Trinity Industries Inc (TRN) 2010 Q4 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A segment. Please note that this call is being recorded.

Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and includes statements as to estimates, expectations, intentions and predictions of future financial performance. Statements that are not historical facts are forward-looking.

Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain of the business issues and risks, a change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. At this time, I would like to turn the call over to our moderator, Gail Peck. Go ahead, please.

Thank you, Ty. Good morning from Dallas, Texas. Welcome to the Trinity Industries fourth quarter 2010 results conference call. I am Gail Peck, Treasurer of Trinity. Thank you for joining us today. Following the 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 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 am pleased with our accomplishments during the fourth quarter and for the year as a whole. Generally speaking, we are off to a good start in 2011. The severity of the winter weather during late January and early February had a slight impact on some of our businesses. Fortunately, the weather factors have stabilized during the past week. I anticipate that each quarter during 2011 will continue to have its own unique characteristics, challenges and opportunities based on the overall business climate.

We are a very flexible Company and will continue to adjust as the business climate shifts and demand fluctuates for our products and services. Overall, the trend lines for most of our businesses are positive. I am very pleased with our businesses' success in obtaining key orders during the last half of 2010. We are targeting orders that allow us to obtain operating leverage. We are highly interested in large orders which provide opportunities for productivity improvements.

Our Barge Group was very successful in obtaining orders that filled their production openings for the majority of 2011. As a result, we expect them to achieve small amounts of operating leverage during the year. During the fourth quarter, our Structural Wind Towers business completed their latest round of reshuffling production schedules to accommodate customers whose wind energy projects were delayed. We tend to lose operating leverage when we reshuffle production. Our Wind Towers Group has done a great job of minimizing the overall effects. We anticipate that demand for wind towers will be inconsistent until the industry resolved some fundamental issues. Fortunately, our Wind Towers business has a large backlog of orders.

Our Rail Group's business volume hit bottom during the first half of 2010. In the last half of 2010, our railcar manufacturing businesses increased their production levels. This provided operating leverage that contributed to improved financial results during the fourth quarter. Our Railcar Leasing Group slightly increased its fleet utilization during the fourth quarter. Our highway products businesses continued to benefit from the successful integration of the company we acquired in early 2010.

Our overall performance 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. We are 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. Fourth quarter operating results for the Rail Group and Leasing Group were consistent with the improving economic and rail transportation trends that Tim mentioned. Our Leasing Group saw leased fleet utilization increase to 99.3% and lease rate trends improve. Our Rail Group posted an increase in operating profit while shifting approximately 2,230 new rail cars during the quarter. Our order backlog grew during the fourth quarter allowing us to plan a higher level of production for 2011.

I am pleased with our operating performance in a highly challenging and competitive railcar marketplace. We have seen continued improvement in demand for rail cars that transport chemicals, minerals and agricultural products. Demand for railcars that serve the lumber, paper, automotive and coal industries continues to be weak. Significant numbers of idle, intermodal railcars have been placed back into service prompting orders to build new intermodal railcars during the quarter. These renewals and lease rates appear to have stabilized and are showing signs of improvement in a few key markets.

The overhang of idle railcars continues to decline and further analysis indicates that the supply and demand for certain railcar types are in balance. During the fourth quarter, the industry received orders to build approximately 10,850 new railcars raising the 2010 total to slightly more than 30,000. Industry orders for the first quarter were heavily weighed toward strategic purchases of railcars by railroads and TTX. Customers appear to be accelerating purchases to take advantage of the 2011 tax provisions favoring capital equipment investment. Industry orders were principally for covered hoppers, intermodal rail cars and tank cars. Our current order inquiries reflect additional strategic purchases being considered by railroads and a few industrial shippers.

TrinityRail received orders for 3,330 new railcars during the fourth quarter. We were successful in securing orders that fit very well with our production plans. These orders should position us to obtain increased operating leverage. We continue to be very selective about new orders we pursue. We have not aggressively pursued orders with weak pricing that would require us to open new production facilities or lines.

