Trinity Industries Inc (TRN) 2012 Q3 法說會逐字稿

Please stand by for real-time transcript. The Trinity Industries, Inc. conference call will begin momentarily. +++ presentation .

Good day and welcome to the Trinity Industries Incorporated third quarter results conference call. Currently all lines are in a listen-only mode. Later there will be an opportunity to ask questions during the question-and-answer session. You may register at any time to ask a question. (Operator Instructions).

Please be advised today's program is being record. 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 include as to estimates, expectations, intentions and predictions of future financial performances. 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. It is now my pleasure to turn the program over to Miss Gail Peck. Ms. Peck, you may begin.

Thank you, Aaron. Good morning, everyone. Welcome to the Trinity Industries third quarter 2012 results conference call. I am Gail Peck, Vice President and 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 and after Tim, our business group leaders will provide overviews of the businesses within their respective groups.

Our speakers are, Bill McWhirter, Senior Vice President and Group Presidents of the Construction Products, Energy Equipment and Inland Barge Group, and Steve Menzies, Senior Vice President and Group President of the Rail and Railcar Leasing Groups. Following their comments James Perry, our Senior 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.

Our business performed well during the third quarter. We continue to see consistent demand for products that transport and store crude oil and other liquids related to the energy industry. During the third quarter we made good progress repositioning a portion of our production capacity to pursue these market opportunities.

Once we complete our repositioning we will be better equipped to serve our customers and generate operating leverage. We are in the final stages of this repositioning. We continue to evaluate investments across our businesses to enhance our manufacturing flexibility.

During the third quarter we entered into agreement to purchase three facilities with heavy steel manufacturing capacity at a very attractive valuation. These facilities are capable of producing many of our products. Based on our current integration plans we anticipate that one of these facilities may be used for railcar production and a second one for manufacturing storage containers in support of our Energy Equipment Group.

We are also opportunistically investing capital into some of our factories to expand manufacturing capacity in order to obtain incremental orders for products that layer on top of existing long-term production runs. This type of available capacity, typically generates pricing leverage and provides an accelerated pay back on the capital invested. The backlogs for our railcar and barge businesses totalled $3.9 billion at the end of the third quarter.

The size of these backlogs gives our business leaders production visibility into 2014 for products that serve the oil, gas and chemicals market. We are in the early stages of extended production runs for these products. Our businesses perform well when these conditions are present. Trinity's Railcar Leasing and Management Services Group continued to produce solid results during the third quarter securing strong lease renewals and making attractive investments in new railcars that serve our customers.

Our Leasing Company also continued to generate profit during the quarter from sales of railcars from the lease fleet. Our Energy Equipment Group is moving in the right direction. I'm pleased with the way this group continued to improve profits during the third quarter. As part of the repositioning during the quarter we began shifting excess wind tower manufacturing capacity to railcar production.

The Company's balance sheet remains in great shape and our overall financial position is strong. We're well-positioned to capitalize on opportunities for growth in the industries we serve and to benefit from our extended production backlogs. Our competency in manufacturing flexibility allows us to continuously shift production to meet the level of demand for our products.

Overall our third quarter performance reflects the strengths are of our diversified industrial manufacturing expertise, our commitment to operational excellence and the talents and hard work of our people.

I will now turn it over to Bill McWhirter for his comments.

Thank you, Tim and good morning everyone. Our Construction Products group produced an operating $12.7 million during the third quarter of 2012. This is a $5.1 million decline from the same quarter a year-ago. The decline is primarily attributable to a soft highway products market, driven by the lack of a Federal Highway Bill.

We are anticipating that the new Federal Highway Bill, MAP- 21 will provide a stable environment for planning and funding of highway projects. Clearly economic uncertainty continues to have the potential to impact individual state's ability to provide matching funds. An encouraging data point is the increased activity in the housing market. A pickup in the residential construction in the markets that we serve, should have a positive effect on demand for our concrete and aggregate products.

Moving to our Energy Equipment Group, in the third quarter this group continued to make significant progress. Posting an operating profit of $9.5 million. From a planning perspective there is a great deal of uncertainty regarding the future of wind tower demand as a production tax credit seems likely to expire.

We are in the final stages of discussions with our customer to determine the appropriate rate of production for 2013 based on the status of the PTC and the overall market demand. Our expectation is that the demand will be lower than our current production rate. We are making the necessary adjustments by transitioning some of our wind tower manufacturing plants to other Trinity product lines but will remain flexible to adjust our production as the market dictates. We will provide more color at the year end earnings call.

And finally I will close with our Inland Barge Group. During the third quarter our barge business reported an operating profit of $26.9 million. Our barge team did a great job during the quarter of bringing in $162 million in new orders and delivering $166 million worth of barges. The effects of hurricane Isaac, while minor, cost us about 70 basis points in operating profit margin. At quarter's end our barge backlog remains stable at $537 million.

