Trinity Industries Inc (TRN) 2010 Q3 法說會逐字稿

Good day. (Operator Instructions.)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 would cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. At this time, I would like to turn the call over to our moderator. Gail Peck, Treasurer of Trinity Industries. Go ahead please.

Thank you, Ty. Good morning from Dallas, Texas. Welcome to the Trinity Industries third quarter 2010 conference call. I am Gail Peck, Treasurer of Trinity. Thank you for joining us today. Following the introductions, you will hear from Tim Wallace,our Chairman, chief executive Chief Executive Officer and President. After Tim, our business group leaders will provide overviews of the businesses within their respective groups. Today's speakers are Steve Menzies, Senior Vice President and Group President of the Rail and Railcar Leasing Groups,Antonio Carrillo, 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, James Perry, our Vice President and Chief Financial Officer, will provide the financial summary and guidance. We will then move to the Q&A session. Mary Henderson, our Vice President and Chief Accounting Officer, is also in the room with us today. I will now turn the call over to Tim Wallace for his comments.

Thank you, Gail and good morning, everyone. I'm pleased with our accomplishments during the third quarter. We had a number of positive events during the third quarter which contributed to our success. I anticipate that each quarter will continue to have its own unique characteristics, challenges and opportunities based on different levels of uncertainty that continue to circulate within the global business environment. During the third quarter, our barge manufacturing facility in Tennessee fully recovered from the damage it received due to the flood last May. James will provide details about the financial aspects of this unique situation during his comments.

I'm very pleased by the way our employees responded to the challenges associated with the flood. Our structural wind towers business completed additional reshuffling of its production schedules during the quarter to accommodate customers. Our railcar leasing group provided earnings during the quarter. Our rail group generated a profit in a highly competitive market environment. Our barge group was very successful extending their backlogs. Demand for products in most of our businesses continues to reflect a positive trend. During the past six months, we have seen a steady demand for products in our highway construct related businesses that were consistent with previous construction seasons.

I'm very pleased with the process our businesses made during the third quarter in pursuing orders. Our overall performance during the 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. Our manufacturing businesses remain prepared to flex as the demands in their markets shift. I'm confident in their ability to successfully respond as their markets change. In a rapidly changing business climate like the ones we are experiencing, we are fortunate to have a highly seasoned group of employees.

I will now turn it over to SteveMenzies for his comments.

Thank you Tim. Good morning. Third quarter operating results for the rail group and leasing group were in line with our expectations. Our leasing group saw lease utilization increase to 98.9% while continuing to grow. Our rail group modest operating profit while shipping approximately 1,140 new rail cars. And our order backlog grew during the third quarter, allowing us to plan a higher level of production for the balance of the year and into the first quarter of 2011.

I'm pleased with our operating performance in a highly challenging and competitive railcar marketplace. We have seen continued modest improvement in railcar demand in certain markets. 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. Significant numbers of idle intermodal railcars have been placed into service. And orders for new intermodal rail cars were prominent during the quarter.

Lease renewals and lease rates appear to have stabilized and are even improving in certain markets. The overhang of vital railcars and slow economic recovery however continues to dampen demand for certain railcar types. During the third quarter, the industry received orders to build approximately 9,200 railcars, raising the year to date total to more than 19,200. Industries orders were heavily weighted towards strategic purchases of intermodal railcars by railroads and TTX. The balance of industry ordered were principally for covered hoppers and tank cars. Current order inquiries reflect additional strategic purchases being considered by railroads.

Trinity Rail received approximately 2,000 railcar orders during the third quarter. We continue to be very selective about orders we pursue. Our orders during the quarter fit well with our production plans and profitability targets. They included tank and covered hopper cars for industrial shippers and third party lessors. Trinity Rail's backlog was approximately 4,860 railcars at the end of the third quarter, up 22% from the end of the prior quarter. Approximately 31% of the units in our railcar production backlog are for customers of our leasing business. Based upon orders received and current inquiry levels, we have increased our projections for railcar production through the end of the year. We now expect to deliver between 1,900 and 2,100 during the fourth quarter.

In comparison, we shipped 1,140 in the third quarter and 890 railcars in the second quarter of this year. We added 790 new railcars to our lease portfolio during the third quarter bringing our total lease fleet to more than 51,640 railcars, a 4% increase compared to the end of the third quarter 2009. Our lease fleet utilization increased sequentially to 98.9% from 98.7% at the end of the second quarter. Our average remaining lease term declined to 3.5 years, and the average age of the fleet is 5.8 years. The TRIP lease fleet totals 14,700 railcars, operating at a 99.6% utilization.

