Trinity Industries Inc (TRN) 2013 Q1 法說會逐字稿

Before we get started, let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and includes statements as to estimates, expectations, intentions and predictions of future financial performance. Segments 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.

Welcome to today's program. At this time, all participants are in listen-only mode.

(Operator Instructions)

Please note, today's call is being recorded. Is now my pleasure to introduce Gail Peck, please begin.

Thank you, Kevin. Good morning, everyone. Welcome to the Trinity Industries first-quarter 2013 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 group. 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'm pleased with our strong financial results for the first quarter. Our performance was positively impacted by our ability to align our manufacturing capacity with the strong demand for our products that serve the oil, gas and chemical industries. Our businesses are doing an outstanding job of converting production capacity to meet customer needs for products to support these industries. I'm very pleased at how well our manufacturing operations are improving their operating efficiencies, while at the same time, shifting product mix and training new employees. This is a major accomplishment.

Demand for railroad tank cars and tank barges that support the movement of crude oil remained strong, as well as the demand for large storage containers. We continue to review options for expanding our existing manufacturing capacity to serve markets with strong demand. Trinity Rail's integrated railcar manufacturing and railcar leasing platform had a great first quarter. Demand for railcars that serve the oil, gas and chemicals industry in North America surged during the first quarter, contributing to a record backlog for the Rail Group of $5.1 billion. We are continuing to pursue opportunities with third-party equity investors who are interested in ownership of leased railcars. A number of high-quality institutional investors are currently expressing strong interest. We are focused on expanding our options for financing the growth of our Railcar Leasing and Management Services businesses. I'm optimistic regarding our potential in this area.

In March, we closed the previously-announced agreement to acquire certain lightweight aggregates operations from Texas Industries, in exchange for our remaining ready mix concrete operations. This transaction creates opportunity for higher returns within our Construction Production group. I'm pleased with the utilization we are obtaining from the manufacturing facilities in the United States that we acquired last year from DMI. The timing of this transaction fit real well with the surge in demand for certain products. We continue to devote resources towards identifying and pursuing additional businesses that provide products that align with our manufacturing platforms. We are confident we will continue to have additional acquisition opportunities from our pipeline of prospects.

In closing, our solid financial performance and the orders we obtained for products during the first quarter reflect the capabilities of our employees, and the strengths of the markets we serve. The demand for products in several of these markets aligns very well with our manufacturing businesses. This is an exciting time for our Company. I'm proud of the significant progress we're making towards achieving our vision to become a premier diversified industrial company. I will now turn it over to Bill McWhirter.

Thank you, Tim, and good morning, everyone. Our Energy Equipment Group's revenue increased approximately 24% year-over-year, due to increased shipments of large containers and structural wind towers. The Group reported an operating profit of $14.9 million, and a margin of 9.6%, which is its best performance in more than two years. During the quarter, we received $48 million in new structural wind tower orders. The extension of the Production Tax Credit, as well as a recent clarification of Federal guidelines for receiving the credit, is giving a nice lift to the wind tower industry. Our current backlog provides us some visibility into 2014.

With respect to our production capacity, we have some flexibility, and are prepared to adjust, if necessary, in response to future market changes. After the close of the quarter, we announced the acquisition of the assets of Formet, a manufacturer of the utility transmission structures and highway products, headquartered in Monterrey, Mexico. The Formet acquisition broadens our product portfolio within the utility structures business, and enhances our manufacturing footprint in Mexico. The acquisition is consistent with Trinity's vision to become a premier, diversified industrial company.

Our Construction Products Group generated an operating profit of $7.7 million during the first quarter, compared to $11.1 million during the same quarter a year ago. Poor weather conditions, combined with a soft Highway products market, resulted in a decline in revenue from last year. While the sequestration does not directly affect the Federal Highway Bill, it does create pressure on many state's ability to fund highway projects. In March, we completed the exchange of our ready mix concrete business for certain lightweight aggregate operations owned by TXI. This transaction is a key part of our strategy to reposition the construction products segment to align with the products that have more consistent demand drivers, and offer greater opportunity for improved returns.

