Trinity Industries Inc (TRN) 2013 Q3 法說會逐字稿

Before we get started, let me remind you that today's conference will contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and includes statements as to estimates, expectations, intentions, and predictions of future financial performance. Statements that are not historical facts are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain of the business issues and risks, a change in any of which could change actual results or outcomes to differ materially from those expressed in the forward-looking statements.

It is now my pleasure to turn the call over to Ms. Gail Peck, Vice President and Treasurer at Trinity Industries. Please go ahead, ma'am.

Thank you, Justin.

Good morning, everyone. Welcome to the Trinity Industries third-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 Groups.

Following their comments, James Perry, our Senior Vice President and Chief Financial Officer will provide the financial summary and guidance. We will then move to the Q&A session. Mary Henderson, our Vice President and Chief Accounting Officer is also in the room with us today.

I will now turn the call over to Tim Wallace for his comments.

Thank you, Gail and good morning, everyone.

I'm pleased with our strong financial results for the third quarter. We achieved a number of key financial milestones. During the quarter our operating profit, net income and EPS all reached new quarterly highs. One of Trinity's key differentiating strengths is the ability of our businesses to create value by leveraging their combined expertise, competencies, and manufacturing capacity to produce products with strong demand. Our businesses that provide products to the oil, gas and chemical industries continued to leverage this strength during the third quarter, delivering impressive results. We have a great deal of positive momentum occurring within our company, and we are strongly positioned to grow the industries we serve.

Our Rail Group continued to improve its performance during the third quarter, reporting a record level of quarterly operating profit and margin. I'm impressed with our Rail Group's ability to continue to generate strong financial results while converting manufacturing space, making line changeovers and increasing production levels. Our Railcar leasing business also delivered another quarter of solid results. We expect to continue expanding our Railcar leasing and management services platform in the near term.

I'm pleased with the way our Inland Barge Group improved its profitability on a lower revenue run rate. Our Barge business successfully converted manufacturing capacity of dry cargo barges to tank barges. Our Construction Products Group improved its year-over-year financial performance, a result of repositioning that has occurred within the segment. Our Shoring Products business that we acquired last year is performing well. The third-quarter financial performance of our Energy Equipment Group continued to show considerable improvement year-over-year. I'm very pleased that our Structural Wind Towers business increased its backlog during the quarter, extending production visibility through 2015. We continue to invest resources to enhance the positioning of our Energy Equipment Group.

During the past few years, the energy Renaissance in the US and Canada has created strong demand for our energy storage and transportation products. We view this demand as the first phase of a multi phase period of demand for these products. During the first phase, customers order railcars and barges to transport crude oil, as well as storage tanks to hold liquefied natural gas products. During the next phase, we anticipate there will be a demand for storage and transportation of products supporting the downstream production of chemicals and petrochemicals. We expect that the increased output from these industries will generate additional demand for our energy containers, barges and railcars over the longer term.

We also see new demand surfacing in the long-term from the ongoing energy transformation that is occurring in Mexico as well. Trinity is in a very strong position to serve customers who need storage and transportation products in the oil, gas and chemicals industry. We continue to devote resources to identify acquisition candidates that have products, services, technology and competencies that could potentially enrich and expand our industrial manufacturing platforms in North America. Trinity's internal structure enables us to quickly link businesses together to aggressively and efficiently pursue products with strong demand.

We categorize our businesses as primary, support, or niche businesses. As we look to expand our portfolio, we consider where an opportunity might fit within this structure. Our primary and support businesses are operationally linked generating ongoing enrichment value for each other through internal supply chains. Our internal structure allows our business to devote a concentration of focus on certain key areas of our manufacturing processes. We are optimistic about the opportunities we have to build upon our platform of businesses.

During the third quarter, we established some new financial records and we expect to build on our momentum. 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. Sustainable progress drives our business activities. Our businesses are constantly striving to reach new levels of achievement. They are successfully implementing a variety of initiatives designed to improve their financial performance, competitive positions and top line growth.

