TRINITY INDUSTRIES INC Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Safety: Jonesboro maintenance facility achieved 5 years without a lost time incident, highlighting the company's focus on safety.
• Market Context: 2025 is a year of uncertainty, but the company is agile; the railcar manufacturing industry is cyclical, with current cycle led by replacement demand.
• First Quarter Results: GAAP EPS was $0.29 on revenues of $585 million; adjusted return on equity for the last 12 months was 14.2%; lease fleet of 144,000 railcars had utilization of 96.8% and FLRD of 17.9%.
• Market Update: Inquiry levels were high but conversion to orders was slow; industry railcar deliveries were expected to be 28,000-33,000 in 2025; North American railcar fleet contracted for the first time in 2 years; railcar activity stepped up in March with low storage.
• Segment-Specific: Leasing segment operating margin increased year-over-year; Rail Products Group revenue decreased, and operating margin was 6.2%.

Segment Performance

• Railcar Leasing and Services: Revenues were flat year-over-year with higher lease rates partially offset by lower external repairs. Leasing segment operating margin increased year-over-year due to higher lease rates and gains on lease portfolio sales, offset by lower external repairs volume. FLRD was 17.9%, fleet utilization was 96.8%, renewal lease rates were 29.5% above expiring rates, and renewal success rate was 75%. Quarterly net lease fleet investment was $87 million.
• Rail Products Group: Delivered 3,060 new railcars and received orders for 695; revenue decreased due to lower deliveries. Operating margin was 6.2%, down sequentially and year-over-year. Backlog was $1.9 billion, and order activity improved in the second quarter. 29% of revenues were eliminated as they went into the internal lease fleet.

Guidance

• Industry Deliveries: Lowered full-year industry railcar delivery guidance to 28,000-33,000.
• Rail Products Group Margin: Segment operating margin expected to be between 5% and 6% for the year.
• Capital Expenditures: Operating and administrative capital expenditures guidance unchanged at $45 million to $55 million; net fleet investment guidance at $300 million to $400 million.
• EPS: Refined full-year EPS guidance to a range of $1.40 to $1.60 per share.

Risks

• Macroeconomic Challenges: Uncertainty due to inflation, recession, or other economic conditions impacting demand.
• Market Volatility: Railcar manufacturing cyclical nature and market uncertainty affecting order conversion and revenue.
• Cost Pressures: Current policy proposals may impact demand and revenue, though minimal direct cost pressures were currently noted.

Question and Answer

Q: The FLRD measure is still quite high but has come down from previous quarters. Could you help us bridge between what's happening in the expiring lease rate comps as we move forward to make that fall and what's happening in the sequential sort of spot lease rate? And then on that second question, if there's any delineation between what you're seeing in tank and freight.

A: As we look at the FLRD, it's really affected by the mix of car types coming up for renewal in the time frame, but still overall very positive. The renewal rate versus expiring rate in the quarter was 29.5%. If we look at our average lease rate, it's up both sequentially quarter-over-quarter and year-over-year. Again, it could vary quarter-to-quarter more on the mix of car types coming up during that 12-month period. The brunt of the delays are more in freight than tank cars.

Q: You made some comments on cadence, Eric. I think 2Q on both deliveries, I believe you said margin and overall earnings would probably be the weakest in your expectation. Can you walk through that in a little more detail on what's driving that cadence? And maybe bridge to sort of where you exit the year in 4Q, like why do you think there is some improvement from the 2Q trough? What do you have visibility into to drive that improvement? And ultimately, anything else that gives you conviction that we kind of go down and then go up from here.

A: Yes. I'll start with leasing because there's probably a lot more certainty around that. When you look at the leasing performance, as Jean mentioned, with both the FLRD and where we're currently renewing railcars, we expect revenue to continue to increase there through our renewals and also through our fleet growth. And so the leasing revenue should continue to improve along with leasing margins. And then when you look at gains on car sales, those are back-end weighted for the year in terms of the gains that we guided to, the $40 million to $50 million. We had relatively low gains this quarter. And so those are in the back half of the year. When you look at the Rail Group, we talked about the deliveries here and the deliveries that we're expecting with -- we expect the deliveries to be lower in the second quarter relative to the rest of the year. So it's kind of all those things that are contributing to that second quarter being lower and improving further out.

Q: Guidance assumes some of the inquiries we are seeing begin to convert to orders in the next few months. Can you just talk about how customer conversations have sort of developed through the quarter and here into April? And what's leading you to believe the inquiries will turn to orders.

A: As we look at what's going on in this quarter, we mentioned that inquiry levels were the highest we've seen in the last couple of years. And we are currently finalizing several orders that are approximately $100 million. So we're starting to see some of that convert more. I guess the other thing I would say there is that as you look at it, the brunt of the delays are more in freight than tank cars.

Q: Do I have it right that I think 17% of the deliveries went to internal fleet in the first quarter, if I just take your own leasing fleet change quarter-over-quarter. Just seeing if that's correct? And then do you still expect the 25% to 30% of the full year deliveries to go to the internal fleet this year implying sort of the larger internal deliveries and eliminations for the remainder of this year relative to the first quarter?

A: Andrzej, we may have to talk later. But eliminations for the first quarter were right around 29%. And for the year, we're expecting them to be over 30% of eliminations. So I think we'll have to go back and look. That really hasn't changed.

Q: Any more share repurchases to think about this year just to think opportunistically there?

A: That share repurchases, we did buy back some shares in the first quarter and we still have our authorization outstanding. We said we’re going to be opportunistic around share repurchases. And so we’re going to be opportunistic.

Q: You talked a little bit about the term loan and the refinancing of the ABS. Can you just talk a little bit about what you're seeing in happening recently on the credit market? Why you chose to go with the term loan instead of an ABS structure? And any impact to either that you want to call on the balance sheet or interest expense from that refi going forward.

A: Yes. Thanks, Bascome. You're noting that we did close a $1.1 billion bank term financing yesterday. That was -- we had a term loan that was maturing later in the year, so we refinanced that. So that was one of the reasons why we stayed with the bank term market is we were -- that was the capital that we were repaying and we were able to merge that with another bank term loan that we had and combine it and upsize it. So we really are happy with the execution. The spreads were, in my opinion, attractive. The ABS market is still an attractive market for us. And so we'll -- in the future, I'm sure we'll be accessing the ABS market as well, but we really took advantage of the bank's appetite for funded loans. And so we think we've got a really good execution there. The rates are – the spread is lower, so that’s good, but you’re increasing the leverage a little bit. So the effect is there’ll be a little bit more debt, but I think nothing material changing from our trend line.