Trinity Industries Inc (TRN) 2006 Q3 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later, there will be an opportunity to ask questions during our Q&A session. As a reminder, this call may be recorded. And I would now like to turn the program over to the vice president and treasurer of Trinity, Mr. James Perry.

Thank you, Theresa. Good morning from Dallas, Texas, and welcome to the Trinity Industries third quarter 2006 results conference call. I'm James Perry, Vice President and Treasurer for Trinity. Thank you for being with us today. In addition to me, you will hear today from Tim Wallace, Chairman, President and CEO, Steve Menzies, Senior VP and Group President of the Rail Group, and Bill McWhirter, Senior VP and CFO. Following that, we'll move to the Q&A session.

A replay of this conference call will be available starting one hour after the call ends today through midnight on Thursday, November 9th. The replay number is (402) 220-0116. I would also like to welcome to our call 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.

At September 30th, our borrowings at the corporate level were the $415 million of convertible subordinated notes, $201.5 million of senior notes and $2.1 million of other indebtedness. The leasing company's debt included $350.6 million of secured railcar equipment notes, $119.1 million of equipment trust certificates and $80.3 million outstanding under our railcar leasing warehouse facility.

Our total debt to total capital ratio was 46.7% at September 30th, up from the comparable amount of 37% at December 31, 2005, principally due to financing for the current and future lease fleet expansion. Net of cash, our net debt to total capital ratio was 37.8% at September 30th, up from the comparable amount of 32% at December 31, 2005. At September 30th, our cash position was $368.1 million.

Now, here's Tim Wallace.

Thank you, James, and good morning, everyone. I'm pleased with our third quarter results. All of our business segments are performing well, and our momentum continues. The completion of the sale of our European railcar business during the third quarter allows us to dedicate our resources on other parts of our company.

During the third quarter, our North American railcar shipments totaled 6,546 units. This was the fourth highest quarterly railcar shipment in Trinity's history. We expect our quarterly shipments to fluctuate between 6,300 to 6,500 units for the next two quarters. Our 2006 annual shipments will be a little over 25,000 units. Our North American Rail businesses continue to benefit from a variety of productivity improvements associates with long production runs. Trinity's businesses perform very well during high volume, repetitive production.

Strong third quarter railcar orders increased our railcar backlog to an all-time record of approximately 32,200 units. This is in part due to an increase in demand for railcar servicing the renewable fuels market. Our production flexibility also gives us a marketing edge. We have honed our ability to quickly ship production from product line to product line to accommodate customer needs and growing market trends.

During the next few quarters, we will convert some production capacity to produce additional railcars for the renewable fuels market. While these conversions will result in some short-term costs and lost production, they will provide substantial long-term gains.

Our barge business continues to perform well. Demand for barges remains consistent. Our backlog of orders for barges currently extends into 2008. We have been successful at increasing our barge production and are continuing to search for additional opportunities to expand capacity. Last month, we opened our new paint facility in our largest tank barge plant. This will help increase our output.

Financial results for our construction products businesses improved slightly on a year-over-year basis. We're beginning to see the impact of the transportation bill signed more than a year ago in our highway safety products business. Highway safety products are usually the final items installed when new roads are constructed. Our concrete and aggregate business is relatively steady. The diversification of the markets we serve have kept us insulated from the residential housing construction decline. We are beginning to see some slight effects from the housing market slowdown.

Our structural wind tower business continues to perform well. In September, I toured our wind tower manufacturing facility in Ft. Worth, Texas and was very impressed with productivity there and the quality of workmanship. Manufacturing wind tower structures requires a high level of competency at fabricating large diameter steel structures. We've been very successful at converting some of our tank manufacturing facilities to wind tower construction. We are now manufacturing wind tower structures in Mexico for both Mexico and the U.S. markets. We expect to add additional manufacturing capacity to serve the Midwest market.

Trinity's high level of production flexibility enables us to pursue a variety of opportunities in various businesses. We continue to invest resources to enhance our flexibility. Our tank manufacturing facilities can shift between railroad tank cars, storage tanks and wind towers. We are also enhancing our flexibility to shift between freight cars and tank cars. This will allow us to pursue more opportunities across a broad product line of railcars.

Trinity's leasing company continues to grow at an aggressive pace. Our leasing company plays a strategic role in our railcar business. It is also an important component of our strategy to diversify our long-term earnings base.

I remain optimistic about the opportunities for our company, and I'm pleased to provide a positive third quarter report. I will now turn it over to Steve Menzies to provide more information about our railcar business.

