Trinity Industries Inc (TRN) 2006 Q1 法說會逐字稿

Good day. All sites are now online in a listen-only mode. Please note this call may be being recorded. At this time, I’d like to turn the conference over to Mr. James Perry, Treasurer of Trinity Industries. Please go ahead.

Thank you, Holly. Good morning from Dallas, Texas, and welcome to the Trinity Industries First Quarter 2006 Results conference call. I'm James Perry, Treasurer for Trinity. Thank you for being with us today.

In addition to me, you will hear today from Tim Wallace, Chairman, President and Chief Executive Officer, Steve Menzies, Group President, Tank Car Leasing and Services, and Bill McWhirter, Vice President and Chief Financial Officer. Following that, we will move to the Q&A session.

A replay of this conference call will be available starting one hour after the conference call ends today through midnight on Thursday, May 11th. The replay number is 402-220-0116. I would also like to welcome our audio webcast listeners today. A replay of this broadcast will also be available on our website located at www.trin.net.

Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and includes statements as to estimates, 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.

On March 31st, our borrowings at the corporate level were the $300 million of senior notes and $3 million of other indebtedness. The leasing company’s debt included the $119.8 million of equipment trust certificates and the $347.5 million outstanding under our railcar leasing warehouse facility. Our debt to total capital ratio was 38.6%, up from the comparable amount of 37% at December 31, 2005, principally due to lease lead expansion. At March 31st, our cash position was $93.6 million.

Now here’s Tim Wallace.

Thank you, James. Good morning, everyone. We had a solid first quarter, and I’m pleased with our progress. All of our business segments improved their profitability over the first quarter last year. The European railcar market is showing some signs of recovery. Our backlog of orders at the end of the first quarter in Europe was approximately 790 units, compared to 334 units at the end of the fourth quarter of 2005. We shipped 190 units during the first quarter versus 513 in the fourth quarter of 2005. We expect our shipments for the next two quarters to remain between 250 and 325 units. We’re closely monitoring our European railcar business activities as we review our strategic alternatives.

Our first quarter North American railcar shipments totaled 6,164 units. We expect our quarterly shipments to fluctuate between 6,200 and 6,600 units during the balance of the year. Our short-term objectives for our North American rail businesses are to continue to improve productivity initiatives that are in place, pursue orders that extend our production lines, launch new production lines in Mexico and enhance our ability to make quick, efficient product line changeovers. We are in process of producing our first group of railcars in our new facility in Mexico. Everything is going as we planned. Demand for railcars in North America was robust during the first quarter. Industry orders were 37,311 units as compared to 17,600 units during the first quarter of 2005, and 26,700 units during the fourth quarter of 2005.

As you see, the quarterly order industry order level can be rather lumpy. We don’t expect a quarterly order level for the balance of the year to remain at such a high level. As we reported in March at our last quarterly conference call, we’ve been receiving a steady stream of inquiries on a variety of railcar types. We sold 12,941 railcars in North America during the first quarter. Our orders increased more than 300% compared to the first quarter of last year and a 66% increase over the fourth quarter of 2005. In part, this is due to the fact that the industry lead times are much longer than a year ago. This is prompting customers to plan ahead to ensure their railcars are delivered when they need them.

We continue to see the demand for railcars in North America as resembling a plateau on a demand chart rather than a short-term spike. Our railcar parts and components businesses are performing well. We are North America’s largest manufacturer of railcar axles and coupling devices. I recently toured our components facilities and was very impressed with their level of productivity. We have a lot of positive momentum moving in these businesses. As for the company as whole, I remain very optimistic about our current opportunities and those on the horizon.

Our barge business is maintaining a strong backlog. Industry demand has been steady for barges. We’re currently taking steps to review a variety of alternatives to increase our barge production capacity. Fortunately, we have some production flexibility and we can shift between our mix between tank and hopper barges. Bill will provide statistics on our backlog in his report.

Our construction product businesses are performing well. Weather conditions in the southwestern part of the United States were typical for the first quarter. We’re currently entering into the normal construction-friendly weather time of the year. Demand remains strong in our concrete and aggregate businesses. We’re continuing to enhance the overall value of these businesses by adding some strategic new Greenfield operations.

Our highway safety products businesses are beginning to see early signs of increased spending due to the transportation bill that was signed last summer. We are experiencing a good demand for our construction products during its peak season.

