U.S. Markets closed

Edited Transcript of TRN earnings conference call or presentation 25-Apr-19 3:00pm GMT

Q1 2019 Trinity Industries Inc Earnings Call

DALLAS Apr 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Trinity Industries Inc earnings conference call or presentation Thursday, April 25, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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 M. Mauer

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

* Timothy R. Wallace

Trinity Industries, Inc. - CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* 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 Lee Johnson

The Vertical Trading Group, LLC, Research Division - MD & 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

* Michael James Baudendistel

Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst

* Robert Stephen Barger

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and includes statements as to estimates, expectations, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking.

Participants are directed to Trinity's Form 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 actual results or outcomes to differ materially from those expressed in the forward-looking statements.

Good day, and welcome to the first 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 Ms. Jessica Greiner, Vice President of Investor Relations and Communications. You may begin.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

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

Trinity has now completed its first full quarter of operations as a leading provider of railcar products and services in the North American market. We are pleased to share some highlights with you today. We will begin our earnings conference call with our prepared remarks from Tim Wallace, Chief Executive Officer and President of Trinity; 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 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.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Jessica, and good morning, everyone. I'm pleased with how our organization has come together and is performing at a high level as the new Trinity. We have a number of seasoned people in new executive roles, and they are providing significant value to our organization. I'm pleased with everything we have accomplished during the first 6 months as a new company following the spin-off of Arcosa. I have a high degree of confidence in our organization.

We're making good progress in respect to optimizing our balance sheet. During the early part of April, we completed a successful $528 million leased railcar financing at a very competitive coupon rate of 3.82%. Our capital markets and treasury teams did an excellent job of executing this financing. Melendy will provide more details in her remarks.

We have also made progress returning capital to our shareholders. Last November, we announced the $350 million accelerated share repurchase program that was completed in the first quarter. Following its completion, our Board approved another $350 million share repurchase authorization as well as a 31% increase in the company's quarterly dividend. Our commitment to returning capital to shareholders through dividends and share repurchases continues to be a priority for us. Our businesses got off to a good start in the first quarter, improving our year-over-year EPS and quarterly revenue growth.

Our Leasing business has positive momentum. It maintained a high level of lease fleet utilization and increased its operating margin during the quarter. Our wholly and partially owned lease fleet grew by 9% during the past year. Our Rail Products team changed over a number of production lines while delivering a higher operating margin relative to the previous quarter. Our Highway Products business had a good first quarter despite a number of severe weather-related events that affected the timing of several highway construction projects.

As we entered the second quarter, the general sense of economic uncertainty that affected many of our commercial markets at the start of the year appears to be diminishing. Overall, we expect 2019 to be a strong year for us in respect to earnings growth. We remain on track to increase our earnings in excess of 60% year-over-year for 2019.

Our vision for TrinityRail is to be a premier provider of railcar products and services in North America while generating high-quality earnings and returns for shareholders. Today, we have an impressive platform that provides a host of offerings to our customers across the railcar equipment ecosphere. The strength and breadth of TrinityRail's platform provides an excellent foundation for us to continually pursue our journey of being a premier provider of railcar products and services.

The integration of our manufacturing, leasing and management services businesses generate a number of tangible and intangible benefits for our company. Our manufacturing business is a highly reliable and timely source of high-quality railcars for our Leasing business. TrinityRail's design engineers strive to develop innovative features that can be launched through our lease fleet, improving the usage and productivity of railcars for customers. Our Leasing business also provides us regular opportunities to engage with our customers and links us with our products throughout their life cycle. These touch points create a direct feedback loop that generates information and data to help us continuously refine, innovate and improve our railcar products and services.

From a financial point of view, we especially value the recurring revenues and predictable cash flows generated by our Leasing and Management Services businesses. Longer term, we expect to continue to advance further into the railcar value stream, enhancing our customer relationships and developing additional diverse sources of recurring revenue with predictable cash flows. We plan to establish -- accomplish this by doubling the size of our lease fleet, leveraging technology and innovation and expanding our platform of railcar products and services to provide valuable business solutions to our customers. Ultimately, we envision our railcar platform as the go-to source for companies that value the associated benefits of optimized railcar ownership and usage. We want them to view TrinityRail as a trusted partner who can help facilitate the rail delivery of their bulk goods in a seamless and cost-effective manner.

Shippers of bulk goods have alternatives for transporting their products. We want shippers to select railcars as their preferred shipment mode. Longer term, initiatives designed to optimize the railcar industry ecosphere, including precision scheduled railroading, should have a positive effect on the modal share of rail in North America.

Increasing rail's modal share generates opportunities for our company that translate into value for our shareholders. We believe TrinityRail can fill a significant role by harnessing the power of the integrated rail platform to optimize the ownership and usage of railcars for our customers. This is a very exciting and transformational opportunity for our company and potentially a significant shift for the rail industry in general.

