Q2 2023 Trinity Industries Inc Earnings Call
Participants
E. Jean Savage; President, CEO & Director; Trinity Industries, Inc.
Eric R. Marchetto; Executive VP & CFO; Trinity Industries, Inc.
Leigh Anne Mann; VP of IR; Trinity Industries, Inc.
Allison Ann Marie Poliniak-Cusic; Director & Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Bascome Majors; Research Analyst; Susquehanna Financial Group, LLLP, Research Division
Jacob Moore; Research Analyst; KeyBanc Capital Markets Inc., Research Division
Justin Trennon Long; MD & Research Analyst; Stephens Inc., Research Division
Matthew Youssef Elkott; Director and Transportation, OEMs & Technology Analyst; TD Cowen, Research Division
Presentation
Operator
Good day, and welcome to the Trinity Industries Second Quarter and 6 months ended June 30, 2023, Results Conference Call. (Operator Instructions) Please note, this event is being recorded.
Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and include 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.
I would now like to turn the conference over to Leigh Anne Mann, Vice President of Investor Relations. Please go ahead.
Leigh Anne Mann
Thank you, operator. Good morning, everyone. We appreciate you joining us for the company's second quarter 2023 financial results conference call. Our prepared remarks will include comments from Jean Savage, Trinity's Chief Executive Officer and President; and Eric Marchetto, the company's Chief Financial Officer. We will hold a Q&A session following the prepared remarks from our leaders.
During the call today, we will reference slides highlighting key points of discussion and certain non-GAAP financial metrics. The reconciliations of the non-GAAP metrics to comparable GAAP measures are provided in the appendix of the supplemental slides, which are accessible on our Investor Relations website at www.trin.net. These slides are under the Events and Presentations portion of the website, along with the second quarter earnings conference call event link.
A replay of today's call will be available after 10:30 a.m. Eastern Time through midnight on August 8, 2023. Replay information is available under the Events and Presentations page on our Investor Relations website. It is now my pleasure to turn the call over to Jean.
E. Jean Savage
Thank you, Leigh Anne, and good morning, everyone. Our second quarter results reflect positive trends in our business, despite some downside in our broader operating environment. We'll provide more details on how those factors impacted our financial performance.
Still, we remain confident in our business' continued momentum and growth as we enter the year second half. We have line of sight to higher revenues on both sides of our business. with increased deliveries, rising lease rates and continued improvement in our operating margins.
Please turn with me to Slide 3 to discuss today's key messages. We are reporting second quarter consolidated revenue of $722 million, a 73% year-over-year improvement. Our second quarter EPS from continuing operations was $0.23, up $0.16 sequentially and $0.09 year-over-year on an adjusted basis. Our leading indicators for our business, namely the FLRD on the leasing side and the manufacturing side backlog, are favorable and give us visibility into strong revenues in 2023 and beyond.
Despite these favorable indicators, we are reducing and tightening our 2023 adjusted EPS guidance to $1.35 to $1.45 This adjustment is primarily due to the outsized impact of the strengthening Mexican peso on our manufacturing business, higher interest expense and continued inefficiencies.
Our revised guidance assumes a substantial improvement in the back half of the year from better efficiency. However, we do not have line of sight to our previously issued guidance range without a significant pullback in the strength of the Mexican peso, which we are not anticipating in 2023.
Let's turn to Slide 4 and discuss the rail market and a commercial overview. Like last quarter, overall rail traffic trends are negatively impacted by intermodal volumes. Through the first 26 weeks of the year, railcars load volumes improved just 2% year-over-year, outperforming the 4% decline in total traffic shown in the slide. While the increase in railcars storage in the quarter is consistent with expected seasonal trends, the North American fleet ended June with the lowest active rate since early 2022.
Fleet storage levels remain well below the 5-year average, but improving network fluidity prompts some normalization. We're willing to take this trade-off as we believe a more efficient rail network will benefit from gaining modal share and driving longer-term sustainable growth.
