Trinity Industries Inc (TRN) 2010 Q2 法說會逐字稿

Good day and welcome to the Trinity Industries second quarter results conference call. Before we get started, let me remind 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. (Operator instructions)

And it is now my pleasure to introduce James Perry, Vice President, Chief Financial Officer with Trinity Industries. Please go ahead, sir.

Thank you, Collin. Good morning from Dallas, Texas and welcome to the Trinity Industries second quarter 2010 results conference call. I'm James Perry, Vice President and Chief Financial Officer of Trinity. Thank you for joining us today.

Following this introduction, you will hear from Tim Wallace, our Chairman, Chief Executive Officer, and President. After Tim, our business group leaders will provide overviews of the businesses within their respective groups. Our speakers will be Steve Menzies, Senior Vice President and group president of the Rail Group and Railcar Leasing Groups; Antonio Carillo, Vice President and group president of the Energy Equipment Group; and Bill McWhirter, Senior Vice President and group president of the Construction Products and Inland Barge Groups.

Following their comments I will provide the financial summary and guidance and then we will move to the Q&A session. Mary Henderson our Vice President and Chief Accounting Officer is also in the room with us. Now, I will turn the call over to Tim Wallace for his comments.

Thank you, James, and good morning, everyone. Our businesses continued to confront a variety of market scenarios. We anticipate that each quarter will have its own unique challenges, due to the continued uncertainty about the direction of the economy.

Our liquidity continues to be strong at $1.1 billion. During the past few months, we have experienced some unfortunate weather related problems. In May our Tennessee barge facility was flooded when the area received a large amount of rainfall during a 24-hour period. We are well underway towards a full recovery of this -- at this facility.

Recently some of our Mexico facilities were affected by Hurricane Alex and we had some minor delays at these facilities. I'm very pleased by the way our personnel responded to the challenges associated with the floodings. My thoughts and prayers have been directed towards our employees' families who suffered losses during these storms.

Market demand for our products in most of our businesses continues to fluctuate. We're seeing relatively steady demand for products manufactured by our highway related businesses. The majority of our large businesses have order backlogs that should provide consistent production at lower than normal levels through the end of the year. All of our businesses are aggressively pursuing orders to maintain as much production continuity as possible.

I am pleased that our railcar manufacturing business increased its order backlog during the second quarter. Our structural wind towers business is continuing to reshuffle its production schedules to accommodate customers. This reflects the uncertainty that remains in the industry. I am pleased with the ability of our wind towers business and our barge business to maintain respectable margins at decreased production levels.

Our Railcar Leasing group is providing the most consistency in earnings. Our overall performance during the second quarter reflects the talents and hard work of our people, the diversification of our businesses, our emphasis on operational excellence, and the strength of our market leadership positions. Going forward, our manufacturing businesses are prepared to [flex at] the demands in our market shift. I'm confident in their abilities to successfully respond to changes in their markets. In rapidly changing business climate like the one we're experiencing, we're fortunate to have a highly seasoned group of employees.

I will now turn it over to Steve Menzies for his comments.

Thank you, Tim. Good morning. Second quarter operating results for the rail group and leasing group were in line with our expectations. We saw lease free utilization increase to 98.7% that shift approximately 890 new railcars. Our new railcar order backlog grew during the second quarter, allowing us to plan a consistent level of production for the balance of the year. I am pleased with our operating performance in the highly challenging and uncertain railcar marketplace.

We've seen some improvement in demand for certain key railcar types. Demand has improved for railcars that transport chemicals, minerals, and agricultural products, while railcars that serve the lumber, paper, automotive, and coal industries continue to suffer from weak demand.

Lease renewals or lease rates appear to be stabilizing and even improving in certain markets. Currently the lack of a strong recovery in North American industrial production and the overhang of idle railcars continues to impede any broad based sustainable recovery in railcar demand.

During the second quarter, the industry received orders to build approximately 4,900 new railcars, raising the total for the first half of 2010 to almost 10,000 railcars. While industry orders for the first half have risen above 2009 levels, the overall demand is still well below the industry's capacity for deliveries.

