Trinity Industries Inc (TRN) 2013 Q2 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. Statements are 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 change actual results or outcomes to differ materially from those expressed in the forward-looking statements. Good day, and welcome to the second quarter results conference call from Trinity Industries. Currently, all lines are in a listen-only mode. Later, there'll be an opportunity to ask questions during a question-and-answer session.

(Operator instructions)

Please be advised, today's program may be recorded. It is now my pleasure to turn the program over to Gail Peck. You may begin.

Thank you, Aaron. Good morning, everyone. Welcome to the Trinity Industries second 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 second quarter, and the successful launch in May of our new railcar leasing joint venture. This joint venture enhances our financial flexibility and provides us another option for financing the growth of our railcar leasing business. Our Rail group had a great second quarter. They have a large amount of positive momentum occurring at this time. I continue to be impressed with their ability to produce strong financial results while converting manufacturing space and making line changeovers. Our Inland Barge group's financial results were in line with our expectations. They're currently repositioning some manufacturing capacity from dry cargo barges to tank barges. This conversion will enhance their manufacturing flexibility. The second quarter financial performance of our Energy Equipment group improved considerably over the same quarter last year. Demand for containers that store energy-related products remains strong, and our structural wind tower business continues to improve.

I'm pleased with the results we're obtaining from the efforts to reposition our Construction Products group. The integration of our recently acquired trench shoring business, along with the integration of our new aggregates business, positively impacted the second quarter financial performance of the Construction Products group. I continue to be pleased with the results we're obtaining from the manufacturing facilities we acquired late last year that are now operating as multipurpose facilities. For example, in one plant we're manufacturing wind towers, railcars, and containers for our energy products. We will continue to devote resources to identify and pursue additional opportunities to expand and enhance our manufacturing flexibility.

One of Trinity's key differentiating strengths is the ability of our businesses to work together to create value, by leveraging their combined expertise, competencies and manufacturing capacity to produce products with a strong demand. The enterprise-wide integration of our business platforms gives us a bird's eye view of our markets. This viewpoint helps us pursue opportunities to deploy our resources in ways that better serve our customers and enhance shareholder value. Such is the case in the energy markets today. We're continuing to build momentum to serve customers in the oil, gas and chemical industries. We plan to continue to expand and enhance our competencies, so that we can grow our base of customers in the energy markets.

I'm highly optimistic about Trinity's future. Sustainable progress drives our business activities and is the fuel that enables us to continually raise our performance standards. Trinity's financial health has never been better. The backlog visibility in our major businesses should position them to continue to generate additional operating efficiencies. Our operating business platforms continue to build momentum, and our employees are creating value through a number of collaborative initiatives. We're continuing to invest resources to identify and pursue opportunities to add new businesses to our portfolio. We're looking for businesses with additional competencies and products that fit within our portfolio of businesses.

Our corporate vision is to become a premier diversified industrial company that provides superior products and services to customers, while generating high-quality earnings and returns for shareholders. We're making significant progress towards accomplishing our vision, as a result of the quality and talents of our people, the strength of our businesses, the depth of our operational capabilities and our commitment to excellence and continuous improvement. I'll now turn it over to Bill for his comments.

Thank you, Tim, and good morning, everyone. Our Energy Equipment group's revenue for the second quarter increased approximately 17% year-over-year, primarily due to increased shipments of energy containers and other related products. The group reported an operating profit of $14.3 million, a margin of 9.4%. These results reflect significant improvement in year-over-year performance, following the manufacturing challenges we experienced in our wind tower business last year. During the quarter, we received $23 million in new structural wind tower orders. The wind tower industry is gaining momentum, since the IRS clarified the qualifications for the production tax credit. Quoting activity has increased, and we are well-positioned to obtain orders. We continue to monitor our production capacity and are prepared to adjust in response to changes in market demand. Demand for bulk storage containers to hold energy-related products is continuing to build. We are actively looking at opportunities to further expand our product portfolio in this market.

Our Construction Products group generated an operating profit of $19 million in the second quarter, a 48% increase compared to the same quarter a year ago. The improved revenue and profit performance is a direct result of the repositioning efforts underway to align the group's product line with those that have more consistent demand drivers. We are pleased with the integration of the recently acquired lightweight aggregates and trench shoring businesses, both of which contributed nicely to the second quarter results. These businesses serve markets directly related to infrastructure replacement and expansion. The highway products market continues to be constrained by tight state budgets. We expect demand for highway products to remain relatively slow until there is improvement in funding at both the state and federal level. In anticipation of an eventual recovery and significant need to upgrade the infrastructure system in the United States, we will continue to pursue growth opportunities in this market.

Our Inland Barge group experienced a year-over-year decline in both revenues and profits, resulting from softer pricing on hopper barges, coupled with the delivery of a specialty barge order in the second quarter of last year, which enhanced earnings. Demand for hopper barges continues to be weak. Many hopper barges are idle, due to reduced coal and grain shipments. We are watching these markets closely and are positioned for a pickup in activity. In the meantime, we are slowing operations at one of our hopper barge facilities. During the quarter, we secured $231 million in new barge orders, increasing our barge backlog to $564 million at the end of June. The vast majority of the orders support the movement of petroleum and chemical products. As we discussed on our last call, in response to the strong demand for tank barges, we are 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 are in the process of repositioning a hopper barge facility to manufacture smaller tank barges.

Overall, I am pleased with the performance of our business unit teams. We remain focused on organic and external business opportunities that provide products which support the infrastructure market. At this time, I'll turn the presentation over to Steve.

