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Edited Transcript of TRN earnings conference call or presentation 24-Oct-19 3:00pm GMT

Q3 2019 Trinity Industries Inc Earnings Call

DALLAS Oct 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Trinity Industries Inc earnings conference call or presentation Thursday, October 24, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric R. Marchetto

Trinity Industries, Inc. - SVP & Group President

* Jessica L. Greiner

Trinity Industries, Inc. - VP of IR & Communications

* Melendy E. Lovett

Trinity Industries, Inc. - Senior VP & CFO

* Paul E. Mauer

Arcosa Marine Products, Inc. - Chief Operations Officer of Trinityrail

* Timothy R. Wallace

Trinity Industries, Inc. - CEO, President & Director

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Conference Call Participants

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* Allison Ann Marie Poliniak-Cusic

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Gordon Johnson;GLJ Research;Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Matthew Stevenson Brooklier

The Buckingham Research Group Incorporated - Analyst

* Matthew Youssef Elkott

Cowen and Company, LLC, Research Division - VP

* Robert Stephen Barger

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Liquidation (sic) [Litigation] Reform Act of 1995 and includes statements as to estimates, expectations, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain of the business issues and risks, a change in any of which could cause the actual results or outcomes to differ materially from those expressed in the forward-looking statements.

Good day, and welcome to the third quarter results conference call. (Operator Instructions) Please be advised, today's program may be recorded.

It is now my pleasure to turn the program over to Jessica Greiner. You may begin.

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Jessica L. Greiner, Trinity Industries, Inc. - VP of IR & Communications [2]

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Thank you, Aaron. Good morning, everyone, and thank you for joining us today. I'm Jessica Greiner, Vice President of Investor Relations and Communications. We welcome you to Trinity Industries' Third Quarter 2019 Financial Results Conference Call.

We will begin our earnings conference call with our prepared remarks from Tim Wallace, Chief Executive Officer and President; followed by Eric Marchetto, Senior Vice President and Group President of TrinityRail. Melendy Lovett, Senior Vice President and Chief Financial Officer, will provide the financial highlights and outlook. Following the prepared remarks from the leadership team, we will move to the Q&A session. Brian Madison, President of Trinity Leasing and Management Services; and Paul Mauer, President of TrinityRail Products, are also in the room with us today and will be a part of the Q&A session. Sarah Teachout, Senior Vice President and Chief Legal Officer; and Steve McDowell, Vice President and Chief Accounting Officer, are also in the room with us today.

It's now my pleasure to turn the call over to Tim.

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Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [3]

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Thank you, Jessica, and good morning, everyone. Trinity's third quarter financial results significantly improved year-over-year due to the growth of our railcar lease fleet and increased deliveries of new railcars. The 34% increase in revenues and doubling of our earnings per share reflects TrinityRail's ability to grow and improve its financial results.

Demand continued at lower levels during the third quarter due to several economic factors. Our management team is responding accordingly and is being highly selective when originating new railcar leases. In addition, our third quarter delivery schedule was impacted by various challenges. As a result, our team worked through -- worked with our customers to shift a portion of our new railcar production of this year into the first half of next year. This helps smooth out the transition to a lower level of railcar production for next year. Eric will provide specifics on this topic during his remarks.

Trinity is positioned to successfully navigate through the shifts in market demand. We are highly experienced at responding to both short- and long-term cycles. The recurring revenues associated with long-term leases in our Railcar Leasing business provide the company with a predictable steady cash flow -- with a predictable level of steady cash flow.

In addition, our management team has been successful in lowering Trinity's cost of capital and streamlining our operating structure. We're making great progress in optimizing our balance sheet. We just completed another successful financing of the portfolio of Railcar. Melendy will provide information about this during her comments.

I'm optimistic about the opportunities that lie ahead for our company. During my 44 years with Trinity, we have successfully navigated through a wide variety of situations, transformed our company multiple times and significantly expanded our competencies. Our railcar lease fleet is now one of the largest in North America. Our management team is highly collaborative and capable. In my opinion, our strengths open the door to a wide range of new possibilities to create value for our customers and shareholders.

Early last month, I informed our Board of my desire to transition into retirement. The Board has initiated a search to identify Trinity's next CEO. The search includes both internal and external candidates and is progressing well. I will continue in my current role as long as necessary to facilitate a smooth transition. I'm confident our Board will select a strong, well-qualified CEO. It's been my honor and privilege to be CEO of this great company for 20 years. Trinity has played an important role in shaping key aspects of our country's infrastructure and has a bright future. The Board and Trinity's management team is committed to executing a robust strategy that supports our vision of being a premier provider of railcar products and services in North America.