From a market demand perspective we continue to have mixed conditions. The dry cargo market continues to show weakness as a results of a reduction in domestic coal usage and the poor grain harvest. We are aggressively pursuing new orders but many of our customers remain on the side lines at this time. On a positive note the increased movement of petroleum and chemical products has created a robust market for tank barges. We currently have tank barge orders into 2014.

While our hopper barge plants can produce limited sizes of tank barges, it is not currently cost effective to convert them to produce larger tank barges. We will continue to analyze the situation and make adjustments as appropriate. We are, however, in the process of a modest capital improvement in one of our tank barge plants. We will expect it will increase production in 2013 and 2014.

Overall, I continue to be pleased with the performance of our business unit teams. At this time I will turn the presentation over to Steve.

Thank you, Bill. Good morning.

North American railcar demand continues to be steady, driven by demand for railcars to support the oil, gas and chemical industries. We are also experiencing steady demand for railcars to support the automotive sector and fertilizer industries. Industry orders for new cars during the third quarter totalled 15,150 railcars, the eighth consecutive quarter of industry demand exceeding 10,000 cars.

This is quite impressive when considering the weak economic growth the North American economy is experiencing. TrinityRail received orders during the third quarter for 4,865 new railcars bringing our total backlog to 31,330 railcars. This results in a 6% increase in the dollar value of our railcar order backlog from the prior quarter to an all-time high of (technical difficulty) and third-party leasing companies.

Approximately 23% of the units in our order backlog are for customers of our leasing business. Third quarter operating results from the Rail group reflect a repositioning of our production footprint and major line changeovers. Operating profit for the Rail group during the quarter totalled $35.2 million, a 34% decline when compared to the second quarter of 2012, but a 94% increase over the same quarter of 2011.

These results reflect fewer deliveries due to line changeovers during the quarter and as anticipated and discussed during our second quarter call also included costs associated with our repositioning. Our repositioning enhances our operating flexibility to meet steady demand for railcars to transport crude oil and other liquids related to the energy industry. The line changeovers were to position us to increase production of railcars to serve the automotive industry. These actions will enable Trinity Rail to produce a more favorable railcar mix in 2013 and 2014 and to be better positioned to respond to future market demand.

We delivered 4,145 railcars during the third quarter compared to the 3,605 railcars we delivered in the third quarter of 2011 and 5,245 railcars in the second quarter of 2012. While our unit deliveries were down sequentially, the per unit value of each increased by 11% reflects a more favorable product mix and pricing environments. We are now positioned to produce operating margins in the fourth quarter closer to what we experienced during the first half of the year.

As we move into 2013, we expect to operate at production levels consistent with planned fourth quarter output. We will continue to evaluate further investment opportunities to enhance select production capacity to meet customer demand. For the year 2012 we are now projecting delivery of between 19,150 and 19,650 new railcars which implies a production increase of 15% to 25% in the fourth quarter compared to the third quarter.

Our Leasing group reported a 33% increase in operating profit compared to the third quarter of 2011, due principally to a larger lease fleet, higher lease renewal rates and profit from lease portfolio sales. Lease rate and lease renewal trends continue to remain very favorable. We added 1,405 new railcars to our wholly-owned lease fleet during the third quarter. We also sold another group of lease railcars from our portfolio during the quarter as the secondary market remains strong for the sale of leased railcars.

We expect additional lease portfolio sales during the next few quarters, given the continuation of current market condition. These activities bring our total lease fleet including TRIP to approximately 71,300 railcars up slightly compared to the lease fleet at the end of the second quarter of 2012. Lease fleet utilization remained at 99%.

These renewal trends continue to be favorable due to strong demand for certain railcar types with extended production lead times. This is coinciding with the expiration of a number of leases we transacted during the recessionary period of 2008 to 2010. Many of the leases executed during the recessionary period were at low lease rates, due to the market environment at the time. Current market conditions are now supporting the renewal of these leases with stronger -- with longer lease terms at significantly higher lease rates.

This positions our leasing company for greater returns during the next few years. We expect this trend to continue while existing railcars are in tight supply and new railcar production backlogs remain extended.

In summary, oil and gas production activities and chemical market expansion are driving railcar demand. We continue to see steady order inquiries during the fourth quarter, on pace with third quarter order levels. We expect to enter 2013 with a strong order backlog with certain production lines extending into 2014.

As we complete the repositioning of our production footprint and line changeovers we expect extended production runs of a consistent and more favorable product mix, will yield improved operating efficiencies. Our operations team will remain focused on improving efficiencies while keeping production levels stable. The reposition of our production footprint will enable TrinityRail to meet strong market demand to serve the oil gas and chemical industries and to capitalize on attractive market opportunities through 2013 into 2014. We will continue to evaluate opportunities to meet selective investment in our facilities to enhance production and to position TrinityRail to compete on the basis of railcar availability.

