Trinity Industries Inc (TRN) 2003 Q3 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. If anyone should any require assistance during the call today, please just press star and 0 and an operator will be standing by to assist you. At this time I would like to turn the call over to your moderator, Mr. Neil Shoop. Mr. Shoop, please go ahead.

Thank you, Sarah. Good morning from Dallas, Texas, and welcome to the Trinity Industries third quarter results conference call. I'm Neil Shoop, Treasurer for Trinity. Thank you for being with us today. With me today are Tim Wallace, Chairman, President, and Chief Executive Officer; John Adams, Executive Vice President; Jim Ivy, Senior Vice President and Chief Financial Officer; Chas Michel, Controller; and Steve Menzies, President of Trinity Industries Leasing Company. A replay of this conference call will be available starting one hour after the conference call ends today through midnight on Thursday, November 13th. The replay number is (402) 220-0423. I would also like to welcome our audio webcast listeners today. Replay of this broadcast will be also available on our website located at www.trin.net. In a moment, John Adams and Jim Ivy will have some brief comments followed by Tim Wallace's comments, then Steve Menzies will provide some brief comments. Following that we'll move to the Q&A session.

Before we get started let me remind you today's call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and includes statements as to 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. Now here is John Adams. John?

Good morning. This is John Adams. We appreciate your joining us. Since our last conference call in August we have been quite active and successful on three separate financings. Two for our railcar leasing wholly-owned subsidiary and one for the corporation.

First let me discuss our financing for the leasing company. In late August we renewed and increased the size of our railcar warehouse leasing facility. As we have previously mentioned to you, this structure has worked very well for us and has given us a great deal of flexibility in financing our leased railcar fleet. CSFD continues to be the lead and we have increased the facility by $100 million to $300 million. It expires in late August 2004. At maturity, we expect to renew the facility for another year and, then, at the appropriate time we will go to the long-term market when the outstanding balance is large enough.

We had $219 million outstanding under the facility at September 30. Last week we priced a $235 million leveraged lease which will pay down the interim warehouse just mentioned. The equity market has been very tight for leveraged leases, and we have been told that this will be the first one done this year. The debt was priced at 80 basis points over the benchmark and was significantly oversubscribed by 18 separate, very respected institutions. Closing should occur next week, then most of the warehouse will once again be available for usage. These are the two financings for our leasing company, the renewal (ph) of the warehouse and the turning (ph) out of the warehouse.

In addition to these, on September 26 we restructured our corporate credit with our banks to give us more flexibility. This was essentially done to redo our covenants so as to more closely align them with our business. As you know, we are a manufacturing company and we have a large leasing subsidiary. Before this redo, we only had manufacturing covenants in our bank agreement; and, as you know, a typical leasing operation is more leverage than a manufacturing company. Our new covenants better reflect this and will allow us to borrow more under our $400 million committed facility. The number of bank participants was expanded from nine to ten as we added a bank that has called on us for some time. We are very pleased with the changes and the banks and specially our agent, JP Morgan, as they were most helpful in working with us.

As you review our balance sheet in the press release, you will notice the debt I just discussed. You will notice under Corporate/Manufacturing on Page 6 of the press release that we had $20 million outstanding under our $275 million bank facility and $123 million term facility. These expire in June 2005 and June 2007. Under the caption "Leasing," you will notice equipment trust certificate debt of $170 million and a warehouse leasing debt of $219 million previously mentioned. When you compare this debt to the assets listed in the chart on Page 6, you will see the company is not highly leveraged. With the financings we have just completed, and as we go into 2004, the company has the flexibility to adjust to improvements in our business and strategically address any new opportunities. Jim Ivy will now give you his perspective on the quarter. Jim?

Thank you, John, and good morning, everyone. I'll make a few comments regarding the comparison of our third quarter results to the third quarter of last year, and both Tim Wallace and Steve Menzies will have further comments regarding the quarter. We have filed our 10-Q this morning for the third quarter, and you'll find more details there. Net income per share for the third quarter of 2003 was 2 cents. In the third quarter of last year we had a net income of 14 cents per share. As mentioned in our press release, after-tax gains on asset sales in the third quarter of last year exceeded similar gains this year by about $1.8 million or 4 cents per share.