My career at Trinity has been very fulfilling. I grew up within Trinity's culture, which emphasizes collaboration, flexibility, professionalism, integrity and other values. I have a deep appreciation for the craftsmanship of our employees. They're dedicated to the quality and excellence of our product. I treasure our relationship and our employees, customers, suppliers and other stakeholders. I'm very grateful for all the people who have helped make Trinity a great company. I will always be passionate about Trinity, our vision and our stakeholders. Trinity has a great legacy, and I look forward to watching our company continue to grow and flourish.

I will now turn the conference call over to Eric for his comments.

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [4]

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Thank you, Tim, and good morning, everyone. TrinityRail had strong year-over-year financial performance during the third quarter. Throughout much of 2019, demand for railcars in North America has remained at or above replacement levels. However, continued declines in rail traffic volumes, ongoing trade disputes and slowing industrial production are creating unfavorable conditions in rail equipment markets. In the near term, we believe these headwinds will be a drag on demand for new railcars and drive existing railcars into storage. With that said, a few railcar markets are likely to see strong interest despite the broader market trend.

Investments in North American petrochemical capacity, new opportunities to shift fuels from Canada and the U.S. to Mexico and ongoing attrition are likely to drive demand for new and existing railcars in portions of the North American fleet. We are being very deliberate as to the business we pursue as we adjust our platform for a softer railcar demand environment.

TrinityRail's third quarter financial results reflect continued growth of our portfolio of leased railcars and higher manufacturing railcar deliveries with a favorable product mix year-over-year. Railcar utilization slipped sequentially primarily due to 2 customers' filings of Chapter 11 during the quarter, one of which was a result of a major fire that shuttered the operations of the company. I'm pleased with our ability to renew and assign leased railcars in our portfolio, given the competitive market environment while differentiating TrinityRail's platform of products and services. We expect our lease portfolio to experience a slight increase in average lease rates year-over-year in 2019.

Our team has done a good job managing the diversification and renewal risk exposure of our railcar lease fleet. As we look ahead to 2020, less than 15% of our portfolio is up for renewal. Based on current market pricing, lease rates are approximately 2% below the average of expiring lease rates next year. We anticipate leasing revenue and profit from operations will be higher in 2020 as a result of fleet growth.

We are also positioning our manufacturing footprint in response to a softer railcar market. Industry orders have declined in 2019 relative to the order pace in 2018 leading to lower delivery expectations for 2020. In the third quarter, the industry received orders for approximately 7,300 railcars and delivered 14,500. Our team secured orders for 2,530 railcars during the quarter across our 5 commercial end markets, and we are pleased with the associated economics. As a result of this demand trend as well as operational disruptions and capacity expansion delays in the third quarter, we tempered our railcar production plan for the remainder of this year, have worked with our customers to shift these deliveries into 2020. This change in our plan will facilitate a smoother transition to our expected production pace for the first half of 2020.

Based on our current market insights, we expect industry railcar deliveries for 2020 to be in the low to mid-40,000 range. Approximately 40% of our backlog or approximately 8,100 railcars is scheduled to deliver in 2020, of which approximately 3,000 will be delivered to our lease fleet from originated lease agreements.

The outlook for our maintenance services business is solid with a backlog and additional line of sight on tanker modification work and foreseeable compliance events. Our platform has demonstrated numerous times the ability to successfully navigate through railcar demand cycles, and we're responding proactively to changing market conditions.

We have built the TrinityRail platform to outperform the industry throughout the railcar business cycle. Our business model is designed to foster and maintain engagement with the direct customer and end-user of our railcar equipment. Our services, from leasing and administration to maintenance, design and engineering to field support are all an important part of our platform, generating unique market insight and providing steady, recurring and predictable levels of revenue and cash flow throughout the railcar cycle.

The commercial and financial synergies generated from the platform have a number of benefits which include the following: a lower overall cost of business operations, including a cost-advantaged asset base; lower cost of ownership for maintenance and lower relative SG&A. A tax-advantaged investment in leasing equipment can generate significant cash flow and a valuable sales channel to originate organic lease fleet growth of our railcar lease portfolio.

We expect significant cash flow generation and a lower overall cost platform to result in a higher level of relative return on investment through the railcar cycle. Our vision is to be the premier provider of railcar products and services. Across our organization, Trinity's teams are actively working to differentiate our platform of products and services. Our expectations are to build customer loyalty with industrial shippers by enhancing the customer experience through innovation and technology that improve the value proposition of railcar transportation.