Moving to the bottom of the slide, we continue to see high fleet utilization and a very strong future lease rate differential, or FLRD, which are good predictors for rising lease rates in the future. Our fleet utilization was 97.9%, and the FLRD was 29.5%, with lease rate strength, especially in pressure tank cars and large covered hoppers.
While rail traffic trends are important in our business, the critical driver is lease fleet utilization and rising lease rates, which have seen significant improvement. But more directly, the strength in our business has been supply-led, which provides confidence in the durability of cash flows.
On the manufacturing side, orders and deliveries were strong in the quarter. We delivered 4,985 railcars in the quarter and booked orders for another 4,770. These numbers and new railcar inquiry levels align with expectations and are consistent with our view of replacement-level demand. Our backlog of $3.6 billion and current inquiry levels give us confidence in our expectations well into 2024.
Moving to Slide 5, I'll briefly discuss the cash flow, with Eric providing more details later in the call. Our quarterly cash flow from continuing operations was $38 million, up $128 million year-over-year. Additionally, our adjusted free cash flow was $45 million, up $50 million year-over-year. Our business can consistently and predictably generate a lot of cash, which is evidenced in today's results as we see the effect of increased production and higher lease rates flowing through our cash balance.
Let's turn to Slide 6 and talk a little bit more about the drivers of our business segments. Starting with Leasing, I've already talked about our FLRD and fleet utilization which indicate momentum and increasing lease rates and revenue. Because it takes a while to reprice the fleet, revenue increases are slower but more durable. We are starting to see several quarters of increased rates take effect, and we are encouraged to see the top line rising.
Our renewals are coming in about 30% higher than expiring rates year-to-date. And when considering the whole fleet, our average lease rate for the quarter was the highest since 2018 and 9% higher than a year ago. It's worth noting that we have only repriced about 30% of our fleet since the FLRD had double digits in the second quarter of 2022, so we expect to see this number continue to rise as we reprice more of the fleet upward.
While lease rates are still growing, the growth rate is starting to moderate. Our renewal success rate was an impressive 91% in the quarter, the highest since 2018, showing a sign of a healthy and balanced lease fleet. And year-to-date, our average renewal turn is 55 months, which allows us to hold on to higher lease rates longer.
Our leasing and management operating margin was 39.7% in the quarter, up 430 basis points sequentially but down year-over-year due to increased maintenance expense and depreciation expense.
Additionally, as we have begun integrating some of our recent acquisitions, those businesses have a different margin profile and slightly decreased the overall leasing margin. Overall, we are incredibly pleased with the performance of the Leasing business and expect to see continued strength in both revenue and margin through 2023.
Moving to Rail Products at the bottom of the slide. Quarterly revenue was up sequentially and year-over-year due to a higher volume of railcar deliveries. Our operating margin of 3.3% in the second quarter was down slightly, which was disappointing. In the second quarter, foreign exchange, persistent rail service issues and efficiency negatively impacted our Rail Products margin.
Rail Products efficiency has not gotten where we wanted as quickly as we'd like. We are seeing improvement in the metrics we track, but we still plan to continue the improvement. Supply chain issues are [being] eased, but there are still negative surprises more frequently than we have expected. The strength of the Mexican peso impacted Rail Products operating margin by approximately 90 basis points in the quarter.
Although we hedge a portion of our pace of spending, our revenue is in the U.S. dollar, but we pay our Mexican workforce and several suppliers in pesos. We are evaluating options to reduce our exposure to the peso. Still, a persistently high exchange rate will be an ongoing drag on the Rail Products margins until we can adjust our pricing and cost structure. While the challenges persist, many indicators give us optimism.
Labor attrition has reached a much more manageable level in Mexico. And the second half of the year requires fewer and less complex changeovers. This will lead to the resumption of production more quickly with the additional benefit of longer runs. To give some context on the progression of improvement, our Rail Products June operating profit was above 5% in the segment, the highest this year. This included the foreign exchange impact.
As we said on the call last quarter, we can still expect to exit the year with our Rail Product margin in the high single-digit range, even after accounting for the impact of exchange rates. This has been a focus of mine, and we have been aggressive in taking the necessary steps to improve the business' overall efficiency and financial results.