Incremental costs related to the implementation of a new financial system that we have discussed previously is included in SG&A expense in the current year quarter of about $2.8 million. The rail group's operating profit for the quarter improved over last year by almost $9 million. North American revenue increases for the quarter were partially offset by a $13 million decline in European railcar revenues compared to last year. Despite the European revenue decline, which is primarily related to plant closures in Europe since last year, European operating results were relatively flat year over year.

In the third quarter this year, $63.6 million in revenues and $4.9 million in operating profit for the rail group were produced by sales to our own leasing subsidiary. In the year ago quarter, sales to our leasing group were $31 million and related operating profit was $2.5 million. The revenues and profits from these intercompany sales are eliminated in consolidation.

Year over year revenues for the quarter in the Construction Products Group declined due to reduced demand in the highway and fittings businesses partially offset by strong demand and better weather than last year in the concrete and aggregates business. Operating profits in the segment declined year over year primarily due to reduced volumes in highway-related products. The Inland Barge Group revenues were down year over year due to lower volumes of hopper barges. Litigation expenses in the barge group were approximately $1.1 million this quarter compared to $700,000 in the third quarter of last year.

Revenues in the Industrial Products Group declined due to reduced volume of tank heads primarily resulting from the sale last December of a plant which manufactured custom heads and lower sales in Mexico. Operating profits were down slightly due to the lower sales volumes in Mexico. In our Railcar Leasing and Management Services Group, leasing revenues and operating profits grew year over year with the growth in the size of the lease fleet and, to a lesser extent, improvement in utilization of the fleet. In the "All Other" group, reduced revenues were primarily due to structural tower sales and last year's results, and the increased expense in this category is primarily due to expenses associated with maintaining coast facilities.

Looking at our balance sheet, our investment in inventory receivables is the same as at this time last year but has increased since last quarter due to the increasing volumes in the rail group. We also reported a $25 million tax refund receivable that is in addition to the approximately $50 million tax refund we received in March. The $25 million was received in October. Owned balance sheet debt and equipment-owned lease have increased pending the termout of our warehouse debt facility that John Adams mentioned. Now I'll turn it over to Tim Wallace. Tim?

Thank you, Jim, and good morning. Our Railcar Group crossed over a threshold during the third quarter by generating an operating profit at a relatively low level of production. Steve Menzies will cover the marketing statistics. I'll hit the highlights of the business in my update. Our railcar shipments in North America increased from 1500 units in the second quarter to approximately 2200 units in the third quarter.

Our rail revenue increased from $90 million in the second quarter to $131 million in the third quarter. 53% of our shipments were delivered to our leasing customers. During the fourth quarter, we're increasing our shipments to a point between 3,000 and 3300 units. Our revenues should increase 35% to 50% in this segment between the third and the fourth quarter. We expect approximately 30% of our shipments, or 1,000 units, will be delivered to leasing customers during the fourth quarter.

We anticipate our production rate during the first half of 2004 will be in the range of 3300 to 3500 units per quarter. Our lease fleet addition should decrease to a level between 18% to 25% of our shipments during the first half of 2000 and '04. Once our shipments reach 3500 units per quarter, it will mark the end of our first phase of increasing our production.

We use the term "first phase" to distinguish between production increases using the facilities we currently have open versus incremental production from facilities which are currently idle. Based on our current backlog of orders and the strength of our customer inquiries for potential orders, we expect to enter into Phase 2 during the second quarter of 2004. We expect to be at a shipment level of approximately 4200 railcars per quarter by the fall of 2004. We currently believe that demand will support this type of action and are pleased to announce our intentions to reopen some of our idle facilities.

I must also state we've been cautious in our decision to enter into the second phase of our production increases. Every time we increase production we absorb additional costs associated with retraining our workforce. There are also additional one-time expenses associated with reopening idle facilities. As I stated before, sustainability is a key word for us as we assess the railcar industry order levels. Our objective is to avoid short-term production spikes and the costs associated with them.