The North American rail transportation ecosphere encompasses over 1.7 million railcars. With an owned and managed fleet of approximately 125,000 railcars, TrinityRail has room to expand our presence in the railcar market, and we'll do this in a deliberate and returns-focused manner. Our integrated platform of businesses work together to deliver solutions that optimize the life cycle ownership and usage of railcar equipment and provide our customers with a single source for all of their railcar equipment and service teams. Few railcar providers, if any, can offer the breadth and depth of TrinityRail's platform to any given customer. Our platform provides a unique ability to integrate new services with our traditional product offering, grow our existing base of recurring revenue from long-term leases and add high-margin services that enhance our returns. We are Built to Deliver.

I'll now turn it over to Melendy to discuss our financial performance and guidance.

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Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [5]

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Thank you, Eric, and good morning, everyone. Before I begin my prepared remarks on our financial priorities and outlook, I'll quickly review the third quarter 2019 performance highlights announced in our press release yesterday.

The company reported significant growth in year-over-year revenue, operating profit and earnings per share, primarily due to higher overall railcar manufacturing deliveries with a favorable product mix as well as growth in our railcar lease fleet and sales of leased railcars from our portfolio.

Third quarter railcar deliveries were lower than our expectation due to the challenges Eric mentioned as well as weakening market demand going into 2020. Our team has responded and replanned our production schedules for the remainder of the year and the first half of 2020.

A reduction in corporate-related expenses also contributed to our financial performance during the quarter. Year-to-date, corporate expense is down $37 million or 32% due to lower litigation-related spend and cost optimization efforts. As of the end of the third quarter, the company has generated operating and free cash flow before lease fleet investments of $164 million and $215 million year-to-date, respectively. We believe free cash flow generation before lease fleet investment will be approximately $240 million for 2019 or around 10% of our market cap as of yesterday's close.

Our third quarter performance is indicative of Trinity's ability to leverage our integrated platform and scale our operations to meet customer demand while generating strong results for shareholders.

We are making good progress on our key financial priorities for 2019, including lowering our cost of capital, deploying capital to return accretive investments and returning meaningful and steady amounts of capital to shareholders.

Subsequent to quarter-end, Trinity issued $387 million of A-rated notes under an existing railcar asset-backed securitization. This issuance yielded a blended interest rate of 2.98% and increased our loan-to-value ratio for our wholly owned lease fleet to 56%. By optimizing the balance sheet of our Railcar Leasing company, Trinity has lowered our weighted average cost of capital by more than 20% since the spinoff. As we achieved our near-term LTV target for the wholly owned lease fleet of 60% to 65%, we believe we can further lower our cost of capital to stay competitive with other railcar leasing companies.

During the third quarter, we made a number of investments in our businesses, including a net lease fleet investment of approximately $90 million and $30 million in capital expenditures for our manufacturing and maintenance platforms. Our year-to-date investment in the lease fleet totals approximately $679 million with solid returns, which we expect to be accretive to Trinity's return on equity. Trinity also completed approximately $100 million of share repurchases during the third quarter, bringing our year-to-date total to approximately $234 million. Our quarterly cash dividend will be paid at the end of October and results in a dividend yield of 3.7% as of yesterday's closing price. When combining year-to-date share repurchases and dividends, we have returned $295 million of capital to shareholders or around 12% of our market cap.

The combined strength and cash flow generation capability of the integrated rail platform enables Trinity to meaningfully invest in high-return growth opportunities and return substantial capital to shareholders. All of these accomplishments are aligned with management's goal to deliver 2019 earnings growth and to improve our pretax ROE to a 3-year average target range of between 11% and 13% by year-end 2021.

Our financial forecast for 2019, the first year of this 3-year plan is on track for a pretax ROE of between 9% and 9.5%. This is a significant improvement from the 6.3% pretax ROE following our spinoff at the end of last year.

Moving now to guidance. As you've heard from Tim and Eric, railcar demand has been further impacted from declining railroad volumes and continued uncertainty related to slowing industrial production and global trade issues. Our management team has responded accordingly and has positioned our business for a slower demand market going into next year.

As a result of the lower railcar deliveries in the third quarter, some of which were designated to be added to our lease fleet, we narrowed our EPS guidance range in our press release issued yesterday. Trinity now expects annual EPS from continuing operations in 2019 of between $1.17 and $1.27, excluding the impact of any fourth quarter potential restructuring charge. This update results in growth of between 67% and 81% year-over-year.