Trinity Rail received approximately 1,900 railcar orders during the second quarter. We continue to be selective about orders we pursue. The orders we received fit well with our production plans, and included tank and covered hoppers for railroads, third-party lessors, and industrial shippers.

Trinity Rail's backlog was approximately 3,990 railcars at the end of the second quarter, up 34% from 2,980 railcars at the end of the first quarter 2010. Approximately 40% of the units in our railcar production backlog is for customers of our leasing business. Based upon orders received and current inquiry levels, we have increased our projection for railcar production through the end of the year. We now expect to deliver between 1,100 and 1,300 railcars during the third quarter. For comparison, we shipped 890 railcars in the second quarter and 500 railcars in the first quarter of this year.

We added 720 new railcars during the second quarter to our lease portfolio, bringing our total lease fleet to more than 50,970 railcars, a 5% increase compared to 48,630 railcars at the end of the second quarter 2009. Our lease fleet utilization increased sequentially to 98.7% or 98.3% at the end of the first quarter 2010. Our average remaining lease term declined to 3.6 years and the average age of the fleet is 5.6 years. Trinity's fleet totals 14,700 railcars operating on 98.5% utilization.

We have increased our new railcar production plant as a result of our increased backlog. Our operating flexibility's allowed to increase production to meet customer needs. We continue to closely monitor demand in various market segments, however we see conflicting economic data in rail transportation metrics, making it difficult to determine the timing or sustainability of a broad based recovery in railcar demand. We will adjust to proven changes in the marketplace as needed while aggressively pursuing select railcar building and lease investment opportunities that meet our objectives. We expect to continue to grow our lease fleet, which continues to perform very well throughout difficult operating circumstances.

I'll now turn it over to Antonio.

Thank you, Steve, and good morning. During the second quarter our wind tower business secured some new orders. Our backlog is stable at around $1.1 billion and extends into 2013. The economics of wind energy continue to be challenged by a variety of issues. As a result, additional wind farm projects have been delayed.

As Tim mentioned, we continue to adjust our production schedule to accommodate customers. This ongoing reshuffling is making it difficult to bring results. We're concentrating on staying flexible and responsive to customer requirements, while maintaining sufficient capacity to handle new customer demand when it develops.

Our other businesses saw demand stabilize for most of their products during the second quarter and their backlogs began to grow. The one exception is products related to the housing market. Demand in this market continues to be weak.

In July, Hurricane Alex caused significant damage to the highway system in Mexico, negatively impacting our operations there. Our team did a great job in finding alternatives to minimize the impact of this storm and our plants were fully operational within days.

I will now turn the call over to Bill for his comments.

Thank you, Antonio, and good morning, everyone. Our construction products group had a good quarter. This is in large part due to the performance of our highway products business, which now includes the recently acquired Energy Absorption Systems. We are continuing to make positive progress on the integration.

On the concrete and aggregate side, we saw little improvement in demand during the second quarter. Both the home building and commercial markets continue to be weak. Highway related projects fill some of the gaps in our construction materials business, but not enough to completely offset the declines in general construction.

Moving to our Inland Barge Group. In the second quarter, our Tennessee barge plant suffered a significant flood. As a result, we incurred $3.4 million in related costs not covered by our insurance policies. We estimate that we will incur approximately $1 million in costs during the third quarter. We expect to be back to normal operations by the fourth quarter.

The recovery and rebuilding efforts by our employees has been nothing short of heroic. During the second quarter, we received orders for approximately $87 million, which keeps our barge backlog relatively (technical difficulty). I am pleased with our performance in this challenging economic climate.

And now I turn the presentation back to James.

Thank you, Bill. My comments related primarily to the second quarter of 2010. We will file our form 10-Q later today.

For the second quarter of 2010, Trinity reported earnings of $0.23 per diluted share with revenues of $543 million. Trinity's EBITDA was $128 million. A reconciliation of EBITDA was provided in the news release yesterday.

Revenues for our construction products group were $171 million in the second quarter with an operating profit of $17.7 million, resulting in a margin of 10.4%. The results reflect the successful integration of Quixote Corporation, now called Energy Absorption Systems, into our highway products business.

