Trinity Industries Inc (TRN) 2010 Q1 法說會逐字稿

Good day, everyone. Welcome to today's program, Trinity Industries first quarter results conference call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the Q&A session. Please note, this call may be recorded. I will be standing by if you should need assistance. 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 are 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. And it is now my pleasure to turn the call over to James Perry with Trinity Industries. Please go ahead, sir.

Thank you, Shannon. Good morning from Dallas, Texas. Welcome to the Trinity Industries first quarter 2010 results conference call. I'm James Perry, Vice President and incoming Chief Financial Officer of Trinity. Thank you for joining us today. We are modifying the format of the conference call as a result of the recently announced executive changes. Following the introduction you will hear from Tim Wallace our Chairman, Chief Executive Officer and President. After Tim, our business group leader will provide an overview of the respective businesses. These speakers will be Steve Menzies, Senior Vice President and group president of the rail group and rail car leasing group. Antonio Carillo, Vice President of the Energy Equipment Group, and Bill McWhirter, Senior Vice President of the Construction Project's minimum barge products . Following their comments I will provide the financial summary and guidance and then we will move to the Q&A session. Mary Henderson our Corporate Controller is also in the room with us.

As we previously reported on January 1, 2010, the Company adopted the provisions of a new accounting pronouncement requiring inclusion of the consolidated financial statements of share holdings and of its subsidiaries and Trinity's consolidated financial statements. You will see this inclusion beginning with the March 31, 2010 Form 10-Q that we will file today. As a reminder, trip is a rail car leasing company formed in 2007 to purchase $1.285 billion of rail cars from Trinity during a two year period. Trinity is currently at 28% equity own are of trip and serves as manager of the rail car portfolio. Beginning with the first quarter, we will report in our 10-Q the same statistics for trip what we that we report for the lease fleet, including fleet size, utilization, average age and average return on the leases in the portfolio work. we will not provide comparative statistics for the prior periods. Neither the activities of trip nor our role in trip have changed. This change in presentation is simply due to a new accounting pronouncement. Trip's debt remains non recourse to Trinity and has no impact on our debt covenants, other than an immaterial impact on a network test. Now, I will turn the call over to Tim Wallace for his

Thank you, James and good morning. I'm pleased to report that we saw signs of improvement during the first quarter in the markets our businesses serve. The majority of our businesses received enough orders to increase their backlogs. Based on what we see at this time it appears we hit bottom from a financial point of view during the first quarter. Our revenues during the quarter were comparable to revenues during the first quarter of 2004, when we lost $10.8 million in net income. During the first quarter of 2010, we earned $2 million in net income. I'm pleased with the progress we have made in positioning Trinity to withstand a severe economic downturn. The strategies that we implemented during the past decade have helped us manage more effectively through this cycle. Most important, our liquidity at the end of the first quarter remained very strong at $1.2 billion.

During the first quarter we completed the acquisition of Kyode Corporation a leading products manufacturer. I'm pleased with the progress we're making with the integration of Kyode, renamed Energy Absorption Systems. Our barge business received enough orders in the first quarter to maintain consistent production throughout 2010. Demand for rail cars in North America also improved during the first quarter. Our rail car manufacturing businesses increased their order backlogs. This was their first quarterly backlog increase since the second quarter of 2008. Our rail car leasing group was successful in maintaining a high utilization rate. Our structural wind towers business received orders during the first quarter which slightly increased their backlog. This business is going through another round of production reshuffling in order to accommodate delays in wind farm developments. This is symbolic of some of the uncertainty that still pre mains within the wind power industry.

All of our manufacturing businesses are closely monitoring their production footprints, and will continue to adjust their levels as business conditions change. Going forward, I expect to see a continuation of the rapid changes that currently characterize the global business environment. While there is less uncertainty today than six months ago, predicting the outlooks for our various businesses continues to be challenging. We are still cautious in respect to whether a sustained recovery is underway. We are confident in our business' ability to respond to changes in their market. Our businesses are highly flexible from a manufacturing point of view and we will continue to shift and direct resources as we navigate through the various business cycles. I will now turn it over to Steve Menzies for his comments.

Thank you, Tim. Good morning. First quarter operating results for the rail group and the leasing group met our projections as we shipped approximately 500 rail cars, and experienced another increase in lease fleet utilization to 98.3%. I'm pleased with the operating performance in a highly challenging and uncertain rail marketplace. However, more significantly since the latter part of the first quarter we have seen an improvement in demand for certain key rail car types. This improvement in demand is consistent with positive changes and key indicators such as rail car loadings and a reduction in idle North American rail car fleet. We also see improving operating metrics in our lease fleet, such as higher lease fleet utilization and stabilizing lease rates as indicators of an improving marketplace.

