Trinity Industries Inc (TRN) 2012 Q4 法說會逐字稿

Good day and welcome to the fourth quarter results conference call. All lines are currently in a listen only mode. Later you will have the opportunity to ask questions during the question-and-answer session. And please note today's call is been 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 include 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 their forward-looking statements.

And at this time I would like to turn the conference over to Gail Peck, Vice President and Treasurer.

Thank you, Tasha. Good morning, everyone. Welcome to Trinity Industries' fourth 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. 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 President 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. I am pleased with our strong financial results for the fourth quarter and our overall performance during 2012. Last year we achieved significant revenue and earnings growth. We directed resources towards select markets that have strong demand for our products, specifically the North American oil, gas and chemicals industries. During the fourth quarter we completed the acquisition of three manufacturing facilities from DMI industries and acquired a trench shoring equipment business. These acquisitions increased our manufacturing flexibility and further diversify our portfolio of businesses.

The North American energy renaissance has resulted in strong demand for a number of products that our businesses manufacture. During 2012 our businesses successfully collaborated and leveraged our manufacturing flexibility to pursue opportunities related to these products. Our railcars, barges and containers are critical to the build out of the North American energy infrastructure. During the past year, we manufactured railcars that transport frac sand, crude oil and a variety of chemicals and byproducts associated with oil gas exploration and production. Demand for large bulk storage containers for natural gas liquids, chemicals and fertilizers has also increased. In addition, increased movement of petroleum and chemical products along the inland US river system has created robust demand for tank barges.

As 2013 begins, we are well-positioned with long production runs in our manufacturing businesses that serve the oil, gas and chemicals market. Our goal during periods of strong demand is to direct our Company's resources toward building large backlogs of orders. We were very successful at doing this during 2012. We are continuing to direct resources towards this goal. Historically, when we load our manufacturing facilities with long production runs, we are able to generate operating leverage and a variety of operating efficiencies. We expect this trend to continue in 2013. We will expand our manufacturing capacity when there are opportunities to obtain orders for products with sustainable demand levels that provide good returns.

We continue to enjoy strong fundamentals in the railcar leasing business. Our railcar manufacturing and leasing businesses are highly integrated, enhancing our ability to obtain orders. During strong market periods our leasing business creates substantial short-term and long-term value by originating and renewing leases with favorable terms. We are currently experiencing this in respect to railcars that serve select areas of the oil, gas and chemicals market. The sweet spot of the leasing business occurs during time periods when market demand for leased railcars is strong and capital market conditions are favorable. The debt markets are providing very attractive financing rates for railcars at this time as evidenced by the debt financing we closed in December. In the past we have been very successful raising third-party lease equity capital during strong markets. We have opportunities in this area. I am very pleased with the progress we are making with our TrinityRail operating platform and the opportunities it provides us.

From an overall Company point of view, I am pleased with our portfolio of businesses and their ability to collaborate to generate earnings. Our integrated business model is working as intended, and our operating business platforms are creating enrichment value through various interactions. We are investing resources to identify and pursue opportunities to add new businesses to our portfolio that we think will connect well with existing platforms, help reduce cyclicality of our earnings, generate stable cash flows and contribute to our ability to serve our customers' needs. The acquisitions we made in the second half of 2012 are examples that fit our criteria. As we enter into 2013, we will continue aligning our manufacturing capacity to pursue opportunities in the energy, chemical, transportation and construction industries. The resurgence in North American energy production combined with the aging of America's infrastructure creates demand for products that align nicely with our Company's portfolio of businesses. Our solid financial performance during 2012 reflects the seasoned capability of our employees, and the strengths of the markets we are serving. This is an exciting time for our Company.

I will now turn it over to Bill.

Thank you, Tim, and good morning, everyone. Our barge business set a new record for annual revenues in 2012 and came close to surpassing the previous record for profits. I am very proud of the hard work and dedication of our people. The fourth quarter profits increased year-over-year by 38% after adjusting for flood related insurance settlements in the previous year. The sequential improvement in quarterly profits of 16% was a result of favorable pricing and the mix of barge types delivered. During the quarter we secured $193 million in new barge orders which brings our barge backlog to $564 million at the end of December.

The movement of petroleum and chemical products continues to create a robust market for tank barges. We now have visibility into 2014 for our tank barge facilities. Demand for our hopper barges continues to show weakness as a result of the reduction in domestic coal usage and the poor grain harvest last season. Many of our hopper customers currently lack a buying catalyst and remain on the sidelines. As a result, pricing and demand for hopper barges has weakened. From a production perspective we are currently enhancing one of our tank barge facilities to accommodate a few additional production slots during the latter part of 2013. We are also making plans to reposition our hopper barge facility to manufacture smaller tank barges later in the year.

