Despite uncertain economic conditions, Trinity Industries (NYSE: TRN) expects rail volumes to improve in the second half of the year, based on "healthy" inquiry levels for its railcars, company leaders said during TRN's second quarter earnings call on July 25.
Railcar "orders are lumpy, and there was a lot of uncertainty this quarter that we think causes pauses, whether it be global trade tariffs, the threat of tariffs on Mexico, interest rates – everything in between," said Eric Marchetto, TRN senior vice president and TrinityRail Group vice president. Trinity leases and manufactures railcars.
"So, all of those things cause people to pause on decisions. [But] we still like the inquiry levels. GDP [gross domestic product] looks like it will continue to be favorable. Railcar loadings, we expect to start to improve. All of that should bode well for demand," Marchetto said.
Trinity reiterated some of its earnings guidance for the year, including an annual earnings per share guidance from continuing operations of $1.15 to $1.39 for 2019, which would constitute as a 64 percent to 93 percent increase from 2018.
"We continue to expect segment profit from continuing operations to increase throughout the year as we add railcars to our lease fleet and ramp up railcar deliveries. At the consolidated level, our operating profit eliminations from sales to leasing will also move up as we add cars to the lease fleet," said TRN chief financial officer Melendy Lovett.
Trinity also has an annual goal of 11 percent to 13 percent for a pre-tax return on equity, which "is going to be a stretch goal for us to accomplish," but "we looked at several different scenarios and we certainly stress tested those... And we are considering both financial and operational levers in looking at what actions we can take to achieve those goals and we're confident," Lovett said.
"Certainly the market has an impact on what our performance can be. However, our goal is to stabilize our earnings and returns to have them be more steady through the cycles as a result of growing our lease fleet and adding service to our platform." Lovett said.
Trinity executives said the company is refocusing itself to become a rail products and services company that offers services that would streamline railcar ownership by enhancing the ability of customers to load, transport and unload railcars more efficiently.
The company has added over $565 million in new railcars to the leased fleet for the remainder of 2019, and it expects modest price improvements sequentially for the remainder of the year.
"Our team has been very successful renewing and assigning leases to maintain a high level of utilization. And I'm very pleased with the service levels with three new rail teams continue to deliver which is differentiating our business," Marchetto said.
Trinity also said it expects the addition of a new Iowa railcar maintenance facility, announced in the second quarter, will increase TRN's ability to service the maintenance requirements of approximately 50 percent of its lease fleet.
"By increasing our capacity to maintain our railcars, we expect to increase our service level to our customers while earning a very attractive return on this growing part of our platform. Managing the maintenance and compliance of our lease fleet will also enhance the productivity of our railcars. Our experience internally servicing our own railcar maintenance requirements has led to reduce turn times of approximately 40 percent per maintenance event compared to third-party providers," Marchetto said.
Trinity reported a 16 percent increase in company-wide revenue when it released its second quarter earnings results on July 24.
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