I'll conclude my remarks on Slide 7 and turn the call to Eric. Trinity's pretax ROE for the last 12 months has improved to 10.6%, progressing toward our long-term goal of a mid-teen ROE. We announced our third acquisition last quarter and are focused on integrating these businesses into Trinity. Across the board, we're pleased with the performance of our acquisitions. [Olin] continues to outperform our expectations with solid demand for auto racks and supporting parts.
We are early in the integration of our recent acquisition of RSI Logistics. By combining our equipment expertise and innovation with RSI's customer-centric, well-respected logistics services, we can make rail a more approachable mode of transportation.
These integrated service offerings will be an important step in our strategy to position the industry for modal share growth with our railroad partners. And before I turn the call to Eric, I wanted to quickly congratulate the team for successfully completing the financing of our senior notes and our TRL 2023 term loan this quarter. I'll let Eric provide more details on these events. Eric?
Eric R. Marchetto
Good morning, everyone. I'll start my comments on Slide 8, discussing our income statement and cash flows. Turning to the income statement. Our revenue in the quarter of $722 million reflects higher external railcar deliveries and improved lease rates. Our earnings per share from continuing operations were $0.23 in the quarter, a $0.16 increase over the first quarter on an adjusted basis.
We benefited from $129 million in Lease portfolio sales in the second quarter. Year-to-date, our net lease fleet investment is $214 million, and our Lease portfolio sales allow us to optimize our fleet and achieve our target for lease fleet investment. Year-to-date, cash flow from continuing operations is $140 million and adjusted free cash flow is $81 million after investments and dividends. We've returned $43 million to shareholders through our dividend.
Turning to Slide 9, as Jean just mentioned, we have seen a $225 million increase in our outstanding debt this year from the completion of a new corporate senior notes offering and the TRL 2023 term loan, offset by reductions in the revolver and warehouse as well as normal amortization. As you are all aware, the debt market has changed significantly, which is reflected in higher interest expense. Ultimately, we executed these deals effectively, given the current environment.
For our senior notes, we used the proceeds to repay outstanding borrowings under our revolver credit facility. We intend to use the remainder of the net proceeds for general corporate purposes, which may include repayment of other debt, including the senior notes due in 2024.
Moving to Slide 10 for an update on our guidance. We remain confident that North American railcar deliveries will be approximately 45,000 this year. This supports our ongoing view of replacement-level demand. As mentioned, we have a backlog that gives us visibility into future deliveries and are now receiving orders well in 2024 for most railcar types.
We are affirming our net lease fleet investment guidance of $250 million to $350 million for the full year, supporting our 3-year outlook. Year-to-date, our net lease fleet investment is $214 million. And along with investment in the fleet in the second half of the year, we also expect to complete a significant railcars sale in the fourth quarter of this year.
Our guidance for manufacturing CapEx for the year remains unchanged at $40 million to $50 million. Moving to our EPS guidance. As Jean mentioned, we are lowering our full-year guidance range to $1.35 to $1.45, driven by the economic headwinds, Jean outlined, namely the strength of the Mexican peso and higher interest expense and slower-than-expected improvement in efficiency, partially offset by better-than-expected leasing profits.
We set our operating plan assuming an exchange rate based on the rates in the fourth quarter of 2022. Since then, the peso has strengthened by about 17% against the dollar and continues to gain momentum. Given the nature of our business, we have no other material currency exposure, except for the Mexican peso.
We do have hedges in place, but even after accounting for the hedges, the exchange rate variance impact has been about $10 million in the first half of the year and pulled down our forecast -- full-year forecast by an additional [$18 million] for a combined impact of $28 million to the downside.
This flows through our Rail Products margin and will impact our margin as compared to our original guidance. We have limited our downside exposure to the peso for the balance of the year. We are also reducing our guidance to account for higher-than-expected interest expense, given the higher levels of working capital and higher borrowing costs.