Turning to our Inland Barge Group. The group experienced a year-over-year decline in both revenue and profits, resulting from fewer hopper barge deliveries in the first quarter of this year compared to last year. As a reminder, segment profit during the first quarter of last year included a gain of $3.4 million from the sale of leased barges to third parties. As a result, on an adjusted basis, the operating margin for our barge business improved year-over-year to 16.5% from 15.7%. During the quarter, we secured $66 million in new barge orders, bringing our backlog to $483 million at the end of March.

The movement of petroleum and chemical products continues to create a strong market for tank barges. Our tank barge facilities now have visibility well into 2014. On our last call, we announced that we were enhancing one of our tank barge facilities to accommodate a few additional production slots. We expect these improvements to be completed by the end of summer. In addition, we plan to reposition our hopper barge facility to manufacture smaller tank barges later in the year. Demand for hopper barges continues to show weakness, as many of our customers are experiencing lower utilization levels from the reduction of coal and grain movements.

Overall, I am pleased with the performance of our business unit teams. The Inland Barge Group is performing well, despite mixed demand conditions. Our energy equipment and construction products group are working hand-in-hand to provide products for the aging North American infrastructure markets. At this time, I'll turn the presentation over to Steve.

Thank you Bill, good morning. The operational and financial performance of the Rail Group in the first quarter resulted in a number of major accomplishments. We recorded our highest-ever operating profits and operating margin during the quarter. The group also set new records for backlog, both in units and dollar value, and both the largest order value quarter in Trinity Rail's history. I am very pleased with the significant accomplishments.

Both American railcar demand surged during the first quarter. Strong railcar demand continues to be driven by demand for railcars to support the oil, gas and chemicals industries. We are also seeing steady demand for auto racks, and rising demand for small covered hoppers to serve the sand and construction industries. Industry orders for new railcars totaled 23,900 during the first quarter, of which Trinity Rail secured 14,505 new railcars, with a record value of $2 billion. First-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 41,265 railcars, valued at a record $5.1 billion in firm non-cancelable orders. Many of our orders extend current production of certain railcars into 2015 and 2016.

During the first quarter, we delivered 5,230 railcars, on pace with our annual delivery guidance of 20,500 to 22,000 railcars for 2013. Operating profit for the Rail Group during the quarter totaled $103 million, resulting in a 16.5% margin, both new records for this segment. Operating efficiencies significantly improved throughout the quarter, as we began to see the benefits of stable production and a more experienced workforce. While I expect a long-term trend of improvement in operating efficiencies, we have several line changeovers planned in the second quarter, which may present headwinds for margins in the near-term.

Our leasing group continues to generate strong returns, and contribute steady cash flows to the company. Operating profit from operations decreased compared to the first quarter of 2012, as lease fleet additions and higher lease rates were offset by increases in maintenance expenses during the quarter. The timing of maintenance expenses can be uneven, and difficult to forecast. In the long-term, maintenance expenses may increase as a percent of revenue compared to historic levels, as the leased fleet ages and the costs of increased regulatory testing are incurred.

Lease renewal trends for railcars serving the oil, gas and chemicals industries continue to be positive during the quarter, as railcar order backlogs and production lead times remained extended. Market conditions for railcars serving those markets supported improved lease returns, lease terms, and lease rates for the first quarter lease renewals. Our lease utilization at the end of the first quarter was 98.4%, down slightly from the previous quarter, due to continued softness in the coal and agricultural markets. During the first quarter, we added approximately 1,695 new railcars to our wholly-owned lease fleet portfolio. The total lease portfolio, including trip, now stands at approximately 72,775 railcars, an increase of 4% year-over-year.

At the end of the quarter, approximately 18% of the units in our railcar order backlog, worth a total of $906 million, was slated for customers of our leasing business. Secondary market conditions remained attractive for lease portfolio sales, sustaining the opportunity to strategically manage our portfolio of railcars and return value to shareholders. We did complete several railcar sale transactions during the quarter.