Our fourth quarter orders included tank and covered hopper cars for industrial shippers, railroads and third party lessors. TrinityRail's backlog was approximately 5,960 railcars at the end of the fourth quarter, up 23% from the end of the prior quarter. Approximately 18% of the units in our railcar production backlog are for customers of our leasing business. We are projecting a similar level of production in the first quarter of 2011 to the level of production in the fourth quarter of 2010. Based upon orders received thus far in the first quarter and current inquiry levels, we project an increase in railcar production beginning in the second quarter of 2011.

We added 500 new railcars to our lease portfolio during the fourth quarter, bringing our total lease fleet to more than 51,900 railcars, a 3.6% increase compared to the end of 2009. Our lease fleet utilization at the end of 2010 was 99.3%, up from 98.9% at the end of the third quarter. Our average remaining lease term remained at 3.5 years. Renewal trends are returning to more historic norms and renewal lease rates on average increased modestly during the fourth quarter. In the near term, we expect to begin seeking longer lease terms as we have the opportunity to reprice assets last priced during the market downturn.

The average age of the fleet is six years. The TRIP leased fleet totals 14,700 rail cars operating at 99.9% utilization. In summary, we are focused on maximizing operating leverage to improve margins. Competitive pressures and excess railcar manufacturing capacity make it challenging at this time to achieve margin expansion through pricing improvements for orders of new railcars in certain markets. Our operating flexibility continues to be an asset as we increase railcar production to meet customer needs.

We continue to closely monitor demand in the various industry market segments, each of which has its own set of supply and demand dynamics. The economic data and real transportation metrics that we consider leading indicators of railcar demand are currently pointing toward a slow recovery in railcar manufacturing and improving fundamentals in our lease fleet. I will now turn it over to Antonio.

Thank you, Steve. Good morning. As Steve mentioned, our customers continue to request delays in wind tower deliveries during the fourth quarter. As a result, our plans went through another round of production reshuffling. In the short term, this impacts our margins. Over the long term, we believe our efforts to meet customer needs will strengthen our relationships, retain focus and tactics that allow us to remain highly flexible as the market demand shifts.

I am pleased with our plant's ability to remain profitable while handling the challenges associated with this reshuffling. While the economics of wind energy are challenged by a number of issues, we continue to be optimistic about its long-term prospects. We received some new orders during the fourth quarter allowing our backlog to remain around $1 billion. Our backlog allows us to shift production between facilities as needed, positioning us to achieve some operating leverage.

The extension of the federal tax credit for renewable energy creates short-term visibility and underscores the government's support for the industry. The backlog for most of the products manufactured by our other Energy Equipment businesses continued to grow during the fourth quarter. I will now turn the call over to Bill for his comments.

Thank you, Antonio. Good morning, everyone. Our Construction Products Group experienced normal winter weather conditions during the fourth quarter. The Group produced a profit of $6.7 million for the quarter as compared to $5.5 million a year ago. These results continue to be driven by the performance of our highway products business.

Demand continues to be slow for our concrete and aggregate business. Both the residential and commercial construction markets remain depressed. Unfortunately, weather conditions for first quarter of 2011 have been less construction-friendly than normal. Moving to the Inland Barge Group. During the fourth quarter, we received new Barge orders for $119 million bringing our backlog to $508 million as compared to $319 million a year ago.

Most of the orders we received were prompted by the need to replace aging equipment. Our Barge team continued to do an excellent job in respect to operational execution. And now I'll turn the presentation over to James.

Thank you, Bill, and good morning, everyone. My comments relate primarily to the fourth quarter of 2010. We will file our Form 10-K later today. For the fourth quarter of 2010, Trinity reported earnings of $0.22 per common diluted share. This compares to earnings of $0.19 per common diluted share in the fourth quarter of 2009.

The results for the fourth quarter of 2010 include an after-tax charge of $3.7 million or $0.04 per common diluted share related to the retirement of our 6.5% senior notes that were scheduled to mature in 2014. Revenues for the fourth quarter were $652 million compared to $508 million in the same quarter last year. For the fourth quarter, Trinity's EBITDA was $122 million compared to $100 million in the same quarter of 2009. The reconciliation of EBITDA was provided in the press release yesterday.

