Trinity Industries Inc (TRN) 2007 Q1 法說會逐字稿

Welcome to today's teleconference. (Operator Instructions) I would now like to turn the call over to James Perry, Vice President and Treasurer of Trinity Industries. Please go ahead.

Good morning from Dallas, Texas and welcome to the Trinity Industries First Quarter 2007 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 from today, Tim Wallace, Chairman, President and Chief Executive Officer, Steve Menzies, Senior Vice President and Group President of the Rail Group, and Bill McWhirter, Senior Vice President and Chief Financial Officer. Following that we'll move to the Q & A session. Also in the room today is Chas Mitchell, Vice President, Controller and Chief Accounting Officer. A replay of this conference call will be available starting one hour after the conference call ends today, through midnight on Thursday, May 10. The replay number is 402 220-0428.

I would also like to welcome to our call our audio webcast listeners today. 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 of 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 would cause actual results or outcomes to differ material from those expressed in the forward-looking statements.

At March 31, 2007, our borrowings at the corporate level were $450 million of convertible subordinated notes, $201.5 million of senior notes, and $1.6 million of other indebtedness. The leasing company's debt included $344.4 million of secured railcar equipment notes, $75.7 million of equipment trust certificates and $178.2 million outstanding under our Railcar leasing warehouse facility. Our total debt to total capital ratio was 46% at March 31, 2007, unchanged from our ratio at December 2006. Net of cash, our net debt to total capital ratio was 41% on March 31, 2007 up from the comparable amount of 39% at December 31, 2006. On March 31, 2007, our cash position was $224.1 million. Now here is Tim Wallace.

Thank you, James, and good morning to everyone. I'm pleased with our first quarter results. Trinity's businesses are well positioned and should continue to benefit from several key markets trends. These trends include the expansion of the renewable fuels market, the growth of the wind industry, highway infrastructure spending and replacement demand for railcars and barges. Our focus on operational excellence combined with our diverse product lines and manufacturing flexibility enables our businesses to pursue a broad spectrum of opportunities. This year we have a number of internal expansion initiatives taking place in addition to plant conversions, which enhance our competitive positions. We are also on the lookout for acquisitions, which will potentially expand our core businesses.

Our Rail Group experienced a solid first quarter. The Rail Group's first quarter railcar shipments were approximately 6,570 units. We expect our 2007 shipments to be between 27,000 units and 28,000 units. Overall demand for railcars in North America was not strong in the first quarter as it was in the fourth quarter of last year. Steve Menzies will provide specific figures for orders and backlog in his report. By the end of the first quarter our railcar backlog reached another record high. As many of you know, the demand for railcars is constantly shifting between railcar various types and is lumpy on a quarter-to-quarter basis. It is unrealistic to expect our backlog to continue to grow every quarter.

During the past few quarters the product demand has fit nicely within our production mix. We continue to focus on production line continuity rather than specific market-share goals. Trinity's barge business continues to perform well. Our barge backlog is growing. Our customers continue to visit with us about opportunities for future business. We continue to make internal investments in our barge business in order to increase our barge production capacity and improve performance. Bill will provide specific figures on our backlog in his report.

Our Construction Products businesses are performing well despite less than ideal weather conditions during the first part of the year. Demand remains steady as we enter the busiest time of the year. During the first week of April we acquired a company whose operations include concrete, aggregates and asphalt. We plan to prove out our competency in the asphalt business before we grow this business. We see long-term potential to grow this business in select communities. We are planning to exit the bridge steel product line at the end of this year. Five years ago we sold our large bridge steel factory in Houston, Texas and leased it back for five years. We are in the last year of that lease. We recently converted our other bridge steel factory to railcar production. If we locate another bridge steel business or manufacturing facility that is ideally suited for this market we will consider reentering that product line.

Our structural wind tower business continues to grow. Demand for wind towers is strong. We expect our order backlog to continue to increase because our production facilities are ideally located in areas where wind farms are being planned. Our wind tower production capacity will be increased this summer when we finish converting an idle railcar factory in Clinton, Illinois. We will have a learning curve in our start-up at Clinton and it may take us several quarters before we reach optimum production for this facility. We will have a better estimate of the timing at our next quarterly conference call. In addition we are pursuing other opportunities to increase our wind tower capacity. We have a unique position in this market and expect our revenue and profits to continue to grow.