Thank you, Tim. Good morning. Industry demand for railcars in North America remains strong, as almost 21,500 railcars were ordered during the third quarter of 2006. This is a continuation of the strong pace set in early 2004 that has continued through 2005 and into 2006, bringing total orders for the first nine months of this year to almost 77,000. These strong order levels support our view that we are experiencing a market plateau at historically high industry demand levels as opposed to a short-term market spike.

The almost 77,000 railcars ordered thus far this year compares favorably to the 54,000 railcars ordered in the first nine months of 2005. We expect railcar demand to remain robust across multiple key market segments as a result of solid industry fundamentals, such as continued railcar loadings growth and long-term railcar replacement demand.

As we've mentioned previously, while overall market demand remains strong, railcar demand will shift from time to time from car type to car type. The North American railcar market is driven by demand for tank cars and covered hoppers serving the renewable fuels and agricultural industries. We also see strong demand for railcars carrying cement and aggregates used in infrastructure projects and commercial construction growth. Recent order inquiries support additional demand for [inter-mobile] railcars, auto racks and covered hoppers.

Coal car demand has abated pending completion of Powder River basin rail capacity expansion projects designed to improve system fluidity. However, we have received a modest number of coal car orders, reflecting the need to replace older steel coal cars. Long term, we believe significant demand for coal cars will return and additional inter-mobile equipment will be required to support continued strong growth in that market, as well.

During the third quarter of 2006, Trinity received slightly more than 9,300 railcar orders, all orders that were reported without contingency. We continue to focus our sales efforts on orders that meet our pricing requirements, including long-term purchased materials commitments, escalation and surcharge protection, and those that extend our existing production lines.

We received orders during the third quarter that will extend production lines for a variety of railcars. Specifically, we received orders for covered hoppers for agricultural products and cement, coal cars, railcars for [inaudible] and tank cars. Our customer mix was diverse, as agricultural and industrial shippers, utilities and third-party leasers placed orders with us during the third quarter. Current inquiry levels indicate further momentum for orders for a variety of railcars continuing throughout 2007, into 2008, and even into 2009, supporting our production and sales strategies.

The industry-wide production backlog at the end of the third quarter grew to approximately 89,000 railcars, from 86,800 at the end of the second quarter 2006. This indicates that industry order levels are outpacing increased industry production. Trinity's North American railcar production backlog increased 10% from the second quarter of 2006 to approximately 32,200 railcars at the end of the third quarter of 2006.

In our last conference call, we mentioned our intent to convert production lines at several facilities to produce tank cars in response to the extraordinary growth in renewable fuels. We are pleased to inform you that our plans are moving along quite well and that we will meet our customer commitments with this new production capacity. This is in large part due to our experienced supervisory and labor force, combined with proven railcar designs and production resources.

We expect extended production runs for railcars serving the renewable fuels market, allowing us to realize significant production efficiencies. Our overall goal is to maximize the returns of our portfolio by optimizing production capabilities and product mix. The strong increase in our backlog is evidence of our ability to adapt our production and market focus to be responsive to changing customer requirements.

Trinity Industries Railcar Leasing and Management Services Group continued to grow its railcar fleet during the third quarter. Trinity shipped approximately 2,100 new railcars to its leasing company during the third quarter. This represents about 33% of Trinity's third quarter railcar shipments. Our operating lease fleet now includes a diversified portfolio of approximately 29,200 railcars, as compared to approximately 23,300 railcars that were in our fleet September 30th, 2005.

The investment in our leasing business helps us to develop long-term relationships with the end users of our railcars, as well as to generate a significant long-term, stable earnings stream that reduces our susceptibility to market cycles.

Our committed lease backlog at the end of the third quarter increased to approximately 14,500 railcars, or 45% of Trinity's production backlog. This backlog extends into 2008 and has been instrumental in our production planning. Our fleet utilization increased slightly to 99.7% at the end of the third 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, indicating 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 overall 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 third quarter of 2006. We will file our Form 10-Q this morning. You'll find more details there about our third quarter results. During my remarks, I will provide earnings per share guidance for the fourth quarter and the full year. Additionally, I will provide updated guidance with respect to operating margins in our Rail and Inland Barge groups.

As a reminder, during the second quarter of 2006, we completed a three-for-two stock split. Accordingly, all earnings per share numbers discussed in my presentation are split-adjusted.