In the Rail Group, revenues grew from the first quarter by 53% to $113 million as we increased our deliveries during the quarter. The operating result for the Rail Group was a loss of $2.7 million or a negative 2.4% margin.

The Rail Group backlog grew by 34% during the quarter to approximately 3,990 railcars, with an estimated sales value of $300 million. Our Rail Car Leasing and Management Services Group reported revenues of $120 million, including $30 million of revenues from TRIP.

Operating profit for the quarter was $49.2 million, including $17.5 million from TRIP. In the second quarter, TRIP provided Trinity with earnings per share of between $0.01 and $0.02. We expect this level of quarterly contribution from TRIP to continue, assuming that TRIP's operating metrics remain relatively consistent.

The Inland Barge Group's second quarter performance was impacted by flooding at our Tennessee barge facility, reducing operating profit by $3.4 million. The barge group generated revenues of approximately $100 million and operating profit of $12 million, a margin of 12.1%. Our barge business received orders during the second quarter of $87 million and had a backlog value of approximately $350 million.

During the second quarter, the Energy Equipment Group's revenues were $115 million with the wind towers business contributing $78 million. Operating profit for the group was $13.5 million, resulting in an operating margin of 11.7%. The results reflect ongoing softness in the wind tower market and a decision by our wind towers business to delay certain deliveries to accommodate customers' requests. The backlog for the wind towers business remains healthy at approximately $1.1 billion as of June 30th.

At June 30th, we had $338 million available under the railcar leasing warehouse facility and $339 million available in the revolving credit facility after accounting for $86 million in letters of credit. Combined with our unrestricted cash and short-term marketable securities balance of $435 million, our total liquidity was in excess of $1.1 billion at the end of the second quarter.

Now I'll move to our forward-looking guidance. We anticipate diluted earnings per share for the Company to be between $0.18 and $0.23 in the third quarter. For 2010, we anticipate full-year earnings will range between $0.60 and $0.70 per diluted share. We anticipate that the rail group will report an operating loss of between $3 million and $5 million for the third quarter of 2010.

Inland barge revenues are expected to be between $100 million and $110 million in the third quarter with an operating margin of 12% and 14%. We expect that the barge operating profit will be negatively impacted by approximately $1 million due to the second quarter flooding at our Tennessee barge facility.

Revenues for Energy Equipment Group are expected to be approximately $110 million to $120 million for the third quarter, with margins anticipated to be between 7% and 10% as we manufacture less profitable orders from the backlog and reschedule delayed orders. The adjustment in production schedules to meet customer needs means several orders will be pushed back to future years. As a result, we expect the wind tower business to contribute between $280 million and $300 million in revenue during 2010.

Through the first six months of the year we had non-leasing capital expenditures of $15.3 million. Our current forecast is for approximately $40 million of non-leasing capital expenditures in 2010.

Through the first six months of the year, we had net additions of railcars to the lease fleet totaling $90.4 million. For 2010, we anticipate approximately $200 million to $225 million in net fleet additions.

We remain well positioned with a diversified portfolio of businesses, a strong balance sheet, and solid cash flows. Our focus on liquidity positions us to be able to capitalize on business opportunities as they arise.

Now, our operator will prepare us for the question and answer session.

(Operator instructions) And our first question comes from Steve Barger with KeyBanc Capital. Go ahead please, your line is open.

Yes, good morning everybody. This is actually Joe Box in for Steve.

Good morning, Joe.

My first question's actually in regards to railcar pricing. It appears that one of your competitors had removed themselves from the market in 2009. Not really pricing aggressively to secure any orders. Now looks like they're back in the market, taking just over about 20% of the industry orders in 2Q. Can you just talk about what you're seeing in the pricing environment? And has it become incrementally more challenging over the last few quarter with an extra competitor back in the market?

Okay, Steve, why don't you take that?