Finally, while improvement in efficiency is evident, it has been slower than we anticipated. We expect to exit the year with Rail Group margins in the 8% to 9% range. Our full-year products -- Rail Products margin average is forecast to be between 6% and 7% after considering year-to-date performance, exchange rate impact and expectations in the second half of the year.
As Jean said, we expect significantly stronger performance in the second half as compared to the first half on the manufacturing side of our business.
Year-to-date, we have earned adjusted earnings per share of $0.30. In the back half of the year, assuming the midpoint of our adjusted guidance, this still implies significant EPS growth in the second half of the year, aided by improving margins, continued top line growth and RevPAR portfolio sales in the fourth quarter. We are confident this is achievable, given the strength of our forward-looking metrics in both of our businesses.
Please turn to Slide 11 before we open the call for Q&A. I want to emphasize the positive trends we see in our business. Our Leasing business continues to improve, and we believe there is room for growth. We expect continued revenue growth in our Leasing business as we reprice more of our lease fleet and extend the term so we can retain the higher lease rates longer. This will also drive up the margin in the business. The supply and demand dynamics of the North American fleet remain very positive.
On the manufacturing side, we've increased production over the last year, evident in the growth in deliveries and revenue, with margin growth soon to follow as this business continues to improve. And now operator, we are ready for our first question.
Question and Answer Session
Operator
(Operator Instructions) The first question comes from Allison Poliniak with Wells Fargo Securities.
Allison Ann Marie Poliniak-Cusic
I want to go back to the Rail Products Group margin. The labor inefficiencies that you talked to, were they purely driven by sort of the complex line changeovers? Was there something more to that? Just trying to get a sense of the confidence that you guys have in that back half in terms of the efficiency sort of moving away from you.
E. Jean Savage
Sure. So what we have, a lot of the [companies] in the back half, is we're carrying a lot of momentum into that half. The first half of the year, we were ramping. If you look at year-over-year car production first quarter, we were up 64%, second quarter 99%, large ramp there. In June, even with the FX headwinds, we were above 5% on the operating margin.
If you look at the changeovers, remember in the past, we talked to you about 65% of the changeovers were occurring in the first 2 quarters, that relates to about 200 basis points for us as we're looking at the effect.
Next, as we talked to you also about the first half of the year, we have hired the employees. They were going through training that by the end of the second quarter, they should start coming [down] and we would see the efficiency start to rise, that is occurring.
So if you take all of that into effect, we see a lot of momentum, going forward into that second half, to get into the operating margins we talked about, so leaving the year at 8% to 9% for the fourth quarter. And the FX is still in that. So a lot of improvement.
Allison Ann Marie Poliniak-Cusic
Got it. That's helpful. And then on the lease rate environment, Leasing, very strong. It seems like it's a very constrained environment right now. Any verticals that you're getting incrementally more concerned of or you're starting to hear a little bit of weakness of understanding the whole lease fleet is actually quite strong for you? But I just want to understand if there's any sort of weak points within that.
E. Jean Savage
Okay. Well, remember, this cycle is really supply driven, and there's not a single market that's driving it. The other point to remember is there's 250,000 cars that are going to have to retire in the next 5 years. So overall, we do have cars -- markets that are stronger, [other apps] are going to be built a lot of those box cars, grain cars that we're looking at. If you're looking for the weaker side, the [chemical] is adjusting to the economic outlook that's there.
So that was probably one of the weaker ones. I'll go back to a stronger one. Construction and ag remains strong, especially as the funds are starting to now flow through from the stimulus that's out there.
Operator
The next question comes from Matt Elkott with TD Cowen.
Matthew Youssef Elkott
Jean, just to follow up on your comment about the 250,000 cars that need to be retired in the next few years; also, the tightness in the fleet overall continues to be pronounced, I'm just surprised that the delivery outlook has -- like you're still continuing to expect replacement-level demand despite all these dynamics that you would assume would be favorable for manufacturing. And also, there's the potential for a pull-forward effect on the tank car replacement, even though it's not regulatory driven, but it could happen anyway.