Moving to our Construction Products Group. During the fourth quarter this group produced an operating profit of $9.4 million. This is a $2.3 million decline from the same quarter a year ago. The decline is primarily due to a soft highway products market and continued economic uncertainty. The new Federal Highway bill provides a more stable environment for planning and funding of highway projects, however, budget constraints at the state level still could create a headwind for total highway funding. In December, we announced an agreement to exchange our remaining ready mix operations for certain aggregate operations owned by Texas Industries. This transaction, which we expect to close early in 2013, is the last in a series of steps to fully divest of our concrete business. As a result, our concrete business is considered a discontinued operation, and the operating results for the business have been excluded from the segment.

In December we also announced the $40 million acquisition of a company that manufactures trench shoring equipment used by the underground construction industry. The equipment has applications ranging from pipeline and road construction to the installation of utilities. Both transactions are representative of our strategy to reposition the Construction Products segment so that it is lined with products linked to the infrastructure market that have more consistent demand drivers and offer greater opportunity for improved returns.

Finally, closing with our Energy Equipment Group. The results of this segment reflect several repositioning activities that occurred during the fourth-quarter. We completed the transition of two of our wind tower facilities to support tanker manufacturing. We also converted one facility, recently purchased from DMI to the production of large storage containers focused on the growing energy market. In addition, the recent extension of the production tax credit for wind energy will provide a nice lift to the business segment. We do, however, anticipate wind tower revenue for 2013 to be lower than our 2012 results. We will continue to remain flexible and may adjust production in response to future market changes. Overall, I continue to be pleased with the performance of our business unit teams. Our Energy Equipment and Construction Products Groups work hand-in-hand to provide products for the growing US and international infrastructure markets.

At this time, I'll turn the presentation over to Steve.

Thank you, Bill. Good morning. I am very pleased with the financial results of the Rail Group and Leasing Group in the fourth quarter and the operating momentum building in both businesses at year end. In the fourth quarter we delivered 4,960 railcars, in line with our expectations for the quarter. Railcar unit production increased by approximately 20% sequentially as we continue to increase our production rate following the repositioning and major line changeovers that occurred during the second half of the year. Operating profit for the Rail Group during the quarter totaled $70.7 million, resulting in a 12.4% margin which exceeded our expectations as operating efficiency gains improved throughout the quarter.

Our fourth-quarter results also included previously mentioned costs associated with our repositioning. North American railcar demand continues to be steady, driven by demand for railcars to support the oil, gas and chemical industries. We are also expressing consistent demand for railcars to support the automotive sector. Industry orders for new railcars during the fourth quarter totaled 11,065, the ninth consecutive quarter of industry demand exceeding 10,000 railcars, an order level that is representative of a fairly healthy railcar market. This is quite impressive when considering that overall economic growth has been sluggish during the same period.

TrinityRail secured orders for 5,620 new railcars during the fourth quarter. Fourth-quarter orders were primarily for tank cars, covered hoppers and auto racks and came from railroads, industrial shippers and third-party leasing companies. Our total backlog increased to 31,990 railcars, valued at an all-time high of $3.7 billion. Order inquiries continue to be strong thus far in the first quarter. For the last three quarters our orders have exceeded deliveries. We expect this trend to continue in the first quarter of 2013. Many of our orders extend current production for certain railcar types into late 2014 and for some into 2015. Based on our current production plans, we are projecting delivery of 20,500 to 22,000 new railcars during 2013. While the number of deliveries planned for 2013 is not significantly higher than 2012, the average price per railcar that we will deliver is considerably higher and reflects an improved product mix. As a result, projections for 2013 show we are on track to meet and possibly exceed previously reported record revenue and profit for the Rail Group.

Our Leasing Group reported a similar level of operating profit from operations compared to the fourth quarter of 2011. This is due to revenue growth from lease fleet additions and higher lease rates, offset by increases in maintenance, depreciation and administrative expenses during the quarter. We added approximately 1,000 new railcars to our wholly owned lease fleet portfolio during the fourth quarter. We also sold another group of lease rail cars from our portfolio as secondary market conditions remained attractive. These activities bring our total lease fleet, including TRIP, to approximately 71,455 railcars, up slightly compared to the size of the lease fleet at the end of the third quarter of 2012. For the year the lease fleet grew approximately 4%.

TrinityRail's commercial team has developed a significant competency to originate attractive railcar leases. Our lease origination capability has attracted the interest of equity investors looking to invest in hard assets such as railcars. We continue to evaluate opportunities to originate and manage third-party equity investments as a way to extend our leasing capacity to generate additional sources of income.