Yes. Joe, there's no question that our industry remains highly competitive and highly challenging. Overall we have weak demand, but combine the weak demand with we're still at very low levels of building compared to capacity utilization. If you just look at the peak of the orders built a few years ago, even if you take an annualized order level from the second quarter of 20,000 cars, you can see that we're still in a very weak position. As long as you're in that position, you've going to continue to have pressure on prices regardless of how many competitors are in the marketplace.

All right. Just looking at a few of your competitors and what they're currently doing, it seems like a few of them are looking at India as a potential option. And it also sounds like there's large lessor starting to set up shop there. Can you just talk about what your desire would be to look at international opportunities, specifically in the BRIC countries?

Yes. Joe, we're always looking there. This is Steve again, Joe. We're always looking at various opportunities, but our principle focus in on the North American marketplace and we're excited about the long-term investment opportunities right here in North America and our ability to get at those. So others may be looking at those opportunities and we'll certainly look at broader based opportunities too. But we're happy with our perspective here in North America right now.

Okay. Switching gears to the wind business, I know it's early relative to the recent energy bill that came out of the senate, but can you give us a sense for what the overall impact might be to the wind space if there's no renewable energy standard included in the energy bill? And does that potentially change your delivery cadence of your wind backlog maybe even more so than you already talked about earlier today?

Antonio, you want to take that question?

Well, as you know, the wind industry requires a long-term energy policy that supports it. This new energy bill that came out does not include a renewable energy standard, so as long as there's no renewable energy standard we believe that the industry will go through periods of strong performance and then periods of very weak performance. So we really believe that the industry requires that renewable energy standard for a long-term perspective.

Do you care to take a stab maybe at 2010 and 2011 installations based on no renewable energy standard? Or at least maybe talk about it directionally?

I think there's a lot of uncertainty in the market and I really don't want to take a position on that right now.

That's fine. That's all for me, guys. Thank you.

Thank you, Joe.

Thank you. Our next question comes to us from the site of Paul Bodnar with Longbow Research. Go ahead please, your line is open.

Hi, good morning, guys.

Good morning.

Question. The -- on the leasing fleet. Obviously it's relatively young and I was just kind of curious here over the next -- in the coming years. I mean should we expect maintenance expenses to start ramping on that? And what would be the pace of that and kind of what would be the timeframe? Or is it going to go in to stay at current levels?

Steve, will you take that?

Well, certainly there's a maintenance lifecycle cost associated with the railcars. The railcar gets older we have increased maintenance expenses, so certainly that's an issue for us. But we're also faced with regulatory pressures as well. And changes from that standpoint. So it's something -- we manage them and we monitor, and hopefully the way we spec our cars and develop our cars for lifecycle costs we're able to minimize those expenses over the life of the railcar.

But if there was, it means it'd have to be that -- it's kind of at a low level now and over the next two, three years it's going to kind of grow or, I mean is this something that could probably stay at these levels?

We -- right now we've experienced probably an inordinate amount of remarketing expenses as we've had to move cars from lessee -- previous lessees and assign them to new lessees. So we're seeing some of that impact on our businesses. As renewal percentages stabilize and the market strengthens, we would expect our remarketing expenses to decrease over time too.

Okay. And sorry if this is -- you guys maybe answered this in your comments. I jumped on a few minutes late. But I know normally in 2Q you usually receive your barge order from the one large customer. Was that in this quarter's orders? Or what -- I guess what was the situation with that this time around?

Okay, Bill, take that one, will you?

Yes. The large order I think you're referring to you is our long-term contract with Ingram. That was actually in our backlog at Q4 2009 as we worked with them for the 2011 production. So the second quarter orders represents new business.

So they placed that early this year basically?

They did. Or actually, fourth quarter '09.

Okay, great. Thanks a lot, guys.

Thank you, Paul.

Thank you. (Operator instructions) We'll next go to the site of Tom Albrecht with BB&T. Please go ahead.

Hey, guys. Good morning. I just wanted to get a little bit more commentary on the leasing business. On a year-over-year basis your revenues declined $14 million and your leasing profit went up exactly $14 million. And I know this is a flippant question, and it's not intended to be, but it sort of seems like you're basically saying all of that business that you lost revenue wise was a money loser because your profits went up by the exact amount. Can you just talk about that dynamic and more importantly why leasing profits could be that strong with that sort of a weak revenue level?