I’m very pleased with the way we are growing our structural wind tower’s business. We have a good backlog of orders, and we expect this business to make a significant contribution to our profits in 2006 and 2007. These products require specialized manufacturing equipment, and we are in the process of upgrading our operations. The current increase in demand for wind tower structures fits very well within our overall growth plans.

Trinity’s leasing company had a great first quarter. Our railcar leasing company performs a vital strategic benefit to our company. The demand for railcar leasing remains strong, and we are maximizing our opportunities. Steve Menzies will provide more details about this in his report.

As you can tell, I am very pleased with the performance of our company. We expect to continue to improve our performance as we go through the year. We have excellent market leadership positions and a momentum that is building as we transition through the year. I remain very optimistic about our opportunities for 2006. I will now turn it over to Steve Menzies to make his comments.

Thank you, Tim. Good morning. I'm going to make a few comments about the railcar market, followed by a few remarks about our leasing and management services business.

Industry demand for railcars in North America remained robust in the first quarter of 2006. This was a continuation of the strong pace that set early in 2004 that continued throughout 2005. More than 26,700 railcars were ordered industry-wide during the fourth quarter of 2005, and the first quarter of 2006 outpaced that figure as 37,311 railcars were ordered. This order level is significantly greater than the quarterly average of 21,000 railcar orders over the last nine quarters. Large railcar orders tend to be sporadic, and we do not expect quarterly order levels to continue at the first quarter of 2006 pace. However, we do expect railcar demand to remain strong as a result of solid fundamentals such as continued railcar loading’s growth and rail transportation’s increased mobile share, as well as long-term railcar replacement demand.

As Tim mentioned, we see strong long-term railcar demand reflected across multiple key market segments, supporting our view that we are experiencing a market plateau as opposed to a short-term spike. For example, demand remains strong for both Powder River Basin and Eastern Coal, as your two leads expand generating capacity using coal as the preferred fuel. Demand for covered hoppers that transport cement, resin, and agricultural products is also high. The growth in renewable fuels, particularly ethanol and biodiesel, has also caused a surge in both tank car and hopper car demand. With the current number of plants under construction, undergoing expansion or in the planning stages, we believe the demand for railcars to support the transportation of renewable fuels, including their feed stocks and coke products, will remain strong through 2008.

During the first quarter of 2006, Trinity received 12,941 railcar orders, including auto racks. All orders that we report are firm and without contingencies. We continue to focus our sales efforts on orders that meet our pricing requirements and extend our existing production lines. We received orders during the first quarter that will extend production lines for a variety of railcars. Specifically, we received orders for covered hoppers for agricultural products, resins and cement, coal cars, railcars for scrap steel, box cars, tank cars, and auto racks. Our customer mix was diverse as agricultural and industrial shippers, railroads and third-party leasors placed orders with us during the quarter.

Current inquiry levels indicate strong momentum for orders for a variety of railcars continuing throughout 2006 and 2007, supporting our production and sales strategies. The industry-wide production backlog at the end of the first quarter increased 27% to more than 88,100 railcars from 69,400 railcars at the end of 2005. This is the largest industry backlog since 74,000 railcars was reported in the third quarter of 1998 and the largest industry backlog since the early 80’s. Industry backlog has increased each of the past five quarters. This indicates that industry order levels are actually outpacing increased industry production. However, we believe tight supplies of railcar castings are a critical variable for further increases in production beyond current levels. Trinity’s railcar production backlog in North America increased 36% from the end of 2005 to 25,541 railcars at the end of the first quarter of 2006.

Trinity Industries’ railcar leasing and management services group continued to grow its railcar fleet during the first quarter, taking delivery of approximately 1,829 new railcars. This represents about 30% of Trinity's North American first quarter shipments. Our operating lease fleet now includes a diversified portfolio of more than 26,000 railcars, as compared to the 21,000 railcars that were in our fleet on March 31, 2005. In addition, we manage more than 60,000 railcars that are part of our customers’ fleets. The growth of our leasing business helps us to develop solid long-term relationships with the end users of our railcars and results in a significant long-term stable earnings stream.