Thank you, Bill. Good morning. I am very pleased with the operating performance of our Rail and Leasing groups during the second quarter. Record operating profit, driven by increased railcar shipments for the Rail group, combined with higher operating profit from operations and improved legalization for the Leasing Group, reflect the focused efforts of our dedicated Trinity Rail team and the benefits of our integrated manufacturing and leasing business model.

Our Leasing group continues to generate strong returns and contributes steady cash flows to the Company. Operating profit from operations increased 16% compared to the second quarter of 2012, due to lease fleet additions and higher lease rates for railcars serving the oil, gas and chemicals industries. Our lease fleet utilization at the end of the second quarter was 98.7%, up slightly from the previous quarter, due to increased demand for both large and small covered hoppers. We sold a small group of railcars during the quarter, as we continue to strategically manage our lease portfolio. As the secondary market remains active, we do not currently forecast additional lease fleet sales in 2013. During the second quarter, we added approximately 1,600 new railcars to our wholly-owned lease fleet portfolio. Our total lease portfolio, including partially-owned subsidiaries, now stands at approximately 74,065 railcars, an increase of 5% year-over-year. At the end of the quarter, approximately 17% of the units in our railcar order backlog, with a total value of $880 million, were slated for customers of our leasing business.

The formation of our newly announced railcar leasing joint venture is very exciting. RIV 2013 brings additional capital resources to Trinity, and increases Trinity Rail's flexibility to respond to customer needs for leased railcars. Having the capital resources to meet the leasing needs of industrial shippers through our partnerships with long-term equity investors is a competitive advantage. Our financial flexibility, much like our operating flexibility and manufacturing, allows us to respond effectively to customer demand.

During the second quarter, the Rail group delivered 5,600 railcars and generated our highest ever quarterly operating profit for the second consecutive quarter. In spite of line changeovers during the quarter, operating efficiencies continue to advance throughout the quarter, resulting from a consistent product mix and a well-trained, more productive workforce. As a result of these operating improvements and a broadening of demand for freight railcars, we have increased our delivery guidance for 2013 to between 23,000 and 24,500 railcars. North America railcar orders in the second quarter reflected improving demand for a broader mix of freight cars. The strength of industry orders contributed to another increase in the industry production backlog. I am very pleased with the orders Trinity Rail received. As we anticipated, orders received in the second quarter and the level of third quarter market activity indicates demand returning in the second half of 2013 for small cube covered hoppers to serve both the frac sand and construction markets.

We also continue to see steady demand for auto racks, as North American production of automobiles increases. To date, weather patterns support a strong harvest and could lead to potential covered hopper demand later in the year. During the second quarter, we received orders for 5,000 new railcars, including tank cars, covered hoppers and auto racks from railroads, third-party lessors and industrial shippers. As a result of the orders we received, our order backlog stands at 40,665 railcars, with a value of approximately $5.1 billion. Our orders are firm, non-cancelable, and in some instances of large orders with deliveries in future time frames, include significant deposits. We have not seen a rash of speculative tank car purchases. Many of our large orders are purchases by oil producers and refiners, or by our leasing company for specific customers. The visibility provided by our extended order backlog to plan stable production into 2015 with high quality customers continues to differentiate this railcar market cycle from others in the past.

While second quarter tank cars orders eased compared to the elevated first quarter level, overall inquiries for tank cars remains steady. We continue to believe that rail transportation for crude oil will grow further in the long-term, and the demand -- and the growth of downstream refined products requiring railcars will be significant as well. A substantial number of new tank cars have been absorbed into the crude oil rail market. It takes time to integrate an influx of new equipment into operations and to properly coordinate transportation supply with oil production demand. As such, we do expect there to be some ebb and flow to the order pattern for railcars serving these markets similar to what we've seen in other fast growing markets, as the necessary infrastructure and downstream supply chain is developed.

The level of existing and planned capital investment by railroads, oil producers, refineries, and pipeline and storage companies clearly establishes a very meaningful role for rail in the transportation of crude oil. Based on our discussions with customers, we believe these investment decisions are not predicated on short-term crude oil spread differentials, but on long-term fundamentals for oil supply and demand. Overall, we continue to see evidence that the energy renaissance will be long-term in nature, and Trinity Rail is very well positioned to provide railcars for the resulting demand. Our rail -- our markets are constantly evolving and changing. Our integrated railcar manufacturing and leasing platform positions us to respond to various market changes quickly and effectively as they develop. Given the outstanding way in which our Trinity Rail team has responded to recent market shifts, I am confident our operating and financial flexibility will support a successful response to any future market changes as well. I'll now turn it over to James for his remarks.

Thank you, Steve, and good morning, everyone. Yesterday, we reported strong second quarter results, with a growth in earnings per share of 26% over last year, resulting in the most profitable second quarter in Trinity's history. Our second quarter results exceeded the quarterly earnings guidance that we provided in May. All of our business groups performed somewhat better than we anticipated, led by the Rail group, which had higher deliveries due to better than planned efficiencies. In addition, we had a lower effective tax rate during the quarter, due to benefits resulting from domestic production activities and the tax treatment of the Company's non-controlling interests. During the second quarter, we purchased 1.3 million shares of our common stock in the open market, for a total of $49.9 million. Our current share repurchase program now has $150 million of remaining authority through the end of 2014. Additionally, as previously announced in May, we increased the dividend by 18%, effective with the July payment made yesterday.