For the third quarter of 2006, we reported earnings of $0.70 per diluted share from continuing operations. This compares with $0.43 per share from continuing operations in the same quarter of 2005. Revenues for the third quarter of 2006 increased 17% over the same quarter last year to $810 million. Earnings from continuing operations exceeded the high end of our expectations, by $0.08 per share. The positive results were primarily due to strong performances by our North American Rail operations, rail component business, rail leasing business, and Inland Barge operations.

At this time, I'll discuss the performance of our individual business segments. In our Rail Group, the European Rail business was sold during the third quarter. A detailed review of this transaction may be found in our Form 10-Q. The European Rail financial results have been removed from the Rail Group and reported as discontinued operations.

Revenues increased 20% on a quarter-over-quarter basis. Rail Group sales to Trinity's Leasing Group were $168 million in the third quarter of 2006, with profits of $19.6 million, or approximately $0.15 per diluted share. This compares with sales to our Leasing Group in the third quarter of 2005 of $83 million, with profits of $13.8 million, or $0.11 per diluted share. These inter-company sales and profits are eliminated in consolidation.

Our margin results for the Rail Group were 11.3%. At this time, we anticipate margins for the Rail Group of between 11 and 12% for the fourth quarter. Our assumptions for margins are based on the following: continued production efficiencies in North American and no significant supply problems in steel or other basic materials. Our North American railcar backlog as of September 30, 2006 consisted of approximately 32,200 railcars, with an estimated sales value of $2.5 billion.

The Inland Barge Group's third quarter performance was strong, posting revenues of $94 million and operating profits of $11.9 million. This reflected the strength of our backlogs, which, as of September 30, 2006, was approximately $424 million. This compares with $281 million one year ago. We anticipate Inland Barge revenues of between $100 and $110 million in the fourth quarter. Operating profit and margins are expected to range between 12 and 13.5% for the fourth quarter.

Now, moving to the Energy Equipment Group. We are very pleased with this group's third quarter performance. On a quarter-over-quarter basis, revenues increased 47% to $88 million, and operating profits improved by $4.7 million, bringing the quarterly profit to $13.4 million. Our current backlog for structural wind towers continues to be strong.

Our Construction Products Group, which plays a key part in our earnings diversification strategy, generated revenues that were up 14% when compared to the same quarter of the previous year. Operating profit improved by $1.7 million for the quarter and $5.1 million for the nine months ended September 2006. Our concrete and aggregates business, which accounted for 58% of this group's revenues. Our highway products business accounted for 34% of the group's revenues and is performing well. Revenues from this unit's proprietary line of products continues to be strong.

Our Railcar Leasing and Management Services Group reported revenues of $61.4 million. Because car sales from the fleet are a regular part of the business and timing of these sales impacts our quarterly results, we focus on year-over-year results for this segment. For the nine months ended September 30, 2006, revenues increased by 31% over the previous year. Additionally, total operating profit increased by $26.8 million due to additions to the fleet and increased lease rates. Our total investment for 2006 will be approximately $550 million in net fleet additions. It is clear that the investments we are making in this business are providing long-term paybacks.

Moving to our consolidated results, non-leasing capital expenditures are currently projected to approximately $130 million for 2006. From an accounting perspective, our fourth quarter results will be impacted by our commitment to invest in our lease fleet. During the fourth quarter, we will defer approximately $190 million in revenue and $20 million in operating profits in order to achieve long-term profits in our leasing business. Additionally, the fourth quarter and first quarter are seasonal lows for our construction products segment. Accordingly, we anticipate earnings from continuing operations for the fourth quarter to range between $0.61 and $0.66 per share.

Overall, we have improved our company guidance for 2006. The new guidance from continuing operations is for earnings per share of between $2.61 and $2.66 for the full year on a fully diluted basis. Included in our assumptions for 2006 are normal weather conditions for the fourth quarter and no unanticipated adverse resolution of legal matters.

In our earnings release yesterday, we have provided a reconciliation of the non-GAAP term EBITDA. EBITDA from continuing operations for the third quarter of 2006 was approximately $130 million, as compared to $87 million in the same quarter last year. It is our custom to open guidance for the next year with our fourth quarter conference call. Accordingly, we will not provide additional earnings guidance during today's call.

At this time, I'll turn the presentation back to James for the Q&A session.

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

[Operator instructions] We will take our first question from John Barnes of BB&T Capital Markets. Please go ahead.

Hey, good morning, guys.

Morning.

Real quick, I'm not sure if I heard it or not, but on the barge backlog, can you give us the dollar amount of that backlog now?

It's $424 million.

And where was it at the end of the last quarter?