When we make selective investments in our facilities to meet customer demand, we can exert pricing leverage and realize superior returns on our investments. As examples since the end of the third quarter we were able to obtain a very large order at excellent pricing levels because of our ability to make investment to enhance production and meet the customers delivery requirements. Our ability to provide premium delivery was key to receiving this order. We expect to continue to see the benefits of a strong leasing environment and an active secondary market supporting lease portfolio sales.

I will now turn it over to James for his remarks.

Thank you, Steve and good morning everyone. Yesterday we reported third quarter revenue growth of 19% and earnings-per-share growth of 100% compared to the same period last year. This continues a trend of significant growth as our businesses focus on manufacturing production capacity to meet market demand for products serving the oil, gas and chemicals industries. Our third quarter performance reflects the dedication of our employees an their ability to flex our manufacturing footprint in response to the dynamic demand for specific products.

The third quarter results also reflect the ongoing strength of our railcar leasing business. We are now in the final phase of repositioning a portion of our production capacity to align with continuing strong demand for products serving the oil, gas and chemicals industries. The costs associated with this repositioning in the third quarter totaled $0.05 per share and are reflected within our Rail Group's operating results. In addition to the repositioning costs we had product line changeovers in our Rail Group during the third quarter. This led to operating inefficiencies and a lower level of deliveries in the third quarter compared to the second quarter.

We are anticipating improved fourth quarter financial results for the Rail Group and I will provide more details in a moment. We remain well-positioned to capitalize on investment opportunities as they arise. At quarter end our unrestricted cash totalled $312 million. When this cash is combined with the available capacity under our credit facilities, we had more than $750 million of available liquidity at the end of the quarter.

I will now discuss the outlook for the remainder of 2012. As a reminder when we provided guidance in July it was for the final six months of the year rather than by quarter. This was due to timing uncertainties around our production repositioning and line changeovers to meet market demand for the oil, gas and chemicals industries. For the fourth quarter we expect earnings to be between $0.78 and$0.85 per share, resulting in full year earnings of between $3.08 and $3.15 per share.

Our previous full year guidance provided in July anticipated EPS of between $2.95 and $3.10. Our new earnings outlook represents growth of between 87% app 91% over our 2011 results after a $0.12 adjustmentfor flood-related gains last year.

In the Rail Group we expect to deliver between 4,750 and 5,250 railcars. We're turning to the production levels experienced prior to the third quarter. This will bring total deliveries to between 19,150 and 19,650 railcars for the full year. This guidance for full year railcars deliveries remains in line what with he previously projected.

We expect fourth quarter revenues for the Rail Group of between $550 million and $600 million, and an operating margin between 9% and 11% as we regain operating leverage from a higher level of production. This margin guidance includes $0.04 to $0.05 per share for repositioning costs, including the $0.05 of repositioning cost from the third quarter we remain in line with our prior guidance for the Rail Group.

Our fourth quarter earnings guidance includes deliveries of railcars to the Leasing Company that will result in revenue elimination of between $100 million and $110 million with net profit elimination of between $0.09 and $0.11 per share. Profit eliminations for the third quarter and year-to-date accounted for $0.11 and $0.29 per spare respective.

Also included in the fourth quarter guidance is between $0.07 and$0.12 per share of net profit from the sale of railcars from the lease fleet.

This compares to $0.17 per share in the third quarter and $0.34 per share year-to-date.

The secondary market for fleet sales remains strong and we will continue to seek opportunities to conduct similar transactions. Through the first nine month of the year we made a net investment in the lease fleet of approximately $150 million and we expect our net leasing investment to be between $60 million and $70 million for the fourth quarter after taking into account the proceeds from railcar sales from the lease fleet. Cash generation from car sales during the third quarter and year-to-date were $84 million and $195 million respectively. Inland Barge revenues are expected to be between $160 million and $170 million for the fourth quarter with margins of between 16% and 18%.

Our tax rates in the third quarter was lower than our historical average rate, primarily due to the release of certain tax reserves or statute of limitations in the impacted states elapsed in favorable non taxable foreign currency translation adjustments. we expect the tax rate in the fourth quarter to be approximately 37%. Full year manufacturing capital expenditures for 2012 are expected to be between $120 million and $140 million. These figures include the capital investments we are making to reposition and expand our production capacity to meet market demand.

They also include the previously announced assets purchase of three facilities were DMI Industries. One of these facilities was purchased during the third quarter and we expect that the remaining two facilities will be purchased and integrated during the fourth quarter, subject to the terms of the agreement. We are continuing to evaluate market conditions as we deploy capital to promote the growth of our businesses.

Our results for the fourth quarter will be influenced by multiple factors including the amount of operating leverage that our rail businesses can achieve, the costs associated with repositioning a portion of our production capacity, the level of sales of railcars from the leasing portfolio, the amounts of profit eliminations from railcar additions to our Leasing Group and the impact of weather conditions on our construction products businesses.