Subsequent to quarter end, and scheduled to close later today, we are pleased to announce that RIV 2013, our railcar leasing investment portfolio formed in the second quarter, purchased an additional portfolio of railcars from Trinity Industries' leasing company, valued at $246 million. This brings total RIV 2013 railcar purchases to approximately $700 million since the formation of the joint venture in May. The purchases were financed with the issuance of $183 million of long-term asset backed debt, with a coupon rate of 3.9% and equity of $74 million, 69% of which was funded by our joint venture partners. Approximately $83 million of equity commitments are remaining to complete the $1 billion railcar portfolio. Today's transaction is expected to increase Trinity's cash on a net basis by approximately $210 million.

I'll now turn to our current outlook for 2013. For 2013, we have raised our expectations for earnings per share for the full year to between $4.20 and $4.40, including the effect of discontinued operations, which had a small impact on our results in the second quarter, but is not anticipated to further impact results for the remainder of the year. At this time, we are not providing quarterly earnings guidance. We have raised our railcar delivery guidance for the year in anticipation of an increase to our production levels during the third and fourth quarters. The increase in production and the impact of profit eliminations on railcars delivered into our lease fleet make it difficult to forecast the precise timing of certain deliveries and the impact those deliveries will have on our earnings.

In the Rail group, we are increasing our 2013 revenue guidance to between $2.7 billion and $2.9 billion, based on the increased delivery guidance of between 23,000 and 24,500 railcars. This guidance reflects a step up in deliveries in the third quarter and comparable deliveries in the fourth quarter. We expect a full year operating margin of between 16% and 17.5% for the Rail group. This group continues to post solid margins, and maintains an order backlog of $5.1 billion of railcars for future deliveries.

In the Inland Barge group, we expect full year revenues of between $550 million and $570 million in 2013, slightly lower than our previous guidance due to weak demand for hopper barges. We continue to see strong fundamentals in the tank barge market and maintain our operating margin guidance of between 14% and 16% for the year.

In the Energy Equipment group, we are increasing our 2013 revenue guidance to between $620 million and $640 million, based on an improvement in demand for structural wind towers and for our storage containers that serve the oil, gas and chemicals markets. We are tightening the range of operating margin for the year to between 8.5% and 10%, given the visibility that we currently have.

In the Construction Products group, we expect full year revenues of between $520 million and $540 million in 2013, and are guiding to a tighter operating margin of between 9.5% and 10.5%, primarily due to softness in the highway products business. As a reminder, seasonality is a factor in this business segment's results, and the second and third quarters typically represent the high points of the year for the construction season.

In the Railcar Leasing and Management Services group, we are increasing our 2013 revenue and operating profit guidance to between $580 million and $600 million, and between $260 million and $280 million, respectively, due to higher rates on our lease renewals for railcars. This guidance excludes any revenue and profit from sales of rail cars from the lease fleet. We now anticipate slightly lower revenue and deferred profit eliminations from new railcar additions to the lease fleet. We are expecting between $775 million and $825 million of revenue eliminations, and between $130 million and $150 million of operating profit eliminations, due to the addition of new railcars to the lease fleet.

As a reminder, the operating results for our railcar leasing joint ventures, TRIP and RIV 2013, are fully consolidated within the Railcar Leasing and Management Services group. The earnings related to the equity not held by Trinity are deducted from Trinity's net income to the non-controlling interest line at the bottom of the income statement. We expect between $12 million and $16 million of earnings to be deducted in 2013. Due to TRIP and RIV 2013's partnership tax status, it is important to note that the taxes are not applied to the amount of non-controlling earnings deducted. The recent TRIP and RIV 2013 transactions were incorporated in our previous guidance. However, the amount of earnings deducted in our current guidance is now slightly higher, due to the increased forecasted income from these portfolios.

During the first half of the year, we recorded operating profit of $11.5 million from lease fleet railcar sales. Our annual guidance does not include any operating profit from railcar sales from the lease fleet during the second half of the year. We will continue to be an active participant in the secondary market, and will evaluate opportunities to conduct external sales and fleet acquisitions as they arise. During 2013, we now plan to make a net investment in new railcars for the lease fleet of approximately $585 million to $615 million. This guidance includes 100% of the investment in new railcars that will be sold to the RIV 2013 lease fleet, and takes into account projected lower proceeds from lease fleet railcar sales to third parties. Full year manufacturing and corporate capital expenditures for 2013 are expected to be between $140 million and $170 million. We now expect corporate expenses to be in the range of $70 million to $75 million for the year.

Primarily as a result of TRIP's conversion to, and RIV 2013's election of, partnership tax status, we now expect a tax rate of 35% to 36% during the remainder of the year. Our guidance uses the full year weighted average share count of 76.5 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 results of which should be the reduction of EPS attributable to Trinity by approximately $0.15 per share for the full year 2013, compared to calculating Trinity EPS directly from the face of the income statement. This is included in our EPS guidance.

Our results in 2013 will being influenced by multiple 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. Our full year guidance reflects earnings per share growth of 32% to 38%, compared to 2012, and would result in a record annual earnings for Trinity. This is a remarkable accomplishment, since certain areas of our Company have yet to experience the benefits of a pickup in the broader economy. We continue to see positive momentum, and our employees are focused on setting the bar higher.

We continue to seek investment opportunities, both organically and externally, that will add value to our diversified industrial portfolio. As we consider external opportunities, we are focused on those that enhance our competencies, complement our product offering and expand our reach in the markets that we are pursuing. Our acquisition strategy includes a number of criteria, the most important of which is increasing shareholder value. We plan to allocate our capital accordingly. We are very deliberate in our search and finding opportunities that meet our criteria requires patience.