As we work at achieving our vision, we remain highly focused on deploying our capital with the expectations of providing value to our shareholders through high returns on our investments. In particular, we're looking for opportunities to develop additional sources of recurring revenues within the railcar ecosphere that provide predictable levels of earnings, cash flow and stable returns.

Six months ago, we completed our spin-off, so we could focus on our integrated platform of railcar products and services. We have established a strong, fresh leadership team and a highly motivated organization that is dedicated to driving value to our customers and our shareholders.

At the beginning of my remarks, I mentioned how well our organization is performing and the high degree of confidence I have in our company. In my experience, when we set our minds on accomplishing something, we deliver. I look forward to sharing progress with you as we continue on our journey.

Now I'll turn it over to Eric to discuss further details on operations of our business and commercial markets.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Tim, and good morning, everyone. I'm very pleased with the performance the TrinityRail team delivered during the quarter. This has started our year with positive momentum. The team achieved improved pricing and operational efficiencies, which yielded higher quarter-over-quarter operating segment margins for both the leasing company and the manufacturing business.

As Tim mentioned, the general sense of economic uncertainty prevalent in our commercial markets earlier this year has begun to clear, an encouraging indicator of the overall health of the business environment. Severe weather negatively impacted railcar loadings during the first quarter, and lasting infrastructure damage continues to hinder rail traffic in some parts of North America. Nevertheless, inquiry levels continue at a good pace in terms of number of railcars and number of quotations. We expect railcar loadings to recover in the coming months. We believe that various geopolitical events, macroeconomic concerns and the effects of the federal government shutdown, all of which clouded the market outlook earlier in the year, are now having less of an impact on our customers' shipping and railcar sourcing decisions.

The TrinityRail commercial and portfolio teams delivered a solid first quarter to start the year, maintaining lease utilization at a healthy level of 98.4% and achieving renewal success in line with our historical averages. Our railcar lease rates for new originations, assignments and renewals and pricing for new equipment purchases exceeded our expectations. As a result, we continue to forecast our average lease rate for the wholly and partially owned railcar portfolio will improve year-over-year.

During the first quarter, TrinityRail received orders for 3,000 railcars across a broad range of railcar types. This brings our backlog to 26,320 railcars with a value of $3.3 billion. We expect to deliver approximately 60% of the backlog units throughout the remainder of 2019. Those units account for approximately 83% of the midpoint of our annual unit guidance. As reflected in our quarter-end report, we removed 3,050 small cube covered hoppers from our backlog with a value of $240 million. These railcars were committed to a frac sand customer for our lease fleet for delivery in 2020 and beyond. The economics of this termination are still under negotiation with the lessee. This car type now represents approximately 1% of our remaining backlog.

TrinityRail Leasing and Management Services continue to make progress on our objective to grow the lease fleet. During the first quarter, our owned, partially owned and managed lease fleet grew to over 122,700 railcars principally through captive originations. Over the years, we have consistently proven to be the leader in new railcar lease originations.

The tangible and intangible benefits of sourcing new railcars from our Rail Products business are significant factors in enhancing shareholder value through the integrated rail platform. Commercially, it allows us to capitalize on market opportunities by rapidly deploying existing assets to emerging opportunities while augmenting our fleet in direct alignment with demand when customer needs surpass the existing railcar supply. Financially, our lower cost base of the asset is reflected in the equipment value on our balance sheet, thus enhancing earnings and returns for shareholders throughout the life of the railcar.

The TrinityRail Products team also delivered a solid quarter. In the first 3 months of the year, the team delivered 4,505 new railcars across a broad array of product types as a result of several successful line changeovers. The Rail Products Group achieved an operating margin of 8.4%, an improvement from 6.3% in the fourth quarter of 2018. The improvement in margin was primarily due to favorable railcar product mix, improved pricing of railcars delivered from the backlog and growth in the railcar maintenance services business. We expect operating profit will improve through the year as we gain operating leverage with increasing volumes.

We are focused on investing in the differentiation of our integrated platform's products and services. As a leading railcar owner, railcar manufacturer and experienced railcar services provider, the breadth and depth of our integrated platform is unmatched in the industry.

Our multifaceted relationships with North American rail shippers, railroads and lessors provide the organization with unique insights into rail shippers' needs and performance of railcars in the field. This constant flow of information creates an invaluable feedback loop, and we have initiatives underway across our platform to leverage this feedback to improve our products and services and deliver greater value to our customers.

In our leasing organization, I'm particularly proud to highlight our increasingly impactful efforts to build scale through digital transformation and continuous improvement of our operational processes, investments in relationship management tools and process improvements, data and analytics and developing our people, all done with an intense focus on delivering an outstanding customer experience. These efforts are paying off.

In our products organization, we have realized that early success of several new railcar types that we highlighted on our fourth quarter conference call, including refrigerated boxcars, (inaudible), our innovative hourglass autorack and an intermodal railcar. Collectively, these new products are expected to contribute approximately $250 million of this segment's gross revenues in 2019. I expect demand for these products to continue in the years to come. TrinityRail continues to invest in product development efforts to convert our unique market view into better products that create more value for rail shippers and drive greater efficiency in the rail ecosphere.