Our people make a major difference in the performance of our Company. We have a very strong team. I'm especially proud of the compliments of the industrial athletes who work in our manufacturing facilities. They have performed exceptionally well, as we have flexed our production lines in order to pursue orders for products in the oil, gas and chemical industries.

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

Thank you, Tim, and good morning, everyone.

Our Energy Equipment Group's revenue for the third quarter increased approximately 25% year-over-year, primarily due to increased shipments of energy containers and other related products. The group reported an operating profit of $15 million on a margin of 8.8%. These results continue to reflect significant improvement in year-over-year performance.

During the quarter, we received orders for wind towers with a value of $442 million. Our manufacturing flexibility positioned our wind tower business to respond to the improved market demand, resulting from the extension of the production tax credit. The Company elected to remove from the wind tower backlog a $413 million order that is subject to litigation. The litigation is ongoing making any public commentary difficult. At the end of the quarter, our wind tower backlog stood at $610 million, and now extends through 2015.

The Construction Products Group generated operating profit of $18.6 million during the third quarter, a 62% increase compared to the same quarter a year ago. The continued improvement in revenue and profit performance is a direct result of our efforts to reposition the portfolio so it is aligned with the products that have more consistent demand drivers. 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 the state and federal level. The government shut down had no impact on highway business.

Our Inland Barge Group experienced a year-over-year decline in both revenue and profit. However, as a result of the manufacturing leverage and the production of tank barges, the segment produced stronger operating margin of 17.4% during the quarter. The recent investments we have made in our barge facilities have increased our ability to flex our production lines in response to changing demand patterns. I am pleased with the financial returns we are seeing from these investments.

Demand for hopper barges continues to be weak. The timing of the a recovery in demand is difficult to predict. We are watching these markets closely and are well-positioned for any pickup in activity. Order patterns in the barge market tend to be lumpy as customers place orders in accordance with their annual capital expenditure plans.

Infrastructure supporting the energy renaissance continues to be built out across North America. The downstream investments for chemical and petrochemical expansions are coming closer in sight. While the timing of new orders is uncertain, the strength of our backlog and the flexibility of our manufacturing platform gives us a great deal of confidence in our business. The barge backlog stands at $476 million after receiving orders of $49 million during the third quarter.

Overall I am pleased with our performance. Our business groups will continue to look for opportunities to grow.

At this time I will turn the presentation over to Steve.

Thank you, Bill, good morning.

I am very pleased with the accomplishments of our Trinity Rail team during the third quarter. Our Rail Group experienced another quarter of record operating profit, driven by an 11% increase in the railcar shipments, compared to the prior quarter and our highest ever operating margin. Our Leasing Group continues to generate strong returns and contribute steady cash flows to the Company driven by strong lease renewals. I am also pleased with the way the North American industrial markets are developing and the resulting long-term opportunities for Trinity Rail. Our Leasing Group experienced another solid quarter with profit from operations increasing by approximately 14% year-over-year, driven by lease fleet additions and increase in lease rates for rail cars serving the oil, gas and chemical industries. Our lease fleet utilization at the end of the third quarter was 98.5%, down slightly from both the prior year and previous quarter, but still very high.

During the third quarter, we sold a small group of railcars which generated $1.6 million of operating profit. As mentioned on prior conference calls, we had a lower level of railcar sales during the quarter as compared to last year, due to our focus on placing railcars into our leasing joint ventures RIV2013. The secondary market for these railcars remains active and institutional investors continue to seek the stable returns generated by leased railcars. We are closely monitoring these market developments for additional opportunities to strategically develop our lease portfolio and to provide railcar leasing and management services for institutional investors.

During the third quarter, we added approximately 1,660 new railcars to our lease fleet portfolio. Our total lease portfolio, including partially owned subsidiaries, now stands at approximately 75,460 railcars, an increase of 6% year-over-year. At the end of the quarter, approximately 16% of the units in our railcar order backlog, with a total value of $848 million, were slated for customers of our leasing business.