Lease renewal trends for railcars serving the oil, gas and chemical markets continue to be positive due to extended backlogs and production lead times within the industry. Market conditions for these railcar types support renewals of longer lease terms at significantly higher rates. We have further ability to re-price expiring leases transacted during the recessionary period of 2008 to 2010 as they come up for renewal in 2013. This positions our leasing company to achieve potentially greater returns during the next few years. Our lease fleet utilization at the end of the fourth quarter was 98.6%. Utilization remains high, but it was down slightly from the previous quarter due to weakness in railcars serving the agricultural and coal markets. Today we see a tremendous opportunity to grow our leasing business at a time when we are achieving excellent returns on our leased railcars. At the end of the quarter, approximately 22% of the units in our railcar order backlog with a total value of $835 million were slated for customers of our leasing business.

In summary, the repositioning of our production footprint has enabled TrinityRail to meet strong railcar demand to serve the oil, gas and chemical industries and to capitalize on attractive market opportunities through 2013 and into 2014. Now that the facility conversion phase of our repositioning is nearly complete, we will face the challenges of additional hiring. As we move through the year, we expect to operate at fairly consistent production levels, providing us the opportunity to realize additional operating efficiency improvements and further margin expansion. Our demonstrated manufacturing flexibility positions us to nicely meet continued strong demand for railcars to transport [true] crude oil and other products related to the energy and chemical industries. We expect to see -- continue to see the benefits of a strong leasing -- lease pricing environment and an active secondary market supporting lease portfolio sales. The railcar market and capital markets are well aligned at this time to support continued growth of our leasing footprint.

I'll now turn it over to James for his remarks.

Thank you, Steve, and good morning, everyone. Yesterday we reported strong fourth-quarter and full-year 2012 results with year-over-year revenue growth of 11% and 30%, respectively, and earnings-per-share growth of 61% and 93%, respectively, after adjusting for one-time items in 2011. A reconciliation of adjusted earnings per share for 2011 was provided as an exhibit in yesterday's press release and excludes one-time flood insurance settlement items from 2011 results.

Results in both the Rail and the Barge Groups contributed to our strong performance during the quarter. Both of these groups benefited from favorable product mix dynamics and outstanding execution by their operations teams. During the quarter, the Rail Group essentially completed the facility conversion phase of the repositioning of its production footprint and is now in the process of hiring employees needed to meet our production plans in those facilities. The costs associated with this repositioning totaled $0.04 per share in the quarter. We will continue to seek opportunities to leverage our manufacturing flexibility to align with the growing demand for infrastructure related products serving the energy, construction, chemical and transportation industries.

During the fourth quarter we reported a 34.3% effective tax rate compared to our guidance of 37%. The lower tax rate resulted from certain state income tax benefits recognized during the period. Also during the quarter, we reported an increase in corporate expenses from the same quarter a year ago due to higher level of legal, environmental and property tax expenses.

As we announced in December, we are in the process of closing a transaction that will exchange our ready mix concrete business for certain lightweight aggregate assets. As a result, we have moved the ready mix concrete operations results into discontinued operations and adjusted prior periods accordingly. You will find details of the changes that were made to both the Construction Products Group and the consolidated results in our 10-K that we will file later today.

During the fourth quarter we executed a $334 million asset-backed debt transaction for our leasing company with an average life of eight years and a historically low blended coupon rate of 3%. We are very pleased with the favorable terms of the transaction, which reflects both the strong market conditions and the attractiveness of our lease fleet to the capital markets. At quarter end our unrestricted cash totaled $573 million. When this cash is combined with available capacity under our credit facilities, we have more than $1.2 billion of available liquidity at the end of the quarter.

I will now discuss our outlook for 2013. For the first quarter of 2013 we expect earnings per share for the Company to be between $0.75 and $0.82. For the full-year we expect that the consolidated revenues will be relatively flat compared to 2012, but we expect earnings-per-share growth of 8% to 18% in 2013. This will result in full year earnings per share of between $3.45 and $3.75. There are many variables within our portfolio of businesses that will contribute to our ability to achieve earnings growth. As a result, I will provide annual revenue and operating profit guidance for each business segment to supplement the earnings-per-share guidance.

In the Rail Group we expect 2013 revenues of between $2.4 billion and $2.6 billion with an operating margin of between 14% and 16%. We expect the Rail Group to deliver between 20,500 and 22,000 railcars in 2013 at a relatively consistent pace of deliveries throughout the year.

In our Inland Barge Group we expect revenues of between $550 million and $580 million in 2013 with an operating margin in the range of 14% to 16%, resulting in operating profit of between $77 million and $93 million for the year. While we expect to report solid results in 2013, at this time our guidance for Inland Barge represent a noticeable step down from the strong performance reported by the group in 2012. The backlog for this business provides good visibility in the tank barge business with long production runs into 2014. However, as Bill mentioned, weaker demand persists on the dry cargo side, leaving some open capacity for hopper barges in 2013. In addition due to pricing pressures, the hopper barges currently in the backlog have lower margins than the hopper barges delivered in 2012. It is early in the year, and our barge business is highly focused on filling open production capacity.