We also continue to invest resources in our maintenance services business as part of our strategic initiatives. This business has experienced year-over-year organic growth of more than 50% in quarterly revenues led by the growth of railcar modifications and our autorack service center.

Our team is making great strides towards increasing our capacity in our existing maintenance facilities to accommodate more railcars as well as identifying plans to expand our geographic presence for better and faster service of our lease fleet. We view our maintenance services business as an important differentiator for our platform.

In closing, we are highly focused on operational execution and increasing the value proposition to our customers by offering differentiated products and services. We will continue to invest in the business that will drive our performance in the future.

The TrinityRail integrated platform is built to deliver for all of our stakeholders, ultimately creating value for our customers, our employees and our shareholders.

I'll now turn over to Melendy to discuss the financial guidance and update on our strategic financial objectives.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Eric, and good morning, everyone. Yesterday, following market close, the company reported first quarter revenues of $605 million and earnings per share from continuing operations of $0.24. The earnings improvement resulted in a 167% increase year-over-year and a 26% increase quarter-over-quarter. I echo Tim's and Eric's regard and praise for the team's outstanding performance and strong start for the year. Following this conference call, we will file our quarterly 10-Q with additional information on our financial results.

As you have heard from Tim and Eric, we are excited about the positive fundamentals and the opportunities we see in our end markets in our rail businesses. Our capital allocation plans and approach remain consistent with our communications following the spin-off. Investing in value-creating business opportunities that transformatively grow the lease fleet and build out our commercial fleet services as well as enhance our manufacturing and maintenance footprint are important elements of our growth strategy and capital allocation plan. Other important elements of our capital allocation approach are to improve returns and return capital to shareholders. We are making progress in accomplishing these goals through optimizing the company's capital structure and opportunistically leveraging the balance sheet to finance our investments.

During the first quarter, we made a net investment of $465 million in our owned lease fleet. Approximately half of this investment was in new railcars for manufacturing, while the remainder was primarily the exercise of the sale-leaseback early purchase option we disclosed in February.

We also built up inventory in preparation for our planned production ramp-up and build-out of capacity. We expect inventory to decline through the balance of the year.

As expected, Trinity completed the previously announced $350 million accelerated share repurchase program during the first quarter, of which $70 million was settled in March. Total share repurchases during the first quarter amounted to $89 million, which included $19 million that was executed under the company's newly approved $350 million share repurchase authorization that expires in December of 2020. We will disclose future share repurchase activity as we report each quarter's financial results.

We were also pleased to announce during the first quarter a 31% increase to our quarterly dividend, which will be paid to shareholders at the end of April. At the time of the announcement, the dividend increase raised our dividend yield to approximately 3%. Collectively, the dividend and share repurchase program reflect our commitment to returning capital to shareholders. These actions are supported by our financial strength and the confidence we have in our integrated platform of rail products and services.

As a result of the investments made across our businesses in the first quarter, our quarter ending balance of cash and cash equivalents was approximately $74 million. Subsequent to quarter-end, Trinity successfully closed on the $528 million railcar asset-backed securitization, TRL 2019. This ABS is secured by a portfolio of $660 million of railcars and their associated leases and is single A-rated by the reviewing credit rating agencies. We're extremely pleased with the level of interest from the investment community for this debt offering and the pricing at a 3.82% coupon rate. We continue to believe the debt markets appreciate and value Trinity's ability to operate and service high-performing portfolios of railcar assets through our unique integrated rail platform.

On a pro forma basis, this securitization brings our wholly owned lease fleet leverage ratio to 50% as of the end of the first quarter, in line with our target of 57% to 59% for the year. And it brings our corporate cash balance to approximately $130 million, in line with our target of $100 million to $200 million.

We still anticipate significant new railcar additions to our wholly owned lease fleet during 2019, and we expect to finance this growth with appropriate leverage. We're making good progress to lower our overall cost of capital and align the capital structure of the lease fleet to an optimized level more typical for a leasing company.

Moving now to guidance. In yesterday's press release, Trinity reiterated annual earnings per share guidance from continuing operations of $1.15 to $1.35 for 2019, resulting in growth of 64% to 93% year-over-year. We continue to expect profit from continuing operations to increase throughout the year as we add railcars to our lease fleet, ramp up railcar unit deliveries and begin delivering railcars from the manufacturing backlog that were priced in more recent market conditions. The timing of railcar sales from the lease fleet is difficult to predict and incorporates considerations in working with our investment partners and analyzing other secondary market factors. We now expect the majority of our railcar sales from the lease fleet to occur in the second half of 2019.