During the third quarter, the Rail Group delivered 6,225 railcars and generated our highest ever quarterly operating profit for the third consecutive quarter. We are beginning to see the benefits of stronger pricing levels embedded in our backlog. In spite of line changeovers and capacity additions during the quarter we realized additional operating efficiencies due to a favorable product mix and benefits derived from a more seasoned workforce.

For the full year 2013, we expect to deliver between 24,000 and 24,500 railcars. This implies railcar shipments of between 7,000 and 7,500 during the fourth quarter. The sizable projected production increase from third quarter to fourth quarter is in large part due to customers requirements for railcar deliveries prior to year end to qualify for bonus depreciation. We anticipate unit deliveries in the first-quarter of 2014 to be similar to the third quarter pace with a higher average sales price per car.

North American railcar orders in the third quarter were solid and continued to reflect improving demand for a broader mix of freight cars. The production backlog for the industry remained essentially flat at a very healthy 73,800 railcars. I am very pleased with the orders Trinity Rail received in the quarter. As we had anticipated, orders received in the third quarter and the level of fourth quarter market inquiries reflect demand returning for small covered hoppers to serve both the frac sand and construction markets. We also continued to see demands for auto racks as a result of increasing North American automobile production, and a change in distribution patterns as new assembly plants come online in Mexico. We are also received an increasing level of inquiries for a variety of freight cars driven by customers with discrete new business opportunities or fleet replacement needs.

During the third quarter, we received orders for 5,610 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 a firm, non-cancelable, 40,050 railcars, with a value of approximately $5.1 billion. The visibility provided by our extended order backlog, which enables us to plan production into 2015, continues to differentiate this railcar market cycle from others in the past.

We continue to believe the market is not speculatively purchasing tank cars, as orders in our backlog appear to be aligned with the completion of additional crude oil loading capacity. While the rate of increase in railcar loadings for mid-continent crude oil may be easy, inquiries for tank cars still remain significant when compared to the historical average. Our analysis shows that tank car demand for crude oil tracks the pace of infrastructure investments to expand rail loading capacity in the various oil production regions.

We believe we are in the early stages of demand for railcars to serve crude oil produced in Canada. Unit train service and infrastructure capacity in Canada will be an important factor in the long-term growth for the movement of crude oil by railroads. Rail infrastructure and unit train loading facilities within Canada are just now being developed. Our market analysis and conversations with customers leads us to believe there will be a long-term demand for tank cars to support the movement of crude oil.

As the energy markets mature and investments are completed, downstream markets will begin to expand and additional opportunities for rail transportation will develop throughout the petrochemical and chemical supply chains. Overall we continue to see evidence supporting a long-term fundamental shift in the North American industrial base driven by the energy renaissance. Trinity Rail is well-positioned to provide railcars and leasing services for the resulting demand.

We understand that the markets we serve constantly evolve and change. Our highly flexible railcar manufacturing and strong leasing platforms uniquely position Trinity Rail to respond to various market changes quickly and effectively. While we continue to see strong demand stemming from the oil, gas and chemicals markets, I am confident that, as aggregate demand improves, or if market shifts, our team will again be ready and able to quickly adjust to our production to serve our customers. We still have ample railcar production capacity to respond to a pickup in the broader economy and any acceleration in the replacement cycle within the railcar industry.

During our last conference call, we received questions about the potential regulatory changes pertaining to DOT 111 tank cars that transport flammable liquids. There are approximately 11,500 DOT 111 tank cars in flammable service in our wholly owned and partially owned lease fleets. On September 6, the Pipeline and Hazardous Materials Safety Administration, PHMSA, issued an advanced notice of proposed rule making that asked interested parties to comment on recommendations proposed by the National Transportation Safety Board regarding regulatory requirements for the DOT 111 tank cars. These comments are to be submitted by November 11.