Trinity's leasing business had a great first quarter. Demand for railcar leasing remains steady. Our railcar leasing company has been a growth business for us. We are in a position to provide railcars for sale or lease to a large customer base. Our railcar leasing personnel are highly focused on improving and expanding their services. Railcar leasing and management services continue to be a key component for our ongoing strategy. Steve will provide more details about this in his report.

As you can tell, I am pleased with the performance of our Company and our unique position within the industries we serve. We have excellent market leadership positions and our backlogs are allowing us to focus resources on improvement and growth. We have a number of internal expansions activities in process. We expect our performance to continue to improve as we implement these initiatives. I remain optimistic about our opportunities for 2007 and beyond. I will now turn it over to Steve Menzies for his comments.

Thank you, Tim. Good morning. Trinity's rail business continue to perform well during the first quarter of 2007 as our railcar production levels and order backlog increased while operating margins continued to expand. The approximately 6,570 railcars we delivered in the first quarter reflect an increase of 7% compared to the first quarter 2006. Our operating margins improved 10% sequentially from the fourth quarter.

Industry demand for railcars declined during the first quarter 2007. Approximately 11,500 railcars and auto racks were ordered as compared to over 17,000 railcars ordered during fourth quarter of 2006 and a quarterly average of approximately 23,000 railcars ordered during all of 2006. The reduced order level in the first quarter reflected continued softness in selected markets such as intermodal and coal and a more normal level of demand for tank cars and covered hoppers. As we have mentioned previously, railcar demand will shift periodically from car type to car type.

The railcar market continues to be driven by demand for tank cars and covered hoppers serving the renewable fuels and agricultural industries. Demand for these car types is also driven by the need to replace smaller, less efficient railcars. We believe the replacement cycle for an aging North America railcar fleet provides a basis for long-term railcar demand to continue at high levels. Recent order inquiries support continued demand for tank cars, covered hoppers and auto racks.

In addition to monitoring railcar demand, we closely evaluate demand for specific commodities, specific railcar types and changes in logistics that may impact rail car demand. With these market insights, we can then be prepared to either shift production or rationalize our railcar capacity to meet changing demand. For example, as a few ethanol plant construction delays have caused railcar deliveries to be postponed, we were able to shift production and sell the available production spaces in 2007 to other customers requiring different types of tank cars. In the case of coal, where we expect demand to improve in 2008, we may adjust production rates to more effectively manage production efficiencies and retain our highly valued trained labor force.

Coal car demand has been soft pending completion of rail capacity expansion projects designed to improve system fluidity. One western railroad recently rescinded its moratorium on additional coal cars as some of the expansion projects reached completion. We are excited by the long-term opportunities in the coal market. The industry's expansion of coal-fired generating facilities will fuel greater demand for coal. A number of current inquiries from utilities and coal companies point toward stronger coal car demand in 2008. That is when new generating capacity requiring increased coal supplies will begin to come on stream and railroad capacity expansion projects are expected to be completed.

To help meet the forecasted demand for coal cars, we are optimistic for the prospects of our new design, longitudinal gate system for rapid discharge aluminum coal hoppers known as the RDL. We have received orders for this new design of coal car and are currently completing our first production units. The new design was developed in response to customer feedback seeking a coal car with increased productivity and improved operating reliability. The RDL is another example of Trinity's ongoing commitment to product development and finding solutions to our customer's challenges.

During the first quarter of 2007, Trinity received approximately 8,500 railcar orders. Many of these orders will extend current production lines for a variety of railcars. Specifically we received orders for covered hoppers for agricultural products and cement, coal cars, flat cars, auto racks and tank cars. Recent inquiry levels indicate further momentum for orders for railcars currently in production.