While our earnings guidance for the company did not change, there were slight adjustments to the business and the corporate forecasts. We now expect slightly higher revenues from operations in the Railcar Leasing and Management Services Group between $775 million and $790 million and operating profit between $320 million and $330 million in 2019. The improvement in revenue and profit is mainly attributable to growth in the lease fleet and modestly improving average lease rates. Our expectations for proceeds from sales of leased railcars from the lease fleet to RIV partners and the secondary market remains the same at $350 million, leaving a little over $300 million to complete through the balance of the year. Certain of the proceeds will be included in segment revenue once the determination of assets is finalized.

As a reminder, in our earnings guidance, we have leases with a purchase option referred to as sales-type leases for accounting purposes. We are required to account for these as sales for the lease accounting rules, and we expect this to add an additional $160 million in revenue. The gain on all of these sales transactions will be attributed to the total leasing segment profit, and our EPS guidance range incorporates these assumptions.

Moving to the Rail Products Group. We continue to expect revenue and operating profit to be $3.1 billion to $3.3 billion with a 9% to 9.5% operating margin. This includes railcar delivery units of 23,500 to 25,500 railcars. Our Rail Products Group margin reflects improving manufacturing efficiencies with higher unit deliveries and broad demand for our products across end markets.

We have slightly lowered our corporate expenses guidance range to $110 million to $120 million as a result of progress we're making in our cost optimization efforts and favorable recoveries during the quarter. Our guidance includes elevated litigation-related expenses continuing through the year as we work to close out the follow-on lawsuits resulting from the federal qui tam litigation. As a reminder, our guidance for corporate expenses also includes transition and stranded costs related to the spin-off and separation of Arcosa. We're working diligently to ensure that our corporate expenses are aligned with Trinity's go-forward business model. We'll continue to update you on our cost optimization progress in future earnings calls.

Regarding revenue and profit eliminations, given orders received during the quarter and ongoing visibility to leasing customers' railcar equipment needs, we now forecast Rail Group revenue eliminations of $1.5 billion and profit eliminations of $175 million. As a reminder, the revenue and profit associated with these investments reflects the market-based transfer pricing for intercompany transactions between our Railcar Leasing and Products business segments.

Regarding our net lease fleet investment, considering the additional railcars we expect to add to the lease fleet and the anticipated proceeds from secondary market sales and purchases, we expect total net lease fleet investment to remain at $1.2 billion to $1.4 billion for 2019. In addition to our planned leasing capital expenditures, our manufacturing and corporate capital expenditures forecast remains at $90 million to $110 million primarily made up of facility expansions and improvements to meet our product delivery commitments.

As part of our plan to improve our financial performance, our objective is to narrow the variability of Trinity's earnings and returns from year to year as we drive our returns higher through the railcar cycles. Our goals for 2019 are focused short term on improving earnings and focused long term on improving return on equity and relative total shareholder return. The Board and management have aligned our incentive plans with these goals, and we believe these goals are well aligned with investor expectations. Making progress on these goals, we aim to stabilize and improve our return results, generating even more value for our shareholders.

In closing, the investments we are making in our businesses, initiatives to optimize our capital structure and our efforts to improve returns are all aligned with our objective of driving value to shareholders over the long term. Our capital structure and financial approach are aimed at moving Trinity in the direction of being valued by investors and the capital market as more of a leasing company.

Together, the leadership team and I are very excited about our potential for growth and improving returns, and we look forward to sharing our progress with you along the way.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we will take our first question from Allison Poliniak with Wells Fargo.

--------------------------------------------------------------------------------

Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [2]

--------------------------------------------------------------------------------

Just going to, I guess, the customer -- the removal of those cars that you talked about it being a leasing customer. I guess one question. Are they existing leasing customer today? And is there any impact to the current lease fleet as a result of this customer?

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [3]

--------------------------------------------------------------------------------

Allison, this is Eric Marchetto. I'll answer that. The customer that we've discussed, yes, they are a current customer. And as we will say in our 10-Q as we release earlier -- or later today, we do not anticipate that to have an impact on our earnings for the year with the existing cars that we have in our fleet.

--------------------------------------------------------------------------------

Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [4]

--------------------------------------------------------------------------------

Got it. And then on the Rail Products Group margin, obviously, a lot of line changeover setting up the production this year. How should we think of the cadence of that margin improvement? I'm assuming those are behind you. Is it a step-up and stable from there? Or is it sort of a slow low trend up for the year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Allison, this is Melendy. So you saw our reported margin for the quarter, and then our guidance is 9% to 9.5% for the year. And we see that improving over the quarters as we get more leverage from our long production runs.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

And we can take our next question from Justin Long with Stephens.

--------------------------------------------------------------------------------

Justin Trennon Long, Stephens Inc., Research Division - MD [7]

--------------------------------------------------------------------------------

So maybe to start, I wanted to ask about the expected quarterly cadence of railcar production over the remainder of this year. And with some of your peak manufacturing capacity going away with Arcosa as part of that spin, can you also talk about how much capital you're investing in 2019 to reposition your lines and increase capacity in order to meet the delivery schedule in your backlog?

