Newsfilter article unlocker

Everybody, thanks for joining us. We're excited to get started with day two of the conference. Yesterday was a really good and successful day. Appreciate everybody's support. And, you know, we're looking for an exciting day two and are very pleased to be starting off with Trinity this morning. So from the company, we have Eric Marchetto, who's the chief financial officer. So first off, Eric, good morning. Thank you for joining. Thank you. Thanks, Chris. Absolutely. It's my pleasure. So I guess maybe let's start sort of big picture. We always like to sort of get a bit of a lay of the land of how we're thinking about things from a macro perspective. So maybe we can start just big picture, how you're thinking about the world that we're in right now. Obviously ISM has started to look a little bit more positive over the course of the last several months. We have seen some other freight indicators that are looking a little bit more constructive, whether they be car loads or some stuff that's happening on the LTL side. Maybe just big picture, how are you seeing the world, and then we can dig into the businesses themselves. Sure, yeah, great. Similar view that we are seeing, as you mentioned, ISM, we're seeing rail traffic in our sector pick up modestly, kind of showing some good growth. And when we drill down and look at everything kind of industrial production, that's a big driver for us is U.S. industrial production. We are seeing healthy signs, both on the employment side and some of the survey data. So from that standpoint, it's been good. There's still a cloud of uncertainty in the market, especially in the U.S. industrial economy. Everything outside of data centers and energy, there's still some uncertainty there. And prices are higher. And so we've seen a lot of inflation pull through in the new car market. That has made the existing car market more expensive as well. And so, you know, it's hard to tell if people are waiting for prices to alleviate or if it's just the uncertainty. But we're still seeing, with all the tariff changes that there have been, weekly changes in tariffs, we're seeing our industrial customers with a difficult time planning, making CapEx decisions. So the result is they tend to hold what they have and kind of freeze. It's kind of like driving in the fog. You wait. People are waiting it out. Got it. And so let's talk a little bit about the businesses. So you do both the rail car manufacturer, you're also a lessor. So I guess maybe talk a bit about the synergies of those two businesses. What's the value of the platform together? Yeah, well, we do talk about it as a platform. And so really, when you look at it, my belief is that by having a large leasing business and a large manufacturing together, along with our maintenance services, we also have some other logistic services that we offer all of those things when you put together give us a very strong view of the market and I would argue it's the best view of market in our space and it's because we serve both railroads lessors and industrial shippers our platform predominantly serves industrial shipper's but we sell direct to leasing companies we sell direct to class 1 railroads we lease to class one railroads We sell to industrial shippers. We primarily leased industrial shipper. So all those things mean we see a lot of opportunities. And so we think we we believe we see change in demand inflection points. And we have very good market knowledge. And so all that gives us a good reach. We're able to serve our customers well. Having the manufacturing and leasing together also gives us the ability to originate content. Yeah. Which is a real differentiator for us. And so having those things together, we originate a lot of new rail car leases, but we're also pretty active in the secondary market, both buying and selling in the secretary market. And for a lot of the other lessors, the primary market has turned to the secondary market just because of everything going on in the primary market. So we're seeing a lot lessors really look for existing rail cars and we're able to serve them through our fleet there as well. And so it seems like the shift has been more to the leasing side and services and a bit away from manufacturing. So I think I understand the logic there, but maybe let's walk through kind of like the strategic thoughts behind that shift towards lease. Yeah, sure. When you look at our balance sheet, our capital is predominantly in the lease fleet. And so it stands to reason that where our capital ist, we've shifted our focus more to the emphasis on the lease flea. Those are long-lived assets, 40, 50-year assets. And so, it's really about protecting that residual value, making sure the demand stays, the supply demand stays in balance. And we have some level of influence on that with having a manufacturing arm. And so all of our demand goes through our lease fleet. Andso we were not going to build a new rail car unless if we have it in our existing fleet. So the result is probably on the margin, a little more efficient market player. 