As a result of our first quarter orders, Trinity's railcar order backlog increased more than 5% from the fourth quarter 2006 and approximately 48% from the first quarter 2006. Our record order backlog as of March 31, 2007 totaled approximately 37,790 railcars. We believe our production flexibility is one key reason Trinity's railcar order backlog has continued to increase. We are pleased with the progress we've made to convert production lines at several facilities and meet the growing demand for tank cars. For example, we completed the conversion of our Saginaw, Texas facility to tank car production ahead of schedule during the first quarter, providing additional, available railcars in a tight near-term tank car market.

In addition, the expansion of our production at our facilities in Mexico has also progressed well. During 2007 we are increasing our production levels in Mexico 40% and expect to produce almost 13,000 railcars from our facilities in Mexico. Our growing production capabilities in Mexico positions Trinity to compete effectively in a dynamic railcar market. These successes are in large part due to our experienced production and supervisory personnel and established labor force combined with Trinity's broad product line, proven railcar designs and production resources. The increases in our backlog are evidence of our ability to shift our production to meet changing market and customer requirements.

Trinity Industry's railcar leasing and management services group continued to grow its railcar fleet during the first quarter. Trinity shipped approximately 2,000 new railcars to its leasing company during the first quarter. This represents about 32% of Trinity's first quarter railcar shipments. This increases the size of our lease fleet to approximately 32,500 railcars compared to 26,000 at the end of the first quarter 2006. The growth of our lease fleet will continue at a strong pace throughout 2007. We expect to ship approximately 50% of our total second quarter shipments to our leasing company. 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 Trinity's susceptibility to market cycles.

Our committed lease backlog at the end of the first quarter increased to approximately 22,800 railcars or 61% of Trinity's railcar order backlog. This backlog extends into 2009 and has been instrumental in our long-term production planning and in realizing current operating efficiencies. Our fleet remains highly utilized at well over 99% at the end of the first quarter. The average age of the railcars in our leased fleet is 4.6 years and the average medium lease term is approximately six years. These rates continue to rise as a result of high fleet utilization, strong levels of new car building and rising new car prices. Our renewal experience measured by the number of leases renewed as a percentage of expiring leases has been very high, indicating strong demand for existing railcars. Our average fleet-lease rate increased quarter-over-quarter reflecting a high number of lease renewals and steadily rising lease rates.

In summary, we are pleased with the overall performance of our rail business. Our operational flexibility has allowed us to respond effectively to meet the changing demand among various railcar types, resulting in our railcar order backlog growth. We continue to gain operating efficiencies through extended production runs favorably impacting operating margins. The growth of our leasing business has enabled us to meet the needs of our customers and effectively manage our production plans while enhancing the long-term stability of Trinity.

Our overall goal remains to maximize our returns by optimizing production capabilities and product mix. We believe we are uniquely positioned to pursue opportunities in the railcar market as demand changes and our customer needs evolve. I will now turn it over to Bill McWhirter.

Thank you, Steve, and good morning everyone. My comments relate primarily to the first quarter of 2007. We will file our form 10-Q this morning. You will find more details there about our first quarter results. During my remarks I will provide earnings-per-share guidance for the second quarter and the full year of 2007. Additionally, I will provide updated guidance with respect to operating margins in our rail, inland barge and energy equipment groups.

For the first quarter of 2007, we reported earnings of $0.74 per diluted share from continuing operations. This compares with $0.49 per share from continuing operations in the same quarter 2006. Revenues for the first quarter of 2007 increased 14% to $828 million over the same quarter of last year. Earnings from continuing operations exceeded the high end of our expectation by $0.08 per share. These positive results were primarily due to strong performance in our North American rail operations, rail leasing business and inland barge operations.

Moving to our Rail Group, revenues for this group increased 9% on a quarter-over-quarter basis. Rail Group sales to Trinity's leasing and management services group were $172 million in the first quarter of 2007 with profits of $28.2 million or approximately $0.23 per diluted share. This compares with sales to our leasing group in the first quarter of 2006 of $148 million with profits of $18.5 million or $0.15 per diluted share. These inter-company sales and profits are eliminated in consolidation. Our margin results for the rail group were 13.7%. At this time we anticipate margins for the rail group of between 12.5% and 13.5% for the second quarter. Our assumptions for margins are based on the following; continued production efficiencies and no significant supply problems in steel or other basic materials. Our railcar backlog as of March 31, 2007 consisted of 37,790 railcars with an estimated sales value of $3.1 billion.