The formation of RIV 2013 in May achieves specific objectives for the Company. To attract and partner with long-term equity investors, and to increase the amount of capital available to grow the lease fleet and our diversified industrial portfolio of businesses. We see opportunities to replicate this transaction in the future. With our strong liquidity position of more than $1.3 billion, including the cash we expect to receive from RIV 2013 later today, improving access of the capital markets -- most recently enhanced as a result of Standard & Poor's upgrade of the Company to investment grade -- we are well-positioned to move forward with the growth elements of our strategy. Our operator will now prepare us for the question-and-answer session.

(Operator instructions)

Steve Barger, KeyBanc Capital Markets.

Good morning, everybody. First, Steve, you took delivery guidance up by 2,000 cars. Can you tell us how much of that is from tank, given increased capacity, and how much is related to other car types?

Well, as you know, Steve, we don't typically breakdown our production, but in this case, I would say we are increasing both tank and freight. As I mentioned, we've seen a broader demand across more car types in the freight sector, which gave us some encouragement to increase our production there. And we've seen productivity improvements that's allowed us to increase our tank car production. So I would tell you, it's both.

Okay, great. And when you think about your book-to-bill from 1Q to 2Q--and I understand it's a lumpy business--is there any reason to think you can't maintain your normal market share, given whatever level of inquiries you're seeing right now or for the back half?

This is Steve again. As you know, we don't focus on market share. But clearly, we see demand continuing to remain steady in tank car sector and have seen a broadening of demand in freight cars.

Perfect. And James, got a question for you. Seems like you're feeling pretty confident about visibility here, given the sizes of the guidance increase and the opportunities you described for capital allocation. I know it's too early to talk specifics for next year, but is there any structural reason why earnings can be up in 2014, versus wherever you end up in 2013?

Yes, Steve. I'm going to let Tim address that. I think he talked about some in his script, and I'll let Tim give you a little bigger picture on that.

Steve, you know, as I stated in my comments a few minutes ago, and James kind of echoed these, sustainable progress really drives our business activities. It's the fuel that enables us to continuously raise our performance standards. And as Steve said in his script, he's got a lot of initiatives going on. And he's been able to increase his production because additional capacity became available, due to efficiencies. And historically, when we have the momentum that we have occurring right now, combined with the backlogs that we have, the longer our production lines run, the more operating efficiencies we are able to obtain. And I expect this trend to continue.

And it's really hard to quantify this number. And that's why we're even at a stage right now of giving six months guidance on a good portion of our business. Because we don't really know how large the efficiencies are going to be and can't really break that down into how many cents per share that will generate in earnings. But as we look to the future, where we've got the rail backlog that's nearly two years--and that's great visibility--and our barge backlog visibility goes deep into 2014, I'll assure you that we're going to look for ways to generate more operating efficiencies and leverage across all of our lines of business.

Right now, we're not prepared to talk specifics about 2014, but there's a lot of good positive momentum, moving here. And on top of that, when James mentioned at the end of his speech, he was talking about the liquidity being at--available after this transaction completes, now of $1.3 billion. This provides us with significant capital to pursue growth opportunities. And you know, I just think we're in a really, really strong, healthy financial position right now, and we've got a lot of good momentum. So we should expect to continue to improve.

All right. That's great color. Thanks. I'll get back in line.

Allison Poliniak, Wells Fargo.

Hi. Good morning, guys. Going back to the increase in deliveries, you did bump up the margin expectations for the Rail group. Should I be assuming there's some level of line startups or--that are going to offer some of productivity efficiencies that you're getting in tank right now, to kind of keep a lid on that number in your term?

Steve, would you handle that?

Allison, again, some of our increase in production really comes from just greater efficiency and seeing productivity improvements from a better trained, well-trained workforce. And as Tim talked about, when we have that type of visibility in our backlogs and a stable workforce, we can really do some things to improve our processes, initiate lean changes in our manufacturing. So we really feel confident about the position we're in.

Okay, great. And then, there's been a lot of noise lately about lease rates collapsing in the tank car market, and maybe there's a sort of a near-term oversupply. Can you address what you're seeing there, right now?

Sure, Allison. I haven't seen any collapse in lease rates. And really, when you look across the spectrum of the entire North America fleet, you'll see that railcar supply is very much in line with railcar demand. Couple that with the backlogs that we have in production, I don't see any reason why lease rates should decline. And that's certainly not the evidence we have in our lease renewals.

Perfect. And then, Bill, I guess just in the conversion of the tank car--tank barge facility. I know you talked about it being complete in the summer. Is there any way to quantify that impact in the quarter to your profits?

Well, Allison, James has included the impact into his revenue. And I think actually, we'll have better impact in '14, when we get that fully running. So we'll sneak a little bit of it into this year, but better results in '14.

But I'm meaning the impact, I guess, of the slower production, as a result of that conversion. Is there--was it 100 basis points? Is the cost related to that, or--?

No, it's primarily a conversion to add additional units into the facility. So we'll get more units, more revenue. Cost wise should be very similar.

Perfect. Thank you.

Eric Crawford, UBS.

Thanks. Good morning, everyone. I'm just curious what factors account for the low and high end of your railcar deliveries guidance at this point?

This is James. I think, you know, we always give ranges, as we look out in the precise delivery schedules. While we have a production schedule we work towards, Steve team is always looking at the types of cars that we put into those businesses. We've expanded some facilities. We've talked about line changeovers, last quarter. So as you go through a year, that firms up as we go along.