20 years ago, we may have built a rail car that wasn't needed in the market because we didn't have it in our lease fleet. Today, because of our large lease fleet, 150,000 rail cars that are either owned or we manage through our RIV investors, that gives us pretty good market presence. And so it's a more efficient model. It's much more efficient to lease an existing rail car than build, invest in a new one. And so the proof should be in our return on equity through the cycle. And we've produced some really good return on equity through the cycle now. So what is the sort of goal? What's the mix, the optimal mix of the business, do you think, whether it be in the next couple of years, longer term, near term? How are we thinking about that? Well, we have a goal. We did an investor day a couple of year ago, and we talked about what we'd characterize as modest fleet growth, adding $750 to $1 billion of net fleet growth over the three years. This is the third year of that uh target and we're right on pace to uh to come in in that range yep uh you know we're we're pretty disciplined when it comes to that capital allocation we want to grow our fleet but we want be smart about it the returns have to be there and so that's really the only time you have a an investment decision on these rail cars is when it's new yeah after that it's becomes more like real estate you're trying to maximize the revenue and so uh we try and be very judicious with our investment decisions. And that's kind of where we are right now. We expect to continue to grow it. There's good returns in the business. The returns aren't there. We'll pivot and change our capital allocation strategy. And so that few hundred million a year kind of pace that you've been on, is that the right way to think about the go forward? I think if the returns are better and there, it's a pretty small market right now. We're in kind of a down cycle. We are building less than replacement level. And so we certainly, if you get back to normal replacement level or even a little bit of growth, I could see that investment growing from there. But that's kind of where we are at the bottom of the cycle in terms of fleet investment growth. Okay. And let's talk a little bit about the end market. So I'm curious from like a rail car type or where there's opportunities, where strengths, what's strong, what's weaker in this environment? So just to frame it, we look at the market in five broad segments. Chemical, refined products, energy, agriculture, metals and mining, and then consumer auto. When you look at our lease fleet, it's really those three markets, the chemical, refined products, industry, and ag. that we predominantly do full service leasing that customer base on those three segments really value the full service leasing yeah and so that's where we that's where most of our fleet is but we serve the whole market and so where we see demand we are seeing some growth with metals things like that all the data center growth sure you know that that's that sort of thing the agricultural side has been resilient it hasn't been it hasn' been great but it's been steady yep the chemical side we've seen coming into the year they had a lot of margin pressure I think with what's going on in the Middle East there's been more volatility there but they've probably done a little better as a result of that then on the energy side you know people from ten years ago always think when it's rail it's on the Energy side it's crude by rail it really more a lot those refined products that we're seeing. We're seeing good demand on the refined products in the energy side. Okay. That makes sense. I guess, can we talk a little bit about lease rates and how you think about the trajectory of lease rates? Yes, sure. When you talk about inflation in the US economy and in a broader economy, and we talk about 40 or 50 year assets, these are real assets. And so, and with all the tariff policy you've seen u.s steel go increase a lot and a rail car is predominantly made of steel whether it's steel plate or cast products it's all steel derivatives so we've seen inflation in new rail cars uh over a long period of time over the last 20 years we've seen about three to four percent annual inflation in new railroad prices yep uh we've seen one to two percent inflation in lease rates over that period uh so i my belief is there's some catch-up that's needed uh and and where we are in new rail car prices uh there's still a lot of inflation coming through uh labor costs aren't going to go down energy costs aren t going to go down and steel costs probably aren't gonna go down their backlogs are strong and so that makes new rail cars that much more expensive uh factor in where treasury rates are where funding rates are that makes lease rates on new railcars more expensive so that allows that existing fleet it provides a gap that your existing car fleets are here and new cars are here there's a bit of a gap they can you can close and you know a 10 or 15 year old rail car which our fleet is 14 years old on average has very similar utility to a new rail car so it stands the reason you'll be able to