Our revenue expectations for the Railcar Leasing and Management Services Group as a result of timing of railcar deliveries to the lease fleet is now expected to be between $760 million and $765 million for the year. We expect operating profit for this segment to be between $320 million and $325 million for the year. We have increased our expectations for proceeds from sales of leased railcars to Railcar Investment Vehicle, RIV, partners and the secondary market to approximately $400 million. Our RIV partners continue to express interest in purchasing leased railcars for their portfolios. A reminder that when we sell railcars to our RIV partners, Trinity keeps the customer relationship in servicing of the cars for a management fee, therefore, we grow our managed lease fleet with RIV partner capital.

The timing of railcar sales from the lease fleet is always difficult to predict. And our margin on railcar sales year-to-date reflects the younger maturity on the railcar assets sold from our lease fleet as well as some portfolio fine-tuning we have done to manage our diversification.

Another reminder, we had sales-type leases in our earnings guidance which are required to be accounted for as sales from the lease fleet in accordance with GAAP. We expect this to add an additional $160 million in car sales revenue for the year with $61 million of this revenue being recognized year-to-date. The gain on sales from the lease fleet will be attributed to the total leasing segment profit, and our EPS guidance range incorporates these assumptions.

Moving to the Rail Products Group. We're revising our railcar delivery guidance range to 21,500 to 22,000 railcars for 2019. Rail Products revenue is now expected to be approximately $3 billion with an operating profit margin of approximately 9%.

Operating performance from the All Other segment during the fourth quarter will be impacted by seasonality in the highway business as well as costs associated with new product development efforts. This segment is also impacted by some transition expenses in peripheral businesses to align with our go-forward operating structure.

Our business and corporate teams continue to work collaboratively to optimize our operating structure and rightsize corporate costs. As a result, we have again lowered our corporate expense guidance range to $105 million to $110 million. As a reminder, our corporate expenses include transition and stranded costs related to the spinoff and separation of Arcosa as well as an elevated level of highway-related legal expenses.

In our press release yesterday, we highlighted the potential for a restructuring charge in the fourth quarter as a result of cost optimization efforts specific to underutilized asset write-downs in our manufacturing footprint and employee transition costs. Again, our fourth quarter 2019 EPS guidance range does not include any restructuring charges we may incur as these decisions are finalized. Due to fewer railcar additions to the lease fleet, we are lowering our guidance for revenue and profit eliminations to $1.4 billion and $165 million, respectively. These line items reflect the revenue and profit associated with the market-based transfer pricing for intercompany transactions between our Railcar Leasing and products business segment primarily for newly manufactured railcars.

Regarding our lease fleet investment, we now expect total net lease fleet investment of $850 million to $950 million with fewer secondary market additions, fewer planned railcar additions and a higher level of portfolio sales from the fleet. In addition to our planned leasing capital expenditures, our manufacturing and corporate capital expenditures forecast is revised to $110 million to $120 million, given expected project progress by year-end.

Looking into 2020, it is too early to provide any specific financial guidance given the uncertainty of economic factors that affect the railcar market as well as the increased pricing competitiveness as a result of lower demand. As Eric mentioned, we have market-driven headwinds affecting our railcar production expectation for next year. However, we anticipate leasing revenue and profit from operations will be higher in 2020 as a result of lease fleet growth. We are also defining significant goals for cost savings initiatives both in our businesses and our corporate organization. For 2020, we expect our free cash flow before lease fleet investments to improve year-over-year, primarily as a result of lower working capital needs in the business.

In closing, our leadership team has been working closely with our Board to refine the strategic plan for Trinity Industries and establish key priorities and initiatives going forward. Our vision, purpose and strategic priorities stem from our belief that TrinityRail's platform is the best model to compete in the railcar industry, and we aim for our results to demonstrate it. We're prepared to respond to a lower railcar demand market in 2020. While a number of macro economic factors create headwinds for our business, our leadership team is excited about the opportunity to refine and evolve our business and demonstrate the value of TrinityRail's integrated platform. We have a number of levers within management's control that can provide meaningful tailwinds to our financial performance in 2020 focused on the elements of ROE improvement. This business model was built to outperform throughout the railcar market cycle by generating predictable cash flows from long-term leases and capturing upside demand to maximize shareholder value. These combined financial advantages of the integrated rail platform enable Trinity to meaningfully invest in high-return growth opportunities, including our lease fleet, while also returning substantial capital to shareholders.

We'll now transition into the Q&A session. Operator, will you please give our listeners the instructions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Bascome Majors with Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [2]

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Tim, congrats on the looming retirement. I was hoping that you could share the Board's perspective on both the time line for the next CEO hire at Trinity and maybe the skill set that you're really focused on when you're trying to find who's going to lead, effectively, what's been a lifetime family business for you into the next generation.