The other primary issue outside of a sustainable market demand, which could affect our ability to increase our production, is related to the railcar casting shortage. The North American railcar manufacturing industry continues to be constrained by the casting industry's ability to produce underframe castings. We're continuing to have executive level meetings with our suppliers in order to ensure their ability to support our production. Our lead supplier, the Amsted Rail Group, continues to add capacity through its domestic and international network of foundries in order to satisfy our requirements. We're confident that our relationship and supply agreement between our two companies will play a major roll in assisting us to meet our needs for these critical railcar components.

In our European rail business, our backlog of rail wagons is around 2,000 units. At the end of the second quarter, our backlog was slightly above 2250 units. We expect to ship approximately 500 units during the fourth quarter. This is a decrease from what we previously expected to ship in the fourth quarter. Our European rail business is experiencing some production delays as we consolidate our manufacturing operations into our Romanian facility. Long-term, we remain optimistic about the benefits associated with our consolidation strategy. Short-term, it's been a challenge for our employees in Europe. We're hopeful by the middle of the first quarter that the majority of our consolidation issues will be behind us. We're continuing to search for a variety of strategic options to improve our European rail business.

We expect our rail car group's operating profit to be a little erratic and difficult to project until we complete our second phase of production increases in North America and consolidate our European rail business. During the fourth quarter of 2003 we anticipate we will make approximately $6 to $7 million in this segment on a stand alone basis. However, the elimination of intercompany gross profit due to sales to our lease league (ph) will substantially reduce this number at the consolidated level. Our product mix and learning curves continue to have an effect on our real business until we reach a sustainable level of orders.

During the third quarter our construction product businesses experienced a reduced demand for highway-related products. We've seen a decline in highway spending in some states. In October, the Federal Government extended available funding for the highway spending at the same level for the next five months. This is a temporary situation.

As we move into the slow season for this business, we're closely monitoring our demand levels. The demand for highway safety products in the East and Midwest was also affected by the unusual amount of precipitation during the late summer and early fall. Our aggregate and concretes business backlog in Texas remains healthy, and the weather was construction friendly during October. Our Industrial Products Group generated a small profit during the third quarter. The U.S. LPG gas industry is preparing for the winter and our backlog is normal for this time of year.

During the third quarter our barge group broke even as they recharged their production lines with new orders we booked during the second quarter. We have a base load of orders for our hopper barge business through 2004, and our tank barge business has a full order book for a year. We're continuing to sell some very nice orders for long runs of hopper barges. The year over year difference in our backlog of orders for this business is phenomenal. Last year at this time we were struggling to book orders to maintain our core employee base. This year we're shuffling our production schedules in order to squeeze more production out. I'm very optimistic about the strength of the recovery of our barge business. Our barge legal proceedings continue to progress slowly through the pretrial stages. We announced earlier in October our settlement with ACF. At this time, it's premature to make any additional comments in this area.

From an overall earnings point of view, we hit bottom during the first quarter of 2003. Our second quarter will probably be the best quarter for 2003 because of the extra asset sales. We expect the fourth quarter will end up somewhere between a small loss and slightly profitable. The fourth quarter is subject to weather conditions in our construction-related businesses. Fortunately, October was very decent from a weather point of view. At this point, I'll turn it over to Steve Menzies for his update before we turn turn it back to Neil for questions.

Thank you, Tim. Good morning. Let me provide a few comments first regarding the North American railcar market and, then, concerning Trinity Rail's third quarter market performance. I will conclude with a few remarks regarding our leasing and management services business.

During the third quarter, North American railcar industry ordered approximately 6,700 railcars. This was a decrease from the peak order rate of 17,000 railcars ordered during the second quarter. However, the rapid growth of the intermodal sector and the aggressive purchasing strategy of TTX, the railroad owned intermodal equipment pool operator, fueled a significant portion of industry orders in the first and second quarters of 2003. Similar order activity did not occur in the third quarter. We expect further industry orders for intermodal equipment in 2004.

The third quarter industry orders did include a broad array of different railcar types serving a number of different end user markets giving credibility to a broader railcar market recovery. We are encouraged to see increase demand for covered hoppers which serve the grain industry and expanding grain exports, significant crop yields, and replacement of older, smaller covered hoppers spurs renewed demand.