We have adjusted our railcar production plan as a result of our increased backlog. Our operating flexibilities allowed us to increase production to meet customer needs. We continue to closely monitor demand in various industry markets segments, each of which has its own set of supply and demand dynamics. The economic debt and rail transportation metrics are leading indicators, currently pointing toward a slow recover in rail card demand. We will adjust to further changes in the marketplace as needed while aggressively pursuing select railcar building and lease investment opportunities that meet our objectives. We continue to expect our fleet lease to grow which continues to perform very well. I will now turn it over to Antonio.

Thank you Steve, and good morning. During the third quarter, we received some new orders for wind towers. Some of these orders fill production openings created by the reshuffling that Tim mentioned. The economics of the wind industry continue to be challenged by a number of issues which, is causing additional wind farm projects to be delayed. In the short term, this impacts our margins as we work to reschedule deliveries. Over the long term, it enhances our customer relationships. Once a sustainable recovery occurs, we will be in a position to produce strong results. I'm pleased with our plant's ability to handle this reshuffling while remaining profitable.

We continue to be optimistic about the long term prospects for wind energy. Our $1 billion backlog provide us with a long-term production platform. In the short-term, we may face some additional uncertainty about the timing of deliveries. There are too many variables to predict when a sustainable recovery will occur. We are 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 during the third quarter for most of their products. And their backlogs began to grow. I will turn the call over to Bill for his comments.

Thank you, Antonio, and good morning everyone. Our construction products group had a good quarter posting operating profit of $20.3 million. These results continue to be driven by the performance of our highway products business coupled with construction friendly weather. On the concrete and aggregate side, we continue to see weak demand. During the quarter, we divested of our East Texas asphalt business, and a single ready mix plant in Louisiana. We considered these assets not to be core to the operations. The result was a one-time gain of $3.8 million. The divested assets represented approximately $40 million in annual revenue.

Moving to our Inland Barge Group. During the third quarter, we received orders of $264 million, bringing our backlog to T516 million. We consider most of these orders to be replacement orders for aging equipment. This level of backlog helps provide a strong sense of clarity for 2011. During the third quarter, we incurred approximately $500,000 in costs not covered by our insurance policies related to the flooding in our Tennessee barge plant. The plant is now operating at normal production levels. I continue to be pleased with our performance in this challenging economic climate. Turn the presentation back to James.

Thank you, Bill and good morning, everyone. My comments relate primarily to the third quarter of 2010. We will file our Form 10-Q later today. For the third quarter of 2010, Trinity reported earnings of $0.37 cents per diluted share. This compares to earnings of $0.29 per diluted share in the third quarter of 2009. The results for the third quarter of 2010 include a pre-tax gain of $10.2 million, or $0.08 per common diluted share related to the disposition of insured property, plant and equipment that were damaged by a flood at Trinity's Tennessee barge manufacturing facility in May.

Revenues for the third quarter were $540 million, compared to $557 million in the same quarter last year. For the third quarter, Trinity's EBITDA was $139 million, compared to $109 million in the same quarter of 2009. The reconciliation of EBITDA was provided in the news release yesterday. Revenues for our construction products group were $160 million in the third quarter, compared to $146 million a year ago. This group reported operating profit of $20.3 million, compared to $13.1 million in the same period a year ago. The results for the third quarter of 2010 include a pre-tax gain of $3.8 million recognized from certain divestitures in our concrete and aggregates business.

Our highway products business, Including the acquisition of Quixote Corporation earlier this year, continues to perform favorably. Rail group revenues increased sequentially by 16% over the second quarter to $131 million. The operating profit for the rail group was $3.3 million,a 2.5% margin.

The rail group backlog grew to an estimated value of $338 million as of September 30, 2010. Our railcar leasing and management services group reported revenues of $122 million including $29 million of revenues from TRIP. Operating profit for the quarter was $52.9 million, including $16.3 million from TRIP. In the third quarter, TRIP provided Trinity with earnings per share of $0.02. We expect the EPS quarterly contribution from TRIP to be between $0.02 and $0.03 for the fourth quarter assuming TRIP's current operating metrics remain consistent. During the quarter, Trinity negotiated the acquisition of an additional 29% interest in TRIP at a discount for a purchase price of $28.6 million.