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Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [3]

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Okay. Thank you. I appreciate your comment and here's my response to your question. As I said, the Board initiated a search process for a CEO, and we're considering both internal and external candidates. And our Board is responding by establishing this as a very high priority. This is an independent selection process. I'm participating in the process at the request of the Chairman from time to time. I'd say the selection process is going really well, and we'll comment publicly when there's announcement to be made about this.

Overall, I am very pleased with the situation. The search really gives us an opportunity to refresh the CEO role, and I'm highly supportive of the entire process. We have a wide variety of competencies that we're looking for in a new CEO, and we'll talk more about it as we identify -- they identify the candidate and introduce the person to the public.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [4]

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Fair enough. And once that's completed, is your intent to remain on the Board? Or is that something where you would eventually step down as someone takes over?

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Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [5]

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Yes. My intent is as soon as the CEO takes the position as CEO, I will no longer be on the Board and I will assume a position as an advisory role and assist when I can, but it's important to me that the person that becomes CEO of the company has the full attitude of being able to lead and direct and manage the company. So I do not plan to be actively involved. I have had a lot of fulfillment watching Arcosa as a public company and seeing the team there pull together and create value for the shareholders. And I ultimately will have that same position as a shareholder of Trinity, watching the company fulfill its vision. So I have a very active personal life planned, and so I'm not going to be actively involved in the company on a long-term basis.

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Operator [6]

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And we will take our next question from Matt Elkott with Cowen.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [7]

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Tim, congratulations on the upcoming retirement. If I look at the last 5 years, you guys have averaged about 37% of industry orders. This year-to-date, you have about 27%. So when I look at this and see that you're also expecting write-downs on underutilized manufacturing assets, is this a strategy to reduce your manufacturing footprint as you focus more on growing the lease fleet and transition into more of a lessor?

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Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [8]

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Eric, you want to take that?

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [9]

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Sure. Matt, I'll take that. So I would -- no, I don't -- I do not think our strategy is to reduce our manufacturing footprint, but the reality is we have 125,000 railcar lease fleet and so all of our opportunities that -- our commercial opportunities, our inquiries have to go through that 125,000 railcar fleet before we build another railcar. So I think the result is you get a more efficient platform as a builder with a large lease fleet that we're going to act more like an asset owner.

The -- when it comes to, specifically, the write-downs, those are older, nonoperating manufacturing assets. We did not operate them in this last railcar cycle. As we went through it, we've expanded our production footprint elsewhere with our existing facilities and so we really didn't see a need for those facilities in the future.

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Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [10]

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This is Tim. Also, some of the facilities we talked about are legacy facilities. But we kept -- we intentionally kept some facilities and let Arcosa go ahead and have a clean start, and we took responsibility for some of the older facilities that have been idled in Trinity for a number of years.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [11]

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Good insights. Just one more question on the lease fleet. In the current tough environment for freight, overall, and also given the small cube covered hopper fleet that you have within the lease fleet, how much more pressure should we see on utilization as we exit 2019 and into 2020?

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [12]

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We have -- certainly, we have a good line of sight on our expirations, both the remainder of this year and into next year. And I think I mentioned that as we look at our expirations next year and the lease rates, where those current lease rates are on those car types, we see about a 2% headwind, which is very modest. We do not expect to see significant changes in our utilization. We're working to keep our fleet fully employed. And where we're at, we're very comfortable with our renewal expirations. It's not -- we work very hard to smooth out any exposures to certain markets and so we're very comfortable, really, as we go into 2020.

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Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [13]

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So Eric, if the underlying freight environment does not change much between now and into 2020 or by the end of 2020, you think that it's plausible that the utilization rate will not be materially different than what you have now?

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [14]

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Yes. I think that -- as I mentioned in our comments, we expect -- we do expect more railcars in the North American fleet to enter storage, but it's still at a relatively good level. You talked about the small cube covered hoppers. And a year ago, that fleet was well over -- or was about 90% utilized. Today, it's about 75% utilized. But it's still fairly utilized from a historical standpoint. A few years ago, it's gotten into the 60% range. So from that standpoint, it feels worse than it is because it's -- 90% to 75% is a big drop. But 75% compared to the overall fleet in the low 80s isn't that different. So I just want to put that out there that, while it's lower, the decline has been dramatic in terms of pace, but the level that it's fallen to is not unprecedented.

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Operator [15]

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And we will go next to Justin Long with Stephens.