In closing, I am pleased with how our team responded to the challenge to transition production to railcars in support of the oil, gas and chemicals industries. Our manufacturing flexibility positions us to meet demand, and earn strong returns from extended production lines. Our record backlog is an indication of our ability to quickly adjust to meet strong market conditions and service our customers' needs. We expect to continue seeing the benefits of a favorable lease pricing environment, and an active secondary market supporting lease portfolio sales. We are solidly positioned to take advantage of the well-aligned railcar and capital markets, 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 first-quarter results, with growth in total earnings per share up 50% over last year, resulting in the most profitable first quarter in Trinity's history. The results were driven by the strong performance of our Rail Group, primarily as a result of better than expected efficiencies during the quarter, and a solid improvement in the Energy Equipment Group profitability. During the first quarter, we closed the previously-announced transaction with TXI, exchanging our remaining ready mix concrete business for certain lightweight aggregates assets. The Company booked net income from discontinued operations of $6.6 million during the first quarter, or $0.08 per share as a result of the transaction, including a $7 million after-tax gain on the sale. This gain was not included in our prior earnings guidance.

At quarter end, our unrestricted cash and marketable securities totaled $420 million. When this is combined with the unused capacity under our committed credit facilities, we had approximately $1.1 billion of available liquidity at the end of the quarter. Capital allocations during the quarter included approximately $161 million in net leasing and manufacturing capital expenditures, $9 million in cash used for acquisitions, and, $84 million in debt payments, including $49 million related to the early retirement of a 6.875% secured leasing term loan.

I will now discuss our updated outlook for 2013, including our annual guidance for each business segment. For the second quarter of 2013, we expect total earnings per share for the Company to be between $0.88 and $0.95. For the full year, we now expect total earnings per share of between $3.80 and $4.05, including the effects of discontinued operations. We do not anticipate any additional impact from discontinued operations during the remainder of the year.

For the Rail Group, we now expect 2013 revenues of between $2.5 billion and $2.7 billion. We continue to expect the Rail Group to deliver between 20,500 and 22,000 railcars in 2013, at a relatively consistent pace without the year. During the second quarter, we will conduct several line changeovers in our railcar operations, which may reduce our margins during the quarter. Despite the near-term headwind, we expect an annual operating margin of between 15% and 17% for the Rail Group.

In our Inland Barge Group, we expect annual revenues of between $555 million and $580 million in 2013, with an operating margin in the range of 14% to 16%. As a reminder, the hopper barges currently in the backlog have lower margins than the hopper barges delivered in 2012, somewhat offsetting the strong fundamentals we are seeing in the tank barge market. In the Energy Equipment Group, we now expect 2013 revenues of between $580 million and $600 million, and an operating margin of between 8.5% and 10.5%. This improved guidance is the result of strong demand in our tank containers business, and an uptick in demand for structural wind towers, as a result of the recently clarified Federal guidelines for receiving the Production Tax Credit. The new tax credit provides the industry with much-needed visibility and the opportunity to advance new projects.

In the Construction Products Group, we expect annual revenues of between $515 million and $540 million in 2013, and an operating margin of between 9.5% and 11.5%. As a reminder, seasonality is a factor in this business segment's results. The second and third quarters are usually the high points of the construction season. Our 2013 guidance reflects the recent acquisition of lightweight aggregates from TXI.

In the leasing group, we expect 2013 revenues from Railcar Leasing and management operations of between $560 million and $580 million, with an operating profit of between $250 million and $275 million. This portion of the leasing guidance excludes potential revenue and profit from sales of railcars from the lease fleet. We now anticipate revenue and deferred profit eliminations from new railcar addition to the lease fleet will be between $800 million and $850 million of revenue, and between $135 million and $160 million of operating profit. An important element of our overall strategy is to reduce the cyclicality of Trinity's earnings, and increase shareholder return on invested capital. Deferring profits now to achieve a premium stream of long-term sustainable earnings is a component of this strategy.

Our annual guidance also includes $20 million to $25 million of operating profit from railcar sales from the lease fleet. Secondary market conditions for sales of leased railcars remains attractive at this time. The exact timing of future transactions is difficult to predict, we will update you on our activities throughout the year. As a result of higher new railcar additions to the lease fleet, we now plan to make a net investment in the lease fleet of approximately $530 million to $580 million in 2013, after taking into account the expected level of railcar sales. The ramp-up in employment due to increased volumes in our businesses has caused our SC&A expense to increase. Contributing to the first quarter increase in SC&A, were certain legal and consulting cost, as well as higher compensation accruals due to better financial performance and expectations. For the full year, we expect SC&A to be between 6.5% and 7.5% of revenues. This level of SC&A is incorporated in the annual business segment guidance I have provided.