During the first quarter, the industry received orders to build approximately 5,100 new rail cares of which Trinity Rail received approximately 1,150 rail car orders. Trinity Rail's backlog was approximately 2,980 rail cars at the end of the first quarter, up 28% from 2,320 rail cars a at the end of 2009. Approximately 61% of our rail car production backlog is for customers of our leasing business. Based upon orders received and current inquiry levels we have increased our projection for rail car production through the end of the year. We now expect to deliver between 800 and a 1,000 rail cars during the second quarter. We shipped 500 rail cars in the first quarter. We added 410 new rail cars during the first quarter to our lease portfolio, bringing our total lease fleet to more than 50,350 rail cars, up 6% compared to 47,650 rail cars at the end of the first quarter of 2009.

In addition, the trip fleet totals approximately 14,710 rail cars. Our lease fleet utilization increased to 98.3% from 97.8% at the end of 2009. Lease renewals and lease rates appear to be stabilizing in some markets and even improving in a few others. Our average remaining lease term declined to 3.7 years and the average age of the fleet is 5.5 years. While we are encouraged by the recent improvement in rail car demand, it is still difficult to determine the timing or sustainability of a broad-based recovery in rail car demand. Our customers lack the visibility to adequately plan for the long-term and they are therefore cautious about making commitments for capital equipment. New rail car orders today are principally to replace older rail cars, or rail cars designed to transport specialized commodities. As you can see by our response to the current shift in rail car market demand, our operating flexibility has allowed us to quickly increase production to meet customer needs.

We will adjust to changes in the marketplace as needed while aggressively pursuing select rail car building and lease investment opportunities that meet our objectives. Our lease fleet continues to perform well and provides a stable cash flow stream throughout these difficult operating circumstances. We expect to continue to grow our lease fleet through all phases of the market cycle. I will now turn it over to Antonio.

Thank you, Steve, and good morning. During the first quarter, our wind tower business secured several orders, some from now customers. this resulted in a sleight increase in our backlog which now totals approximately $1.1 billion and extends into 2013. While the majority of the deliveries are for projects in the central sections of the United States the backlog includes towers everywhere from Delaware to California and all the way to the southern part of Mexico. We have also shipped towers from the Mexico facilities to South America.

The economics of wind energy continue to be challenged by transmission constraints and competitive utility rates. These challenges have caused some wind projects to be delayed. We continue to work with customers to accommodate the delivery requirements and have rescheduled some 2010 deliveries to 2011. This ongoing shuffling is causing inconsistent revenues and make it difficult to predict results. We are anticipating lower margins this year because of the reshuffling and changes in our product mix. We will continue to be highly flexible and customer focused. We are prepared to resume growing when the market conditions improve. Although federal fund s have been slow to work their way through the allocation process, we continue to be encouraged by President Obama's support of renewable energy. I will now turn it over to bill for his comments.

Our construction products group continues to make good progress on the integration of EAS into the highway products business. The second quarter marks the beginning of the construction season and we are seeing a strong level of activity from highway spending and stimulus funds . We will continue to gain synergies from the EAS acquisition throughout the year and we will begin seeing the full impact of the integration in 2011. On the concrete and aggregate side, we continue to see a weak market in home building and commercial projects. Highway related projects have provided some support to our construction materials business but not enough to completely offset the declines in general construction.

The construction season should bring better volumes, but margins will likely continue to be pressured as compared to last year. In 2009, our barge group produced record earnings, Making compare soon to 2010 challenging. For the first quarter 2010, we had solid results from the profit perspective and order intake view. During the quarter we received orders for approximately $140 million. Demand still remains choppy, but key indicators moving in the right direction all be it slower than we would like. Our production team continues to do a great job at finding efficiencies and lowering costs and providing quality products to our customers. Now, I turn the presentation back to our incoming Chief Financial Officer James

My comments will relate primarily to the first quarter 2010. We will file our form 1 Q today. For the first quarter of 2010, Trinity reported earnings of $0.2 per diluted share, this compares to $0.43 per share at the end quarter of 2009.Revenues for the first quarter were $454 million, as compared to $793 million in the same quarter last year. For the first quarter, Trinity EBITDA is $98.7 million. The reconciliation of EBITDA was provided in the news release yesterday. In our rail group, revenues decreased on a quarter by quarter basis by 74% to $74 million. Margin results for the road group was a loss of $7.9 million or a margin of 10.8%. The rail group backlog grew during the quarter by 28% from year end to approximately 2,980 rail cars with an estimated sales value of $250 million at March 31, 2010. Our rail Car Leasing and Management Services Group reported revenues of $121 million. These revenues include the impact of $29 million of revenues from trip which as I mentioned earlier is consolidated with Trinity's results beginning this quarter.