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [8]

--------------------------------------------------------------------------------

Justin, this is Eric. I'll start and then we can -- I'm sure we can all chime in. So our -- if I understand your question, the ramp of delivery units will be throughout the year in terms of what we're expecting. When you talk about what we lost with Arcosa, I would push back on that a little bit. I don't think we really lost much of our manufacturing flexibility and certainly not any of our capacity with the spin. We retained many of the assets that -- in our footprint. We continue to invest in our existing footprint to increase our flexibility in order to respond. Paul, do you want to add anything to that?

--------------------------------------------------------------------------------

Paul M. Mauer, Trinity Marine Products, Inc. - Chief Operations Officer of Trinityrail [9]

--------------------------------------------------------------------------------

This is Paul. Just a little bit more color. We mentioned $30 million of investment we were putting in place this year, and a large part of that is to increase our flexibility within our existing shops. And the way to think of it is we're going to do more with less facilities.

--------------------------------------------------------------------------------

Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [10]

--------------------------------------------------------------------------------

And Justin, this is Melendy. As far as the build-out of our CapEx, our overall guidance is the $90 million to $110 million. And that also builds fairly normally through the quarters along with our production plan.

--------------------------------------------------------------------------------

Justin Trennon Long, Stephens Inc., Research Division - MD [11]

--------------------------------------------------------------------------------

Okay. That's helpful. And secondly, we've gotten more details around the lease fleet, and that's really helpful, and I wanted to ask about the return profile. So last year, excluding gains on sale, the ROE was around 4%. Melendy, you mentioned one of the long-term goals is improving returns, but can you help us understand what you view as a reasonable target for ROE for the lease fleet and share any thoughts around the timing of getting returns to a level that exceeds your cost of capital?

--------------------------------------------------------------------------------

Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [12]

--------------------------------------------------------------------------------

Certainly. So as you mentioned, we shared where our ROE is today for the lease fleet in our investor materials that we shared in March, and that's kind of in the mid- to high single-digit range. I mentioned in my comments that return on equity and improving return on equity is a key goal for us over the long term. And when we were setting our goals in that area, we studied the history of Trinity post spin, and we compared our performance to our industry peers as well as a broader comparator group. And over a 5- to 7-year cycle, our historical ROE performance was in the mid to high teens. So our goal, Justin, aims to move our returns to that mid- to high-teens level. It's going to take us some time to do that. But our goal is to deliver returns above industry or comparator averages that address your question of -- in terms of exceeding cost of capital -- or returns on capital exceeding cost of capital and our returns on equity exceeding our cost of equity.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [14]

--------------------------------------------------------------------------------

I wanted to get a sense for overall orders and just demand post first quarter closing. It sounds like the environment has improved. It's picked up a little bit post kind of a slower, maybe disappointing first quarter. But I'm trying to gauge if that is true, the market's improved. Then if you could provide any color in terms of -- kind of quantify orders or inquiries post the first quarter closing.

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [15]

--------------------------------------------------------------------------------

Sure. Matt, this is Eric. Let me start with -- as I mentioned in my prepared remarks, we are seeing inquiry levels both in number of units and the number of actual inquiries that I'd characterize as good. We did get off to a slow start, in my opinion, which was reflected in our comments in February. And I mentioned all the reasons why I think -- what attributed to that slow start. We have seen the cadence pick up, which gives us a high degree of confidence in what we're guiding for the year in terms of deliveries and what we're expecting in terms of lease rates.

I'll just go into a little more color on first quarter. First quarter order activity was probably a little less than some may have expected, and I think that's generally a reflection of -- we have a broad view. We participated. We saw a lot of market opportunities. And I would say that we raised our railcar pricing a little bit faster than some others may have done in the market. And as a result, we didn't get as many of the deals as we bid on. And I think that will catch up as we go through the year

--------------------------------------------------------------------------------

Matthew Stevenson Brooklier, The Buckingham Research Group Incorporated - Analyst [16]

--------------------------------------------------------------------------------

Definitely helpful. And then I think last quarter, you talked to PSR initiatives at the Class I railroads. We talked about, I guess, the bad, right, in the near term but also there being potential for good to come out of it for Trinity. Maybe you can provide us a little bit of an update in terms of how you're thinking about PSR in some of those -- some of the railcars that have been idled or put back to shippers or -- is there still the possibility that those cars could find their way into either your owned or your managed lease fleet?

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [17]

--------------------------------------------------------------------------------

So this is Eric again. There's a lot there. So in terms of PSR, I think in the quarter, as we've gone through, the discussion on that has dissipated a little bit in terms of the impact, and it's probably been offset by what's happened in the weather in the market. That's probably had a greater impact on our shippers' business than PSR. As we go forward, as Tim said, we think PSR -- we're for all things that increase the efficiency and the competitiveness of rail transportation, so from that standpoint, we think, long term, it's healthy. We do think there will be opportunities for railcars, for the shifting of ownership as the burden of providing railcars may change. When you get into the cars and storage, the AAR puts out a measure on railcars and storage. That's the best measure that we have in the industry. It's just not a great measure, and so -- but it's what we had. We study that a lot. We have seen -- I believe there's a lot of rotation in that number month to month. In other words, there's cars that come in and out of those numbers in the details, and the aggregate number may not change a lot.