Full year manufacturing and corporate capital expenditures for 2013 are expected to be between $160 million and $190 million. We expect corporate expenses to be in the range of $65 million to $70 million for the year, and we expect a tax rate of 36% to 38% during the remainder of the year. Our guidance uses 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 cross method of accounting, the results from which is estimated to resume EPS attributable to Trinity by approximately $0.12 per share for the full year 2013, compared to calculating Trinity's EPS directly from the face of the income statement. This is included in our EPS guidance.

Our results during 2013 will be influenced by many factors, including -- the amount of operating leverage and efficiencies that our manufacturing businesses can achieve; the level of sales and profitability of railcars; the amount of profit eliminations due to railcar additions to the leasing group; and the impact of weather conditions on our businesses.

In summary, our employees are diligently meeting the many opportunities and challenges presented to them. In 2013, we expect to improve profitability and deliver strong year-over-year earnings per share growth of 19% to 27%, while total net revenues increase at a more moderate pace. This is a direct result of the hard work of our employees to achieve operating leverage and efficiencies from our long production runs. We are very pleased with our first quarter results, and look forward to building on the quarter's performance during the rest of this year. Operator, we are now prepared for the question-and-answer session.

(Operator Instructions)

Eric Crawford with UBS.

I just have a few questions. Mostly just around the theme -- is this as good as it gets? Following the tank car demand last quarter, it looks like it will be tough to match going forward, can you speak to the inquiry levels? While we may not see orders beat 1Q, is it fair to expect your backlog to continue trending higher, or is there a concern that backlog ticks down from here?

Steve, do you want to take that?

Sure. Certainly, the order levels in the first quarter were extraordinary. They were at a very high level. It will be difficult to continue that order level, I'm in agreement with you. We continue to see strong order demand for tank cars serving the gas and chemical industries. We are also starting to see increase for small covered hoppers to support sand and construction products, and the auto demand has been fairly constant. So, we are still seeing good, strong demand, though I don't expect the order levels in the comparable to those in the first quarter.

Okay. Thank you. Just on the orders you got in the quarter, a competitor last week suggested they were being selective on which tank orders to bid, in an attempt to maximize margins. I can see the record backlog number and the average price went up sequentially. It sounds like, if I heard, the value of the orders, that pricing came in pretty healthy. Could you just address that concern, specifically, pricing in the tank car market you saw in 1Q versus prior quarter?

This is Steve again. Eric, we are very pleased with pricing levels. I think the market has, in general, behaved rationally. We are very pleased with the orders that we received in the quarter. We continue to see strong pricing trends both in the sale market, as well as the leasing market.

Okay. Great. Thanks. Lastly, assuming relatively flat build going forward, I'd expect to see some margin improvement coming through, just from better priced products in the backlog, but can we also expect benefit from more efficient production from some of your newer facilities, as they ramp up the learning curve? You've given the margin guidance to put for the year, but how should we think about framing the margin profile going forward longer-term?

Eric, Steve again. I think I mentioned in my prepared remarks that we would certainly strive to see an improving trend over the long term, with some line changeovers that we have scheduled in the second quarter. We may have some headwinds on margins in the near-term, but certainly our expectations and our goals are to improve efficiencies over the long-term.

Okay. Great. Thank you.

Steve Barger with KeyBanc.

Steve, you reiterated that orders are non-cancelable, but given the lead time in your backlog, are you concerned about any double ordering in the industry? Are you looking at customer credit? Are you requiring deposits from anyone?

Steve, thank you. Good question. Again, we want to emphasize our orders are non-cancelable. One of the interesting things that we've not witnessed thus far in this marketplace is a rash of speculative buying. So, that the orders that are being placed are very serious orders. We indeed, are taking deposits from customers for extended orders going out into the '14 and '15 timeframes. So, we are highly confident about the solid nature of our backlog.

That's great. Are you seeing non-traditional tank customers coming in? Is that what's really driving some of this? Or, is this normal shippers and lessors placing the orders?

It's been largely on the tank car side, refiners and exploration and production companies. We've seen lessors placing orders and we also see other industrial shippers, as well as railroad. So, you had some good diversification in our customer base and I have not seen anything extraordinary or any brand-new entrants coming into the marketplace.