Trinity's total ownership in TRIP after the purchase was 57% at the end of the third quarter. The purchase was the result of an investment portfolio restructuring by one of TRIP's equity partners.

The Inland Barge group generated third quarter revenue of approximately $99 million and operating profit of $22.4 million resulting in a margin of 22.6%. As previously mentioned, the Inland Barge group's third quarter performance included a $10.2 million pre-tax gain from the disposition of damaged property plant and equipment from the flood at our Tennessee manufacturing facility in May.

Our barge business received $264 million of orders during the third quarter and had a backlog value of approximately $516 as of September 30, 2010,an increase of 48% over the second quarter of this year.

During the third quarter, the Energy Equipment Group's revenues were $107 million, with the wind towers business contributing $65 million. Operating profit for the group was $6 million resulting in an operating margin of 5.6%. This compares to an operating profit of $16.2 million in the third quarter of 2009.

These results affect our ability to adjust to our customers' needs due to the ongoing softness in the wind tower market. The backlog for the wind towers business, as of September 30, 2010, remains healthy at approximately $1 billion.

I will now move to our balance sheet and capital structure. At September 30, we had $338 million available under the leasing warehouse facility, and $344 million available under Trinity's revolving credit facility,after accounting for $81 million in letters of credit.

Combined with our unrestricted cash and short term marketable securities balance of $371 million, our total liquidity position was in excess of $1 billion at the end of the third quarter. Subsequent to quarter end, our leasing company executed a railcar lease financing transaction for $369 million. This transaction has a coupon of 5.19% which provides us with attractively priced capital. With a portion of the proceeds, we paid down $55 million of our warehouse facility and have issued a redemption notice for all of our $201.5 million of 6.5% senior notes that were scheduled to mature in 2014. The redemption will settle in late November, and will result in a net charge of approximately $0.04 in the fourth quarter.

The net benefit to the Company of these transactions is a reduction in our overall borrowing rate and a longer term maturity profile. The remaining cash further enhances our liquidity as we continue to grow our leasing business and seek investment opportunities throughout our portfolio of businesses.

I will now discuss our forward looking guidance. We anticipate earnings per share for the Company to be between $0.10 and $0.15 in the fourth quarter, after including an approximate $0.04 net impact from the redemption of the senior notes. For 2010, we anticipate full year earnings will range between $0.73 and $0.78 per diluted share. We anticipate that the rail group will report operating results between have break-even and a $2 million profit for the fourth quarter of 2010. Inland Barge revenues are expected to be between $115 million and $125 million a the fourth quarter, with an operating margin in the range of 12% to 14% for the same period.

Revenues for Energy Equipment are expected to be approximately $110 million to $120 million in the fourth quarter with margins anticipated to be between 4% and 6%. We expect the wind tower business to contribute $260 million to $280 million in revenue during 2010. Year-to-date, nonleasing capital expenditures are $22 million. Our current forecast is for approximately $30 million of nonleasing capital expenditures in 2010. Year-to-date, net additions of railcars to the lease fleet total $154 million.

For 2010, we anticipate approximately $175 million to $200 million in net fleet addictions. We remain well positioned with a diversified portfolio of business, a strong balance sheet, and solid cash flows. Our continued focus on liquidity solidly positions us to capitalize on business opportunities as they arise.

Our operator will now prepare us for the question and answer session.

(Operator Instructions.)And our first question comes from Steve Barger from KeyBanc Capital Markets. Go ahead please.

Hi, good morning guys.

Hi, Steve.

First question on TRIP. Did any outside entities or other participants in TRIP get a look at that or did you just negotiate with the seller there.

We did have a direct negotiated transaction with the one party, because of an opportunity they had to restructure their portfolio.

How should we think about your increased TRIP investment in the context of the coming refinancing next year? Can we conclude from your increased exposure that you are not overly concerned with your ability to get a deal done in some favorable terms.

Well, as we've discussed previously, TRIP's warehouse facility begins amortizing in June of 2011, unless it's refinanced or renewed before that time. So that gives us a lot of options that are available for the equity partners and our debt participants to discuss. Sp we will work with those partners as we determine the best solutions but we have got some time as we continue to work on that.

But generally speaking, you're happy with the flexibility that you think you have to be able to get a good outcome there?

Yes, we believe so.

Can I talk about the lease rate negotiations between TRIP and [TLK]? Any real difference between the economics for the two fleets? I know TRIP is a really young fleet. So just trying to get a sense for where lease rates are.