E. Jean Savage
So really, it's the underlying fundamentals that we see there remaining strong. Utilization, 97.9%; renewal rate, 91% in the quarter; term, 55%. And scrapping is continuing. It's not at the pace we've seen in the prior year. So, so far this year, we've had about 16,000 car scrapped, and we expect about 35,000 to come out of the fleet.
So we're still seeing the inquiry levels to support 40,000 to 50,000 cars a year. And if you look at our backlog, we ended the quarter with just under 50% of the industry backlog sitting on our books. So we have good visibility well into '24 right now.
Matthew Youssef Elkott
Yes. I was just surprised that like, I think if this had been any other cycle with the current tightness in the fleet, we would have already seen 50,000 to possibly even 55,000 car a year, but I guess it's just a more smoothed-out cycle. So we might have solid builds for 2 or 3 years to come.
On the order side, your orders were solid in the quarter. Can you talk about where they came from? Was there like 1 or 2 big orders included? And can you talk about the order activity after the end of the quarter?
E. Jean Savage
Sure. So when we look at the orders, it's really spread out. We're not seeing very large orders. So we're seeing consistent orders of car types that we talk about. They may be in smaller quantities than you've seen in the past when you've had a single market that is driving the demand. So overall for us, this is really good because it gives us the ability to stabilize our manufacturing facility.
But to your other point real quick, I really think that this cycle, everyone's being disciplined. There's not a lot of speculative orders, and that's why the tightness is remaining, and that's a good thing. Not only from a manufacturing standpoint, but from a leasing standpoint, it's really good. So we're hoping that continues.
Matthew Youssef Elkott
Got it. And just one last high-level question. The Class I seems determined to continue to improve velocity in other service metrics, which could be a headwind to equipment demand in the intermediate term in absence of volume, given the volume outlook continues to be pretty anemic, that's basically one of the few levers they have.
How concerned that this might start affecting actual underlying demand for equipment? And if it does, where would we see it first, in manufacturing orders or lease rates?
E. Jean Savage
So again, remember, there's not one single commodity driving this demand. It is actually supply driven. So when we're looking across the board, we're still seeing good orders. If you want to pick an area where it's lighter, it's tank cars right now. So someone had mentioned before that maybe the upcoming rule change in '25 would affect some of that, we've not seen a large increase in tank car orders. There's still some there, but it's a freight car-driven demand and recovery that we're seeing.
So if you look at -- if you look at the biggest downside, it's intermodal. Luckily, we don't have any intermodal in our fleet for our lease fleet. And yes, we've built some, but it's not a major car type that we build. So overall, we're still seeing very positive signs and again, our outlook is well into '24.
Operator
The next question comes from Justin Long with Stephens.
Justin Trennon Long
Thanks, and good morning. So building on the question about orders, if you look at the industry order book, it took a pretty big step-up in the second quarter versus the first quarter. How much of that would you attribute to an acceleration in the demand environment versus just the timing of orders? I know there can be a lot of lumpiness quarter-to-quarter. And I'm curious if you have any updated thoughts on industry order flow as we move through the back half.
E. Jean Savage
So Justin, as you know, the orders can be lumpy quarter-to-quarter, and I think that's what you're seeing. It's never really smooth. As we look at what we believe the industry will order, we still believe it's going to be the replacement-level demand. So it's going to be equivalent to getting that 40,000 to 50,000 railcars a year. If you look at intermodal, there were about 10,000 less -- go ahead.
Eric R. Marchetto
Justin, going back to what we talked about, 10,000 orders a quarter is kind of that replacement-level demand. Last -- first quarter was a little bit lower than 10,000. Second quarter is higher than 10,000.
When you go back over the last 6 quarters or so and even if you remove our long-term agreement that we have with GATX, which you shouldn't, but if you did, you'd still average 10,000 cars a quarter. So we would expect that, going forward. There may be a quarter where it's lower, but I think that long-term trend is at 10,000 a quarter. And we see that going out into 2024 and beyond.
E. Jean Savage
And one thing to go with that again, is that 250,000 cars that have to be scrapped, either from regulation or age over the 5 years, so there's going to be some consistent demand there.