Got it. I heard you say that there's going to be some margin headwinds in 2Q from line changeovers. Just looking at the margin profile of the quarter, and your backlog, was there anything unusual this quarter, in terms of mix or efficiencies, this should make us think this margin is a real outlier, or is it just you realizing the benefits of good pricing and the long production runs?

We think it's the latter, Steve. Just very pleased with the performance of our operating teams. We are really seeing the benefits of the extended production runs that we have planned, and our leadership in our field have really done a great job in processing and realizing the efficiencies that we are capable of gaining.

Okay. Last one, and I will get back in line. Another leasing company indicated they published a lease price index improved 30% last quarter. Is that a reasonable way to think about the renewals in your lease fleet? Related question -- for new leases that you are signing right now, is pricing up versus what you saw last year?

We don't talk specifically about our renewal increases or changes. Again, as I made comment, we are very pleased with the renewal trends, both in terms and lease rates, including new car pricing is up both on the sale and lease side compared to last year.

Very good. I'll get back in line. Thank you.

Allison Poliniak with Wells Fargo.

On the capacity additions, I think you alluded to -- you didn't really announce anything, but are you thinking just because of the level of the order inquiries that you are still getting, I'm talking about the rail segment, that you may need to add capacity as we go forward into 2014?

Steve, go ahead.

I'm sorry, Allison, I didn't hear the first part of your question. Excuse me.

Sorry. I have a bit of a cold, too. Just on the capacity additions that you alluded to, nothing was an announcement, but is it -- do you see some level of order inquiries that you are receiving on the rail side, that you might need to?

This is Tim. As I said, we continue to review options for expanding our existing manufacturing capacity to serve any market, where there's a strong demand. We want to anticipate that it's a sustainable demand, and that we'll get the returns on it. The additional capacity that we acquired last fall has been very helpful to us in a number of our different products, not just in the rail area. We have -- both facilities are becoming multi-purpose facilities, and that's the ideal type of facility that we like to operate.

Okay. Perfect. You touched on leasing the third-party potential opportunity. I think this is something similar to what you did with TRIP a couple of years ago?

I'm sorry, Allison, with the which piece?

The third-party leasing transaction that you were talking about, the interest on that side?

Like we said, there's been a lot of interest in that space. We've obviously had some nice debt transactions over the last year, especially in the fourth quarter, so there's a lot of capital markets interest, and we have seen that on the equity side, as well. To your point, it's a lot like when the market was strong six years ago, and we conducted the TRIP transaction. Nothing to talk about specifically, at the time, but there's a lot of a lot of conversation there. We are very optimistic we have got opportunity there, and we're looking for the best way to take advantage of people that want to partner with us on this leasing railcar strength.

Great. Bill, I think this one is for you. I was in the camp with the MAP-21 Bill that we would probably see some improvement on the Highway side. You touched on some of the regional side of things. Are they not getting funding? Are they not -- I'm just confused on why that isn't, I guess, working out the way we thought it was?

Allison, the funding is starting to come through, really started kicking off in March. Unfortunately, it was combined with some pretty poor weather conditions throughout the central part of the US and up in the Northeast. So, I think a bit of a slow start. As I said, one of the drags we have in the marketplace is that states still need to come up with a small matching amount, and states are struggling at a funding level on how to take care of their transportation projects. So, we will just have to monitor it quarter by quarter.

Okay. Perfect. Thank you.

Bascome Majors with Susquehanna Financial Group.

You touched on this a little bit earlier, but I was hoping you could give us a little more detail on the capacity reallocations you've done to help you capture such a significant share of industry orders in the rail business, namely where it is this coming from? Where is it geographically? And, how much could you potentially shift to rail from other segments that are still producing other products, should demand warrant, down the road?

Yes, this is Tim. Our capacity allocation is a corporate-wide function and we look at the facilities that we have, the backlog of orders that they have in the various facilities and the competency of the workforce in the facilities. Then, we look at the demands that are coming in for our various products, and our leadership here does a terrific job at the operation management level of trying to utilize our facilities for the highest and best usage. So, we're very confident at shifting facilities fairly quickly, and it's a very dynamic situation. So, it's difficult to say that something is going to be static in that area.