Rail Group revenues increased sequentially over the third quarter, up 56% to $205 million. The operating profit for the Rail Group during the fourth quarter was $8.8 million resulting in a 4.3% margin. The railcar order backlog grew to approximately $458 million as of December 31, 2010, of which $111 million is scheduled for delivery to our lease fleet. Our Railcar Leasing and Management Services Group reported revenues in the fourth quarter of $135 million which included $17 million of revenues from the sale of rail cars from the lease fleet. Operating profit totaled $56.7 million including $2.3 million of profit from railcar sales from our fleet.

Included in our results is a contribution from TRIP of approximately $0.02 of earnings per common diluted share. We expect to see a similar contribution from TRIP going forward, assuming TRIP's current operating metrics remain relatively consistent along with our share count. As a reminder, Trinity's equity interest in TRIP is approximately 57% as of December 31, 2010. The Inland Barge Group generated fourth quarter revenues of $127 million and operating profit of $16.8 million resulting in a margin of 13.3%. During the fourth quarter, our Barge business received orders totaling $119 million.

The backlog as of December 31, 2010 was $508 million, an increase of 59% year-over-year. Revenues for our Construction Products Group were $129 million in the fourth quarter compared to $115 million a year ago. This Group reported operating profit of $6.7 million compared to $5.5 million in the same period a year ago. During the fourth quarter, the Energy Equipment Group's revenues were $108 million including $54 million from the Wind Towers business. Operating profit for the Group was $5.2 million resulting in an operating margin of 4.8%.

The backlog for the Wind Towers business as of December 31, 2010 was approximately $1 billion. I'll now discuss our balance sheet and capital structure. At December 31, we had $395 million available under the leasing warehouse facility and $345 million available under Trinity's revolving credit facility after accounting for $80 million in letters of credit. Combined with our unrestricted cash and short-term marketable securities balance of $512 million, our total liquidity position was more than $1.2 billion at the end of the fourth quarter. During the fourth quarter, our leasing company executed a non-recourse railcar lease financing transaction in an amount of $369 million with an approximate 11-year average life. This transaction has a coupon of 5.19% which provides us with attractively priced long-term capital.

We used a portion of the proceeds to pay down $55 million of our warehouse facility and redeem all of our $201.5 million of senior notes that were scheduled to mature in 2014. These transactions reduced the Company's overall borrowing rate and extended the maturity profile of the financed assets. We increased our liquidity position with the remaining proceeds from the said issuance enhancing our ability to pursue internal and external investment opportunities including the growth of our leasing business.

Subsequent to quarter end, Trinity announced the renewal of our $475 million railcar leasing warehouse facility through February 2013 with more favorable terms and pricing. This facility has supported the growth of our lease fleet and will continue to provide us with the capital needed to sustain its growth. I will discuss our forward-looking guidance. We expect earnings per share for the Company to be between $0.15 and $0.20 in the first quarter of 2011. During this period of relatively low level of railcar deliveries, our product mix and ratio of railcars being sold to external customers versus our lease fleet may vary substantially from quarter-to-quarter which can have an impact on our earnings.

During the first quarter, we expect that deliveries to our leasing company will be quite a bit higher than in the fourth quarter of 2010. This will result in a first quarter elimination of approximately $100 million in consolidated revenues and between $0.06 and $0.08 per diluted share as we deliver these railcars to our lease fleet. Until we have further clarity on the level of orders for our leasing company, it is difficult to provide guidance regarding the investment that we expect to make in our lease fleet beyond the first quarter.

We anticipate that the Rail Group will report revenues of between $210 million and $230 million with an operating margin of between 2% and 4% for the first quarter of 2011. Inland Barge revenues are expected to be between $130 million and $140 million in the first quarter with an operating margin in the range of 11% to 13%. Revenues for the Energy Equipment Group are expected to be approximately $130 million to $140 million in the first quarter with margins anticipated to be between 5% and 7%. We expect earnings per share of between $0.45 and $0.60 for the first half of 2011. While positive trends are developing for the key drivers of our Company's businesses, the continuing uncertainty regarding the pace of economic recovery makes it difficult at this time to provide earnings guidance beyond the first half of the year.

We remain well positioned with a diversified portfolio of businesses, a strong balance sheet and solid operating cash flows. Our continued focus on liquidity firmly positions us to capitalize on business opportunities as they arise. Our operator will now prepare us for the question-and-answer session.

Thank you. (Operator Instructions) Our first question comes from Steve Barger with KeyBanc Capital. Your line is open.