Okay, great. And as far as the cadence of deliveries for the remainder of the year, just to clarify, you mentioned an increase in deliveries in the third and fourth quarters. Are you calling out a sequential increase from 3Q to 4Q, or just highlighting deliveries about Q2 levels?

Yes. This is James again. What I mentioned in my script was we'll have a step up in deliveries in the third quarter, then a comparable level of deliveries in Q4.

Okay, great. That's helpful. And then, just switching over to barge, are those additional tank barge build slots on schedule for the end of summer?

Bill, you want to take that?

Yes. For the end of 2013, they are on schedule, and they are included in the guidance that James has provided for the segment.

Okay, perfect. Thanks very much, everyone.

Bascome Majors, Susquehanna Financial Group.

Good morning. You talked about steady demand or inquires levels in the tank car markets, but I'm curious. With price differentials in crude narrowing sequentially pretty much every month since February, has there been any noticeable impact in either the level of inquiries or orders from crude industry customers in your tank car business, on a month-to-month basis?

You've got to keep in mind--this is Tim--Steve will answer the balance. But a lot of what we're quoting right now, we're quoting deliveries that are way out into the future, with the backlog like we have.

Yes, Bascome. I think you have to look at the market in its totality. We have a backlog that goes well into 2015 to serve, in large part, the crude oil market. We continue to receive inquiries in that business. Perhaps the sense of urgency to rush in to get an order--to get a production spot two years out--has slowed, but we clearly see continued demand by producers and refiners. And we believe that demand is going to continue to be consistent to meet the increase in oil production in both Mid-Continent and in Canada.

Okay. So I guess you imply there a little bit that perhaps demand within tank cars brought into some of the more traditional core customers that you see in that space? Or is that what you're saying there?

Well, I think demand for tank cars has been very steady. We've had inquiries, obviously, for crude oil and a number of the chemicals that are required to support the drilling and exploration. And we still think we're at the beginning of seeing demand for railcars to support refined products. And the advent of that, I think, is still yet to come. And again, we also see in the Canadian market, the early stages of unit train infrastructure developments, which will help to expand Rail's role in taking away Canadian crude oil from those fields, too.

All right. Thank you for that. One more on the regulatory front. There's been a lot of chatter, potential changes to tank car specifications that could require a retrofit. And you guys being the largest producer, one of the largest owners of tank cars, are probably in a pretty unique position to comment on that. What, if anything, do you guys see as a potential change that could potentially affect the existing tank car fleet? And is there any way to size up how many cars might be impacted, when you think about your business?

First off, this is Tim. For my 35 years experience in the rail industry that we have--or more than that, really. 36, 37--there's waves of regulation changes that occur on a routine basis, when you get information that has been fed back from usage of railcars. And so, it's common that they will come in with new types of retrofit programs for various cars, and we've participated in these for decades. And normally, when they make these regulations, they get with the industry--as they're doing now--and they get feedback on how long it would take to make the modifications. And then you incorporate these modifications into what the industry can absorb, and it becomes more of a program type repair, and it extends over a period of time.

So we're not really anticipating right now that there would be a crisis of some sort. But at the same time, in our risk management planning aspects, we do some what-if's. And then we ask ourselves, if this was to happen, then how would we cope and manage with that. And so, we've been looking at this for a couple of years. Steve, you want to comment a little more?

I think your comments are correct, Tim. This is a natural part of our industry, and something that's been a part of this industry for quite some time. With respect to the recent incidents and questions about certain railcar types, we think there's way too many variables remaining unknown, regarding this derailment. Common at any potential implications to the railcar industry, regarding design specification standards or retrofit programs. Again, this is something our industry has dealt with historically, and if those things come about again, we'll deal with them appropriately then.

Right. Well, thank you for the time.

Art Hatfield, Raymond James.

Thank you. Good morning, everybody. Just real quick on the year-end guidance, or the balance of the year guidance, in getting away from quarterly guidance. You say that you have less confidence in giving quarterly guidance, but you appear very confident in the back half of the year. Is this just something a function of what type of cars and when they're going to be delivered, and who they're being delivered to, and how that will impact eliminations, quarter to quarter?

Yes, Art. This is James. I think you've hit on it. I think at the level of production we have now--especially in the rail business, but even across the Company--the precise timing, as I said, of when a car gets delivered month-to-month, even week-to-week, how mix's spread out over a quarter. And similarly, which of those cars going to the lease fleet, and how that may affect profit eliminations, makes a few pennies or nickels, here and there, hard to precisely define right now, whether it's a September or October event. But we do have a good sense of what the back half of the year looks like, in total.

Okay. So you're not concerned about fourth quarter cars or a significant number slipping into that? That's really what the range of the guidance is for.

Yes. You always have the timing, but really, the range is just to encompass two quarters at a time.

Okay. Did you give guidance--I missed it if you did--what the total revenue eliminations would be for the back half of the year, or the full year?

We did. For the full year, we have revenue elimination between $775 million and $825 million of revenues, and $130 million of $150 million of profit, due to the lease fleet additions. And as a reminder, we'll file these statements in an 8-K later today to give you all those guidance specifics. But that was what we provided earlier.

And on the RIV transaction that occurs today. Obviously, if it is--if there is an impact, it's in your guidance. How is that going to show up in the--? Will it have an impact on the income statement, Q3?

Well, the impact on the income statement is--as we mentioned, those result are fully within our leasing business already. Those are cars that we have in our lease fleet, prior to the transaction. So the impact is the non-controlling interest number at the bottom of the income statement moving up some. It was about $4 million or so in the second quarter. We're anticipating about $12 million to $16 million for the full year. So you'll see that number move up as we go through the year, as more cars are in those--in that fleet.