With local inventories at power plants and the market supply and demand for aluminum coal cars finally reaching equilibrium, we are experiencing improved coal car demand as well. Increased shipments of paper and railroad replacement of older, poor condition railcars has resulted in growing demand for boxcars. However, industry demand for new tank cars continues to be lower than normal reflecting sluggish demand for commodity, chemicals and plastics. A bright spot is the demand for tank cars built to transport ethanol, as ethanol is used as a fuel oxygen at gross (ph).

During the third quarter Trinity received orders for approximately 3,100 railcars or 46% of the industry's total. Trinity maintained its strong position in covered hoppers with 70% of covered hopper orders and 61% of coal cars ordered during the quarter. In addition, Trinity received orders for intermodal cars, boxcars and tank cars. While the industry railcar order backlog dropped slightly in the third quarter to a little less than 32,000 railcars, Trinity's railcar order backlog of over 11,500 railcars grew for the sixth consecutive quarter to its highest level since the first quarter 2000. Our growing railcar order backlog has allowed Trinity Rail management to develop a plant deployment plan matching increased production capacity with increased market demand. Current customer inquiries for covered hoppers, boxcars and coal cars remain strong. We have seen recent improvement and demand for pressure tank cars and new demand for auto racks. Current order and customer inquiry activity supports our long-term view of the railcar market.

Our leasing subsidiary continues to be an important strategic tool for Trinity Rail. Trinity Industries' Leasing Company showed continued fleet growth, improved fleet utilization and operating earnings growth in the third quarter. During the third quarter, TILC added more than 1100 new railcars to its fleet including coal cars, milgons (ph) for steel, intermodal, covered hopper cars for grain products, and various tank cars. Our owned and leased rail fleet has grown to approximately 17,700 railcars. The average lease term of the third quarter fleet additions is over 12 years. All fleet additions in the third quarter were placed on lease with customers.

Our entire lease portfolio is performing well. The average remaining lease term of the portfolio is approximately 6 1/2 years. The average railcar age in the fleet is just over 5 years. Fleet utilization increased to 96.8% at the end of the third quarter as idle tank cars and covered hoppers were assigned to leasing customers. Our portfolio is well diversified by car type, industries served, and customer concentration. Portfolio credit quality is stable. As railcar prices firm and fleet utilization increases, we expect to begin to see improvement in lease rates as well.

Supporting the growth of our lease fleet is our ability to access the capital markets. John Adams has previously addressed the renewal of and increase in TILC's $300 million warehousing line of credit in the anticipated closing of our permanent financing. These important financings demonstrate Trinity Industries Leasing Company's ability to access the capital markets and enable us to support Trinity Rail's production goals and to effectively respond to our customers' leasing requirements. I'll now turn it back over to Neil Shoop for questions.

Thanks, Steve. Now our operator will prepare us for the Q&A session. Sarah?

Thank you. If you would like to ask a question, please press star and 1 on your touch-tone phone. You may withdraw yourself from the queue at any time by pressing the pound key. Once again, to ask a question please press star and 1 on your touch-tone phone. And our first question comes from John Sikes (ph) with Nomura (ph).

Hi, good morning. You just mentioned something about pricing, railcar pricing. Could you just kind of give a little bit more background or detail on what you're seeing in terms of railcar pricing?

Okay. This is Tim Wallace, and I think Steve and I will respond to this. Railcar pricing is a little bit difficult to come up with one number since we participate in so many different markets, and each market has its own demand level. But, Steve, basically could you give them your overview of this?

Railcar pricing levels have begun to improve from the low levels of 12 months ago but still well short of pricing levels achieved in 2000. Much of current price improvements have been offset by increased steel and componentry cost increases.

Where we've been fortunate at this point to pass on most of the cost increases that we have, but we haven't reached a point to where we're seeing a substantial margin improvement on that.

Okay. All right. Thanks.

Thank you. Our next question comes from Fritz Von Carp with Sage (ph) Asset Management.