price set up that takes time you know we generally we reprice about one-sixth of our fleet a year we have a metric that we call our future lease rate differential That has been double digits for the last four years. It dropped down to single digits the last two quarters. I think that's more of a pause than a trend because of everything else we're seeing in the market. So I would expect lease rates to continue going up from here in the aggregate. There will be certain car types that are softer and stronger, but in the accurate, I would expect that inflation will pull through. And how does utilization sort of play into this? I think last year it was 97.1. How do we think about that in the interplay with lease rates? There is certainly an interplay, and utilization has held on. It's improved. At the end of the first quarter, it was 90.7, 2, or 3. And so that's held on nicely. And there is always a play. We really look at the overall yield in the fleet and make sure we're improving the yield inthe fleet. Utilization is important because if you get cars back, It's generally, there's a maintenance event, you have to remarket it. But we have been very successful in assigning existing rail cars when they do come back and getting them back in service and thus maintaining the utilization the way it is. But you really, we're looking at the overall yield on the fleet and how do we keep improving the yield on that asset. Yeah, that makes sense. I guess, you know, I'm curious about the Napier Park transaction. Maybe we could help kind of walk through a little bit there and what the opportunity, I think, comes from that for you guys as we look forward. Yeah, so great. So the Napier Park, we have, you know, in other asset classes, they'd call them sidecar investments. We have what we call our rail car investment vehicles, which is passive capital that wants to own rail cars without building out the infrastructure. Napier Park has owned a fleet of rail cars that we've managed back since 2012, 2013. And that was fund capital, kind of private credit capital. Their fund was getting at the end of life, and so they were raising a new fund, more of an evergreen fund that's probably a better owner of these railcar assets because of long lives. And so we were also an owner of those assets, roughly about 40% of those assets. We consolidated them on our balance sheet. result was we never booked any profit, manufacturing profit or gains from selling those railcars them because they're all consolidated in our fleet. So back last year, they raised a new fund, we had a lot of control rights in that fleet that was gonna, the control rights was not going to be conducive to the new fund. So we contributed those rail cars into their fund. There was another portfolio that we also own 40% of we took 100% of that, so we effectively traded. When we did that, the railcars that left our balance sheet, there was a lot of pent-up value in those. We transacted at market value. The result was $190 million gain that we realized in the fourth quarter of last year. And those railcards went into the new fund. The other railcords went wholly onto our balance sheets. Fast forward into the second quarter of this year, there was another group of rail cars that we did the same thing for. We contributed those rail cars we own 40 percent of, took an 11 percent interest in all of their rail cars, about 30,000 rail cars. And that we realized one hundred and thirty million dollar gain on that. So at the end of the day, what we have now is roughly 50,000 real cars that are in our managed portfolio that we have an equity interest in. but it won't be consolidated. We will recognize the income on more of an equity basis accounting on our 11% or on our partial interest in those rail cars. And we manage them. And so we manage them as one fleet. We are blind ownership. We market those. It's just part of our fleet. It'S got our marks, one contract. And the result is we get fee income and we get some of the residual income from owning our 11 percent uh it simplified our balance sheet we had a lot of partially owned assets and partially owned debt so from that standpoint you know in minority interest which it's not everybody has minority interest so we simplified the balance sheet from that standpoint we think it's cleans up the story but at the end of the day what it demonstrated was there's a lot value in our rail car fleet we put our rail cars on our fleet at cost at least the 90% or so that we manufacture in our fleet. And with a 15 year old fleet, you see, I've talked about 4% inflation a year and railcar assets, you're depreciating them over some time, the economic depreciation is a lot less than the book depreciation. And so when you fast forward to today, we think the value of our fleet is 35 to 45% higher than the than the carrying cost of our rail cars and we can realize that that should come you know through higher returns uh with a lower basis in our fleet or when we sell cars we'll have uh probably a little higher gains than the most would have and so you know don't read too much into that but it's just it's i