I'll give you an example of that, cars in shop. Generally, cars that are going in the maintenance facilities today for compliance or change of service or anything would end up showing up in that idle fleet count in the AAR statistics. I don't believe -- I wouldn't view those cars as idle, personally, but they certainly do show up in those numbers. As we study the fleet, the idle fleet, and we look out, we've studied historically and look forward, I believe that a good portion of those cars are in and out of storage. When you get into how many of those are in long-term storage, say, greater than a year, I think it's a fraction of that total fleet. It's a long answer to your question, but I hope that's helpful.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

And we will take our next question from Gordon Johnson with Vertical Group.

--------------------------------------------------------------------------------

Gordon Lee Johnson, The Vertical Trading Group, LLC, Research Division - MD & Analyst [19]

--------------------------------------------------------------------------------

With respect to, I guess, the removal of cars that you guys announced yesterday, I understand that it may not have an impact or isn't going to have an impact on earnings this year. But could it potentially have an impact on earnings next year?

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [20]

--------------------------------------------------------------------------------

Gordon, this is Eric. I'll answer that. So certainly, our backlog, we expect to realize value in everything that's in our backlog. And as we said, we didn't expect that -- those cars to deliver this year. Therefore, it didn't have an impact. Certainly, going forward -- we made the determination that we were going to get more value by taking it out of the backlog now than leaving it in the backlog and delivering those cars, trying to lease them to our fleet. So certainly, as cars come in our backlog, that can have an impact long term, but we have plenty of time to react to that and to plan accordingly and to fill our production capacity as necessary.

--------------------------------------------------------------------------------

Gordon Lee Johnson, The Vertical Trading Group, LLC, Research Division - MD & Analyst [21]

--------------------------------------------------------------------------------

Okay. That's very helpful. And then with respect to orders, I guess just -- maybe you guys don't give quarterly guidance or maybe you don't want to talk about it, but are you guys seeing anything right now that would suggest that we're going to see a big uptick in orders near term, maybe even in the second quarter?

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [22]

--------------------------------------------------------------------------------

Yes. This is Eric again. I don't -- when you look at -- orders are lumpy. And if -- when you just look at the industry numbers, in the fourth quarter, we did 20,000 railcars, which I think most would characterize as good. This quarter, we did 10,000, which people are probably disappointed in that. When you average them together, it's not bad. And I think order activity -- we don't predict the order activity by quarterly basis, but when you -- as we look out through the year, I would expect order activity to end up being good, whether it's second quarter, third quarter, fourth quarter. In the end, I think we expect it to be a healthy environment.

--------------------------------------------------------------------------------

Gordon Lee Johnson, The Vertical Trading Group, LLC, Research Division - MD & Analyst [23]

--------------------------------------------------------------------------------

Helpful, helpful. And then last question. Just looking at loadings ex coal, we know this is on a weekly basis. For the last 11 weeks, the number has been negative. It's gotten better recently, but is there anything that you guys see that would suggest or help explain that weakness in loadings that we've seen recently? And clearly, I would assume you guys expect it to get better going forward.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Gordon, this is Eric. I'll answer that, and I've mentioned some of this in my prepared remarks. We do think weather had a dramatic impact on railcar loadings. Weather doesn't have a direct impact on our business, but it certainly has impact on our industry. So I think that has a big piece of it. When you do look at the railcar loadings, most of the car types are down. The bright spot has been crude oil and petroleum products, what's going on there. But generally speaking, I think weather is the bigger impact than demand for the output on railcar loadings.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [26]

--------------------------------------------------------------------------------

You guys made some commentary about positive market lease rates. Did you actually see a sequential improvement in spot rates from Q4 to Q1? Or did this positive momentum happen after the close of the quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Matt, this is Eric. I'll -- so when you talk about sequential improvement on lease rates, the answer -- in the quarter, we did see sequential improvement on lease rates in many of our car types. When I say many of our car types, we're tracking dozens of car types that would include both tank cars and freight cars. And kind of across the board, we're seeing increases sequentially. And I have talked about that in the last couple of quarters, that sequentially, we continue to see lease rates improving. I'll give you -- one of the brightest spots has been in the coal market. We've seen lease rates with 3-digit increases, where a year ago, those lease rates were very, very low. And today, they're getting -- they're not quite good, but they're certainly a lot better, and to put an example, $350 to low $400 in terms of lease rates. So we have seen increases not just in the tank car side but on the freight car side as well. And I extend -- I would extend that to look at specialty covered hoppers and some of the specialty freight car types, where we have seen continual improvement in pricing.

--------------------------------------------------------------------------------

Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [28]

--------------------------------------------------------------------------------

Very helpful. And my next question is on the mix of deliveries going forward. Should we expect a higher percentage of tank cars progressively as we move throughout the year?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Go ahead.