Hi, good morning, guys.

Good morning.

You talked quite a bit about targeting orders that can show operating leverage. In the last up cycle, the Rail Group ran incrementals in the 30% range, I think Barge was in the 20% range, plus or minus. Any reason to think that you can't meet or exceed those incrementals in this cycle as you start to figure out your production runs in the back half of the year and into 2012?

Steve, this is Tim Wallace. As far as operating leverage goes, we remain real cautious in our approach to forecasting profit improvements from operating leverage. We are continuously refining our production processes and we're implementing lean manufacturing initiatives. These things help increase our capacity, our production flexibility, and improve our potential for operating leverage. But it's real difficult to predict the point, the time, and the magnitude at which an operating leverage will kick in.

We know it's there. We know it will occur. Then it's also difficult to predict how long the demand is going to last in our business. That's why we built the business platform around being very flexible where we know when demand is there and we go for orders and we obtain them that we will receive some operating leverage.

I would be disappointed if the demand stayed as strong as it was last time and we didn't exceed our operating leverage. We think during the down cycle we removed a lot of costs and we are positioned to perform even better, but time will tell on how strong the demand is and how well the operating leverage kicks in.

But structurally, you do feel like you are in a better position now to drive an incremental margin, assuming you had X-volume?

Absolutely.

Okay, great. And now that -- every cycle is different, but thinking about customer inquiries and how you see or expect to see price-through evolve, does it feel like the early part of this cycle has legs for Rail and Barge or is it that you just can't make that call yet?

Well, each of our businesses is a little different. Each of the industries has different levels of capacity and, so, we are relying primarily on operating leverage to drive our margins, as Steve had said, and the capacity in the barge and the rail industry is a little bit different issue right now. I think Bill has got -- in the barge industry we are positioned, we think, better for pricing leverage in that business along with operating and then in the rail business, Steve, I think you are looking at operating leverage and then if the sustainability of the demand is there for a period of time to consume the capacity that is there, then we would think the pricing leverage would kick in.

Tim -- Steve, this is Steve Menzies. One of the things that does make it a little difficult for us to get a handle on the sustainability of the demand leg, using your terms, is that a number of these orders we are seeing are driven by tax depreciation benefits. We are even seeing some of the orders are acceleration of purchases by large buyers of railcars, maybe looking to accelerate two and three years worth of purchases into this year. So, the demand is somewhat clouded by tax driven purchasing and how much of that is really driven by economic growth it is really hard to determine at this time.

Presumably if you are having conversations with people that want to accelerate two to three years of demand into this year, that is not reflected in your backlog at this point, right? If that were to happen are there big orders out there to come?

There are several railroads looking still to place some large orders for railcars that may reflect several years' worth of purchases.

Wow. Okay. One more and then I'll hop back in line. James, if I heard you right, you said TRIP added $0.02 per share, and that's how we should think about it next quarter, assuming TRIP's operating statistics and the share count remain consistent. Can we read anything into that about your confidence level in refinancing TRIP at similar or at least favorable terms later on in the year?

I don't think we are intending to give any indication there other than the $0.02 is a relatively consistent number. With TRIP at a 99% operating utilization level right now, TRIP's operating metrics are relatively consistent. We are not intending to provide and guidance as to any changes due to TRIP otherwise in terms of financing or otherwise.

Okay, I understand. Thanks. I'll get back in line.

(Operator Instructions)And our next question comes from Allison Poliniak with Wells Fargo. Go ahead, please.

Hi, good morning.

Good morning.

There has been a lot of talk about the idled fleet at this time or the storage fleet. Could you give us your thoughts in terms of what level do you think will be scrapped or if there is a level that that number needs to come down to for the orders to start accelerating?

Okay, Steve, will take you that one?

Sure. Allison, we continue to see the idled fleet as reported by the AAR continue to decline. I guess we look at those numbers and feel there is probably about 100,000 railcars in there that will probably stay idle and may reflect full employment if you will. But really, when you start to dissect the information by car type is where the real information helps drive your decisions about your business what orders you are pursuing. So I think you'd find that there are certain markets where we have supply and demand of railcars very much in balance and then there are a few markets where supply and demand are out of balance. Those types that are out of balance probably do constitute the larger number of cars representative of the idle fleet counts reported by the AAR.