$487 million.

Okay. During the quarter, [Inaudible] acknowledged that they had lost some production days during the quarter on the barge side. Any issues there on your quarter, that you've got to make up some in the fourth quarter, or did you avoid a lot of that?

This is Tim. We didn't really see any significant falloff during the quarter of rain days or things like that. In fact, the new paint facility that we just put in allows us to do covered painting of the large tank barges, which is a big plus for us.

All right. On your railcar group, it looked to me like, versus my numbers - I mean, I think I hit the number in terms of deliveries in the quarter, and it's certainly - I wouldn't expect that you would see this level of margin improvement if you weren't getting some price on that, so where you came in a little short versus my expectations - now, I know it's not your guidance, but I'm just curious as to anything in the quarter mix issue-wise? I'm getting some questions today as to how do you determine when you're going to add a little extra into your lease fleet; it sounds to me like you all ran some longer runs and that type of thing. Is there anything there that would have skewed the revenue performance in the quarter on the railcar side?

No. I think, John, on the railcar side, what you need to be aware of is the European Rail operations had previously been in that segment, and so those are out of the segment reporting. In the second quarter, European Rail had $34 million in sales, so if you extrapolated that into the third quarter, those sales would be out of the Rail Group.

All right. But nothing else in the quarter, other than -

Not within the Rail Group. When you come to consolidated revenues - we spoke of the eliminations; we did eliminate $53 million more in the third quarter than we did in the second quarter, and that was associated with growing our lease fleet.

Okay, that's what I - okay. All right. And then on the construction products side, I know you've started seeing some benefit from the highway bill. I think we've had six months, seven months in a row now where we've seen better than $4 billion in contract awards per month. When do you really begin - when do you think you will really begin to see that business kind of surge along with these contract awards? Have we seen the sweet spot yet, or do you think the sweet spot is still, say, six to maybe even 18 months out?

I think that with us entering into the winter season that we're entering into now, it will probably be the spring and the summer before the pipeline is full like you're describing. But what happens weather-wise is you end up with stormy weather that causes delays in constructions, people have cut back their teams of people that they are employing because they don't want to carry the load, and we just don't have the demand. Bill mentioned this in his comments about the seasonal aspect of the fourth quarter and the first quarter, and so you will have a lull, but I think you'll find when - we're expecting when we go into the March/April/May time period of next year, you will then have had time for those funds to flow through, as well as the demand picks up as well on the normal construction season.

Okay. And then the last question I have for you, on production capacity. I think you talked about in your prepared comments looking at doing some things on the railcar side to increase a little bit of production capacity, and as well on the barge side. Incrementally, what do you think you can wring out by going through some of these initiatives? Are we talking 1 or 2% increase in capacity, or are you talking about something much more meaningful in both business units?

Well, in the rail business, we have a number of different alternatives that we look at on an ongoing basis, from an idle facility that we could bring back or expanding existing facilities that we have and then shuffling the production that we have, and so we're highly flexible in that area, and it's all a matter of the demand shifting in the various markets and our continuous quest of adding on to our existing production lines and then starting up lines that we feel have long-term continuity. And Steve and his team are right in the middle of a major shifting of production right now that I think will carry us for a year and a half to two years on some of our lines at very high productivity rates. He talked about that in his comments. In the barge area of our business, it's a matter of the type of mix of products between tank barges and the hopper barges, and our people, with this new paint facility that we just brought on stream, they're looking at being able to enhance that. We have some other equipment and facilities enhancements that they're looking at, that they've got on the drawing board that allows us - our game plan is not to miss any orders because we don't have the production capacity in any of our businesses to serve that customer's needs, so we have a common theme moving throughout Trinity of continuously raising the bar in our performance and output and searching for numerous ways to increase our capacity. So it's not a finite number that we have, but our people always - and they have been for the last year to year and a half - amazed me of the number of ways that they've been able to figure out to squeeze more out of the facilities that we have.

Okay. All right. In terms of the barge backlog, we've seen both companies now, both [Jeff Bodine] and you guys, see a little bit of a decline in the backlog. Are you beginning to see some deterioration in demand there just because of pricing spiking up, or is this just a timing thing and some seasonality into when the orders materialize? Can you just give some insight into why you think the backlog declined?