In summary during the third quarter we incurred certain expenses and made investments in our businesses that we believe will enhance our long-term profitability. As we look to the end of the year we remain focused on delivering solid operating results while repositioning a portion of our production capacity.

Our strong order backlogs gives us good visibility when developing our production plans and we will are well positioned to take advantage additional opportunities in the markets we serve during 2013. We will provide financial guidance for 2013 on our next Earnings Conference Call in February. We continue to asses our markets and will make further enhancements to our manufacturing footprint if necessary to maximize our financial returns.

Our ability to adjust to market conditions by repositioning our production capacity, integrating acquired businesses and facilities, and opportunistically investing in production capacity, gives us an optimistic outlook for 2013.

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

Certainly. (Operator Instructions). We will first go to the site of Allison Poliniak with Wells Fargo. Your line is now open.

Hi. Good morning, guys.

Morning.

Just going back to the deliveries in the quarter and I know you mentioned there were some line changeovers. Was that the only impact for the declining deliveries this quarter? Was there some mix issue there because I'm assuming the repositioning was still going on into this quarter, right?

Steve, you want to take that.

Yes. Good morning, Allison.

Yes. The line changeovers were --of the principal drivers and the reduction in the number of units and as we transition our product mix I think it's important to realize that the number of hours that goes into building say a tank car compared to a covered hopper car is significantly greater so as with he do transition our production we do end up seeing some decrease in volume output while consuming the same number of labor hours but, again, we expect to recover those units in the fourth quarter.

Great. And then going to the highlight products business the MAP- 21 Bill is it right to assume we probably won't see a benefit of this until 2013 once the funds start flowing a little bit better?

Bill?

Yes, Allison, I think in the last call we talked about 2013 in particular the construction season of 2013, so obviously we're headed into the winter right now and I don't think you will see much of an effect, but we're hopeful 2013 hopeful the states have the funds to match those funds.

Great. Thanks guys.

And we will he will now go to the site of Eric Crawford with UBS Your line is now open.

Hi. Good morning. I was wondering if you could talk a bit about how the customer reception has been to your increased tank car capacity. Have customers began filling the new spots or have existing customers paid up to receive earlier delivery?

Steve.

Yes. Good morning, Eric. I think generally thus far what we have done is tried to match capacity increases with production orders.

So typically we have been receiving orders based upon our operating flexibility -- our ability to enhance production and then taking those orders and putting them into the backlog. We've not brought on capacity that thus far has not been assigned to an order in the near-term. I think customers are very anxious to see us increase capacity and those who have driving needs for that have been willing to pay a premium for that production space and we're seeing very nice returns and pricing associated with that.

Okay. Thanks. And just a point of clarification. Did I hear correctly that 2013 railcar production is going to match the 4Q run rates implying about 20,000 deliveries next year?

At this time we plan to have steady production going into the 2013 at the production rate of 2,000 -- at our fourth quarter production rate. Certainly as we see other investment opportunities to enhance our production and to bring on capacity at the pricing levels we're looking for. We'll continue to do that selectively.

Got it. Great. Thanks, guys.

And we will next go to the site of Bascome Majors with Susquehanna Financial Group. Please go ahead.

Hey, guys. I was hoping you could clarify. I think you said that you got a very large order as part of your capacity additions in some of your railcar products after the end of 3 Q. Could just speak to that or clarify if I misheard you there?

No. You heard that correctly. Post the close of the third quarter, we were successful in receiving a very large order, again based upon our operating flexibility and our ability to enhance production to meet the customer's delivery requirements. Worked out very nicely for us an we're very excited about the order.

Okay. And turning it to a bit towards I guess a higher level question. We heard all the rails report their 3Q results by now and a lot of them talked about sequential slowing in their business into 4Q. But they're also talking about the improving productivity and their ability to serve their customers more efficiently, which should help them turn assets a bit faster. What if anything can you see that is spilling into sort of the demand for railcar or the need for railcar overall keeping sort of the amount of freight in the flat to moving in the mid-single digits range?

Well, Bascome, that's a good question. Certainly our long-term prospects are very much tied to the success of the North American rail industry. We certainly support them in becoming more efficient, more customer friendly and expanding modal share and as that happens this is long-term we think we will be the beneficiaries of that. Certainly an example of a new market for the railroads is the crude oil sector and we're currently benefiting from railcars going into that service and I think there will be other developments for the rails as they create additional capacity through greater efficiencies and more railcars can actually go into the system. So long-term we're very optimistic about rail's ability to expand modal share.

Alright guys I will keep it to that. Thanks for the time.

We will next go to the site of Art Hatfield with Raymond James Your line is open.

Hi. Morning. Just a couple questions. First on demand and you had mentioned that you think customers would be buying but they seem to be holding off. Do you gets' sense that some of your customers are just kind of sitting back waiting to see how things play out with regards to the election and how maybe this fiscal cliff gets dealt with and that as that gets dealt with in an appropriate way that we may see some pent-up demand come in as orders kind of late part of this year, early part of next year?