think it surprised people that um there's so much value there and then i guess like maybe this is a combo question here you know is there more to be done with third party capital are there more opportunities for you to do this obviously that 35 to 45 percent seems interesting so there's maybe opportunity to monetize that so how do you think about that yeah so yeah the 35 to 40 percent is the rail cars on our on our balance sheet that we own um there rail cars are an attractive investment and so uh it is a but it's a it's long cycle too we have a few partners that we work with uh that want to own rail cars but don't want to build the infrastructure uh by doing this and also with the Brookfield, GATX, Wells Fargo combination, I think that's open eyes to other capital coming into the space. And so we certainly are having a lot of conversations with folks. It's a long sales cycle, to say the least, because it's highly structured. But the fundamental big takeaway is these are attractive investments. You've got capital in the market looking for yield. And rail cars offer offer some nice risk adjusted yields. So there should be more to come from that. Okay. And then I guess maybe if we can think about sort of, you know, how you think about debt, ABS versus maybe other opportunities for you sort of how do we think about where your debt levels are today, what you maybe want them to be or what you think could be a target over time? And then, you Know, the products that you're you're kind of focused on? Yeah, sure. So we, We hit the capital markets two different ways. With our lease fleet, we hit it through the ABS market, and that is non-recourse debt. The leases are a very good way for us to access the capital market. We generally access the market through that market as a AA issuer. We've been an issuer in that space since 2002, so long history there. And so we're able to get pretty good access to funds by accessing it as a double A. We also access the market as a high-yield issuer, double B, double-B plus credit, and there is a differential. The ABS market is generally about 75 to 100 basis points more attractive. comes with some structure uh but we're you that structure is pretty normal for us and so from that standpoint uh it's good but we've also see the high yield market as an opportunity to continue to access and you know there's a little more flexibility in the high-yield market versus the ig market and so we like that as well but most of our debt comes through the abs market in terms of debt levels we look at it two different ways on the abs side we look at loan to book value and we're running right around 70 percent 69 70 right now uh our range is 60 to 70 percent uh but you access the abs market on more of an appraised value and income approach so we certainly could uh raise that we've got about 900 million dollars of unencumbered equipment on our lease fleet but we don't see a need to do anything with that we got goals that we've talked about 60 to 70 we're going to stay in those goals when you look at more on a consolidated basis we look at debt to total capitalization we're running right around 81 82 percent there very comfortable with the lever the the amount of debt we have on the balance sheet um and so the result is we keep paying the dividend raising our dividend and buying back shares periodically okay and then just to wrap up i know we talked a little bit about pricing and i think i think it's come down a little but the last couple quarters can we just you know but but i think you think we'll we'll stabilize and start to see that moving up as we go forward the next yeah i think there's the the underlying trends are there's still inflation in the market yeah and so that that really and especially with what's going on the treasury market uh you know they're they're 450 plus today on the 10-year uh that earlier in the year was 420. yep uh four even four at one point and so i think you'll continue to see some inflationary pressures in the existing We did a survey yesterday morning, and I think the consensus is for a 25 basis point hike as we get a little later on in this year. So we'll see where those numbers go over time. That's shocking how much of how fast it's changed. Exactly. That's right. So consensus has moved a little bit here. Yeah, that's fantastic. So let's let's pivot a little bit to the rail products group and maybe talk a bit about manufacturing. You know, let's talk a little bit about the delivery pace for this year and maybe early thoughts on what you might expect for next year. next year sure so if you just framing the uh the overall market uh la we would say a normal market it's around 40 000 we did our three-year uh uh look a couple years ago we put out guidance that we thought the industry would do about 40 000 a year uh last year we did about 31 000. uh and a lot of that was all the uh macro uncertainty uh this year we expect to do about 25 000. yep So another step down at 20%. So pretty dramatic. If you think about other industries 20% down year over year, there'd be, you know, there would be people in front of Congress looking