Good morning, gentlemen. Pardon me for asking for clarification. You were talking about breaking even or a little plus, little bit minus breaking even profit in the fourth quarter. That was for the combined company or for the rail unit?

That was for the combined company.

Okay. And did you say exactly what the rail unit's contribution to that guidance would be?

No. For this quarter?

For fourth quarter.

Yes. For the fourth quarter we said it would be $7 million, the rail, in the $7 million range.

Okay. Great.

We also said that a good portion, a substantial portion of that would be eliminated because it's sales to our lease fleet.

Okay. Thanks. I apologize for asking that.

That's fine.

Thank you. Our next question comes from Shawn McDaniel (ph) with Blackbird Research (ph).

Just a quick question regarding the settlement, and I'm not sure to what extent you can discuss this. It looks like everything settled pretty reasonably, doesn't look like [inaudible] any impact. You mentioned that you had some other discussions in progress. If you were to settle all these, the current barge lawsuits for the same economic benefit that you settled ACF with, how would that affect the balance sheet? Is that something you could afford to do, is to clean the slate here?

No. We view this settlement that we have entered into as a unique settlement and don't see acquisition of the barges as a major issue in the other lawsuits at this time.

Okay. Great. Thanks.

We really haven't stated that we've got ongoing discussions in that area. We just had an opportunity from our leasing company point of view to acquire barges that had some attractive leases on them, and we see it more of an asset purchase with an ability to resolve a lawsuit as well.

Okay. And, then, did you give the production number for the quarter? I hopped on the call a little bit late. North American Rail?

Yes. You're saying how many units did we produce?

Yes, sir.

2200 units.

2200 produced. Great. Okay. Thank you guys.

Thank you. Our next question comes from Stephen Simmons with Flippin.

Yes. Can you comment -- if you look at the steel scrap prices per ton they seem to have almost doubled in the last 18 months. And I was just wondering, what the impact of scrappage of old railcars this could have or if you've got any comment on that aspect?

Okay. Steve, do you want to handle that?

Well, one of the things we are seeing is the larger fleet owners and particularly the railroads beginning to scrap their older more obsolete cars. I think in part the answer to that is higher steel scrap prices. At the same time they also see opportunities to buy equipment at good prices and finance them at low interest rates. So I think steel scrap prices is contributing to some acceleration of the replacement market that we've been anticipating.

Would you say that the railroads have been -- from what I've heard, they have not really been the buyers in this market, and so maybe they are kind of the second leg of the buying after they scrap their excess cars and then come into the market? I mean, the leasing companies appear to have been the early birds. Where do you see the railcar or railroad companies in that mix?

Well, TTX --

Just as an example, in the first half orders TTX represented about 50% of all orders. In that time period, we have seen the major railroads begin to consolidate their purchases and are looking to replace some of their older obsolete fleets, particularly in the boxcar and covered hopper car areas. So they have been active in the market, we see them increasing their activity in the market, and that's a lot of the orders we see happening in the fourth quarter and into next year.

All right. Great, thanks.

Thank you. Our next question is a follow-up from Fritz Von Carp with Sage (ph) Asset Management.

Yeah, thanks. On the new covenants on the corporate revolver, is this relevant to the situation you talked about in the last quarter where you had a limited availability? So is what we should take is what was behind that was the new balance sheet with the debt levels for leasing?

Well, it's a combination of that along with the recognition that we do have a very large captive leasing company. And the more leasing assets we put into it the more pressure it put on our covenants. So we wanted to separate our covenants, so essentially we had a covenant with the leasing company and a covenant for the manufacturing company.

What's the availability of the line now?

It is $65 million [inaudible] quarter end.

Okay. Thank you very much.

Thank you. And at this time we have no further questions, so I'll turn the call back over to Mr. Neil Shoop.

Okay. Thanks, Sarah. This concludes today's conference call. Remember, a replay of this call will be available starting one hour after this call ends today through midnight Thursday, November 13th. The access number is (402) 220-0423. Also, this replay will be available on our website located at www.trin.net. We look forward to visiting with you again on our next conference call, and thank you for joining us this morning.

Once again, this concludes today's teleconference. Thank you for attending. You may disconnect at this time. Everyone have a great day.