Operating profit for the quarter was $48.2 million, including $17.1 million from trip. Revenue for the leasing business are expected to be $110 million to $120 million higher and operating profit for leasing is expected to be $65 million to $70 million higher during 2010 than they would have been without the consolidation of Trip. In the first quarter, trip provided Trinity with earnings per share of between $0.01 and $0.02. We would expect this level of quarterly contribution from trip to continue assuming that trip's operating metrics remain relatively consistent. The Inland Barge Group's first quarter performance was solid with revenues of $97 million and operating profit of $17.8 million, a margin of 18.3%. Our barge business received orders during the first quarter that resulted in backlog growing by 13% from a year end figure of approximately $319 million to approximately $360 million at March 31, 2010. During the first quarter, the energy equipment group's revenues declined by 30% quarter to $90 million. $55 million of the first quarter revenues from the wind towers business. Operating profits were $10.4 million, resulting in an operating margin of 11.5%, as compared to operating profit of $18.3 million in the first quarter of 2009. These lower results are due to a slowdown in the wind tower market and a decision by the wind towers business to delay certain deliveries to accommodate customers' requests.

The backlog for the wind towers business remained healthy, grew slightly and was $11 billion as of March 31, 2010. Revenues for our construction products group were $118 million in the first quarter, as compared to $123.5 million a year ago. This group reported operating profits of $2.7 million compared to loss of $1.7 million in the same period a year ago. At March 31, we had $335 million available under the rail car leasing facility and under $336.1 million available in the resolving credit facility. After accounting for $88.9 million in letters of credit. Combined with our unrestricted cash and short-term marketable securities balance of $522.8 million, our total liquidity was approximately $1.2 billion at the end of the first quarter.

Now, I will move to our forward-looking guidance. In the first quarter of 2010, we had non leasing capital expenditures of $6.2 million. Our current forecast is for approximately $40 million of non-leasing capital expenditures in 2010. In the first quarter net additions of rail cars to the lease fleet totaled $30 million. For 2010 we anticipate approximately $200 million to $225 million in net fleet additions due to improving market conditions. We anticipate earnings per share for the Company to be between $0.15 and $0.20 in the second quarter. For 2010 we anticipate full year earnings will range between $0.45 and $0.65 per diluted share. We anticipate that the rail group will report an operating loss of between $7 million and $10 million for the second quarter of 2010. Inland barge revenues of between $100 million and $110 million in the second quarter with operating margin of 12% and 14% for the same period. Revenues for energy equipment are expected to be approximately $115 to $125 million for the second quarter. Margins anticipated to be between 10% and 12% in the second quarter as we manufacture less profitable orders from the backlog. The adjustment in the production schedules are to meet customer needs resulted in several orders being pushed back to future years. As a result we expect the wind tower business to contribute $280 million today's $300 million in revenue during 2010.

We remain well positioned with the diversified portfolio of businesses of strong balance sheet and solid cash flows. We have been very focused on these items to be sure we are able to capitalize on business opportunities as they arise, as reported by the acquisition of Keynote Company at the beginning of the first quarter. Now, our operator will prepare us for the question and answer session.

(Operator Instructions). We will take our first question from the line of Steve Barger with KeyBanc Capital. Please go ahead.

Hi, good morning.

Good morning.

Good morning, Steve.

First, Tim, you said that there is less uncertainty today but it is still tough predicting the outlook yet you are willing to take the guidance up one quarter into the year. Is that a function of what you are seeing in the macro environment or is it the positive book, bill, rail, or barge or specifically can you tell us what gives you confidence to take that guidance range up?

Well, Steve, it really has to do with the inquiry levels that we have from our customers and the backlogs we have been able to build in that in that area and we are assuming there is sustainability of some this of kind of movement throughout the year. Kind of a combination of the backlogs and the feel that we are getting out in the industry.

That's great. Can you talk maybe, Steve, what car types you are seeing the most inquiry activity on and is there any order activity following the close of the quarter that you can talk about?

As to the latter part, this is Steve. We don't usually comment about orders, but we have seen good inquiry activity and we are pleased ,as Tim said, with the outlook at least near term on inquiries for rail cars. As far as types, if you look at the rail car types that are most idle, for instance coal cars, inter-modal cars, those are the cars we don't have demand for. We are seeing demand for covered hoppers for various commodities and the chemical and petrochemical industries in the tank car sector so that would be some stronger areas by comparison.