for bailouts, not in our industry. That's kind of our normal, that's our normal. And so we expect about 25,000. That is well below replacement level. We'll scrap probably 35,000 to 40,000 rail cars this year as an industry. And so that fleet will remain tight, especially with railcar loadings improving. And so it should get back to 35,000, 40,000 railcars within the near term. And we expect next year you'll start to see that. We haven't really seen the order intake to support that inflection point. So I'm looking for that later this year, hopefully. It's taken longer than I've expected, just because the uncertainty has lasted longer than I expected. But at some point, it's got to come back. What I'm really pleased with on the manufacturing side is even at these low levels, we've produced some pretty good margins. And so in the first quarter, our rail group margins were about 7%. We've got a guide of five to six for the year in our railgroup. And so at these low levels, being able to produce solid single-digit margins I think is a testament to the work that the team has done on taking cost out. And as the volumes come back, we see a lot of operating leverage in the business, and we would expect those margins to improve pretty dramatically as the volume comes back. And how do we think about tariffs here? So we've got the Section 232 tariffs, I guess. How do you think about that in the context of tank cars? What do you your exposure is? What can you guys do for mitigation? one thing i know is the rules keep changing that's for sure and so uh trying to keep up um there are there are some there are new 232 tariffs for tankers that make entry uh into the u.s our tankers do not make entry into the us okay uh and so we're trying to get clarity from cbp on what all that means. But right now, we keep working to get clarity. It just adds to the uncertainty. And so I think what the result will be, people will pause on making investment decisions on tank cars in the near term just because of the uncertainty. We're certainly hearing that from lessors, as we call on them. On the freight car side, we're seeing a modest pick up in the demand there. Hopefully that's a sign of things to come. But the only thing I can say for certain with tariffs is they're going to change. That's for sure. Between now and our conference call, they'll change. So more to come, but they're not making entry right now, I guess, is your point, right? So there is a little bit of that distinction versus what's been stated. Exactly. Okay. All right. That that's helpful. I appreciate you giving us that color. You noted this sort of inflection in, in, in numbers on the manufacturing side that you're expecting. What are typically the benchmarks that we should be watching for that'll give us some clarity that this is actually happening? We talked earlier about ISM and overall industrial activity. I don't know if that's a correlation that we shouldn't be particularly focused on, or is there something else? You know, so ISM is a good metric. Also, just we look at rail traffic. Rail traffic is, you know, even for those outside of the rail space, it's great data because it comes in weekly, it's effectively real-time and it's across a lot of different markets and so when we look at that railcar data and we do some other stuff with the data we see kind of a supply demand balance and we can look at things like that also our inquiry levels we look in our inquiry levels our inquiry are supportive of we're starting to see things coming the the counter that is people are taking longer to make decisions you know that just speaks to the uncertainty, which is code for tariff talk. It's difficult to plan. I thought with the midterms coming up, we'd get more clarity, and we've probably gotten a little less clarity. Yeah, no, it seems like the tariff stuff took a pause for a period of time earlier in the year and maybe has come back a bit more recently as a source of that. Or we at least got numb to it. It may be. That's certainly possible. We spent a lot of time working on a lot of brain damage last year, that's for sure. And then inquiries to orders, that conversion process, how does that typically play yeah typically um it's fairly predictable uh but uh lately there's been a little bit more of a pause on it it's extended a little but in terms of uh and that's just it just talks about what you just talked about so it's not as uh it's softer now in terms of converting those okay both on existing cars and new cars got it um so i guess you know you you took up guidance decently in the first quarter um i think that's higher gains but then you know you got secondary market sales and and the deal um you know i guess how how can we disaggregate that and think about sort of the gains you have the deal and an underlying business and think about sort what the key drivers are of the upside yeah when you the upside is primarily the gains yep and so when you look at the underlying business um the underlying businesses we haven't seen a lot of change in it from our original guidance in february that's good because we had still a lot