And then, moving on to lease rate real quick. Making adjustments for the adjustments to revenue, related to the sales out of the fleet, year over year, it looks like revenue was up about 14%, year over year. And if my numbers are right--and please correct me if I'm wrong--it looks like the fleet grew about 4% year over year, which would imply maybe somewhere pricing was up 9%, 10%, year over year. Am I thinking about that right, from a perspective of a core leasing business?

This is Steve. I think you are thinking about it right. Two components to the increases there. One is the increase in the lease fleet. With year over year, was about 5%. And then, we've also seen an increasing in lease rates to support that additional revenue as well.

Thank you, Steve. And then, knowing that--and I appreciate your comments on the DOT-111 car regulatory speculation. But do you remember a time in history where there were regulations that see--that had a significant impact on the Company, both from productivity standpoint and from a profit standpoint? Is there a period that you would recall that that was the case, other than just kind of normal, having to deal with new regulations?

Are you talking about regulations that may have changed on railcars?

Yes, sir.

There are--this is Tim. I don't recall in my time with the Company that we had something that we were disclosing that was material in that area, because--these programs usually go on for a number of years, and you have time to be able to work it out. Then you've got your individual contracts with--between the leasing company, the lessor and the leasing company. And so, it just depends on whose responsibility it is. So it's kind of a complex situation, but it's part of car ownership and being in the leasing business to respond to these situations.

Great. That's all I've got this morning. Thanks for your time.

Tom Albrecht, BB&T Capital Markets.

Good morning, everyone. Continued nice job on this very unusual railcar cycle. I had a couple of questions. So in terms of the length of leases, years ago, you used to have an average lease term of--I think at one time, even 7 years, and certainly a lot of 5.5 to 6 years. But it continues to be stuck around 3.5 years. Can you talk about why that hasn't extended out more to at least 4.5 to 5 years? What's the dynamic of that staying in the mid 3.5 year range?

And this is James. And Tom, I think really, a lot of this is math. When you have 74,000 cars in your lease fleet, as we do now, you're adding to that every quarter with longer leases and you're renewing. But you have the majority of those leases are getting one quarter less on their term, obviously. So to your point, you've stated about the same number for several quarters, which tells you that you've been able to extend leases enough to offset that. So we're seeing very positive trends in lease terms and pricing, and long-term leases are certainly where we're focused right now. But math tells you that that's going to be relatively steady, just given the inertia of the existing fleet.

One of the earlier questions was about lease rates. I think where there has been weakness has been what I call more of the spot rental market, three months to certainly less than a year, but can you comment on two things? On the longer term leases, are lease rates beginning to look like they may plateau for the next quarter or two? And then, between getting a car into an actual lease, when it may be rented, what have you seen there on those shorter-term situations?

Well, Tom. I think you're right. This is Steve. There's a short-term market, and there's a long-term market. And those probably behave a little differently. We're principally focused on the long-term. What we are seeing are solid lease terms and pricing remain firm. And as cars continue to increase in price, we would expect lease rates to potentially move up along with that.

In the short term, you may see some lease rates converge, but we really don't participate very actively in that end of the market, and difficult for me to say much more about that. There is a strong sublease market. I think you had a number of your ethanol producers, who had railcars, who are subleasing into the crude oil market and basically bridging oil producers and refiners until they received delivery of their new cars, which we may very well be delivering to them now. So the short-term, build-a-bridge responsibility or opportunity for refiners and producers. And that bridge may no longer be needed.

Okay. That's helpful. And then, and if 5,000 orders that you took in the quarter, how evenly spread out what's that? In other words, was most of that in April, or was it still a healthy order market during the month of June?

Yes. I would say it was very consistent throughout the quarter.

Okay. And then, my last question would be, I don't think you've ever said this, but the market has assumed that tank cars are by far and away the most profitable. What's the second most profitable railcar that you can make? And how big of a margin cap, hypothetically, even if you don't want to give the margins, but just percentage points between a tank car and the second most profitable car type?

Yes. Well, I'm not sure I ever said what the most profitable car type was or the second most profitable car type. And that's really a discussion that is probably best suited--not suited for this call. But railcar pricing is pretty simple. It's about supply and demand. And when demand exceeds supply, we get traction in our pricing. We get traction on our lease rates. When supply exceeds demand, the opposite happens. And that doesn't change, whatever market you're addressing.

Okay, I appreciate that, and you made me think of one other thing. So given that there's been so many non-traditional buyers of railcars this cycle, does it ever come up in discussions? Do they think about supply and demand in the entire universe of railcars, whether it be some of the petroleum companies, refiners, et cetera? Or do they just think about their needs, and sort of are blind to supply and demand in the marketplace at large?

I really think--this is Tim. I think you're going to ask them this question, because when they come to us, they don't really say, let me tell you what's driving my purchase, as to how I will view this. They usually will have--the thing we do know is people don't normally purchase railcars unless they have some type of need that's based on their--it's not something that they just wake up someday and say, I need some rail--I'd like to have some railcars. It's based on a specific need that they have to transport a product over a period of time, and then they run economics, and it's normally approved by boards, and it's a major capital expenditure. So by the time it gets to us, it's been germinating within a company for usually an extended period of time.

Okay. That's helpful, Tim. Thank you. I'll jump back in the queue.

Matt Brooklier, Longbow Research.

Thanks. Good morning. Within your Rail group, is there any way to quantify how much of a headwind some of the production line changeover was in the quarter? Or talk to it, at least.