Now turning to our inland barge group. The inland barge group's first quarter performance was strong, posting revenues of $109 million and operating profits of $17.4 million. These figures reflect the strength of this group's backlog, which as of March 31, 2007 totaled $569 million. This compares with $327 million one year ago. We anticipate inland barge revenues of between $110 million and $120 million in the second quarter. Operating profit margins are expected to range between 14.5% and 15.5% during this quarter.

Now moving to the Energy Equipment Group, during the first quarter we continued to experience some production issues and growth challenges, all typical of fast growing operations. The result was operating profits of $10.1 million and an operating profit margin of 11.1%. Overall we still expect margins for the Group of between 13 and 15% for 2007. Revenues for the entire segment will be approximately $450 million for 2007, which represents a 34% improvement in revenue over last year.

Revenues for our Construction Products Group were up 10% when compared to the same quarter the previous year. Operating profit was $10.1 million for the quarter, representing an improvement of 6%. As Tim mentioned, we are exiting our bridge product line. In 2006 our bridge product line proved approximately $40 million in revenue. Our recent acquisition of Armor Materials should replace the revenue for this segment.

Our Railcar Leasing and Management Services Group reported revenues of $70.9 million compared with $56.3 million in the same quarter of the previous year. Operating profit increased by 58% to $27.8 million due to additions to the fleet and increased lease rates. Car sales from the fleet were $8.3 million during the quarter, which is consistent with the first quarter of the prior year. For 2007 we anticipate between $750 million and $850 million in net fleet additions. This represents a change from our previous projection of $650 million to $750 million in net additions. The increase is the result of additional originations by our leasing company during the first quarter coupled with our desire to add more cars to our fleet. This potential additional investment would result in increased deferred profits. I will speak more on this matter in my guidance remarks. It is clear that the investments we are making in this business are providing long-term payback, significant growth and diversification of earnings.

Moving to our consolidated results, for 2007 we expect non-leasing capital expenditures of between $170 million and $190 million. This represents an increase of $30 million since our last projection. The increase is primarily due to our decision to invest in a wind tower facility in Mexico. This new facility should generate revenues beginning in 2008. During the second quarter we will defer approximately $325 million in revenue and between $44 million and $49 million in operating profits as we grow our leasing business. This represents between $0.36 and $0.40 per diluted share. This amount is a significant commitment to our leasing strategy and will impact our second quarter earnings to some degree. We anticipate earnings from continuing operations for the second quarter to range between $0.68 and $0.73 per diluted share. Our previous guidance for 2007 remains unchanged at earnings per share of between $3.00 and $3.15 for the full year on a fully diluted basis.

Included in our assumptions for 2007 are normal weather conditions, no unanticipated adverse resolution of legal matters and the elimination of between $110 million and $125 million in profit for railcars sold to our leasing company, or approximately $0.89 to $1.01 per share. It should be noted that deferred profit could increase further if the strong demand for lease cars continues and/or we elect to retain more lease railcars on our balance sheet. Our current financial model suggests a potential $0.17 impact to 2007 earnings if we elect to take net fleet additions to $1 billion for the year. During our second quarter call I will provide an update on our estimates for deferred profit.

In our Earnings Release yesterday we provided a reconciliation of the non-GAAP term EBITDA. EBITDA from continuing operations for the first quarter of 2007 was approximately $140 million as compared to $97 million in the same quarter last year.

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

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

(Operator Instructions) We'll take our first question from Kevin Maczka with BB&T Capital Markets.

First, a question on pricing in the Rail Group. It looks like the average price, and I know mix is an issue here, but the average price in the quarter is a little bit higher than what's implied in your backlog going forward so the first question is what are you seeing in general on pricing? And the second question is are you seeing any trend towards more fixed rate pricing contracts?

Yes mix has a big impact on average pricing so you're correct in that sense. Pricing today has held strong. We are seeing fixed prices on rail cars through the balance of 2007 although as you get beyond the end of 2007 raw materials, steel in particular and component prices are not fixed so we would not expect to see fixed pricing going into 2008 at this point in time.