of uh rail cars to sell to hit our guidance this year and they've kind of come in as as we've expected and so from that standpoint um you know that that's been you kind of no change is positive uh because things are coming along uh you know on the gain side uh they can be lumpy they're operating there's be opportunistic it's a very robust trading market right now yeah as i mentioned most of your other uh independent lessors are sitting out the primary market and they're focusing on the secondary market which means it's a pretty deep uh broad market in terms of buyers and sellers and so there's a lot of activity there we we access it both on both sides of it we see opportunities on both side of it and so uh that's probably where there's more availability within the business you'll get some variability quarter to quarter especially on the maintenance side the fleet you know it's all for full service leases large tank car fleet so compliance can uh it's predictable on an annual basis it's not as predictable on a quarterly basis and so you'll get some variability there uh but you know in the lease business it's fairly predictable i talked about you know about 15 of our fleet up for renewal on an annual basis that means 85 of it isn't and so uh you know contracted cash flows we ought to be able to project those pretty effectively. And so there's a lot less volatility there. And so that sort of speaks to like the normalized earnings power. That's the way you should be thinking about the algorithm there. Okay, that's super helpful. Okay. And if there are any questions from the audience, feel free, raise your hand, we'll get you in there. If you have any questions. So I think you talked about 1.2 to 1.4 billion in cumulative cash generation over that 24 to 26 sort of planning period, I guess. How do you think about deployment? We talked a little bit before about you know maybe where the investment opportunities are coming but how do you think about that between sort of the fleet the secondary market and you're working on the debt and sort of all the so yeah that's the beauty of this business it generates a lot of cash flow yeah and it's fairly predictable and so what we're going to do with that cash um that that 1.2 to 1.4 first we're going to invest in the fleet so that's 750 to a billion dollars of net that's before you finance it so you can you can leverage that and uh where it's not 750 billion dollars of cash we pay a dividend of about 100 million dollars a year we've grown that dividend for seven eight years straight and so a healthy dividend on the debt side our abs debt amortizes monthly and so there's always some cash flow that's going to pay down debt and then when we refinance rail cars there's usually uh you get more cash out and so um that that will continue overall i don't expect big changes in our leverage profile uh we're opportunistically buy back cash and we'll opportunity to look at m a opportunities m a opportunity is probably more on the fleet side than than uh you know other operating businesses but we've bought a few over the last few years and we'll continue to look at other kind of bolt-on uh adjacencies that'll just round out our platform does this feel like a better or worse m a environment than what you've seen in the last several years it's probably a little there's probably little more realism in the bid ask yeah um but you know in the last couple years uh people remember those multiples from a two or three percent interest rate environment and not from a four to five percent benchmark and so I think that's I think people are starting to realize and I think also what you mentioned earlier if people's outlooks or interest rates are going to go higher and not lower then today may be better than tomorrow yeah absolutely so that will probably lend to a little more tightness around that bid aspect. Yeah, that makes sense. Okay. And I guess maybe to wrap up, I guess kind of what's the sort of three to five-year outlook? How do you guys think about the world for Trinity beyond just sort of the near term in terms of how you want to size these businesses and sort of where you think the opportunities will take you? Yeah, so over the medium term, I expect this business to really outperform from a return on equity and an economic profit standpoint um i think the fleet will continue to improve the yield uh i think manufacturing's at you know what what should be at the bottom of the cycle uh and so really when you start getting mid-cycle uh this business especially the rail group will generate a lot of cash yep uh and So it'll be it'll Be fun to do something with that cash whether that's in fleet purchases or or whatever whatever uh whatever that may be but i i you know we look at the returns on equity in the business and i would expect those to we've we've run 24 percent the last trail in 12 months and going back a little bit further and i don't expect that will continue got it well listen eric this is super helpful appreciate you spending some time with us this morning thanks chris great way to kick off thank you thank you thanks guys appreciate it