Yes. I can let Steve talked to color. We really don't define how much of a headwind it was. We talked about that there was going to be some of that in the second quarter. And you can see from the results that the operating efficiencies and leverage that the team was able to accomplish in the quarter offset that.

I mean, I guess--was it meaningful? I mean you--really nice margins, but they were down a little bit from what you guys did in first quarter. Should we assume that--and your guidance implies it--I'm just trying to get a feel for magnitude, that the changeover was somewhat meaningful and did weigh on your margins.

Matt, this is Tim. It was extremely meaningful to me. I've been around for a long time, and to watch the group increase their production and transition their production lines, and accomplish the things that they have, it was significant. Now, we haven't gone back through and said how much of this was in our estimation and how much of it was not. We just know that we were able to produce the type of financial results we have, and we've pat a lot of people on the back as a result of it. So it's extremely meaningful.

Okay. Understood. And then, as I think about the second half of this year and your Rail group margins, and I think the question was kind of asked earlier, but are there incremental production line changeovers that will occur in the second half? And also, are you adding production lines at this point to support the increased delivery guidance?

Yes, Matt. This is Steve. We're always making adjustments in our production plans to respond to orders and our customers. But looking at the second half of the year, we don't have any major line changeovers or startup of new production lines planned at this time. We're seeing really an increase in production efficiencies and productivity out of our existing lines and facilities.

Okay, that's helpful. And then, just my final question. Saw a nice uptick, in terms of orders on the tank barge side. A lot of that having to do with supporting future chemical and also refined product movements. Where are we, from an innings perspective, in terms of what incremental orders could look like on the tank barges side, given what you've seen thus far?

Yes, Matt. This is Bill. Yes, I don't know that I would put it in an innings perspective, but as you know, we had really nice orders in the second quarter. We've got great visibility, as we move out to '14. We've talked about adding some production capacity and converting one of our facilities to the smaller tank barges. So the market is still active. We're still engaged in conversations with customers about their future demand. But I don't think it would be appropriate for me to try to gauge what inning that is.

Okay, that's helpful. Thank you for the time.

Justin Long, Stephens.

Thanks, and good morning. You talked about the focus on acquisitions. I was wondering if you could just comment a little bit more on some of the targeted areas, whether it's to complement existing businesses or entry into a new market. Also, any details on the potential deal size you might be comfortable with today, and also what level of activity you're seeing in the overall M&A market as well.

Well, as far as commenting on deals, we really don't comment on deals until a deal is complete. But we definitely have resources that we're dedicating to go out and visit with customers--visit with potential companies that we might be interested in acquiring or partnershipping with, or something like that. And we consider a wide variety of external opportunities that we think can enhance our competencies and complement our product offerings, and expand our reach into markets that we're currently in. We have a fabulous platform within our Company at manufacturing businesses, and the bolt-on factor of other companies that we are able to identify and bring into our portfolio can produce significant benefits for us. And so, this is an ongoing process. It's very dynamic.

Sometimes, we're planting seeds with businesses today that may not germinate for a number of years. And in some cases, we've had seeds planted for a number of years that begin to germinate. So it's a very dynamic program. We're very much like an entrepreneur. When we see an opportunity, we like to react very quickly.

And I'm optimistic that over the next 6 to 18 months, that we will have a pipeline of opportunities that we'll be pursuing, and that we will have some things that we will announce--some successes in that particular area. We've got a substantial amount of cash reserves that we've worked hard to position ourselves. The RIV 2013 was a strategic play for us in this area. We worked for quite a while to be able to build the foundation for some long-term relationships where that we think that's a sustainable progres--a sustainable platform. And this allows us to look at our capital go to other areas, and just our--the growth of our leasing business. Where as in the past 10 years, we spent a lot of capital growing our leasing business and getting this platform set up. So we're at a position now where that we can get back to some of the basics of what built this Company, and the diversified industrial manufacturing platform that we have, and we're real excited about this opportunities.

Okay, great. That's helpful. And maybe to shift back to tank cars, are you comfortable with where industry capacity stands today? I know you've announced some additions over the last year. Some of your competitors have announced increases as well. Would you say we're probably getting maxed out on the capacity front by the end of this year? Or would you still consider bringing on additional capacity at some point?

Well, I can't speak for the--this is Steve, Justin--I can't speak for the other manufacturers in what capacity they have or don't have. I do know that we are being very clear that we bring on capacity when we believe the demand for a product is sustainable. Sustainable is more than a couple of quarters. I think the benefit that we have in our operational flexibility is with the facilities and the competencies that we have at Trinity, we have the ability to transition production capacity to meet shifts in demand very quickly. So we think we're in good position for current demand levels. We continue to monitor that to see if there's adjustments in our production that we want to make to seize any changes.

Got you. And maybe one last one. And Steve, this is probably for you too. But could you talk about some of the maintenance requirements you'll have for the railcar lease fleet over the next few years? One of the other sizable leasing companies has commented a lot on the maintenance bubble they're facing on tank cars the next few years. So curious if that was something you'll be dealing with as well.

Yes. Good question, Justin. And first of all, the timing of maintenance and regulatory testing's pretty hard to bake into forecasts, so it is a bit spotty and lumpy. But I think generally, we can expect a higher level of maintenance, particularly on the tank car fleet, as the age of our fleet continues to increase, we will also see cars used in greater distances, increased mileage. And certainly, we expect that over time we'll have increased regulatory compliance requirements as well. So generally, the trend in railcar maintenance is up.

Okay, great. I'll leave it at that. I appreciate the time.