Yes. This is Tim Wallace. I guess you must be talking about in general throughout our businesses and there is a degree of hesitation with the complexity that's in the political arena right now and we are optimistic that once we get through the next two or three weeks that there will be a sense of clarity and then people can get back to their basic business planning and there will be some infrastructure orders placed and that's really right down our alley.

Alright. Thank you for that. The other thing is as you add capacity, you have invested a lot I think your lease fleet and you've got a lot of capital tied up in that. How do you balance adding capacity, selling cars into the market without kind of doing so in a way that kind of floods the market with excess capacity and in time maybe having a negative impact on the results that may come out of your lease fleet i.e. lower lease rates if there are excess cars in the market? How do you go about thinking about balancing those two aspects of your business?

Well, this is Tim and then, Steve, you can jump on this one, but you're talking about a very dynamic market and you have customers that for railcars that come in a number of different areas and we like to have a good mix of sales that come from sales from our leasing company and then sales rights off of our production line. We look at sales out of our Leasing Company as kind of an extended sale of railcars. We are in the business of manufacturing railcars and selling railcars and to us it does not matter if the cars come out of our lease fleet or come right off the production line. We like generate revenue and profits off of selling railcars. I do not think Steve, you have a real delicate situation there, it just a matter of lining up customers with railcars isn't it?

Well it is and an encouraging thing with respect to the crude oil market is we're seeing a number of the refiners and exploration production companies purchasing railcars making the investment as well. But you're right., Art. There is a dynamic there. We have seen the leasing companies are very active in buying railcars from us, too. So how we manage that and the insight it gives us into trends in marketplace are important for us in positioning our production capacity and in looking at fleet sales and additions to our lease fleet, but right now there's significant investment both from shippers as well as leasing companies in this marketplace and we find that to be very encouraging.

Do you get the sense -- and I have no idea. I haven't seen any of this myself, but are you concerned or have you seen any indication or evidence that maybe with the backlog that's out there right now that there has been some double ordering going on so people are confident that they'll get cars when they come off the lines?

Good question, Art, and I would answer that as no, I think in some of the other announcements by leasing companies they're indicating that all of their backlog of orders for new cars are placed through 2013 and into 2014. 25% of approximately of our backlog 23% of our backlog is in the leasing. Everything else is sold to industrial shippers. So right now I don't see that speculative fever going on notice marketplace and everything that is being placed for production appears to be leased or have a home when it comes our the production line.

Great. Thanks for your time today.

And we will next go to the site of Sal Vertally with Sterne Agee. Your line is now open.

Good morning. Thanks for taking my question. If I look at the industry backlog data and specifically look at small cube covered hoppers that's pretty much come down over the last -- sequentially over the Last four quarters gradually to currently about 1700 cars and, again, that's for small cube covered hoppers. How do we think about how low that backlog starts to gets? I mean, is it pretty much at the trough level now ? Where you're going to start to see, to prompt orders to come in, with natural gas prices especially having come up recently, which might spur some fracking activity?

Yes Sal, this is Steve. I appreciate the question. Clearly, the demand for railcars to support the fracking industry as well as cement and other construction materials has been a little slower the last few quarters. Some industry experts expect a recovery in fracking activity in the second half of 2013. Certainly a higher natural gas prices would encourage that activity. As Bill talked about, we would hope that we would see improved construction activity going into 2013 which would also create greater demand for those cars. So right now we're really looking towards the second half of next year before we see a recovery in that specific market.

Okay. And I assume a very small portion of your current backlog is for cars for fracking activity, small cube covered hoppers?

I don't have that number at my fingertip but the cars that we have in our backlog have been placed with customers in that market.

Okay. If I could just switch to the backlog that you have. You have 31,300 cars in your backlog and if I understood correctly I think you said that we should expect the 2013 production to approximate your fourth quarter production which the mid-point of it is about 5,000 cars. So that would imply about 20,000 cars for next year?

Well, as we start 2013, that's our intent, yes, Sal.

Okay. So then if you have 31,300 cars in your backlog, should we assume that the entire 20,000 comes out of that 31,300 or does the some of the 20,000 for next year include orders that are placed early in the year for let's call it none tank cars because tank cars have a longer lead time right now.

Yes. Steve, again, our backlog extend well beyond 2013 so for us to maintain that production level we have some under sold cars going into 2013 from certain production lines that we're going to have to sell.

Okay. And then if I could just switch real quick to your margin guidance. Well, actually first and third quarter can you pinpoint what the impact to your -- whether it's in dollars or basis point of margin of the line changeovers was?