In the Energy Equipment Group we expect revenues of between $510 million and $540 million and an operating margin of between 8% and 10%. As Bill commented, the production tax credit for the wind energy industry was extended providing us with improved visibility in the structural wind towers business through the end of this year.

In the Construction Products Group, we expect revenues of between $515 million and $550 million in 2013 and an operating margin of between 10% and 12%. As a reminder, seasonality is a factor in this business with the second and third quarters representing the seasonal highs points aligning with the construction season. Our 2013 guidance reflects the pending divestiture of our ready mix concrete business in exchange for certain lightweight aggregates assets.

In the Leasing Group we expect revenues from railcar leasing and management operations in 2013 of between $550 million and $580 million with an operating profit of between $250 million and $275 million. This portion of the leasing guidance excludes any revenue or profit from sales of railcars from the lease fleet, which I will address separately. We are anticipating that revenue and deferred profit eliminations stemming from new railcar additions to the lease fleet will be higher during 2013 than in 2012. In 2013 we anticipate the elimination of between $650 million and $700 million of revenue and between $1 and $1.20 of earnings per share compared to $486 million and $0.40 per share, respectively, in 2012. We expect that the railcars that are committed to our lease fleet within the Rail Group backlog will generate superior returns and annuity-like earnings for many years.

Trading reductions and short-term earnings for our premium stream of long-term sustainable earnings is an important element of our strategy to reduce the cyclicality of Trinity's earnings and increase shareholder return on invested capital. We will continue to sell railcars from our lease fleet into secondary market in 2013. Our annual guidance includes $0.20 to $0.25 per share of profit from railcar sales compared to $0.46 per share in 2012. The exact timing of transactions is difficult to predict, and we will update you on our activities throughout the year. As a result of our planned new railcar additions to the lease fleet and expected level of sales of railcars from the lease fleet, we plan to make a net investment in the lease fleet of approximately $350 million to $400 million in 2013.

In addition to investing our own capital for railcar leases, we have previously been successful in attracting capital from both debt and equity investors. Strong debt investor appetite for leased railcar assets is illustrated by the attractive financing we completed in December. Equity investor appetite for leased railcars is also strong and can provide us with more capacity to grow our lease fleet. We are exploring opportunities in this area and will update you in the future on any progress that we make.

Before concluding my guidance remarks, I will now provide additional guidance for a few remaining items. Full year manufacturing and corporate capital expenditures for 2013 are expected to be between $160 million and $195 million. During 2013 we expect our corporate expenses will be the range of $60 million to $70 million, and we expect a tax rate of 36% to 38% during the year. And, finally, our earnings guidance is based on a full-year weighted average share count of 77 million shares for purposes of calculating fully diluted EPS. As a reminder, we are required to report EPS using the two class method of accounting. The result of which reduces net income attributable to shareholders by a small percentage each year.

Our results during 2013 will be influenced by multiple factors, including, the amount of operating leverage and efficiencies that our manufacturing businesses can achieve, the level of sales of railcars from the leasing portfolio, the amount of profit eliminations from railcar additions to the lease fleet and the impact on weather conditions on our construction products businesses. We were pleased with our performance in 2012 as our employees met the many challenges and opportunities presented at Trinity during the year. In 2013 we are confident that they will perform well again, and we look forward to reporting our results with you during the year.

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

Thank you.

(Operator instructions)

Bascome Majors, Susquehanna.

I was curious, in your guidance for railcar deliveries, how much of that for the current year is in firm backlog today? And how much would be perhaps reflective of an order uptick in some of the freight car markets that have been weaker recently?

Bascome, Steve Menzies. A significant portion of our backlog for '13 is in orders. Our production plans are in firm orders. We do have a few open production slots in our freight car lines for 2013.

Okay. And with FreightCar's announcement this week that they're opening some of that stagnant capacity in Alabama, how does that affect the competitive landscape for some of the freight car markets? And how do you guys, as Trinity, respond to that?

Steve again, Bascome. I guess, we have been aware that that facility has been available, and we read the announcement yesterday. But that really doesn't have any significant impact on our plans and our operations at this point in time. We will certainly watch to see what happens there. But there is no reaction from us, per se.

Okay. And just one on the wind business. I know that's going to be down, and you alluded to that this year. But with the renewal of the tax credit earlier this year, and potential for that to get stronger in 2014, could you just walk us through how that landscape has changed competitively with some people actually in the market? And what your share looked like a couple of years ago, and what it might look like if that business does come back in 2014?

Bill, you want to respond to that?

Sure, Bascome. From our perspective on the wind tower business, as I stated in my comments, we have moved a couple of those facilities over to tank car production, so our production footprint is a little smaller, although, with the acquisition of the DMI assets, we have some flexibility available to us. So, I think from an overall competitive landscape perspective, Trinity's in a good position with good assets. I think right now the market is a little unsure of how aggressive wind tower and in particular wind turbine production will be for the next couple of years. But it is certainly a plus as compared to not having the PTC.