Our committed lease backlog at the end of the first quarter increased to 11,419 railcars or 45% of Trinity's North American production backlog. This backlog extends into 2007. Our fleet utilization decreased slightly to 99.2% at the end of the first quarter of 2006. The average age of the railcars in our lease fleet is 4.8 years. Our average remaining lease term is more than 6 years. Lease rates continue to rise as a result of high fleet utilization, strong levels of new car building, and rising new car prices. Our renewal rate, the number of leases renewed as a percentage of expiring leases, has been higher than normal, reflecting strong demand for existing railcars. Our average fleet lease rate has continued to increase quarter-over-quarter, reflecting the high number of lease renewals and rising lease rates.

I’ll now turn it over to Bill McWhirter.

Thank you, Steve. And good morning, everyone. My comments relate primarily to the first quarter of 2006. We will file our Form 10-Q this morning. You will find more details there for the quarter ended March 31, 2006. During my remarks, I will provide earnings per share guidance for the second quarter and the full year. Additionally, I will provide new guidance with respect to operating margins in our rail and inland barge groups.

We are pleased with our first quarter earnings of $0.70 per share. These results compare with earnings of $0.67 per share in the fourth quarter of 2005, excluding the $0.18 charge associated with the European write-down. In the first quarter of the previous year, we reporting earnings of $0.11 per share. Revenues for the first quarter increased 18% over the same quarter last year to $760 million. Our earnings of $0.70 per share exceeded the top end of our previous first quarter guidance by $0.05 per share. The higher results are primarily due to strong operating performance in our North American railcar production facilities.

At this time, I’ll discuss the performance of our individual business segments. Our construction products group, which plays a key part in our earnings diversification strategy, provided revenues which were up by 15% when compared to the same quarter in the previous year. Operating profit increased by $5.7 million and margins improved from 4.7% during the same quarter last year to 7.5% this year. Our concrete and aggregate business accounted for 55% of the group's revenue. Our highway products business, which accounted for 28% of the group's revenue, is also performing well. Revenues from this unit's proprietary line of products continues to be strong.

Our fittings and bridge business accounts for the remainder of the revenue. Both of these businesses are performing well. The inland barge group's first quarter performance was consistent with our guidance, posting revenues of $82 million, an operating profit of $6.6 million. Our March 31, 2006 backlog of work is approximately $327 million versus $89 million one year ago. This backlog does not include any barges associated with the announced multiyear contract with Ingram. We continue to have a very strong inquiry list at this time.

We anticipate inland barge revenues of approximately $75 million to $90 million per quarter during 2006. Operating profit margins are expected to range between 9% and 11% for twelve months ending December 31, 2006. The first quarter margins represented orders in our backlog with less pricing strength than those which will be delivered in the remainder of the year.

Now moving to the energy equipment group. We are pleased with the group's first quarter performance. On a quarter-over-quarter basis, revenues increased by approximately 46% to $68 million, an operating end profit improved by $5.9 million, bringing the quarterly margin to 16.3%. Our current backlog for structural wind towers continues to be strong. We anticipate the revenues from our wind tower business will gross over $120 million in 2006, compared with approximately $67 million in 2005 and $11 million in 2004.

In our railcar leasing and management services business, we reported revenues of $56.3 million which were up $3.8 million on a quarter-over-quarter basis. Eliminating the effect of railcar sales from the fleet, revenues have increased by 24%, reflecting our commitment to growing our lease fleet. The operating profit increased by $4 million due to the additions to the fleet and increased lease rates. We plan to invest between $450 million and $550 million in net fleet additions during 2006.

In our rail group, revenues were 241% higher on a quarter-over-quarter basis. Rail group sales to Trinity's leasing group were $148 million in the first quarter of 2006, with profits of $18.5 million or approximately $0.22 per diluted share. This compares to sales to our leasing group in the first quarter of 2005 of $72 million, with profits of $4.5 million or $0.06 per diluted share. These inter-company sales and profits are eliminated in consolidation. Our European rail business continues to suffer from a compressed market. The total incurred loss was approximately $5 million for the first quarter. At our current billed rate, we expect to incur a second quarter loss between $3 million and $4 million.

Our margin results for the rail segment were 10.6%. When you remove the effect of our European operation, North America achieved an operating margin of 11.9%. Based on our current operating performance and the quality of our backlog, we are providing annual operating margin guidance for the North American rail group of approximately 10% to 12%. This guidance is based on the following assumptions: continued production efficiency in North America; and no significant supply problems in steel or other basic materials. The effect of the European operating results should reduce the rail segment margin between 1% and 1.5%.

