TRINITY INDUSTRIES INC Q4 FY2024 earnings call

• Jean thanked Trinity employees for delivering strong financial results in 2024. The full-year adjusted EPS was $1.82, a 32% year-over-year increase. The adjusted ROE was 14.6%, and cashflow from operations with net gains on lease portfolio sales was $645 million, a 65% increase over 2023. - Market update: In 2024, the industry delivered just under 43,000 railcars and received orders for 25,000. Anticipate industry deliveries of about 120,000 railcars from 2024 to 2026. 2025 inquiry levels were elevated with positive volume signals in certain segments. - Segment highlights: The leasing and services segment continued to perform well. The maintenance business had increased external repairs. Forward-looking metrics were favorable. - Safety: Continued incremental year-over-year improvements in safety metrics, achieving approximately half the industry average of manufacturing incidents. - 2025 outlook: Confident in the strength of the leasing business, with balanced market conditions favoring existing assets.

Railcar leasing and services segment: In the fourth quarter, the segment generated revenues of $287 million and a segment operating profit of $121 million with a margin of 42%. Gains on portfolio sales in the quarter were $21 million. For the full year 2024, leasing segment revenue was $1.1 billion, an increase of $102 million year-over-year. The maintenance business saw an increased volume of external repairs. Forward-looking metrics: The future lease rate differential (FLRD) was 24.3%, the lease fleet utilization rate was 97%, and the renewal success rate in the fourth quarter was 77%. Full-year lease portfolio sales were $361 million with gains of $57 million. Rail product segment: Full-year operating profit improved in 2024, driven by margin improvement, partially offset by lower gains on railcar sales and higher eliminations. Full-year revenues for 2024 were $3.1 billion, a slight improvement over 2023.

• 2025 industry deliveries are expected to be approximately 35,000, a ~20% decrease from 2024. - 2025 net lease fleet investment is expected to be $300 million to $400 million. - 2025 EPS guidance is in the range of $1.50 to $1.80 per share. - Leasing and services segment: Segment operating margins inclusive of gains are expected to be between 38% and 41%, and gains on lease portfolio sales are expected to be between $40 million and $50 million. - Rail product segment: Full-year segment margin is expected to be between 7% and 8%. - Tax rate is expected to be approximately 25% to 27% for the full year. SG&A costs are expected to be lower in 2025 by approximately $40 million, including lower incentive compensation.

• Macro-economic forces are putting pressure on manufacturing. - Uncertainty surrounding tariffs has led to investment and order deferrals. - The uncertainty in tariffs may pose additional risk to the 2025 guidance if it continues to cause delays in railcar orders.

Q: Can you talk a little bit about the backlog coverage for the year and any shaping on how that looks differently in the first half versus the second half, or maybe even the fourth quarter?

A: As we said, we expect industry deliveries for 2025 to be down about 20% to 35,000. We believe the second half will be better and higher than the first half, and we still strongly believe there will be about 120,000 cars delivered between 2024 and 2026, meaning we expect 2026 to tick back up.

Q: Given how fluid the tariff uncertainty still is, have you been able to maybe adjust some of the terms of your new purchase contracts? How is that uncertainty shared between the buyer who might pay more or your margin that might get eaten up by something that changes before a car is delivered?

A: The majority of our contracts have escalation in them, which would allow us to pass those tariffs on. We have a good team in supply chain and compliance working to mitigate what some of those tariffs could be so we can avoid passing all of that on to a customer. We are not taking risk on the tariffs; it is a pass-through, and we are working between our different groups to minimize that effect.

Q: The lease business, when you're originating leases but holding the car on your own balance sheet, is there a similar escalation cost if the cost of that car changes materially from what was anticipated at lease?

A: Yes, there is escalation in that too. With interest rates staying higher for longer, we are still bullish on what we can do with our lease rates. We have just recently gone over 50% of our lease rates being repriced in that double-digit positive FLRD range, so we still see room to continue to raise those rates.

Q: You mentioned that incentive comp was going to come down this year in how you framed guidance as part of the SG&A decline. Could you maybe quantify sort of how much that is contributing to the $40 million or so lower SG&A cost?

A: Effectively, we had a good year in 2024, so our incentive compensation was up. When we reset our guidance, we kind of put everything back to target. More than half of the $40 million cost savings is coming from other cost takeout, whether that's headcount or other spending costs. And less than half of it is the incentive compensation, but it’s a meaningful number.

Q: On the deliveries for 2025, I think implied down roughly 18% versus 2024. Relative to the industry expectation, would you expect Trinity's deliveries to fall roughly in that range, the relative to the 18% or should we think higher or lower?

A: We are expecting industry to be down around that 20%, and we're expecting to be in our normal range, which is between 30% and 40% of deliveries during the same timeframe.

Q: For the margin though in manufacturing, I think you mentioned the 7% to 8% full-year. Is there any way we could think about how that trends through the year, maybe starting off in the first quarter?

A: Typically we're not giving margin range quarter by quarter because again, it can vary depending on what's going on in that quarter, the mix of cars, the number of setups and all that we have there and then also the volume. We did indicate that we expect the second half to be better than the first half. So, I would expect to see improvement from that standpoint.

Q: You mentioned I think the order inquiries were picking up into 2025. If you could just - unless I heard that wrong. And then is that tank car-led or freight car specific? So, that's the first question. Then the last question would just be if there's any update on the parts business, how that's doing, how that's expected to perform in 2025?

A: When we look at the inquiries, they have picked up. We've got some strong ones there. This is still a freight car-led recovery. Still more of a replacement demand, but I will say tank cars have been fairly consistent on the level of inquiries there. When it comes to the parts business, we're really pleased with the work that they're doing, both for internal and external sales. As we look at our acquisition we did with Holden, it is proved out very well with the automotive increase, the other racks that we've seen go in and performed extremely well in 2024. Our traditional business has also picked up in new areas and they continue to look for either other agreements or ways that we can provide more parts both to our own fleet and to the external fleet that's out there.