It really depends on the demand flow and the perceived profitability and returns that we think we get. We still have some additional facility capacity that we can find. We're shifting this between our containers group, our barge group, and our railcar group, as well as some other smaller products that we may have. So, it's not like one major shift, it's a combination of inland shifting that occurs within our Company, and we have the objective of enriching our earnings by shifting and utilizing our facilities in this way.

Okay. Perhaps a higher level one for Tim, here. Things are going really well right now. You've got a $5 billion railcar backlog. You've got production visibility out two years or so, and margins are at record levels. But, when you look out to 2014, 2015, what is it that you are worried about that could, perhaps, change things? What are you doing, or can do to make sure that doesn't happen?

Well, one of the key challenges that we have is getting the new employees that we are hiring on board, trained, appropriately, and, integrated into our company, as well as some of the new management-type people and supervisors that we have. So, Human Resources is always a key area that we focus on, when we are growing like we are growing. At the same time, this year, and as we look at it, as James said, our revenue is relatively flat. So, we have to have teams of people working inside the Company to drive the operating efficiencies and the operating leverage, and then, the utilization of our facilities, like I just mentioned. So, mainly, our concern right now, is being able to ensure that everybody is in the right place at the right time to maximize this shareholder value, as best we can. At the same time, we are looking at the markets and the demand levels that we anticipate will be out in the future. Then, we've got new product developments that we are looking at, both organic and externally.

All right. Well, thanks for the time.

Matt Brooklier with Longbow Research.

You mentioned that you've had a pickup in terms of inquiries for some of the covered hopper equipment. I'm just curious to see if you have any visibility with respect to when those inquiries could actually turn into orders?

Steve?

Well, hopefully all the order inquiries turn to orders. But, I would say, Matt, that the inquiries we have for small covered hoppers are serious inquiries. We have booked some orders here in the second quarter in that direction. I really think that the demand we are seeing is at the beginning of a trend that we are hopeful will continue for the balance of the year.

Okay. Is that potentially a steady ramp into the second half? Or, I mean, any incremental visibility, in terms of when those orders could hit?

I think we are a little early in the cycle to really be able to determine that. We originally had thought that the frac sand market would recover in the second half of 2013. We're starting to see some early inquiries and some orders that would support that, but, I would certainly like to see the trend go a little longer before I was ready to put claim on a steady recovery in that market.

Okay. That's helpful. And then, in terms of the plastic pellet market, have you seen inquiries pickup there as well for covered hoppers?

We have not. We have had some inquiries, I still think the capacity for plastics and resins to come on stream is still a little far out. As we get a little bit closer, I think late '15, 2016, we'll start to see those inquiries pick up for those products.

Okay. Then, I think in someone's prepared comments, mentioned that two of the DMI facilities are currently being used to produce multiple products. I haven't heard anything about the third facility, in terms of what's being done there.

Yes, this is Tim. We are still looking at a variety of different opportunities for that facility. We are optimistic on opportunities that we see, but as of right now, what we've been doing is focusing on fulfilling the demand and pursuing the orders that we have in the other areas of the facilities that we are currently operating, when we took them over. This is how we run our business. Idle plants kind of sit in bay until the existing plants are full of business, and we've got the operating leverage and the operating efficiency going, before we try to bring on more incremental production. We'd rather milk the maximum out of profitability that we can from an existing facility, instead of diluting it by taking some of those products to an idle facility.

Okay. That makes sense. Just my final question, the wind tower facilities that were converted to manufactured railcars, are you at full utilization on those facilities at this point?

No. We are coming up the curve, and having really good results with those facilities. As Steve and I said, and I think James even said, we are really pleased with the performance of our group to be able to make such a smooth transition as they have, and deliver the type of results that they have in that particular area. When Steve talks about line changeovers, he's not referring to line changeovers that are associated with wind towers converting to tank cars, he's talking about line changeovers at the product line level, right Steve?

Within that freight car sector we have line changeovers from product to product.

Okay. Understood. Thank you.

Tom Albrecht with BB&T.

Most of my questions have been asked or, answered. But, Steve, you were giving so many numbers, I didn't catch the percentage of the backlog currently going to Trinity leasing.