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Justin Trennon Long, Stephens Inc., Research Division - MD [16]

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Tim, congrats on the retirement and wish you the best. Maybe to start with my first question. You gave some color on a few items for 2020. We'll clearly have some pressure in the railcar manufacturing business, but you mentioned the lease fleet will grow and there are some cost actions underway. When you put everything together just from a directional standpoint, do you think next year is an up arrow or down arrow for EPS?

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Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [17]

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It's Melendy. I would say that, especially given the delivery -- the deliveries that we expect, I would say, overall, it would be a down EPS. However, I mentioned that there are a number of levers in management's control, and I think we've demonstrated this year that we will take action on those such that the EPS decline would not be as much as you would expect. So does that give you a good sense?

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Justin Trennon Long, Stephens Inc., Research Division - MD [18]

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Yes, that does. That's helpful. And maybe following up on that, I wanted to ask about railcar sales going forward. Obviously, the guidance for this year was increased. We're at a pretty elevated level relative to kind of historical averages. And I know this will be a key part of the business going forward, but is there any sense you could give us for what you expect from railcar sales going forward, whether it's 2020 or just on a normalized basis? And then also the margins on railcar sales, they've been around 17% this year. Just curious, directionally, if you think that's still a good place to be going forward.

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Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [19]

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So with regards to railcar sales, we did increase our guidance from $350 million to $400 million, and that's primarily driven by our railcar investment partner demand. And it's also part of our desire to grow our lease fleet with our investment partners' capital. I'm not really prepared today to signal specific car sales for 2020, but what I will point back to is, as we set out as a new Trinity company, we said that we want car sales to be -- and as we continue to grow the lease fleet, we want car sales to be more of a normal part of the way we do business and we want our RIV program to be more programmatic. And so I believe at the time, we said something like $300 million to $350 million of sales in a given year would be what we were targeting. I see that moderating in years where we don't grow our lease fleet as much, and so that kind of gives you our general thoughts about car sales without any specifics for 2020.

Speaking specifically to the margin, there are a number of factors that impact what that margin is. One is the age of the cars. Another is the type of cars, the market value of the cars that are in the portfolio that we sell as well

(technical difficulty)

on those assets. So I would say that we would expect our sales to RIV partners to be in a similar margin range to what you've seen historically.

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Operator [20]

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And we will go next to Gordon Johnson with GLJ Research.

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Gordon Johnson;GLJ Research;Analyst, [21]

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I guess the first question. I just wanted to know if you guys, management there, thinks that the investment community gives you guys enough credit for earnings from selling railcar assets between the manufacturing division and the leasing division. And if not, how do you plan on addressing that?

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Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [22]

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We've communicated, as I mentioned, that our plan is we consider it an advantage of our integrated platform to have the ability to monetize those assets while, at the same time, keeping the customer relationship and the servicing opportunity of those assets. So not only do we receive a management fee, we keep the customer relationship and we have the opportunity for those cars to continue to take advantage of services that are offered by our platform. So our goal is that by making our railcar sales more predictable and more programmatic, that those will be considered as part of our earnings and cash flow-generating ability.

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Gordon Johnson;GLJ Research;Analyst, [23]

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Okay. That's helpful. And then there's been some concerns, I'm sure you guys have heard about PSR. And some of the shippers kind of, I guess, complaining, at least we've heard some recent concerns. Have you guys heard these concerns and what's your view there?

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [24]

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Sure, Gordon. This is Eric Marchetto. I'll take that. So let me first -- PSR is certainly a big topic. Let me just step back and talk about rail transportation and then we'll get into the PSR.

Rail transportation is still the lowest cost and the greenest mode of land-based transportation. So it starts with an inherent advantage. Rail traffic has declined in the last year, and that certainly has had an impact on demand for railcars. When a railroad implements PSR, the first thing they do is they look to rightsize the assets on their line. And so that will have -- where they will try and get railcars off of their line. And then when there is growth, they're going to have to turn around and add cars at that time, which will either be in the form of shipper cars or railroad cars.

PS -- the good news on PSR is now we're hearing, for the first time in a few years, more of the railroads talk about growth and driving traffic growth and, specifically, modal share. I would not have heard that in the last few years, so that's real positive that they're going down that path. From an operating system, more efficient operating system, which will lead to a more efficient railroad network would be good for our business, certainly long term.

You've mentioned demurrage and other fees related to PSR. Demurrage is incurred when railroads -- on railroad equipment, which is about 20% of the fleet. It's an unplanned expense for shippers, which no business likes unplanned expenses, so that certainly generated points of frustration with customers. There's also other ancillary fees charged to private railcars, and this can be a point of frustration with shippers. Generally, the impact of PSR has been principally more on railroad supply cars like well cars, box cars, flat cars. It does impact covered hoppers in the grain service and agricultural service, which is typically a little more lessor provided railcar. So that's one spot where it would have a negative impact on the operating leasing community.