Okay. Great. Are there any component or potential component issues as we look to a potential acceleration in railcar deliveries this year that we should be worried about?

Sure. At this time, we have not experienced any significant delays from our component manufacturers. There may be some strain on the system with respect to cast products. As you know, we buy our own axles and couplers from -- internally. So we have not experienced any delay and I would assume component manufacturers will increase their production to meet rising demand.

Great. Thank you.

(Operator Instructions)Our next question comes from Art Hatfield with Morgan, Keegan. Go ahead.

Good morning, everybody. Just a couple of things here. James, if I heard you correct, you said that in the quarter, the lease business was impacted by $17 million in revenue and $2.3 million in operating income from cars sold out of the lease fleet?

That's correct, Art.

Thanks. On TRIP real quick, if you can help me out here, looking at the -- kind of deriving a bottom line number, it looks like TRIP's earnings declined maybe $1 million, $1.5 million on the net level sequentially from Q3, but yet operating income was up and interest income was flat. Can you kind of help me understand the derivation of that and why the decline on the bottom line, but yet the increase is elsewhere?

James, why don't you take that one.

Yes, Art, we can certainly go through on the 10-K and walk through the exact numbers with you. I think the 10-K will show that TRIP was relatively consistent quarter-over-quarter. Again, the 10-K is going to give you the detail, breaking out our internal lease fleet in TRIP which you don't have the full benefit of in the press release.

Then on the -- you said you wouldn't give us any guidance with regards to what you think TRIP would do. But can you just refresh our memory on the amount and what the cost of that debt is that needs to be refinanced this year?

James?

Yes, TRIP has about $1 billion of debt that is reflected, again, in our 10-K as well. Amortization on that potentially begins mid-year. There's some amortization period going forward beyond that. As we've said before, we are and will be in conversations with our both debt and equity partners on a potential refinancing or other options that we may have with that and we will provide that update as we have such updates as we go on through the year.

Can you tell us now what the cost of that debt is currently?

Well, TRIP's interest last year on that $1 billion of debt, and the debt, of course, amortized during the year was about [$27 million] all in.

I'm sorry. I knew that. I'm sorry to ask that. And then going on to a couple of other things on the lease fleet, I think, Steve, I heard you say that the renewal pricing was up in the quarter?

Yes, modestly up in the fourth quarter of 2010 for the renewals that we were successful with.

Okay. So could you tell us what the average age of those renewals were?

I don't have that broken out at this time, Art.

Okay, that's fine. And then can you tell us on -- both on TRIP and on the Trinity lease fleet, what portions of those fleets are up for renewal in 2011?

James, why don't you take that one?

Yes, Steve has talked about the average age of the fleet. Things are relatively even throughout that period of time. The average remaining term of the fleet, Steve talked about, and that is relatively well spread out this year, next year and in future years.

And the same conversation about TRIP, or it being still so young nothing really up for renewal?

Well, you're going to have some renewals, Art, but, again, relatively smooth level of renewals in both fleets.

Okay. And then finally, if you could -- I know the K is coming out later today but just looking at the cash balances year-over-year, the decline, I think, was $170 million and understanding where we are at in the cycle, can you tell us just kind of where the bulk of that cash was used in 2010?

James?

Yes, Art, this is James. There's really two main pieces. You have variances here and there. At the high level, you will recall that early in the year we used cash to purchase Quixote, which has been a good acquisition for us that we've been [girded] very well through the Highway Products Group. You will see in the 10-K, again, and you saw it as we went through the year, the investment in working capital as our businesses recover from such a low level as we started 2010 was the bulk of the remaining difference in the cash balances. Thirdly, I'm sorry, and thirdly, I would say, Art, as we continue to invest in our lease fleet, of course, we have some consumption of cash there.

Got it. Okay. And then I can look at those numbers when the K comes out. Thanks, that's all I got today. Thanks for the time.

Thank you, Art.

And it appears we have no more questions at this time.

That concludes today's conference call. A replay of this call will be available after 1.00 o'clock Eastern Standard Time today through Midnight on Thursday, February 24. The access number is 402-220-0398. Also the replay will be available on the Web site located at www.trin.net. We look forward to visiting with you again on our next conference call, and thank you for joining us this morning.