Our North American railcar backlog as of March 31, 2006 consisted of 25,541 railcars, with an estimated sales value of approximately $1.9 billion. The backlog is subject to a variety of escalation provisions and firm raw material contracts. Together, these items are referred to internally as cost coverage. Cost coverage of the current backlog is approximately 91%.

Moving now to consolidated results. Non-leasing capital expenditures are currently projected to be $115 million for 2006. We anticipate consolidated earnings for the second quarter to range between $0.78 and $0.85 per share. Overall, our company guidance for 2006 has been improved. The new guidance is for earnings of between $2.90 and $3.10 for the full year on a fully diluted basis. Included in our assumptions for 2006 are the deferral of approximately $69 million in profit on railcar sales from our rail group to our leasing group, or roughly $0.85 per diluted share. Results of our European rail operations, as discussed earlier, continuing to achieve production efficiencies in North America, no significant supply problems in steel or components, normal weather conditions, and no unanticipated adverse resolution of legal matters.

In our earnings release yesterday, we provided a reconciliation of the non-GAAP term EBITDA. EBITDA for the first quarter of 2006 was approximately $97 million.

At this time, I will turn the presentation back to James for the question and answer session.

Thanks, Bill. Now our operator will prepare us for the Q&A session.

Thank you. [OPERATOR INSTRUCTIONS]. And we’ll go first to the site of Chris Wakien from Wachovia Securities. Please go ahead.

First of all, I want to congratulate you on a fabulous quarter. These are some fantastic numbers. My question to you is obviously with ethanol, with the prices they are and with the demand of gasoline and crude oil as high as they are, are you going to be expanding your businesses into South America to help alleviate some of these pressures here in the United States?

Could you be a little more specific on what your asking?

Well, I was asking if you’re going to be expanding your railcar business into South America to work with the governments down there or some of the corporations.

We don’t have any current plans of extending our business into South America at this time.

Okay, thank you.

[OPERATOR INSUSTRUCTIONS]. And next we’ll go to the site of John Barnes from BB&T Capital Markets. Please go ahead.

Hey. Good morning, guys. Nice quarter. A little bit on the barge side, you said you were looking at doing some things to increase production capacity. Outside of establishing new shipbuilding yards, what are you looking specifically at doing?

This is Tim replying to this question. We have some flexibility in our barge operations. We have a plant that can build both tank barges and/or hopper barges. And we’re always looking at the mix of barges and the demand, and we could flip from one product line over to the other as well as we’re putting in some new equipment that will help us with some productivity improvements into our barge business at this time.

Okay. And then in terms of magnitude, what are we talking about? Are we talking about the capability of adding another third to your production capacity or are we talking about being able to produce another 25 barges a year?

Well, we don’t disclose the units that we produce for competitive reasons. But basically, we had some productivity improvements as well as some growth in an existing facility that we just started last fall that we plan on getting some additional output in those. And, as I said, if we move from tank barges to hopper barges in a plant, the unit quantity can be a big increase because we can produce more hopper barges than we can tank barges. But the dollar amount is almost a wash on that and it depends on where the demand is. Where we’re putting in the improvements and installing a new state-of-the-art paint facility in one of our facilities, and that should improve our capabilities quite a bit. I would think over the next couple of years, we may get a 20% improvement over the next couple years.

In units produced?

Yes, in units produced.

Okay, alright. Now, to me, a 20% improvement still doesn’t even make a dent really in the demand, based on where I see production in this country today. Are you seeing the same thing? You don’t feel like a 20% increase is going to do any kind of damage to your ability to get pricing on new barges or anything?

We see that 20% improvement’s going to benefit us from having more of our overhead absorbed by the production that we have. We think the demand for barges is somewhat like Steve and I described in the railcars, that it’s more of a plateauing demand that’s an old fleet that need replacement. And if we find that the market factors are strong enough to support, then we will always consider bringing on additional facilities that we could convert or acquire.