Sal Vitale, Sterne Agee.

Good morning, all. Just a quick question. If I can just further explore what was said about the tank cars, tank car demand going forward. So it seems like you're really positive on the long-term fundamentals of demand for tank cars. But you also said that orders eased in the second quarter, and there's not the same urgency in demand, but that you're still seeing inquiries. Based on all that, is it fair to say that say, for the last couple of quarters, that we'll probably see a step down in tank car orders placed, relative to say, the first half?

Sal, this is Steve. I don't know that I could do that type of prognosticating on quarter to quarter orders for any type of railcars. Again, we're looking at things on a longer-term basis. And we're encouraged by the long-term trends and demand for tank cars, as well as what we've seen in a broadening demand for freight cars.

Okay. And then--I'm sorry if this was discussed earlier--but the increase in the margin guidance for the full year for the Rail group, what's the driver there?

And this is James. Sal, I think as you look at our ability to step up the production level and the pricing we have on those cars is a very positive thing for us, as we look at the back half of the year. As well as Steve and Tim, and I have all mentioned, the operating efficiencies and leverage we've had as we've continued to build our production up to these levels has been very positive and we expect that trend to continue in the back half of the year.

Okay. So it's a combination of better pricing and efficiencies as well. Is it more one than the other?

I don't think we can break it down like that, but both are certainly contributors to the guidance.

Okay. And then, if I could just shift gears to the energy side. You said that there's a very strong demand for energy containers. Are you seeing--well, you said the shipments of energy containers increased significantly in 2Q. Are you seeing a lot of orders for those types of containers? Have you seen that increase sequentially?

Yes, Sal. This is Bill. Yes, the storage container business has been particularly robust right now. A lot of it associated with midstream processing plants. Some of the products, particularly on the NGL side. So it looks pretty good, and we're positioned well to produce the tanks.

And are you seeing on the pricing side of it, without providing any specifics, are you seeing pretty strong increases in pricing for those products?

Yes. I would classify the market--again, we go back to a supply and demand situation, and then there's a little leverage out there right now for good pricing.

Okay, thank you.

Mike [Boughton Distel], Stifel.

Thank you. Wanted to ask, you already have provided some comments on the crude differentials in the Rail group. I was wondering, is the volatility in the various oil prices impact any of your other businesses? Whether it's the tank barges or the tank containers?

Yes, Michael. This is Bill. Again, I think very similar comment that Steve made. Those are probably questions better directed to transporters and refiners of the products. From our position, there's still activity. The activity can be as simple as their need to have flexibility and shipping points and destinations. So I think from the spread situation, it's probably better--a better question for the end users.

Okay. That's makes sense. And to ask for clarification on the barge industry. You talked about the unfavorable mix in barge. Is that just a shift from the liquids, or a shift away from the--towards the covered--within the covered hoppers, or was it more from between the covered hoppers and the tank segments?

Yes. You're talking about the barge business right, Michael?

Yes.

Yes. On the barge side, you're really dealing with two dynamics right now. On the dry cargo side, we have shipments of coal that are down considerably. And also, shipments of grain that are down considerably. We're all hopeful that the harvest is a very good harvest this year, and that could bring some upside to the industry. But right now, those are two headwinds for the industry. On the opposite side of the table, the tank business. Again, benefiting from many of the same situations in our tank car businesses, and so it's to the more robust side, right now.

Okay. So is the comment you provided on softer pricing in barge, that was just related to the hopper barges, and not the tank barges?

That's right. Softness was related to the hopper barges.

Okay, thanks. Those were the questions I had.

Bill Baldwin, Baldwin Anthony.

Thank you. Tim and team, congratulations. Fantastic job you're doing with your Company there. Steve, a lot of talk about petrochemical companies expanding capacity in this type of thing. Are you seeing any reflection of that, in terms of orders for some of your railcars coming from that sector of the economy?

Yes, Bill. Thank you for the question. Again, when we talk about the downstream implications of the energy renaissance, I think that's really the investments that we're seeing made by the petrochemical companies today, both in the Gulf Coast, as well as up in the Appalachian area, and those are going to yield demand requirements for railcars to support refined product production. So I think we're in the early stages of that. And again, that's part of our belief in the long-term demand for tank cars to remain steady through the energy renaissance.

So when you use the word, refined products, that includes petrochemical and chemical segment of the economy?

Yes, it does. Thank you for the clarification.

And on a specific question here, I guess, directed to Bill. You talk about making acquisitions, to kind of supplement your existing product lines. Would this entrance into the shoring business be one that would lend itself to further acquisitions and build up presence in that marketplace over time?

Yes, Bill. Great question. We're excited about the shoring business. So we got into it in a relatively small way, but we like what we see. It matches Trinity's competencies very, very well. And there seems to be a growing need for the product, as there's a lot of underground construction, which directly links to our comments about infrastructure rebuilding and infrastructure expansion. So the market is a little regionalized right now, and there could be an opportunity for growth and-or consolidation in that industry.

Is that a product line that you could utilize your other manufacturing facilities for? To broaden it out beyond the existing region that it currently operates in.

Yes, Bill. As we talked about, one of Trinity's strengths is manufacturing flexibility. So it is a product that can be made at many of Trinity's facilities in different parts of the United States.

So you can grow that business organically then, without really doing additional acquisitions?

You could go either approach.

Okay. Thank you.

This does conclude the Q&A portion of today's program. I'd like to turn the program back over to Ms. Gail Peck.

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 August 8th, 2013. The access number is 4022200116. 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.

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