This is James, Tom. The backlog right now, they indicated the leasing is about $900 million out of $5.1 billion.

Okay. Perfect. Thank you.

Art Hatfield with Raymond James.

On Tom's question, is it possible, or could you have discussions with existing customers for those third-party sales, that over time, maybe those could convert to leases?

Art, this is Steve. Yes, it is possible. I think one of the attractive benefits of our customers working with Trinity Rails, is our of ability to both sell and lease cars and work with customers on that basis. So, there is some chance that leases convert to sales, and we also have a chance, that sometimes customers look at things a little different and want to lease some cars rather than buying, too. Our flexibility does play into that.

Okay. That's helpful. Just my second question, because all my other ones have been answered. Regarding the backlog mix, obviously with everything going on in the energy markets, tank, as we all understand, is a big portion of the backlog. Have you seen a change within the mix within the backlog, where you are seeing more and more opportunities to move heavy crude out of Canada, and that would require a different car type? Have you seen the change in the mix? If so, could that, or how would that maybe have an impact on margins, as you have to readjust to that changing manufacturing build?

The different types of crude oil being transported, sometimes require different configurations in the railcars. Further south has a different configuration than the Canadian cars would be required to have. We really don't see margin differences. We've seen strong demand for both car types. I think that's probably more Canadian crude to come on the marketplace and we may see more cars in demand configured to be able to support those movements. But we view those cars as both marketable within the crude oil sector, as well as into other products, beyond crude oil. We're please to manufacture them both and lease them both. So, we are well-positioned to be able to respond to that trend.

I'm sorry, this is Tim. We manufacture those on the same line. So, it's not really -- you are doing them simultaneously. So, it's really not a major changeover for us to switch from one car type to the other. They are happening together routinely, along with a variety of other types of tank cars.

Good. Just as a follow-up to that, as we see any changes, do you see, maybe, the demand patterns change a little bit with those different car types? Do you think they'll be pretty consistent with where they've been over the last -- as with regards to the mix within the backlog?

Good question, Art. We are in the early stages of the game here. I think there is so much yet to be developed and infrastructure to be developed, transportation patterns to be developed. It's really hard to make that type of projection. But, right now, we are very comfortable with where we are positioned to respond to the demand for cars that serve the different markets.

Right. Thanks for your time this morning.

Sal Vitale with Sterne Agee.

Just first, a quick question on the changeover costs in 2Q. I'm sorry if I missed it earlier. Did you mention what the magnitude of those costs could be in 2Q?

This is James. We did not give a magnitude, we simply indicated as a headwind and we may seem some margin dip there in the near-term, but didn't give quantification of that.

Is there any chance that could bleed into third quarter?

Really, it's more of our near-term thing for us. We are not as specific on that and that's another reason why we're really focused on the annual guidance for the group, which we increased from the previous guidance for rail, both on the revenue and the margin side. So, we are seeing nice trends. You're going to see a near-term headwind and exactly the timing of that is hard to nail down, but we will focus more in the second quarter there.

Okay. Bigger picture, looking at the margin potential going forward, it was mentioned earlier, you are pretty much at peak margins at this point. So, given the higher profitability of tank cars, I'm just curious what your view is on what the peak would be in the cycle? If we look out to calendar '14 or even '15, how much more margin potential do you have at this point?

This is James again. As Steve mentioned earlier, we're certainly looking to drive efficiencies. We're going to have, as we mentioned, the second quarter, some headwinds occasionally as we do changeovers for specific products. As we talked about, it's our best quarter we've had in that respect from a margin perspective. We've got a very strong backlog in visibility. We are certainly challenging the teams to continue to drive efficiencies. Right now, looking of the 15% to 17% margin for the group for this year, is all we're able to really project openly. Beyond that, we will have to kind of wait and see how these come through and give that guidance as we got closer.

Sal, this is Tim. I don't look at this as peak margins. I think that our people are challenged to continuously improve in this particular area, and we are not -- I'm not accepting that these are peak margins. So, I think we've got some opportunities on the horizon to continue to drive greater margins.

Okay. That's fair. Is there -- can you give a little bit of color on how much of the margin expansion over the last couple of quarters, which is roughly 800 basis points, how much of that was due to efficiencies? How far along you are there, in terms of gaining efficiencies? How much do you have left, do you think?