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Operator [25]

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And we will go next to Allison Poliniak with Wells Fargo.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [26]

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First of all, congrats, Tim. Just echoed everybody's comments on that. I just want to go back. I think Matt asked the question about lease. Just would like to get your thoughts just over your philosophy on managing the utilization of that fleet. I know these fleets are fairly stable, but if they take a step down from here entering 2020, I mean how are you thinking about that, rates versus duration versus that utilization number?

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [27]

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Sure, Allison. This is Eric. I mean that's always the art, is managing -- no lessor wants railcars go in storage because that tends to be a negative event in terms of earnings. As rates are falling, you have a decision to make whether you want to go short on lease terms, and it's generally going to be determined by what those lease rates are, if they're -- and what the yields on those assets are. If they're lower than cost of capital on a yield basis, you go shorter. If they're higher, then you lock in longer term. And that will vary deal to deal, car type by car type. So that's certainly something that we're very conscious of and we manage accordingly.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [28]

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Great. And then I just want to go back to the operational challenges and capacity expansion beliefs. Can you expand on that a little bit? It just seemed a little bit unusual for Trinity. You've always been a great operator. What was going on there and is it something that's going to continue in Q4?

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [29]

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So Allison, I'll start with that, and Paul can add any color on this. Generally, we had a -- we've had, as we've talked about on previous calls. This year, we have a very high mix of railcars requiring interior coatings, both on the tank side and the freight car side. We've made investments to expand our capacity in that space. We've built cars ahead of that lining capacity. And we've -- and in return, we had -- we started lining some of those cars this quarter and we're lining in the remainder of the year. So that had additional cost and throughput challenges in terms of getting the units that we expected.

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Paul E. Mauer, Arcosa Marine Products, Inc. - Chief Operations Officer of Trinityrail [30]

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Just -- Allison, this is Paul. Just to give a little bit more color on that. We had 2 major capital projects that we took on this year, and our unit deliveries were predicated on us getting those projects done on time. Unfortunately, both of those projects were delayed for various reasons, really, outside of our control. So those delays in the projects really impacted our ability to deliver units in the third quarter. And as Eric pointed out, we had a historically high number of lined cars coming into our product mix this year.

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Operator [31]

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And we will take our final question from Matt Brooklier with Buckingham Research.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [32]

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Tim, congratulations on your pending retirement. So I wanted to follow on to Allison's question. We know that Rail Group margins were negatively impacted by some inefficiencies in the quarter. And obviously, the lower volumes than anticipate there contributed as well. But as we're looking into fourth quarter, directionally, where do we think margins are? Do you think Rail Group margins are up? Are they about the same? Maybe just provide a little bit color there.

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Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [33]

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This is Melendy. So what I guided for the full year is a 9% approximate margin for the segment, and that would be for the full 2019 year. And so that would be, I would say, a little bit of improvement from third quarter to fourth quarter, to make that math work.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [34]

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And then as I think about it, you -- there's kind of diverging trends in your 2 businesses, as you guys think about it. Next year, expectations are that deliveries are going to be down and that's going to put some pressure on profitability within Rail Group. But the message is you're doing some company specific things on the leasing side of your business where you think you can grow the fleet and hopefully also improve profitability next year. So if you could just talk to what are some of the contributing factors that gives you conviction that you're going to be able to grow your lease fleet next year in a market that right now doesn't seem too favorable.

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [35]

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Sure. This is Eric. I'll take that. Our track record is -- kind of speaks for itself in terms of the growth that we -- the rate of growth in our lease fleet over the last 20-some-odd years. Our platform -- our market visibility in our platform is unprecedented, our broad product line, our ability to originate leases, so I'm quite confident we'll continue to be able to originate leases that are accretive to our earnings and that we'll be able to perform. We have line of sight on -- we still expect 40,000 to 45,000 railcars or low 40s to mid-40s in terms of industry deliveries. The industry has a healthy backlog, so while we expect it to be lower next year in terms of industry deliveries, we still would expect them to be relatively good and so it's a healthy industry. And with that, the demand for leased railcars continues to grow, whether that's through PSR or other trends, the trend has been for railcars provided -- the shippers provide railcars and they typically provide them through operating leases. Nothing is going to change there.