James, why don't you take that? And Steve you reinforce if you need to.

Sure, Tom. This is James. And I think when you see the 10-Q here that we'll file later today, you'll get the detail that you normally do between revenues and profit from operations versus car sales. You remember last year in the second quarter we were wrapping up the ramp up of TRIP and still had some car sales from our fleet into our -- into TRIP's fleet. So the revenues are down as a result of that. The revenues from operations are relatively flat.

The profitability on a car sale is not terribly significant necessarily and as Steve said, we have had some added expenses due to remarketing over the last couple of quarters and expenses moving from one car customer to another. So it's really the difference in the car sales you'll see on the revenue and on the profit line it's just the general operation profits that we've experienced.

And Jim, thank for mentioning TRIP. I think I misspoke in my earlier comments. I said TRIP utilizations was 98.5%. It's actually 99.5%. So just wanted to clarify that.

Thank you, Steve.

Yes, thank you. And let me follow up on that. On the lease rates, approximately how much have they rebounded on a, let's say a year-over-year basis compared to the darkest days of four or five quarters? But then if you -- I'm sure they're up nicely, but the part two of that question would be where are lease rates today maybe versus a really good market of let's say three years ago?

Steve, why don't you go ahead and take that one?

Well, it's difficult when we make broad generalizations in talking about lease rates because really -- we really need to analyze lease rates based upon individual market segments. And in general, I think lease rates are stabilizing and we've seen them improving actually going up in certain segments. We do see rates tick up slightly in the first half of 2010. And we're seeing other improvements in the operating metrics of our lease fleet as well. Higher lease fleet utilization certainly would indicate as a precursor to rising lease rates too. So we'll continue to put pressure to raise our lease rates, but again it will vary by market segment.

Is it -- how does it -- can you give any color versus maybe three years ago? I appreciate the segment difference and also lease term length I know affects that. But maybe compared to before things got that bad.

Yes, really tough to generalize and I really don't that analysis to give you a concise response.

Can you talk about whether the demand is more still for two- and three-year leases? Or are you starting to see any reemergence of six- and seven-year leases?

Yes, really prefer not to comment on specific lease terms. Our average remaining lease term has declined. I would expect that in market segments we'll have to see that going the other way.

Okay. I'll look forward to the 10-Q. Thank you.

Thank you, Tom.

(Operator instructions) We'll next go to the site of Alex Blanton with Ingalls & Snyder. Go ahead please.

Hi, good morning.

Good morning, Alex.

I missed the number on how much you expect the wind power to be for the year. Could you repeat that please?

Sure. We expect our wind tower revenues to be between $280 million and $300 million for the year. They were $78 million in the second quarter.

Yes, what were they last year in the quarter?

Let me get that for you real quick.

In the second quarter.

Yes, in the second quarter last year, the revenues were right at $100 million.

Okay. And the full year last year was what?

For wind towers are you saying? Or are you saying for the --?

Right, wind towers.

-- energy equipment?

No, wind tower. Just that wind tower part.

Okay. Well we're going to have to -- yes, we'll pull that one (multiple speakers).

Yes, we'll get that for you too. Six month last year was right at $192 million. We'll pull for you the full year, Alex, here in a second.

Okay. So of the $1.1 billion, then the amount to be delivered in next 12 months is fairly small. Is that correct?

Yes, that's correct.

So that is really all the backlog you have. And some of that -- is it all scheduled to be delivered at some -- a specific time?

Antonio, you want to take that one?

Yes. Alex, I mentioned in my comments the backlog extends into 2013. So --

2013.

Yes.

And Alex, the annual total for 2009 was $358 million.

Okay. So, all right. Good, it gives us some indication of how much it's down. Now I want to shift to the overall margins were -- I have to say it's astounding. Your gross margin overall was 14.5% -- I'm sorry, the --

The operating margin.