Okay. And I think I have these numbers right. For the year you expect $200 million to $225 million in net lease fleet additions or if you net out first quarter $170 to $195. The backlog is not $250 million. Is the current backlog mostly for the lease fleet or is your expectation that you are going to take other lease orders as the year progresses?

Well, this is Steve again. 61% of our current backlog is committed to customers of our leasing business. And in certain markets where we see improving investment returns, we will continue to make investment as we said and we will continue to grow our leasing business in those areas.

Okay. Perfect. And one more and I will get back in line. For the inquiries that you are seeing, who are the buyers typically? Is it shippers or class ones, or is it other lesser, what is the feel of the market in terms of where you are getting order inquiry?

Steve, will you handle that?

Sure.

We are seeing industrial shippers in those specific market sectors need equipment to respond to changes in their marketplace. We are having discussions with several lesser about opportunities to buy cars and the railroads are keen buyers at opportunistic opportunities to buy at the low end of the marketplace, and they are nibbling as well. We are seeing inquiries from each of those key market factors.

Thanks very much. I'll get back in line.

The next question is from Paul Bodnar with Longbow Research.

Sounds like the margins are coming back here a little bit in Q2. Is that something where you have been more aggressive on price to gain market share or maybe a little more color on that?

Bill, would you address that?

From the barge perspective, I think the margins are more reflective of orders taken 2009 and a little more in 2010, so obviously a little bit more competitive environment than orders taken in 2008. But it is certainly not a market share driven activity. More of just demand and capacity.

So that is something that as we get into with the environment improves we could look at margins heading back up to prior levels? Is there anything that would prevent that?

I think it will be demand and capacity and we would certainly hope that margins could expand as business got better.

And most of the barges being sold are in the replacement area.

Demand for barges right now seems to be solely replacement and a little optimistic. There has been rumors about steel pricing moving upward and I think some people are coming to the table as steel continues to go up.

We had a pretty strong order activity this quarter, too. Is that something that sounds like that was replacement driven but any expectation on what we can think on a run rate on that going forward. How are you seeing 2Q entry levels. I know you have the annual contract you get every year coming in 2Q also?

I said that the order activity or inquiry activity was choppy and it continues to remain choppy. I don't think you can project orders as we move forward.

Another question on Trip. After I net out interest expense and all that the margin on the Trip business looks like it would be high than in your internal lease fleet. Again, a reason on that. Obviously again adjusting for the interest expense on both.

Sure, Paul and I think you will get a better look at Trip when you see our 10-Qs, I'd be happy to go over that with you a little later too. There are several adjustments that come through the revenues and operating profit that as we go down to the net income line come out in the new consolidation we are going through. I think it is hard to take a look at Trip on it so and the operating profit and interest and revenue margins the same way we look at our fleet. Trip is a bit of a newer fleet and a little higher utilization. And it has got a little longer remaining lease term, as you will see in the 10-Q as well. The trip is a bit of a newer fleet but overall comparable to the Trinity fleet.

I will address that with you offline. Thanks.

Once again, as a reminder that is star one to ask a question. We will move now to the line of Louis Sapir is with Oppenheimer& Company. Please go ahead.

Good morning.

Good morning. Has the government stimulus had any significant effect on your business and the withdrawal of government stimulus being a significant deterrent to what you are doing.

James, do you want to take that?

Sure, this is James. One piece Antonio mentioned, there are some federal programs on the wind tower business, some of that has been slow for allocation purposes. We are still seeing some of that in the administration support of wind energy. On the construction product sides we have seen benefit in the highway business particularly from stimulus spending. There is currently a rather short-term bill on the highway side that we are seeing benefit from. As always the highway business does have benefits from a longer term more somewhat permanent highway build where the states can get their projects and the federal government can get their projects funded. We are certainly seeing some impacts there, benefits of certain programs but long-term it is hard to make a determination now given where some of the bills are in Congress.

Approximately what percentage of business would you ascribe to the stimulus?

I would say it is pretty small. The wind tower peak, you have seen the backlog grow over the last several years so not a lot of that in the backlog side of wind towers come in the past couple of years as the wind towers have just come into play. On the highway business side, of course, that is a rather small business in the grand scene of Trinity with you a growing business with the recent acquisition as well. A part of that depending on spending at the federal and state level but not necessarily just stimulus spending.

Thank you very much.

Thank you, Lewis.

And again, that's star one to ask a question. We will pause now to allow additional questions to join the queue.

Okay. It would appear we have no more questions so we will conclude today's conference call. A replay of this call will be available after one o'clock today through midnight on Thursday May 6.That access number 402-220-1117. Also the replay will be available on the 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.

And again this will conclude today's teleconference. We thank you for your participation. You may disconnect your lines. And please enjoy the rest of your day.