Yes. This is James, Sal and we haven't pinpointed the line changeover piece. There's moving variables when we go through one of those. We did talk about how the guidance included the repositioning costs of $0.08 to $0.10 back half of the year and we continue to maintain guidance for the back half of the year that's still within that range when you look at the midpoint of where we are now so we didn't breakdown quarter to quarter and that's exactly why we provided six month guidance for the timing of those changeovers and precise impact was going to be difficult but we have given guidance now for the fourth quarter that's still within that range that we expect to achieve.

Okay, Thanks and then just one the last question. What is the current lead time on a tank car so if a customer tries to place an order today, what is the earliest delivery?

Well, how many are you ordering, Sal?

Put me down for as many as you can.

Let's talk. I think generally we're seeing backlogs as long as 18 months for a new tank car.

Understood. Thank you very much.

And we will next go to the site of of Thom Albrecht with BB&T Capital Markets Your line is now open.

Hey everyone thanks for the discussion. I want to kind of take it in a little different angle here. So you're close to being around 20,000 right now, but let's say you got a flood of orders and you could realistically think about doing let's say 25,000 cars next year, how comfortable would you be in that kind of a fairly dramatic increase year-over-year, in the past your peak has been 27, 28 would you really prefer to keep it in the low 20s?

Thom, this is Tim. It really gets down to return on investment and what the cost is to bring on the extra manufacturing capacity an as I said in my remarks, we're constantly looking at all of our business, when we have long backlogs, for opportunistic situations where we can take an order like Steve mentioned we did recently and layer that on top of production we have and then we will put in capital investment and that usual gives us a good quick return on the investment. So it's hard to just say there's another 5,000 railcars or X number of barges or something like that. We have to kind of look at the customers, the relationship, where we're headed, the returns and so there's a number of factors that go into that decision.

Okay. And the reason I ask is just with this tepid economic environment just the confidence level to do things that's where that question originated from. I also want to ask Tim or Steve, as we all try to better understand the tank market your backlog or perhaps an industry comment I mean what percentage ball park of the tank orders seem to be designated for petroleum versus chemical at this juncture?

Thom, this is Steve. Clearly the significant demand in the marketplace is for tank cars. I think there is a tendency to focus a little too much on crude oil cars because we're also seeing the ripple effect of the energy renaissance impacting other aspects of the chemical industry. We're seeing significant demand for high pressure tank cars. We're seeing significant demand for tank cars that carry assets that are used in the fraking process. So really what we're seeing from the energy sector is a ripple effect into many different types of tank cars going into the chemical sector. We think we're in the early stages of that and expect that to continue.

Steve, if I try to put words in your mouth, maybe a lot of the early momentum was petroleum but now it's broadening out to chemical and related?

I think that would be a fair comment, Thom.

Okay. And then two other things. So energy -- there was a brief period, James, where your comments were cuts off for about a minute. I don't know if you commented on that. It was nice to see it profitable again. We know that wind tax credit is going away. Should we be comfortable with a 6% or 7% margin from here on out? Can you just kind of help us out there? It feels like we're throwing darts on that one.

Yes.

Tom, this is James. I did not make any energy comments in my remarks and playing off of Bill's remarks in terms of uncertainty we have we are work working with our customer on defining our production for next year. Obviously, the extension or lack there of the PTC is a big variable in what to expect next year. We're going to be very flexible on being able to have capacity if there is demand beyond what we expect right now, we're not able to provide margin type guidance given where we are in the moving variables in that group.

Do you think you will be profitable, I mean setting aside whether it's low margin or high margin, just want to have a positive number in that line item if possible?

You know, I think we're optimistic that our team is doing a good job managing and there is obviously more within the Energy Group beyond just the wind tower business. So generally the group has done a nice job of recovering to a good profit level this quarter versus where we were a year-ago or even six or nine months ago but again it's a little too early to get real precise on figures there.

And our containers business is seeing some demand for some of these NGLs, these natural gas liquids and things like that.

Okay. Good. Steve, as a wrap it up here, how big was the order? Was it mostly tanks and then you guys must be seeing something really bullish to have bought the properties from BMI that maybe you aren't quite ready to pronounce yet so view all that as one question with a couple components.

Steve, you answer the first and I'll answer the second.

Okay. Well, I will do my best to be nebulous on the answer, Thom. We really don't comment about specific orders but I think it's safe to assume that it was an order related to the energy sector and as Tim indicated was a investment we were able to make to layer that order on top of other production we had so it really fit our production model very well and we were very, very pleased with the returns the investment would provide.

And the customer was pleased to get capacity.

So real economic advantage for them to be able to take delivery of railcars sooner as it enhances their production model as well.

And Thom this is Tim in answer to your question about the purchase of the DMI facilities, for years we have always kept our eyes open for opportunities to acquire heavy manufacturing capacity at valuations that we think is very attractive and this was a classic example of that. We like the manufacturing flexibility aspects of it and we like the work force that we have come in contact with there, the equipment, the facilities. It really fits nicely in our portfolio of manufacturing plants.

Okay, I may ask about that again in the future, but thanks very much.

Sure.