Justin Trennon Long
Okay. Got it. And secondly, I wanted to follow up on manufacturing margins. It was good to hear that we've seen some improvement in June. I was curious if you could comment on July and if that improvement in margins has continued?
And then Eric, on -- for gains on sale, that could be such a big swing factor in the modal. So I'm curious if you can give us any color on how the second half could look versus the first half and particularly the fourth quarter because it sounds like there's a big sale coming.
E. Jean Savage
I'll go ahead and start a little bit. When you're looking at manufacturing, a couple of things that we've seen. I've talked about the changeovers in the first half of the year, that was about 200 basis points of headwind that we saw that we won't see in the second half. If you look at the efficiency improvement, we are seeing that flow over into the third quarter.
And the fact that we're not going to have as many changeover, the fact that we have less turnover in our employees in the second half that we saw in June less turnover and also the fact that we pretty much got to our ramp point, so we got to the volume, I think you're going to see that level out and the performance come through.
The last thing I'm going to say is the reason we lowered the overall operating margin coming out in the third and fourth quarter was the fact that you're going to have FX headwinds of about 120 basis points in there. So the FX is a driving factor in the fact that we had to lower the guidance. And Eric, if you want to...
Eric R. Marchetto
Yes. And so Justin, and following up on the second part in terms of gains on RevPAR sales, yes, in the second quarter, there was significant gains by $29 million, which, in my prepared remarks, I talked about in the fourth quarter.
Certainly, there are gains embedded in our forecast, but when you get back to where -- getting to that net fleet investment of $250 million to $350 million, and you'll see in our Q, the leasing backlog is about $380 million. So we still have deliveries to our fleet, and so we are managing that net fleet investment.
In terms of the size of the gains, I'm not going to get into specifics, but the first half of the gains -- gains on sale, they're pretty significant. And from a directional standpoint, we're expecting fewer gains in the second half of the year.
Operator
The next question comes from Bascome Majors with Susquehanna.
Bascome Majors
I appreciate all the quantitative framing of how FX is weighing on both the quarter and the second half outlook. Qualitatively, though, we followed you for about 12 years now, I don't recall FX coming up as a major driver of unexpected upside or downside really ever historically, and apologies if we missed that.
I'm just curious if something has changed in the way that you either manage the business or hedge that risk, where this is going to be a more meaningful driver of volatility, going forward because the Mexican currency has always been pretty volatile and we just haven't seen it show up in your results, at least at the conference call sort of level?
Eric R. Marchetto
Yes, Bascome. This is Eric. You're right. They have not come up. Part of it is prespend, we had some natural hedging in place because we were generating revenue in pesos with the non-rail businesses. So that always neutralize some of the impact. And then if you go back to over, as you referenced, last 12 years, generally, the peso has weakened against the dollar. And so it's mainly -- but it hasn't had the volatility where you've had 17%, 18% changes in over a 2-quarter period.
So we've had some significant strengthening in the peso this quarter or over this year through the first half. It started -- we put our guidance in around 20%. It's now down to below 17%, so that has had an impact. It strengthened -- in the first quarter, we mentioned it was about a $3 million impact. The second quarter, that accelerated to about a $6 million impact. So -- and then as we looked at our guidance for the balance of the year, we didn't see the peso getting weaker. And so we adjust our guidance to reflect kind of the current level of the peso.
We put some hedges in place to protect any downside from that, if it strengthens further. And then if the peso does weaken, which some forecasts say will weaken, but if it weakens that we'd benefit from that, and we would benefit from the peso.
We have a lot more of our production in Mexico. So most of our new car production is in Mexico, while most of our overhead costs are peso-denominated, and so that does come through. We're not immune to changes in currency, especially now that more of our productions are in Mexico, it has an impact. And that comes through in both the balance sheet, and it comes through in the operating margin of the Rail segment.
Bascome Majors
I appreciate that. That does make a lot of sense. Maybe taking a step back. If we go back to the Investor Day from almost 3 years ago, some of the messaging was on a variabilization in some ways of the cost structure in the manufacturing business, where you might have higher lows and lower highs through the cycle and margins there.