--------------------------------------------------------------------------------

Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [30]

--------------------------------------------------------------------------------

Matt, this is Melendy. In our February call, we did share that the mix shifts from freight over to tank as we move through the year, and that remains -- what we're seeing now is consistent with that guidance that we gave in February.

--------------------------------------------------------------------------------

Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - VP [31]

--------------------------------------------------------------------------------

Okay. And just one last question. Your backlog ASP went up. How much of that was attributable to the removal of the frac sand cars? And how much of it may be pricing or new orders?

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [32]

--------------------------------------------------------------------------------

So I would say when you look at the change quarter-over-quarter because we had 3,000 railcars ordered and we removed over 3,000 cars, it's a combination of both. But the impact of the small cube covered hoppers, those definitely had a lower ASP, and so they had a -- those would have had a larger impact in the order activity.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

And we will take our next question from Steve Barger with KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [34]

--------------------------------------------------------------------------------

Eric, I get that orders evolve quarter to quarter, but if we don't see booking activity pick up, will you hold that price discipline or your above-market stance that you had in 1Q? Or will you adjust to the environment to get back to historical share?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

We're going to be -- Steve, we're always responsive to pricing. I wouldn't say -- I would say pricing -- there's a wide band on pricing, in the pricing environment. I wouldn't say necessarily we are above market. I would say that it only takes one to be lower. So from that standpoint, there were some opportunities in the quarter that we participated in that we did not -- the customers went different directions, and I'd say they went different directions based on price. But I wouldn't say that we're above market in our pricing expectations. I do think there's inflationary pressures on railcar pricing, and I would expect that to continue.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [36]

--------------------------------------------------------------------------------

So you're pricing to your assumed margin profile rather than any kind of share?

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [37]

--------------------------------------------------------------------------------

And we've said this for years. I guess I've never said it. We do -- we don't run our business on market share. And especially as our lease fleet has grown, having 120,000 railcar lease fleet, it's important that we have pricing discipline. And we cannot have -- we cannot let the marginal new car deal impact the lease fleet.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [38]

--------------------------------------------------------------------------------

Yes, understood. And actually, that's a great segue. Melendy, thinking about your comments on narrowing the variability of earnings, does that mean if the OEM cycle rolls over, you'll accelerate growth in the lease fleet? Or how can you reduce variability, understanding the cyclicality of manufacturing?

--------------------------------------------------------------------------------

Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [39]

--------------------------------------------------------------------------------

Yes. Thanks, Steve. The way that we're thinking about that is over the long term and through the railcar cycle, certainly, the manufacturing side of our business will continue to be cyclical. So the way we're thinking about that is -- we've talked about transformatively growing the lease fleet, and Tim mentioned doubling the lease fleet while making our earnings and returns more steady and more predictable. So it's more of a long-term expectation that as we dramatically increase the size of the lease fleet, that will therefore provide steady earnings and returns with our manufacturing business as kind of an upside when the cycle is strong.

--------------------------------------------------------------------------------

Robert Stephen Barger, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [40]

--------------------------------------------------------------------------------

So if we do get into a softer order environment, I guess going back to Eric's point about the marginal buyer setting price, how do you grow the lease fleet in that environment when, presumably, the OE market would be softer because of economic conditions, which would certainly affect the leasing market?

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [41]

--------------------------------------------------------------------------------

Well, certainly, our -- historically, our lease fleet growth has been principally through organic lease fleet originations. And we talked about it in our Investor Day presentation last year, and as we demonstrated over the last few years, we are active participants in the secondary market. And so we're always looking at what's the right mix of buying railcars in the secondary market versus organically originating the deals. And likewise, when we looked at what assets we're going to sell out of our portfolio, we're looking at where are the right value-creation opportunities. So I don't think that changes. And we probably haven't been given enough credit for that discipline, but that's certainly our approach.

--------------------------------------------------------------------------------

Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [42]

--------------------------------------------------------------------------------

And I would just add to that. As Eric mentioned, that the down part of a cycle, whether that's in manufacturing or in leasing, historically has been a good opportunity for Trinity to take a contrarian position and buy at a really attractive valuation.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

And we will take our next question from Mike Baudendistel with Stifel.

--------------------------------------------------------------------------------

Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [44]

--------------------------------------------------------------------------------

I just want to make sure I understand all the sort of impacts on the Rail Group margins, from the 8.5% this quarter to 9.5% for the year. So it's the mix shift towards tanks, the greater volume, you've got some changeovers. Is there anything else that I'm sort of leaving out there?

--------------------------------------------------------------------------------

Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [45]

--------------------------------------------------------------------------------

Those are the main drivers, is the mix change, as we mentioned, from freight over to tank. And then as we ramp up our production runs, we're able to create more leverage.

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [46]

--------------------------------------------------------------------------------

And there's probably a little bit of pricing improvement as we go through the year.