Okay. And just on a stable number of orders, assuming they do come back, can we assume that your market share would be much higher in that business than it was perhaps when Chinese imports were pressuring you, and there were more competitors in the market space?

Bascome, I really don't think we can comment on what the market share might be. We tend not to be so market-share focused, as really focused on particular orders that fit well into our plants and provide profitability to the Company.

All right, understood. Thanks for the time, guys.

Allison Poliniak, Wells Fargo.

On the rail side, and correct me if I'm wrong, Trinity could -- I thought that you have additional capacity or potential for tank cars if you obviously had the right order. Are there any issues on a component -- and I'm thinking more on the tank car side -- that would limit you, I guess, increasing production on the tank cars this year?

Allison, Steve, thank you. Thus far, component availability has not been a constraint. The industry seems to be able to respond to the increase in demand. There is also a number of components that we make for ourselves. So, we are able to control some of that. So, at this point in time, I don't see component supply as a constraint in the tank car sector.

Okay, great. And then on the leasing side, I know, James, you had indicated a lower level of sales out of the lease fleet this year. Has anything changed for you guys to give that kind of guidance? Or are you just trying to be a little conservative at the start of the year, just given the uncertainty around it?

James?

Yes, Allison, it's James. Good morning. I think the dynamics are still there. It's simply where we are this early in the year, the expectations we have -- yes, the number is a little lower than last year on an EPS basis. But, given where we are in mid-February, and what we're seeing in the market, we feel that that is the right level for us to guide at this point.

Okay, great. Thank you, guys.

Eric Crawford, UBS.

Would you talk a little bit about your inquiry levels for tank railcars? Has there been a noticeable trend up or down, or has it just been remaining relatively stable?

Steve?

Yes, Eric, we have seen significant demand for tank cars to serve the oil, gas, and chemical industries. And I think, as I pointed out, that we have seen continuing strong inquiries into the first quarter, and what we think the trend will be for the first quarter. So, I think when you look at what is really happening in the energy sector, rail is going to play an important role in the development of the infrastructure to support that industry, and we think it is a long-term role. So, that is exciting for us, and we think we're well positioned to take advantage of those opportunities.

Thank you. I guess, just as a point of clarification, looking at your earnings guidance, works out at the midpoint about $0.90 per quarter. So, I'm just curious what the cadence is -- how you're thinking about that through the year?

Sure, this is James, Eric. We gave the $0.75 to $0.82 guidance for the first quarter. As we mentioned, there's some seasonality in some of our businesses, especially the Construction Products business in the second and third quarters. So, you would see a tick up from the first quarter in that respect.

We also continue to gain operation efficiencies and operating leverage in our businesses, as we said, which is part of our forecasting model is -- these facility conversions have been essentially completed in Rail. We are in the process of hiring the people to meet our production plans, and we always look to operational efficiencies there. So, to your point, it is maybe not steady through the year, but we do expect from the first quarter through the rest of the year to pick up

Okay, that's very helpful. But railcar deliveries themselves, I think you said would be relatively consistent.

A relatively consistent pace, again, this is James, Eric. As we look at pricing coming through the business and efficiencies, that's where you see some improvement as we go through the year.

Right, right, perfect. Thanks, guys. Appreciate it.

Justin Long, Stephens.

Good morning, and congrats on the quarter.

Thank you. Good morning.

After some of the manufacturing transitions that were made over the past year, it sounds like you are very well positioned for the long production runs that you have talked about. But could you comment on any planned changeovers within your manufacturing footprint in 2013? Or would you say at this point most of the adjustments have already been made?

This is Tim. I think we will tweak some adjustments depending on market movements that we see. And then we have this extra capacity that we acquired last Fall that we're looking at very strongly. We have one of those facilities already shipping products, or both -- two facilities are shipping products out of them right now. And those facilities appear to be very flexible. And we might end up with one of them doing a combination of products within our Company. We have done that many times before, and been highly effective in that area. So, the oil, gas and chemicals markets, both for containers as well as railcars, mix well inside one of our facilities.

Okay, got you. And maybe on a similar note, I was curious if you could talk about your ability to transition to build some of these non-tank car types. If we start to see a pick up in these markets going forward as the cycle progresses. Could you provide some color in terms of the timing, costs, et cetera, associated with switching, say, a tank car line to build an intermodal car or a hopper car or something else?

Steve?

Justin, long conversation about cost and changeovers and -- probably not for this conversation. But we have plants that are making freight cars today, so we are well positioned for recovery in covered hopper demand, which we think will be forthcoming as a ripple effect of the oil and gas expansion. We also see other demand for covered hopper cars serving some of the chemicals markets and commodities markets. So, we are ready to pursue that business when it comes around, and we have our tank car plants working and meeting our production plans and working towards greater operating efficiencies.