We would like to the site of Matt Brooklier with Longbow Research. Your line is now open.

Hello, thanks. Good morning. I wanted to follow up on Thom's previous question. If we do get into next year and have somewhat of a better macro backdrop and deliveries are somewhere closer to the 25,000 type number, do you think you could handle that type of volume with your current manufacturing facility footprint with the wind tower conversions and then the assets that you bought on the DMI side or would that type of number do you need to take some idle manufacturing capacity back online?

Yes. This is Tim. Right now we have a lot of positive momentum going in our -- occurring in our Company as we head towards 2013 and the repositioning activities that are taking place have kind of fueled that momentum. We've got a lot of highly qualified seasoned people in our Company and they like the challenges of being able to bring on new capacity within our Company and convert facilities and things like that. So I'm highly confident in our ability to convert facilities, bring idle facilities back into production mode. It's just a matter of us having confidence, the sustainability in this particular area and the returns that we would get on that.

So we're positioned nicely to have large backlogs to be able to make the decision and select those potential orders that are out there that are meaningful to us and then have the staffing that we have within our Company of the competent people that can deliver the results like they did. And it gets a little bit of a challenge for us to predict precisely exactly when the operating leverage and when the repositioning and when all the activities are going to occur and that's why sometimes we go with a six-month window or we hesitate on giving firm guidance long-term, but level of confidence I'm highly confident in our Company's ability and in fact our people they kind of get turned on by doing these things.

Okay. That's good to hear. I guess to ask it another way or just a follow-up, your ability to if needed to bring on some of that idle capacity, roughly how long does that take to revamp and open back up one of your facilities? Is it a three months process, is it a six months process? Can you just talk a little bit about that?

Well, it just depends on where the facility is, where it's located, one of the attractive things associated with the purchases of these factories that we just acquired is they've got a workforce in place rights now and they're finishing up some orders. These people are anxious to be able to go to work and convert and we get a lot of positive signs from them so bringing in an idle facility a lot of times we have supervision in our idle facilities that are working elsewhere in our Company and we have some of that right now with some of these people that had worked previously in some of our ideal facilities, they're working elsewhere in our Company and they go back home and they gets a crew of people together. So it's a challenge and it is a little bit difficult to predict the exact timing, but it's really a lot of fun and it's a positive type of challenge and opportunities to the communities that we go into.

Okay. And then I think in someone's earlier remarks you indicated what two of the three DMI facilities will be manufacturing. Can you comment at this point on what the third facility could be used for?

No. Or. We're looking at that third fatal. That third facility happens to be in Canada and we have hoped for a long time that we would have a nice facility in Canada that we could build off of because a lot of times when we're competing up there it's about Canadian content and all of our businesses are very anxiously looking at that facility and talking with customers and things like that. So at some point in the future we'll have that one an integration plan developed for that facility.

Okay. Very good. Thank you.

(Operator Instructions). We'll now go to the site of Brad Delco with Stevens. Your line is now open.

Hey. Good morning guys, thanks for taking my question. Most have been addressed, but James I just wanted a point of clarification. You mentioned margins on the railcar side of 9% to 11%. That is inclusive of the $0.04 to $0.05 of head winds that you expect with the changeovers?

That's correct, Brad.

Okay. And then I guess going back to had this quarter then, I think you guys had mentioned $0.05 of head winds. Was there anything else in addition that I would imagine with an improving mix maybe margins could have been a little bit better. Is there anything in particular that was in the quarter that caused margins to be down, what they were relative to maybe where our expectations were?

Well, Brad, the one thing that we did mentioned, Steve and I both mentioned $0.05 due to repositioning cost for the oil, gas and chemicals industries that we've had in our plants. In addition, we had line changeovers to produce different type products and Steve addressed that. That is not included in that $0.05 so that was the primary impact on margin which affected your volume as well as your inefficiencies.

Got you appreciate the color. And then this is maybe more high level maybe for you, Tim. Understanding how your flexibility is allowing you to increase capacity in certain areas is there any way or is it wrong to be thinking about the new capacity coming on having any sort of barriers to seeing the same type of productivity that you're seeing kind of in the existing plants building tank cars for example or do you have the opportunity to be as efficient in these newer converted facilities?

We built this Company through acquisitions an we have acquired a lot of plants over the history of the Company. I am in my 38 year with the Company and there's a lot of people who got 15, 20, 30 years, 40 years experience and we move into each facility, people are people. We begin to motivate them, we put in programs that we think -- or we know that work and so I have a high degree of confidence that given these facilities that we have that we will reach similar and comparable levels of productivity and then there's this pride element that gets in that the plants like to be able to be the flagship plants and show the other plants how productive they can be and then we've got a group of people transfer best practices, we've got Trinity's Centers of Excellence that work on that area. So we have got a lot of got internal programs that support productivity improvements. And there's a culture that's built in this Company with a deep legacy.

