very, you know, it won't happen tomorrow, but it will. You've got more clarity and so that will help as well. So just overall, that's one of the reasons for our optimism in terms of where we think we are in the cycle is you are getting more clarity on these things that businesses can underwrite investment decisions.

Thank you for that. And also tying it back into sort of the sentiment and the fundamental sort of customer responses, we could see that come through in the next year. Just one last one from me and I'll pass it on. You have an investor day target for margins for next year. I mean, if we start where we are this year, you're a little below what you promised then, but not massively what five to six versus seven to nine. And ultimately, it seems that the big delta is build rates and absorption. I think you promised, sorry, sort of had an outlook tied to 40,000 annual rail car deliveries on average. And we're tracking 30,000 ish give or take right now for the industry. How do you level set sort of the nine to 11% margin expectation from the investor day for next year? Looking out with kind of where we are today and maybe some improvement from that, but maybe not all the way back into that 40,000 plus range.

Good question, Bascom. And you're right. We did set out the 40,000 a year on average for the deliveries. The uncertainty that came into this year dropped that drastically, about a 30% drop year over year. And without the volume has been the biggest impact that we've seen on our products margins. When you look at recovery from that, as we see the volume go up, you will see the recovery in those margins. I think it'll be quicker this time. And I'm saying that because of all the hard work that the products group has done over the last few years. They've worked on their efficiencies, their changeovers, the automation, supply chain, all of that work, although it won't come back overnight. We'll come back quicker than what you've seen in the past as we see the volume recovery. So when we get back to the 40,000, you'll see it. We think they're deferring orders right now. Depending on where they feel comfortable with the certainty in the macroeconomics and the tariffs, is when we'll start seeing that volume get closer to the 40

for the industry.

Thank you both.

Thank you.

Our

next question comes from Andre Tomczyk from Goldman Sachs. Please go ahead.

Good morning, everybody. Thank you for taking my questions. Maybe just one quick one to follow up on Beth's earlier question on the margins for the full year, the 5 to 6% in manufacturing. Should we expect, and I know you said improvement through the year, but should we expect to be below the low end of the range in the third quarter and ramp more into the fourth quarter, or would you expect to be within that range through the second half, just to clarify there?

So we don't give quarterly guidance, Andre, so sorry about that, but we are saying our full year guidance should be in the 5 to 6% range. So you would have all four quarters going into that to get to the full year. We do expect to see volumes improve through the year. Hopefully that helps a little bit with you and the business improved through the year.

Nope, that makes sense. And I guess putting those pieces together, does the delivery picture in the back half then look more like that first quarter level, or should we be thinking more between the two quarters? I'm just trying to get a sense for the full year, the full year deliveries relative to the total industry delivery guidance, because I think you said the 28 to 33,000. If we come in at 28,000 and you guys maintain your market share that you did last year at 41%, that would assume roughly 11,500 deliveries for you this year. I'm just curious if you can comment on the relative back half deliveries, if that's looking closer to the first quarter, or if we should expect to ramp more into the fourth quarter. Any additional call, that would be super helpful. Thank you.

Sure. And you hit the key points. We do expect the industry deliveries to be between 28 and 33. We expect to be within our normal range of market share, which would be between that 30 and 40%. And so you can back into the numbers there. And as I say, the business improves through the year, which means the biggest improvement we'll see is based off volume.

Understood. Thank you. And maybe just switching to leasing. Could you speak a little bit more to the current competitive environment and what you're seeing in terms of the secondary market perspective and lease rates? I know you said it, you should expect that to kick up into the second half, but any additional commentary into the quarter relative to the beginning of the year would be helpful as well. Thank you.

So the market is still very tight and in balance. And so that's always great for a leased fleet. So we're seeing good FLRD. We're seeing that our renewal rate and success was 89% in the quarter. That's the highest that we've seen for a while. And that aspect, I think all the metrics that we're looking at are positive overall for the leased fleet. We don't see anything that's going to change that. As you can see from the build deliveries that they're not outpacing the demand or the orders. So that those are all good data points to say we expect leasing to continue to be strong. We've only repriced 63% of our fleet. So we still have quite a bit left there to replace reprice over the next few years. So all those indicators are positive in our viewpoint. And

on the secondary market, I'll just add that we see the market as still very good. And it stands the reason with lower build rates, leasing companies really are going to get your growth through the secondary market. We're seeing that. And you may have caught in our comments on the guidance, we did increase our gains on sale from 40 to 50 to 50 to 60 for the year. And that's just that's a testament to the how we see the secondary market.

Yep, that makes sense. And then maybe just two sort of higher level questions for me to close out. The first one is it on the tariff situation, I'm just curious, is it too simplistic to think higher steel prices could limit customer demand for new cars in the near term? Or is that does that sort of speak to the delayed decision making that you guys were talking about earlier, just trying to think through that longer term? And then if you could share thoughts on the recent news on the potential transcontinental rail merge. You know, if that were ultimately to go through, how do you see that impacting the leasing and manufacturing business or the industry overall? So the time everybody.

Thank you. So in higher steel pricing does mean that the car is going to be costs are going to be higher. But also, as you look at higher steel prices, that means scrap prices typically are higher too, which leads people to attrition. The first half of this year, 20,000 cars, just over 20,000 cars were scrapped. So the scrapping was higher than the delivery. So we saw a little bit of a contraction in the overall fleet. And at some point that contraction is going to be to having to order new cars. That's what we're saying. We're seeing sentiments start to change there. And that's with the steel prices already in effect for us. As far as the merger, when you look at it from what we know right now, the interchange process does cause inefficiencies between the railroads and anything you can do to fix or improve those inefficiencies should help our customers overall and lead to better motor share. And if you look at what the synergies that have been called out for this merger are, two thirds of those are in revenue synergies from identified opportunities to grow volume. So they're talking about converting truck to rail, capturing transcontinental shipments, and then penetrating deeper into international markets. All of those are good for us in the long term with modal share shift. So that's what we know right now. We'll keep watching to see if anything new comes out, but we think this could be good overall for the

industry.

Thank you, Gene and Eric. Appreciate it.

Thank you. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Gene Savage for any closing remarks.

Thank you for joining us today. Trinity's second quarter results highlight the strength of our leasing business and the resilience of our franchise. We're encouraged by our ability to perform in a challenging delivery environment and are optimistic about the improving order volume. This positive trend paves the way for enhanced operating environment and improved financial performance in

the second half of 2025.

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