Yes, we really can't break down the difference in pricing versus efficiencies and those type things. Again, to Tim's point, we are certainly challenged to continue to improve that opportunity on the efficiency side. Breaking that down specifically is difficult.

Okay. Thank you for your time.

Sal, let me follow-up on those two comments for a moment. We continue to see prices increase in our railcars. With the steady production, as we've laid out, our plans here with our backlogs, we certainly have goals to continue to improve our margins. So, I think we're well positioned. Time will tell whether or not we are able to execute.

Okay. I appreciate that. Actually, one last question, if you could. I think you said your tank car backlog extends into 2016. Can you give a sense for how much of the total tank car backlog is '15 and '16?

Sal, I think what I said is that our total backlog extends into '15 and '16.

Sorry.

We don't break out how much we have each year or what car types those are.

Okay. Thank you very much.

Eric Crawford with UBS.

Thanks for the time and all the color. Just had one more on the guidance. You raised the Rail Group revenue guidance, but maintained deliveries. So, just wondering if the change there is you moving closer to the upper end of the deliveries range? Or, is that just a reflection of maybe repricing some of the deliveries to reflect input costs?

Sure, Eric. This is James. It's the sum of all the above. As we look and continue to refine our delivery schedules for the year, we see where that is within the range. To your point, you didn't change the range. Where that falls exactly is difficult to project right now. Part of it, we continued to fill in pieces of the production schedule and get more refined on that, see where the pricing for those cars is. The combination of those two took the revenue up slightly.

Great. Thanks a lot.

Barry Haimes with Sage Asset Management.

I had a question on the leasing division, and the profitability. You talked about the mid expense being higher. I wanted to get a sense for whether that's a more lasting upward expense because of your greater age and so on, or is this something that's relatively short-term in nature, and will revert back down? Just a little more color around that. Thanks.

Good question, Barry, thank you. The timing of maintenance and regulatory testing can be very uneven and is very difficult to project. It does have an near-term impact on margins. Our first-quarter maintenance expenses were abnormally high, due to a lot of timing issues. But, I would say in general, that we expect a higher level of maintenance than in previous years, as a result of the increasing age of our fleet, increased mileage, and increased regulatory compliance requirements. So, long-term, I think the trend is going to see increased maintenance expenses as a percentage of revenue. I think the first quarter was abnormally high, due to timing issues.

Great. Thanks. Maybe just one follow-up to an earlier question, having to do with pricing. You talked about, you still see prices moving in an upward direction. So, I presume that the pricing in the backlog, impression of margins in effect in the backlog is greater than where we are right now? Is that a fair way to think about?

Well, maybe. You always have a mix issue and we have a number of other different products entering into that equation. But, I think where products demand is strong, we are seeing positive pricing trends.

Great. Thanks very much.

Steve Barger with KeyBanc.

I think you said you have $900 million worth of cars in the backlog going to the lease fleet and if I have the 1Q number right, I think your guidance implies you'll add $600 million to $650 million for the remainder of the year. If we hold everything else equal, and deliveries were flat in 20,000, does that suggest there would third-party cars shipped next year, which I think would result in higher manufacturing revenue and profit?

Steve, this is James. To your overall point, you are looking at it somewhat correctly when you do the math. One thing, in the first quarter, you had $198 million of eliminations, so you're close to 200 of that number. Just to be sure, we are apples-to-apples from the press release comments. Then, we can help you walk through the Q as we release that later today. To your point, a lot of those cars dedicated to leasing right now are slated for this year, given the numbers that you are backing into in that respect. We'll shift to leasing next year, and going forward, we'll see that to your point, that doesn't imply more external in future years given where we are today.

Got it. Thanks, which obviously would imply better absorption through the manufacturing arm and that sort of thing, right?

Well, the absorption on manufacturing, they're building the cars the same way, the only difference is what gets eliminated from the revenue profit line at the bottom of the consolidation.

Got it. Thanks.

Looks like that concludes today's conference call. A replay of this call will be available after 1.00 Eastern Standard Time today through midnight on May 8, 2013. The access number is 402-220-0116. Also, the replay will be available on the website located at www.Train.net. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.