I think the backlog decline was a timing issue. We still have a high level of inquiries for new barges, and our backlog carries us into 2008. The productivity things that I was just talking about - we have customers that are talking with our key management and salespeople right now on contracts that they have a need for for barges, so we don't look at it as any type of early sign that anything significant is happening that would cause us to think that there's a deterioration in the demand for barges. Now, there's always a smoothing out of a production cycle like we're into with - when you have customers that have needs and then you shuffle your production around and you try to end up taking care of as many needs as you can, and when we have to report our numbers at the end of a quarter, there can be an order that drops on the backside of it or one that comes on the front side of it that can make a significant difference in all of our businesses. But we just have to pick a point for when we report the orders, and it's at that point.

Okay. Very good. Guys, nice quarter. Thanks for your time.

Thank you.

We will take our next question from Steven McBoyle with Lord Abbett.

Yes, thank you. A number of questions here. Maybe first - you went fairly quickly, as usual - the order discussion in terms of the quality of orders. Again, it sounded as if - again, getting all the clauses that you require, no contingencies, so is it fair to say the quality of orders you continue to get are equal to that which you've had recently?

Yes.

So no deterioration whatsoever?

No.

Okay. On the wind side, can you quantify the backlog?

Steven, we haven't quantified the backlog to date. All we can say is that we have a nice backlog, and we continue to pursue new orders to grow that backlog. In Tim's comments, he mentioned the production expansion within that business unit.

And how do we size that, and is that predominantly for non-GE business: Siemens and I guess the other Asian customer you have there?

We don't get into details of our customer base. On the size factor, we've previously discussed kind of a run rate of $130 million a year, and we haven't really updated that guidance.

Continuing on wind. You talked about the potential capacity in the Northwest. How would you be doing that?

I said Midwest when I was talking, and we have a facility that was formerly used for other products that is in the Midwest, that we're currently in the process of looking at converting to wind towers. It's one of the classic Trinity expertise of being able to go in and take a facility that was used for one product and move it to another, and it's ideally suited to serve the Midwest market. And we have inquiries, strong inquiries, from customers saying if we locate a facility there, the orders will follow, so we're doing what we normally do. We'll be a little more precise at our next conference call, because a lot of our production planning efforts will be well on down the road. In fact, hopefully we'll be producing some wind towers to serve that market by that time.

And having listened to GE, obviously, I think they saw a 20%-plus order growth there; obviously, you're serving them, so it seems like the outlook continues to be pretty good?

Yes, the outlook looks to be good, and it's now more of a geographical expansion for us.

And any comment on the regulatory situation there? Obviously, there's been some discussion as to whether this is, quote, unquote, a bubble, if you will, just in terms of the PVC credits. What's your view?

Our view is that the turbine manufacturers are becoming more efficient at making the turbines, and that it's very apparent that the country has to take steps to search out alternative fuels, and the wind tower structures are a very effective way of doing that, and the customers that we're talking with are all very bullish on their expansion plans, and there's funding behind a lot of the expansion plans, so we think that we're in a different position than we were in three or four years ago when we first started entering into this business.

Okay, great. Turning to leasing, I think from a revenue basis, it was down sequentially. I don't know if I'm thinking about this incorrectly, but if the lease fleet in units is up and rate is up sequentially, should revenue not be up sequentially?

Steven, it was down sequentially, but it was down because we had fewer cars sold from the fleet. That is why I focused on the YTD numbers, and it is up on a YTD basis.

Can you quantify that number?

Yeah, the YTD.

The YTD number?

Well, the sold dollar amount in the third quarter.

The sold dollar amount in the third quarter was $4.7 million, as compared to $18.7 million in the previous quarter.

$4.7 million and $18.7 million. Okay. And the margins - how do you think about where those can go going forward? What's a reasonable expectation? Obviously, they continue to [inaudible].

We haven't provided any guidance on the operating margins in the leasing business, but clearly, from Steve's comments about improving rates, the margins are moving forward in the direction that we think they should be.

Okay, great. And last question, on the backlog. I think you broke out shipment and revenues on rail that went to leasing, but the backlog in terms of units that would be for leasing purposes?

What is that question again?

What part of our backlog that is going to our lease fleet?

Exactly.

14,500 cars.

About 45% of our production backlog.

Okay. And then last question: what percentage of the backlog, whether dollar value or units, would you say is alternative fuel-related as you define it?

We don't sort that out, for numerous reasons. We just look at and report one backlog.

Okay, great. Super results. Thanks.

Thank you.

[Operator instructions] It appears that we have no further questions.

Thank you, Theresa. 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 9th. That access number is (402) 220-0116. 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. Thank you for joining us this morning.

This concludes today's teleconference. At this time, you may disconnect. Thank you, and have a great day.