-- operating margin. 14.5% versus 11.8%. 14.5% would be good in any case for an equipment company, but when you've had sales decline 24% year-over-year, it's astounding. And then you look at the railcar, which is probably the principal reason for that, and it's even more astounding because the railcar business was $113 million versus $303 million, that's about one-third. And yet you maintained -- almost maintained profitability. And you only had a $6 million decline in profits on $190 million decline in sales. So how do you achieve that? I mean that's really the question.

Yes, I think (multiple speakers).

Because this is outstanding performance really.

Thank you for that. We're -- this is James, Alex. We're -- I appreciate that. We've certainly worked hard to cut costs at all levels of the Company, improve our efficiencies in our facilities. I think our business leaders here in the room today would certainly echo that thought. So we've done a better job getting efficiencies out of our production backlog that we've had and managing through the down cycle that we've been through.

One thing I would point to is our leasing business has continued to grow. That's become a bigger and bigger part of our overall portfolio. And given leasing operating margins are certainly well in excess of the overall corporate margins. And as a blended average that'll bring your margin up. So that's certainly a reason why over the last 10 years we've had a very intense focus on growing that lease fleet so it us that stability and gives us that profitability base that you look for in a downturn.

Alex, this is Tim Wallace. Back to what James was saying. Over the past 10 years we've been focusing quite a bit of resources to be positioned that when we went through the next cyclical downturn, and it came faster than we anticipated, it would be -- we would be able to respond in the way that we've been able to respond. So I really appreciate your comments and recognition of that because it's been a lot of hard work on a lot of our peoples' part.

And like I said in my script, we've got a seasoned group of employees that are highly equipped at flexing with the various demands in the marketplace. And you can see that in the results of our financial statements.

Well, it's more than just cost cutting. Isn't this lean manufacturing techniques and practices that you have put in over the last 20 years?

It's just a combination of a number of different initiatives that we've put in. It plays a lot to though the seasoned capabilities and competencies of the organization that we have of people understanding how to flex with shifts in market demand.

Okay, thank you.

Thank you, Alex.

It appears we have a follow-up question from Tom Albrecht with BB&T. Go ahead, please.

Hey, James. Just in the interest of being able to work on the model ahead of the queue, can you reveal the gain on the sale of the rail cars in the quarter?

From the lease fleet?

Yes, I'm sorry.

Very minimal. You had about $3 million to $4 million of profit from -- $3 million to $4 million of sales from the cars that you sold from the lease fleet. You had less than $500,000 of profit as a result of those sales. So very minimal.

Okay.

And 12 months ago. I'm sorry, 12 months ago for comparison, that number was about $3.5 million of profit.

And I've got it in the model, but somebody's in there. What was the sale a year ago? Like $15 million or something?

The sales I show are about $54 million.

Okay, thank you.

Sure, Tom.

(Operator instructions) We'll now return to the site of Steve Barger from KeyBanc. Please go ahead.

Actually my follow-up question was answered. Thank you.

Okay, Joe.

Well then, we'll now return to Paul Bodnar. Go ahead, please.

It's a follow-up on the leasing business there. You said you had a lot of -- a pretty good level of remarketing expense in the quarter as you're moving cars around. Just out of curiosity, what percent of your cars are going back to kind of the same customer that you had the car with before? And what percent is actually going to a new customer and being remarketed?

Okay. Steve, you want to take that?

Yes. Paul, we don't provide specific renewal percentages, but there was a fair amount of displacement during 2008 and 2009 with chemical companies and biofuels companies realigning their fleets. So it did have an impact on us then. But generally we don't really provide those renewal percentages.

So that'd be the same thing year though that most of these cars are being renewed with the same client?

We're seeing improving trends.

Is there a lot of shifting around basically going on right now?

Yes, we're seeing improving trends in lease renewals.

Oh good. Thanks a lot.

And we'll now go to the site of Justin Harrison with Ramsey Asset. Please go ahead. Oh, looks like they've disconnected. Go ahead, please.

Okay. This will conclude today's conference call. A replay of this call will be available after 1:00 today through midnight on Thursday, August 5th. The access number is 402-220-0680. The replay will also 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.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.