Okay, alright. Onto the railcar fleet for a moment, when Burlington Northern announced earnings a couple weeks ago, the question I asked of them and have since asked of the other rails is, are the equipment orders being made today enough to just keep up with demand or are they giving much into replacement? And the answer seemed to be that they really haven’t engaged much of a replacement side. Would you echo those comments? And then, more importantly, do you foresee major replacement program announced on the side - - out of the class one rails in the next twelve to eighteen months?

Well, when you do an analysis of the class one rail fleet, you will see that the age of the fleet is still a fairly old fleet and there is a large amount of equipment there. But then you also have the other factor which are the leasing companies that purchase equipment that will have equipment available. And the leasing companies, our leasing company as well as the other companies that are out there, keep a pretty close watch on this. So it’s hard to say if some of the cars that the leasing companies are buying will provide some of the replacement. But we still see, in order to replace the demand for railcars, it’s going to be a multi-year event. It’s not going to be a one year event to replace the fleets. Steve, do you have anything you want to add on that?

What I think we’ve seen over the last few years given the high price for scrap steel, a fair amount of attrition out the North American fleet. Tim’s right. It’s not a smooth replacement demand and it will vary quarter to quarter. We think the attrition rate for the North American fleet is somewhere around 2% to 3% a year.

Okay, alright. Very good. And then last question, on the aggregate and asphalt side of the business or the construction materials side, we’ve got an analyst here that I follow his stocks pretty closely in terms of valuation and that type of thing. And it seems like there are very rich multiples being paid for those kind of companies today, potentially peak multiples on things like asphalt companies. Is this as good as it gets and do you - - could you hit the market today and potentially divest that business if this is a peak multiple that would be paid for a company, that I view as non-core to your business?

First, I think it’s important for us to say that don’t produce asphalt. We’re a concrete and aggregate company, and we have been in a fairly aggressive mode of building that business over the last decade. And we’re now putting in some strategic sites in - - Greenfield sites, which I mentioned before, in that area and market factors can play all types of - - forms of reinforcement to a company as to deciding what is the highest and best use of their operations and their facilities. And right now, we don’t have any - - our strategy is geared towards rebuilding and expanding our operations where we think it’s adding value to our overall franchise.

Okay. So you’re going to continue to invest in that business. You view it as more of a core business then.

Well, it is definitely a core business to us, and we are investing in that business. That’s what our position is. This year in our capital investment program, we’re putting probably what, 30% or so of our - - ?

In excess of $30 million.

In excess of $30 million into that business, so, I think factually, we’re definitely investing in that business.

Okay, alright. Very good. Again, congratulations on the quarter. Thanks for your time.

Next we’ll go to the site of Cort Deagan of Fidelity Investments. Please go ahead.

Hey, guys. Great quarter. Quick question on the leasing fleet. Just as a point of reference, it’s about 26,000 now. What was it in the late 90’s?

What was the question again?

The size of the leasing fleet?

The lease fleet for several decade was between 8,000 and 10,000 (inaudible).

Okay, so it’s roughly three times that now.

Yes.

Okay. That’s it. Thanks.

Next we’ll go to Bill Baldwin of Baldwin Anthony.

Good morning.

Good morning.

Reading a lot about the possibility of seeing increased construction of new power plants down the road. And maybe it’s too far down the road to be in your planning process, but would that be a business on the structural steel side that potentially could be a market that Trinity would be interested in?

Bill, we stay pretty in tune to what’s going on in the power plant construction end of the business, and we look at all different types of opportunities that we may have from providing concrete and aggregate to these facilities to providing railcars and barges. And that’s one of the unique features of our portfolio of businesses. We have the ability to go in and offer a variety of components to a project like this. Right now, we’re not in that type of structural steel business. And we - - as our structural steel is oriented more towards highway bridge garters and we are not strategically looking at entering into that business at this point.

Thank you, Tim.

[OPERATOR INSTRUCTIONS]. Next we will go to the site of Fritz Von Carpe of Sades Asset Management. Please go ahead. Mr. Von Carpe, your line is open.

Holly, let’s move on.

[OPERATOR INSTRUCTIONS]. And it appears that we have no further questions.

Thank you, Holly. This does conclude today’s conference call. Please remember a replay of this call will be available starting one hour after the call ends today through midnight on Thursday, May 11th. The access number is 402-220-0116. Also, this replay will be available on our website, located at www.trin.net. I look forward to visiting with you again on our next conference call. Thank you for joining us this morning.