And you have certain freight car facilities that you are keeping intact, that you're not changing over to tank cars?

Absolutely.

They will be just sitting there ready for additional orders, right, Steve?

No question. We're well positioned as those orders recover.

Okay, so you have the ability to ramp up capacity at some of these freight car lines just based on your footprint and your manufacturing facilities today?

We do, Justin, and we are making freight cars today. So, we are in production of several different freight car types today.

Yes, we have significant capacity in our tank car plants to produce large volumes. And that is what we were doing last year at this time, is large volumes of tank -- of freight cars coming out of that facility.

Got you. That's helpful. I appreciate it. I think my last question is a little bit higher level, but obviously we have seen a lot of growth in the lease fleet since the last cycle. Curious to get your thoughts on the long-term strategic plan for that business as you look out over the next five years or so. Do you think we are going to be looking at a much larger lease fleet versus where it stands today? Or is it more just kind of modest growth in that fleet going forward?

This is Tim. Our leasing platform and the integration of our leasing business with our manufacturing business provides us a number of different opportunities in a number of different areas. We worked for a decade to obtain the scale of the lease fleet that we have now, and when Steve was talking in the 70,000 level, we're not really focused on how big we can become. We are more focused on how much value can we create with the platform that we have of offering varieties of services and leases. And we like the ability to go to the marketplace to our customers and say -- we can sell you the cars, we can lease you the cars, we can sell them with you having the right to lease them, or we can lease them with you having the right to buy them. So, it ties into this flexibility that drives our Company.

So, we don't have specific goals and objectives of saying -- we want our leasing company to be large to a particular size. We have the goal and objective to say -- let's have our leasing business integrated well with our manufacturing businesses, and let's create value with that platform. And so, that is our objective.

That makes sense. I appreciate the color, and thanks for the time.

Steve Barger, KeyBanc Capital.

Does your backlog right now reflect the same mix as the industry, where 80% is tank for --?

We don't disclose the key elements of our backlog, but --.

Obviously, Steve, a significant part of our backlog is tank cars, but the specifics of which we don't disclose.

Okay. And if I heard right, you said the average car prices will be up on a year-over-year basis, which makes sense as the mix changes. But can you frame that up relative to the number in 4Q? Is it going to be significantly above that number?

Yes, Steve, this is James. As you see the orders we've taken in the quarters, and the value of the cars in the backlog has grown over the last several quarters, comparing Q4 to Q1 is getting a little precise for us. But the trend is certainly moving in an upward direction on pricing as we work through the backlog.

And that should improve throughout the year, as you start to monetize cars that you took later in 2012; is that fair?

I think, generally speaking, again, the cars in the backlog now are priced at a higher level. Quarter to quarter it may vary, but generally speaking, the trend is moving up.

Okay. And I will try this one. Did you deliver more tanks than other types in the quarter? And, if you didn't, when do you expect to hit that inflection point?

Steve, this is Steve. Appreciate the effort. We just will not provide a breakout of product mix in production. But I appreciate the spirit of the question.

Okay. Well, you guys have converted some plants obviously to tank car production. Other competitors are trying to increase tank car capacity. Any thoughts on where the industry can get to on a run-rate basis when everybody's ramped, what the quarterly run rate could be? Just trying to think about that in the context of the total backlog.

Steve, this is Tim Wallace. In my years of experience that we have always been amazed at the industry of how it can bring on extra capacity. And that is why our whole model is built around flexibility, and making decisions on capacity based on sustainable demand and returns. And it is just really hard to fathom what the number could be if the industry put its mind to it, because it is a very powerful industry, and we have some really good, strong competitors that we compete with on a day-in and day-out basis. So, we don't -- we really focus on ourselves, and focus on what we can do, like Bill was saying earlier, on instead of market share or anything, we go after orders that we know will potentially bring value to us. So, I don't know what that number could end up being.

Okay. And I'll just switch gears to the lease fleet for a minute. When you net out additions and sales out of the fleet, did you say how many cars specifically you expect to grow the fleet by?

Steve, this is James. We did not give the car count. We said that the net growth will be about $350 million to $400 million. If you look at the average car in our backlog, you can do some math and get a rough range, but, again, it's going to depend on which cars we put into the lease fleet. Which cars we sell, more importantly, will impact that number quite a bit.

Right. And Steve, did you say what the average remaining term in the lease fleet is? Or can you talk basically about, for new releases that you are signing, what kind of term you are able to get?

I didn't comment on the average remaining lease term. We are looking that up for you while we talk. But clearly we're seeing longer lease terms on new railcar leases. And I would say the lease terms we're looking at are significantly longer than what we have historically seen in the industry. So, I would think that longer terms and locking in high lease rates and high returns is what we all want to do in this industry.

James, do you have that statistic?