Okay great. And then another question on margins if I could-- you gave the guidance for the Rail Group of margins but you did 13.7 in the first quarter and I think typically the back half is a higher margin than the first half of the year. Do you expect that to still be the case this year?

No I would say the back half is not typically higher within our Rail Group. That's true of some of our seasonal businesses in Q2, Q3. I think this margin is more representative of having all of our lines up and moving at a very nice production rate at the 6,500 to 6,600 rate.

Okay and then the last question if I could and I'll jump back in line, 76% market share of orders in the quarter. It's been a couple quarters in a row now of very, very high market share of new orders. What's changing on the competitive environment? I know some of the more niche type players are talking about ramping up new car types be it intermodal or hoppers or coal. Can you just talk about what you're seeing in general on this competitive landscape?

Well, with the market softening you definitely have certain car types that are a lot more competitive. As I said in my portion of the talk that the order level fit real well with our production mix and for two quarters we've seen that happen and we're not really highly focused on market share other than extending our particular production lines and we've just been fortunate in that way and we are very aggressive when we have production lines that we're trying to remain continuity. At the same time we've done some transitioning. I know the other competitors are doing things and taking steps to diversify their particular product lines as they can and I think they'll have to speak for themselves as to the things that they are doing.

Art Hatfield with Morgan Keegan.

This is actually Logan Stevens in for Art. Couple of quick questions-- first, looking at the order rate of 8,500 in the quarter, can you give us some details on how much-- how many of those orders came from third parties and how many of them were in house from the lease fleet?

Yes I think we had that statistic of-- or did we not?

We didn't have the statistic of how many but we did tell you that our backlog is comprised of 61% going to our leasing company.

Okay that's helpful. And then kind of on the same question on the margin side, the 13.7%, can you point to anything as specifically in the quarter that you did to improve that or is it just the little blocking and tackling you're getting from having longer production runs?

Well, the longer production runs is the key issue with us as well as the particular product mixes that we have and just getting through the experience curve in our organization. Our rail people, as well as the other people in our companies that have large backlogs, are doing a tremendous job of managing to squeeze productivity out of our system. You're seeing that in our barge group as well and in our rail cars so margin improvement really is a function of getting way on down the long learning curves as best as we can and focusing more of things, now that we have a large backlog, on productivity improvements.

Okay and then finally one more question, a little thing-- on the operating profit on the other line turned positive this quarter and it's kind of been trending negative for the last couple quarters. Is there anything going on in there that we should know looking forward?

No and actually that's in our hedge accounting. We had some mark-to-markets that were favorable associated with several hedges we use.

Great quarter, guys. Thanks.

(Operator Instructions) Kevin Maczka with BB&C Capital Markets.

I just wanted to follow up on the second quarter guidance, the 68 to 73. It seems like we get a lot of questions from investors. They're similar each quarter. You know how conservative is this guidance and that definitely proved to be the case this quarter with your 61 to 66 outlook. Can you just talk again a little bit, Bill, about how you get to that 68 to 73 and why exactly is it that you don't think you'll do more in the second quarter than you did in the first?

Sure. I mean I think a key is the deferred profit that we'll incur in the second quarter. As Steve said, half of our cars are headed to our leasing company. We're making a significant commitment in that long-term strategy. That would result in a deferred profit of between $44 million and $49 million in the quarter, which is $0.13 better than the previous quarter, the first quarter. So I think if you did kind of apples and apples you would see our EPS moving up in the second quarter by kind of $0.10 to $0.15.

So, in other words, if you didn't make these additional investments in the lease lead in the second quarter, those sales would go to external customers and you would potentially have $0.13 more cents in EPS? Is that how I should think about that?

No I don't know that I would think about it that way. I mean these are definitely sales going to our leasing company but the math is that we deferred $0.23 in the first quarter and in the second quarter we'll defer between $0.36, which would be $0.13 more, and $0.40, which would be $0.17 more cents yet still report our guidance is for earnings very close to the earnings in the first quarter.

(Operator Instructions)

We'll let this conclude today's conference call. Remember, a replay of this call will be available starting one hour after the call ends today through midnight Thursday, May 10th. The access number is 402 220-0428. 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.