TRIP is young. I think you can see lease rates to some degree as you look at our financials. As you know, TRIP's fleet and Trinity's fleet are very similar in mix and so forth. TRIP is a little bit younger and those leases were put in 2007 through 2009. Very similar cars and customers as the overall Trinity fleet.

Got it. I will ask one more and then I'll jump back in line. In terms of the barge orders, very solid. Anyone buying ahead, do you think, in terms of -- thinking about steel prices potentially going up or is that demand in the marketplace?

Bill, will you handle that?

Yes, sure. No, I think it's just actual demand in the marketplace. We are seeing a lot of customers come to the table with replacement barge needs as their fleets get a little older. There is always speculation of steel prices rising, so maybe taking a little advantage of that as well.

Got it. Thanks very much. I will get back in line.

Thanks, Steve.

And our next question comes from Arthur Hatfield with Morgan Keegan. Your line is open.

Just a real quick on the TRIP investment. What's your total equity investment to date in TRIP?

James, will you answer that one.

Sure, in the 10-Q, it will show you these details. Right now the total equity investment you'll see in note six of the 10Q that we'llfile shortly after the call is right at $82 million all in.

And that includes the recent $5 million purchase.

The recent about $28.6 million purchase, yes.

Okay. Excuse me. Excuse me.

Yes.

And on that situation going forward, you said that this was a negotiated transaction. And I think I recall that you said in the past that your partners, your equity partners don't have put options, (inaudible - overlapping speakers) is that correct?

That's correct. This was an opportunity that an equity investor had to restructure their portfolio. And with the performance and success of TRIP it was a good transaction for us to undertake.

Great. And finally with that and sorry to dwell on this, is there just three equity partners in this transaction now or is it four?

There's four equity partners now including ourselves.

And then finally, we actually lost the call for a second. Did you give any indication or guidance on what you thought railcar deliveries in Q4 would be?

Steve, would you take that one?

Sure. Yes, we are projecting railcar deliveries in the fourth quarter of between 1,900 and 2,100.

Got it. Thank you. That's all I got today.

Thanks, Art.

And our next question comes from Alex Blanton with Ingalls & Snyder. Your line is open.

Thank you. Hello?

Go-ahead.

I think I'm on speaker. Hold on a second. Okay. Now I'm off. Regarding the fourth quarter in railcars, that 1,900 to 2,100 cars is up from 1,140 in the third quarter?

That's correct.

So that's a 75% increase. I looked at your railcar profit. Incremental profit was extraordinary for the nine months. Because it looked like there was a swing of $14 million positive for the nine months on a 58% decline in sales. And then for the three months, your sales were off 21%. But you had a $15 million increase in earnings. So you are getting very good incremental either from a mix change or from cost reduction or both. But now, you're forecasting a very minimal profit in the fourth quarter for the railcar business despite a 75% sequential increase in railcar deliveries. Why is that? Why isn't it a lot more?

Steve, why don't you take that one?

Yes. Sure, Alex. We are increasing our production levels, but along with the increase in production levels, we do have some costs that we incur in ramping up our production. And so we're mindful of those and we also do have a little bit of a different mix issue as we expand our production levels impacting the profitability for the fourth quarter.

Well, what are the mix -- could you detail the mix changes that are affecting you? And which is bigger? The ramp up costs, or the mix --Because it's quite a -- in other words, it would look to me like you would -- you should have very good incremental profits if you have a 75% increase in production.

Alex, this is Tim, and you've followed us for quite a while. And you know, in the early stages, when we are increasing our production, we are cautious about controlling our costs as best we can and estimating what we think the impact of the efficiency level is going to be in that area. And so we're still on the same kind of trend that we've always been on.

Are you hiring a lot of new people to do this?

We are recalling people back to our factories. In some places, they end up being new hires.

And do you expect that level of production to continue next year?

We're hopeful that the level of production will continue through next year. But the uncertainties that exist in the market, you just never know.

You don't have the orders to do that though right now, right?

As Steve said, we are being very selective in choosing which orders that we pursue based on the whole thought of, let's get to a persistent level that we think is sustainable in the market conditions.

Yes. So therefore, the productivity and the incremental earnings ought to increase as you go through next year? Is that right?

That's the plan.

Okay. Thank you.

It does appear we have no more questions. So we will turn the call over to Gail Peck to wrap up.

That concludes today's conference call. A replay of this call will be able after 1.00 pm Eastern Standard Time today, through Midnight on Thursday, November 4, 2010. The access number is 402-220-0429. 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.