Yes, we do, and that will be in our 10K, of course, we will file later. It is about 3.25 years -- 3.3 years, Steve. So, it is in line with what you have seen lately. Obviously, the fleet gets a hair shorter on term versus what we add each quarter, but it is about 3.3 years right now. So, it's where it's been.

Okay. And just one last one. We have heard some of the other lessors that the report numbers say that some of their tank car leases are stretching out as much as 7 and 10 years. Is it reasonable to think that you have the ability to get that same kind of exposure?

Yes.

Great, okay. Thanks very much.

Sal Vitale, Sterne Agee.

Just a quick question regarding something mentioned in the earnings release. The sequential increase in the backlog -- the dollar value of the backlog -- part of that was attributed to re-negotiations on prices on certain contracts. Can you give a little bit of color on that? Is that just essentially a price escalator on raw materials?

James?

Yes, this is James, Sal. Just to pick one word, re-negotiation is not really the word. The contracts call for certain price adjustments as we get closer to building the cars, and we look at the pricing of the materials and those type things. So, as we have such a long-term backlog and so many cars in that with these type of arrangements, we have those adjustments from time to time. Because we have so many cars right now, the adjustment is a little larger than it has been in the past, given the escalation in certain things, so we wanted to call that out

Okay, but should we expect the escalation to be accretive to the bottom line? Or is it just basically going to be offset by cost?

It is generally a pass-through, Sal, so I would not see it having a material impact on the earnings itself.

Okay, makes sense. And then just a question on the backlog. Currently for orders you're taking on tank cars, what is the earliest delivery?

Are you placing an order, Sal?

I am, I am. (laughter).

Okay. Our salesmen will be out to talk to you about that confidentially and privately. But you want a tank car, you are going to be very late in 2014, and most likely in 2015.

Late in 2014. Okay, so what I'm trying to get a sense for -- what the deliveries could look like for 2014. I understand you don't give that kind of guidance. But essentially, is there any reason to think that if the orders for non-tank cars that you receive throughout this year are not materially different than the orders that were placed for non-tank cars last year, that your deliveries for 2014 should be well above your '13 deliveries?

We will have to see. That is well beyond what we are prepared to talk about today, Sal.

All right, thank you.

Matt Brooklier, Longbow Research.

I just wanted to clarify an earlier comment on the three DMI manufacturing facilities. Are there one or two currently producing the storage tank product?

There is currently -- this is Tim. There is currently one producing storage tank, and we're looking at a second one as to the potential that we could put in there, and it could be producing sometime in the future.

Okay. And on that second location, I think you also mentioned there is a potential to do a split, and do storage tanks and another product. Did I hear that correctly?

Yes, we think the DMI facilities, as a whole, all have multipurpose capability within the products in our portfolio. And so, we plan to run them that way. We have a number of our facilities that are like that. So, we don't -- it is really not a major event for us if we bring another product in and run it alongside a second -- a primary product that we have. So, we have a number of multipurpose facilities, and those facilities will end up probably being multipurpose facilities as well.

Okay. And have you talked about the -- I guess you kind of did -- but the third facility, when that could potentially come online, and what products could be manufactured there?

Yes, Matt, this is Bill. The third facility, which is the facility in Canada, we don't have a date for it coming online. We are still analyzing the potential for products coming out of it. From a fit perspective, it is very similar to the other two facilities, so it's capable of producing many of Trinity's products. But we don't have a date at this time.

Okay. And then, when we look at your aggregate manufacturing footprint, you have the three acquired DMI facilities that are coming online. You've prepped and converted the wind tower facilities, and getting ready to push product out of there. I'm just curious, as we've gone through this process, where do we stand from an all-in capacity utilization perspective on the entire manufacturing footprint?

Yes, as I said, we kind of have unlimited manufacturing potential in our Company, because we have a number of multipurpose factories that we have. And so, we're constantly looking at which orders are out there that provide the most value to us, and we can shift over our facilities relatively fast. In fact, I think the wind tower facilities that we have converted are already shipping railcar products out of them, as we speak. And so, like I said, a lot of times we will bring other products in and run them adjacent to the primary product that is running there. So, it's really a challenge for us to say -- we have a capacity of X or Y for any one of our particular product lines.

Okay, but I guess the message being -- you have incremental capacity moving out -- outside of what you have acquired or converted at this point?

Absolutely. And I think you'll find that that is the mode that we will be in, in the future is we will be looking for businesses that fit within the nesting and platforms of businesses that we have that give us that multipurpose capability. And that is what kind of drives our Company is this whole manufacturing flexibility with being able to direct resources and our capacity towards markets that have a robust flair to them.

Okay, excellent. Thank you for the time.

Thom Albrecht, BB&T Capital Markets.

Steve, I wanted to delve a little bit more into the demand for different car types. So, we know grain and coal have impacted the hopper market. But what are you seeing relative to plastic pellets? And then also the auto market where you had made favorable comments the last couple of quarters. I don't think I heard any demand comments this morning.