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Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [36]

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Yes. This is Tim. Another thing to take into consideration. During the slower demand periods that we experienced historically, there are people that want to sell assets and railcars for a variety of different reasons, and we've picked up a lot of nice railcars during those time periods. And this is shippers that want to sell railcars or other leasing companies.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [37]

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So I guess the message is, doing the things you've done in the past, you believe, should enable you to grow your market share. And given kind of the environment and things being a little bit weaker here, you think there's opportunity to potentially acquire cars, portfolios, which will be additive, I guess, to the growth story.

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [38]

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Yes. All of that, our platform is built to perform throughout railcar cycles, whether it's a -- when you look at railcar manufacturing, the thing you can count on is change year-over-year, whether that's up or down, and we're used to that. We are -- we measure us by improving our returns in the business, year in and year out, and that's what we're going to do.

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Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [39]

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And then just finally, I think someone did mention it on the call that in a market that is a little bit weaker, maybe the pricing environment on new railcars has gotten a little bit more competitive. If I heard that correctly, can you talk to, directionally, how much pricing has changed and I guess your expectations going into next year? I'm trying to get my arms around if we could see some incremental pressure in terms of new car pricing across the industry as we move into 2020.

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Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [40]

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Sure. So when you look at -- this is Eric again. When you look at existing lease rates, we've seen modest declines in lease rates in the current quarter. And as we look at these lease rates and compare it against our expirations next year, we see a modest decline in lease rates. The -- when you look at new car pricing, new car asset pricing has come down somewhat slightly. That's probably more of an impact on raw material prices coming down, some steel prices have fallen. Both steel plate coil and scrap prices, all of that has an impact. Margins -- the orders that we took in the third quarter on a -- for sale as margins I would characterize as good. So from that standpoint, it's good. New car lease rates, interest rates have fallen. So certainly, we've seen lease rates on assets -- on new assets come down a little bit as a result. Generally, there's probably -- in periods like this, you get a little bit wider range of pricing. We do see some shippers subleasing railcars in the market. And generally when they start subleasing railcars, that can have a downward impact on lease rates.

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Operator [41]

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And we do have an additional question. It comes from Steve Barger with KeyBanc Capital Markets.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [42]

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Tim, as you and the Board think about setting up Trinity for the next leg of its history, for the external candidates, are you considering people from outside the rail world or more broadly from outside machinery manufacturing?

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Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [43]

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Yes.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [44]

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Great.

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Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [45]

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Well, we're just very -- the Board is very oath-abiding. We have recruiters and they are looking for people that they think could come in here and take charge of the organization and provide some superior leadership as well as internal candidates. So very -- we're very -- they're very open-minded.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [46]

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Got it. And Melendy, you said you expect free cash flow before fleet investment to improve next year. But any thought -- is there any environment where you would envision free cash flow to be positive including lease fleet investment?

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Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [47]

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No. We really haven't put that fine of a point on it to this point, Steve. The primary -- as I mentioned, the primary driver of free cash flow improvement before lease fleet investment for next year is that our business will be consuming less working capital.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [48]

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Right. And then just the environment will dictate what the size of the lease fleet investment is.

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Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [49]

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Well, and if you can think about the lease fleet investment, net of financing that we would do, as we add leverage to -- as we grow the lease fleet and add leverage to that, the net of that financing, our free cash flow would still be -- free cash flow before lease fleet investment and after financing would still be positive for 2020.

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Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [50]

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Got it. And one last one, your buyback program so far this year has a higher average price than the current share price. Can you talk about your thoughts about buying shares into weaker industry conditions as we look into 2020? And has the Board considered other ways to deploy capital? Maybe a special dividend or something else?

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Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [51]

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At this time, we're operating more in a share buyback -- an opportunistic share buyback. And we've tried to be very programmatic. And we have increased -- you saw us in third quarter increase our share repurchases as the share price declined. And so we expect to continue to regularly and programmatically repurchase shares. As far as the Board's consideration for any other deployment of capital to shareholders at this time, there hasn't been discussion about anything such as a special dividend, but this is a topic that is routinely discussed with our Board and it's something that we will stay flexible as the market gives us the opportunity to make the appropriate decisions to return capital to shareholders.

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Operator [52]

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And this does conclude the Q&A session. I'd like to turn the program back over to Jessica Greiner for any closing remarks.

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Jessica L. Greiner, Trinity Industries, Inc. - VP of IR & Communications [53]

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Thank you, Aaron. That concludes today's conference call. A replay of today's call will be available after 1:00 Eastern Standard Time through midnight on October 31, 2019. The access number is (402) 220-7205. A replay of the webcast and definitions and reconciliations of certain non-GAAP measures discussed during the call will also be available under the Events & Presentations page on our Investor Relations website located at www.trin.net. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

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Operator [54]

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Thank you for your participation. This does conclude today's program. You may disconnect at any time.