Thank you. Thanks for the color there. And then final question and just to focus on a point I think that you made on the press release. You guys are basically setting yourself up for some pretty long production runs next year. What type of efficiency gains maybe from a margin perspective can that drive just thinking about what sort of run rate we can be look at coming out of the fourth quarter?

This is Tim again. I think that the challenge for our people is to show us the productivity that they can get and the operating leverage that they can develop in this area and we're looking at all times of systems. We've got lean activities going on. So it's really hard to tell. I'm always amazed at the levels of productivity that our people are able to generate and that gets translated into margin improvements. The good news is with long backlogs like we have they can do some planning, they can get into the repetition and we can have a lot of elements working in our favor and we don't have, I don't think, Steve, in your business or in the tank business, barge business, we don't have a lot of changeovers planned for next year. So that's a real bright spot for us.

Okay. Well, appreciate the time guys. That's all I had. Thanks.

And we do have a follow-up from the site of Thom Albrecht with BB&T Capital Markets. Your line is now open.

Okay. Steve, when you talk about that earlier order of whatever it was 3,000 cars or so when you say energy, I assume you mean more tank and less the hopper side, the small cube hopper?

Yes Thom just to be clear I don't think I mentioned a specific number for the order but yes, it would be in the tank side of the business.

You noticed I tried that.

Yes, I did.

And I don't know. Did you make any comments just about the broad-based strength or not with other car types? Frequently you will address that and giving in what we have seen in the economy I think there's a lot of concerns that there's maybe not as much momentum for other car types as we would prefer right now.

Well, Steve, the market constantly shifts. It's always shifted in my career and it shifts from one particular market to the other. It's a broad market and then it just shifts from one area to the other.

It does and, certainly we have been operating in the backdrop of a weak economic environment. I am anxious to see what our railcar market might look like with a greater economic expansion in growth. It seams as though the oil and chemical industries are driving demand for cars. We have seen improved demand for our fertilizer and automotive related products. Most of the other freight car business that's in marketplace today is largely a replacement. So economic growth I think would add another element to demand for railcars and would be very complimentary to the current energy renaissance.

How about hoppers?

There's no question that I think Bill saw it in his barge business that the weak harvest had an impact on demand for graincars that we think will change over time and you also have the ability to replace older equipment. There's still a lot of smaller older equipment in the hopper car business. The chemical sector has been greatly impacted by low natural gas which yields opportunities for expanded production of plastics and resins. Those are transported in covered hoppers. We have received orders for those cars as well. So again there is evidence ripple effect of lower natural gas prices and the benefit to the domestic chemical industry.

Okay. Thank you. Thanks again, guys.

And once again (Operator Instructions). We'll pause momentarily to allow any final questions to queue. And it does look like we have a follow-up question from the site of the Sal Vitale with Stearne Agee. Your line is now open.

Okay. Thanks fortaking my follow-up. Just a quick question if I look at the guidance regarding to I think you said $0.07 to $0.12 per share of resale gains in 4Q.

That's correct, Sal.

Okay. If I look at just looking at your guidance from 2Q from the 2Q call, I think you had said $0.17 to $0.22 for the second half and you did $0.17 alone in 3Q. So I guess when you gave that guidance, did you -- was it loaded towards the third quarter or were there just some opportunities that presented themselves in the quarter that you took advantage of?

Yes, Sal. This is James you've got your numbers right and we're little above what we projected the back half of the year and it's been the strength of the secondary market. We've been very active in that market. It's always harder to predict which transactions will come to fruition but our commercial team is doing a great job of looking at car sales sells as Tim mentioned earlier it's an extended sale for us and being able to take cars from our lease fleet that have often times leases attached and have higher value as a results give us a good opportunity to achieve profitability from our leasing business and improve our returns.

Okay. And looking at it from a high level just looking at the lease sale gains that you've done this year versus what you can do next year, do you think that it would be a stretch for you to repeat this next year.

Yes. This is still James. You know, again, it's hard for us to talk about next year in terms of that given the timing of those. We've been very successful this year. We expect the market to remain strong as it is right now. The magnitude is hard to quite are quantify. It's an active and regular part of what we do. Now that Trinity has a lease lead in excess ion of 70,000 cars, we have the economy to scale that we've worked to that achieve, it does not prevents us from growing by selling cars from the lease fleet as it might have when we were much smaller so it's a normal part of what we do. We're certainly going to look to the secondary market for that strength and have that opportunity but, again it's hard to quantify where we are given it's October now looking into 2013 beyond that.

Okay. Thank you.

Okay Aaron this is Gail Peck. I think wear ready to conclude today's call a replay of this call will be available after 1:00 Eastern Standard Time today through midnight on November 1st, 2012. The access number is 4022 200 116. Also, the replay will be available on the Web site located at www.trin.net. We look forwards to visiting with you again on our next conference call. Thank you for joining us this morning.

This does conclude today's program. You may disconnect at any time.