Yes, thanks, Thom. I did make a comment that we have seen consistent demand for railcars to support the automotive sector, and I would expect that to continue with the major assembly plants coming online in Mexico, and some changes in the distribution patterns in the delivery of automobiles, I think, is an opportunity for additional railcars.

You mentioned the plastics business. It is a natural progression of available low price natural gas that we are going to see increase production of resins here in North America. It is going to take a while for those facilities to be built, and for the expansions to be completed. We have seen some inquiries for plastic pellet cars thus far. But we think that wave is maybe 18 or 24 months away from really starting.

Okay. And then, a couple of other questions, too. I'm sure it is not nearly as profitable, but the small cube hopper, which was an early fracking play, is also a construction play for cement and things. What is going on with that car type? And at this point in the cycle, how interested are you in building such a car?

We are thrilled to build that car. We built many of them last year. And we would expect that there will be some sort of a pickup in demand for small cube covered hopper cars as we see an improvement in the housing industry and in the construction industry. And we also think there will be a recovery in drilling for natural gas. And when that happens, we should expect a resumption in demand for small cube covered hoppers.

Okay. And then, refresh my memory -- maybe this is for James. I've got this in my notes somewhere, but I couldn't find it. So, for 2013, the $0.20 to $0.25 of profit from railcar sales versus $0.46, is that for the cars over or under one year?

Yes, when we look at that, what we report in that respect is all-inclusive, okay? Where you see the distinction is on the revenue side, and you will see that breakdown in the 10K for us. And it obviously skews the margins, so we tried to provide that data for you in the press release. But that number is all-inclusive of both.

Okay. All right. And then one last question. So, with the tank market, I think the presumption may be wrong, but is it -- it was overwhelmingly driven by petroleum last year. And that maybe in '14 and beyond, chemicals really kicks in. But from your perspective, the tank market, was it mostly petroleum? Or was there a better balance of petroleum and chemical customers last year than maybe we all realize?

Hey, Thom, this is Tim. Are you talking about tank in containers? Or tank cars as railcars?

Well, you can address both. I was really talking on the railcar side. But also maybe what you saw on the tank side -- I'm sorry the container side.

Yes, we are expecting it to be just like what Steve was talking about in the plastic pellet area. We look at it as -- and it really plays over all three of our major product lines -- our containers, our barges, and our railcars -- that you have the oil, gas and chemicals market that play off of each other. And there is a variety of storage-type tanks that are used in the processes of the oil, gas and chemical markets. And then there's a variety of transportation vehicles that are used, whether it be railcars or barges. So, we are aligning ourselves to where we can serve the transportation needs, as well as the storage needs for the oil, gas and chemicals market.

And they're coming at us from a number of different directions, which has created the excitement that we have going on inside of our Company. And that is why it works well for us with this platform that we have that is highly flexible, where we can shift production from one facility or the other, and bring on additional production when customers have needs. And customers are contacting us a lot of times right out of the blue with some pretty strong demands. And then the team here gets together and says -- what can we do to bring on some more capacity to take care of this customer's needs? And that is a lot of fun to see that happening inside of our Company.

Yes, absolutely. Thank you. And I said last question, but I actually thought of one more. On the 14% to 16% EBIT margin guidance for the [mit] rail manufacturing group, would you expect that even starting in the first quarter you would be able to hit the low end of that guidance range even though I know that was an annual target?

Yes, and really we gave -- this is James. We gave the annual number because, as we have -- we are continuing to hire the employees for that, work through the backlog, it is hard to get real precise quarter to quarter. You were at 12.4% in the fourth quarter. We see that ending the year 14% to 16% annually. But the distinction between one quarter and the next right now is hard to determine. So, we would not press ourselves into saying where we are going to be within that range in a particular quarter.

And there is no more repositioning cost within the plants, the way there was the last two, is there?

When we say repositioning, it really has two phases. It has the phase of getting the assets repositioned and the facility equipped. And then we have got to reposition the employees in the facilities, depending on what the demand level is. So, there's two phases, and Steve had talked about a learning curve that he had in some of the facilities that was associated with kind of the second phase. And this will be a trend that will happen in our plant and in our Company as we go along, as we exercise this manufacturing flexibility. We convert the equipment over, and then we will have to retrain some of the employees.

In other facilities, we will let lines sit idle, and then shift the employees to potentially other areas. And then when the product comes in, we can just crank over that line. So, each one is a little bit different depending on the particular product that we are talking about.

Okay, thank you, very helpful.

At this time, we have no further time for questions. I would like to turn it back to the floor for closing comments.

Thank you. That concludes today's conference call. A replay of this call will be available after 1.00 Eastern Standard Time today through Midnight on February 28, 2013. The access number is 4022200120. 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.