Now clearly, that's been difficult to achieve in the supply chain disruption environment that you and all of your competitors have been operating in over the last 2.5 years.
I'm curious, does the strategy still have an opportunity to work as design? Or is there a need to change some of the calculus that went into that? Do you have the right procedures, people? Just curious if looking forward on the environment you're operating in today versus the one you plan to operate in on 3 years ago, if the manufacturing business could be done a little differently?
E. Jean Savage
So Bascome, we do believe that we still have the opportunity to do what we said in the 3-year plan. You mentioned some of the headwinds, the change in the environment, everything from COVID, the war in Russia, the inflationary period. All of those have mitigated the results coming through. I think the second half of this year, you're going to see the manufacturing results start to shine, even with some of the FX headwinds that we've talked about. We expect, going into next year, we won't have quite the headwinds on the FX that we have now.
But as you go through, we're always going to be looking to optimize our operations. They've taken a lot of the steps. We're still working on some of those programs. So we look for those results as you look at the second half of the year, moving into next year.
Bascome Majors
Maybe just to look in that conversation. We're in year 3 of that period, do you have a sense of how and when you'd like to share your next mid- or long-term vision for the business?
E. Jean Savage
So right now, we're looking at later this year, most likely in the fourth quarter. You'll hear us announce at Investor Day and give you the update on the strategy.
Operator
The next question comes from Steve Barger with KeyBanc Capital Markets.
Jacob Moore
This is Jacob Moore for Steve this morning. My first one is just with the balance sheet getting to your leverage targets. Can you just talk about how you're thinking about capital allocation priorities? Given the current environment, where do you see the best opportunities for value creation?
Eric R. Marchetto
Yes, Jacob, this is Eric. In terms of capital allocation, that calculus continues to change. What's good is we do see opportunities to invest, we have still returned a lot of capital to shareholders, we've grown our dividend, we've done a lot of share repurchases. We've not done any yet this year, but it's certainly been a big part of our track record.
The other piece is yields are up. We're seeing the returns better. So leasing investments, the yields are looking better. We're seeing opportunities in the secondary market. We're also seeing opportunities to sell assets in the secondary market. So it's a very balanced approach.
It's -- one of the good things about our business is that we have opportunities to deploy capital, and we're going to do right by the shareholders. So I think that nothing changes there. We'll continue to deploy capital as the business generates significant cash flow.
Jacob Moore
Got it. That's helpful. And then just my second one is on -- back to your guidance. So it looks like you've increased industry deliveries to the high end of the range, the lower EPS a bit, that implies second half industry deliveries down a bit, but then on the same math, EPS up a lot.
So can you just talk about the factors that you think are going to drive that sort of starkly contrasting performance? I think some of that's probably implied in margin improvement. But do you think that your deliveries are going to trend differently than what you're implying for the industry?
Eric R. Marchetto
So the first half of the year, I think the industry has delivered right at 23,000 units. So we're talking about 45,000. I would say that we see it kind of leveling off, not reducing, is implied in that. .
When you look at -- we do see significant margin improvement coming through, that's a factor. We have visibility of the orders taken, and we've also have confidence in improving the -- our performance in terms of realizing those margins into operating profit. So none of that has really changed. I wouldn't read too much into our -- by 45,000 railcar comment. We expect the deliveries to kind of be at that level for a longer term.
Jacob Moore
Okay. Understood. And then one just quick one, if I could, could you provide any clarity on expectations for cadence as we head into '24 after what's likely a [lopside] in '23?
E. Jean Savage
So overall, as we're looking into 2024, we're not giving an overall guidance, I guess the only thing I would say is we still expect the 40,000 to 50,000 railcars for the industry, is about as far as I'll go there. We'll get into '24 guidance later in the year.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Jean Savage for any closing remarks. .
E. Jean Savage
Well, thank you for joining us today. Despite some downside factors in the quarter, we're continuing to feel positively about the operating environment and our company's ability to execute on substantial revenue, margin and EPS growth in the back half of the year. We look forward to sharing our progress with you.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