--------------------------------------------------------------------------------

Michael James Baudendistel, Stifel, Nicolaus & Company, Incorporated, Research Division - VP & Analyst [47]

--------------------------------------------------------------------------------

Got it. That's helpful. And then I just want to ask you, is the Greenbrier and ARI combination, you think that's going to have an impact on pricing in the industry? And do you compete with both of them, one more than the other? Or just how often do you see sort of both of them together competing for business that you're also competing with in the marketplace?

--------------------------------------------------------------------------------

Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [48]

--------------------------------------------------------------------------------

Okay. This is Tim. We've competed against both companies for decades. We're very -- we were very close to reaching a contract terms to acquire ARI over 20 years ago, and we just weren't able to reach an agreement with them. And I've admired and respected ARI for a good while. And Greenbrier is an aggressive, impressive company, and I appreciate their interest in ARI. But my early view is that it really does not change or affect our situation in any way. I really don't have anything else to comment on that subject.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

What I would add, Mike, is that I feel like the transaction announcement really supports attractive valuations and long-term value appreciation for railcar products and services businesses so -- and this underscores our belief that Trinity is undervalued. So it's nice to see these industry transactions really have the attractive valuation from that perspective.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

And we will take our final question from Bascome Majors with Susquehanna.

--------------------------------------------------------------------------------

Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [51]

--------------------------------------------------------------------------------

Melendy, I appreciate you sharing your view to take the company's returns on equity from, call it, mid- to high single digits to mid- to high teens over the cycle. And you talked a lot about ways to do that. Can you maybe rank order the things in kind of the time line over them to how we get from point A to point B? I mean, clearly, you're adding leverage. You just got a good chunk of permanent debt at a pretty attractive fixed price. But kind of how that fits into the other things you can do in maybe just a generally better renewal environment, taking all that into account.

--------------------------------------------------------------------------------

Melendy E. Lovett, Trinity Industries, Inc. - Senior VP & CFO [52]

--------------------------------------------------------------------------------

I'm glad that you -- I remembered your question from February, and I'm glad that you noticed that I did my best to answer it. Certainly, return on equity improvement, we're thinking about it in -- from all of the different aspects of doing it. So we're looking at, of course, what can we do to improve our profit margin, what can we do to improve our asset efficiency and then, as you mentioned, the financial leverage that also contributes to ROE improvement. And we're really taking a holistic approach at looking at actions that we can take to move all those levers. And again, if we know that it's going to take some time. It's a bit like moving the Titanic with only 13% of our lease fleet renewing in a given year, for example. So we're expecting it to take some time, but we're excited about the opportunities that we have in front of us to move in the direction of our goals.

--------------------------------------------------------------------------------

Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [53]

--------------------------------------------------------------------------------

So it sounds like positive renewals over time are a big piece of that. Or am I reading that kind of wrong?

--------------------------------------------------------------------------------

Eric R. Marchetto, Trinity Industries, Inc. - SVP & Group President [54]

--------------------------------------------------------------------------------

Bascome, this is Eric. Certainly, in this business, we are expecting lease rates to improve over time. That's one of the tenets of investing in railcars. And so as we go out over time, certainly, a big driver of it will be increase in lease rates. And especially as the fleet ages, the fleet -- we have a relatively young fleet, so that has -- that does not have the best return on equity on a book basis profile. So as that fleet ages and the lease rates either hold or increase, we would expect there to be some natural benefits on a return on equity measure. That's certainly an impact, but I think in the near term, a lot of the balance sheet optimization that Melendy talked about will have a greater impact in the near term.

--------------------------------------------------------------------------------

Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [55]

--------------------------------------------------------------------------------

And last one for me. We talked a little bit about ARI. Their new owners just sold the railcar manufacturing business to Greenbrier to focus more squarely on leasing. And your strategy post spin-off is built around growing both the size of and returns on your Leasing business. Is Trinity committed to a vertically integrated manufacturing and leasing platform over the long term? Or is there a period at some point down the road where the lease size gets to kind of where you want it to be and the returns are there that you might consider selling off that business and focusing straight on leasing?

--------------------------------------------------------------------------------

Timothy R. Wallace, Trinity Industries, Inc. - CEO, President & Director [56]

--------------------------------------------------------------------------------

This is Tim. I covered in some of my remarks the benefits that we see of our integrated model and what it does for our platform, having a leasing business and a manufacturing business connected. And we have talked about that subject for more than a decade at our Board level and at the management level, and we'll probably still continue to talk about it and assess it. We're an opportunistic company, and you saw what we did last year in an effort to create shareholder value. That's what our focus is. And so we take a lot of different things into consideration.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

And this does conclude the Q&A session. I would like to turn the program back over to the presenters for any additional remarks.

--------------------------------------------------------------------------------

Jessica L. Greiner, Trinity Industries, Inc. - VP of IR & Communications [58]

--------------------------------------------------------------------------------

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 May 2, 2019. The access number is 4022207204. A replay of the webcast 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, and thank you for joining us this morning.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

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