We are closely monitoring the regulatory process and we are preparing to respond accordingly. It's still too early to discuss the possible regulatory changes to DOT 111 tank cars in flammable service that may result, or when a ruling may be made. As we gain further clarity, we will provide an update on how we plan to address any changes. The industry has been through numerous regulatory changes in the past and it is fundamental to the railcar leasing and manufacturing business to respond effectively when new regulations are issued.

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

Thank you, Steve, and good morning, everyone.

Yesterday we reported strong third-quarter results, with earnings per share of $1.26 and $1.1 billion in revenues. Our net income grew by more than 57% over last year, resulting in the most profitable quarter in Trinity's history. All of our business groups performed well.

During the third quarter, we purchased 540,000 shares of our common stock in the open market for a total cost of $24 million. This brings total purchases of our common stock during the last two quarters to 1.8 million shares. Our current share repurchase program has $126 million of remaining authorization through the end of 2014. Additionally, as previously announced in September, we increased our dividend by 15%, effective with the October payment made today. Together with the $0.02 per share increase declared in May, the Company has increased its quarterly dividend by 36% in 2013. These actions reflect an ongoing commitment to the return of capital to our shareholders as a part of our overall capital allocation strategy.

I will now turn to our current outlook for the remainder of 2013. For the fourth quarter of 2013, we expect earnings per share of between $1.24 and $1.34. As a result of this fourth quarter guidance and our performance during the third quarter, our new expectation for earnings per share for the full year is between $4.55, and $4.65, including the effect of discontinued operations. In the Rail Group, our 2013 revenue guidance is now between $2.8 billion and $2.9 billion. Based on our delivery guidance of between 24,000, and 24,500 railcars. We expect a full-year operating margin of between 16.75% and 17.25% 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 now expect full-year revenues of between $560 million and $575 million in 2013. Our Barge business continues to deliver from a strong backlog of tank barges and its manufacturing conversions have gone well leading to increased operating margin guidance of between 16% and 16.5% for the year.

In the Energy Equipment Group, we are increasing our 2013 revenue guidance to between $645 million and $660 million. We expect the range of operating margin for the year to be between 8.75% and 9.25%. We are pleased to announce a backlog for wind towers of $610 million as of September 30, as a result of order activity during the third quarter. This backlog represents orders that carry us through 2015 at our facilities.

In the Construction Products Group, we expect full-year revenues of between $525 million and $540 million in 2013 with an operating margin of between 9.75% and 10.25%. As a reminder, seasonality is a factor in this business segment's results, and the second and third quarter typically represent the high points of the year for the construction season.

In the Railcar Leasing and Management Services Group, we have tightened our 2013 revenue and operating profit guidance to between $580 million and $595 million, and between $265 million and $275 million respectively, due to higher rates on our lease renewals for railcars. As a reminder, the operating results for our railcar leasing joint ventures, TRIP and RIV2013, 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 through the non controlling interest line at the bottom of the income statement. We now expect between $15 million and $17 million of earnings to be deducted in 2013, due to increased forecasted income from these portfolios. As a result of TRIP and RIV2013's partnership tax status, it is important to note that taxes are not applied to the amount of non controlling earnings deducted.

We are now expecting between $750 million and $775 million of revenue eliminations and between $130 million and $140 million of operating profit eliminations due to the addition of new railcars to the lease fleet. We will also have between $220 million and $240 million of revenue eliminations for other inter-Company transactions.

During the first nine months of the year, we recorded $13.1 million of profit from railcar sales from the lease fleet. Our annual guidance does not include any operating profit from railcar sales from the lease fleet during the fourth quarter. Our Leasing Group 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 expect a net investment in new railcars for the lease fleet of approximately $540 million to $555 million. This guidance includes 100% of the investment in new railcars that have been sold to RIV2013, as well as the proceeds received from railcar sales from the lease fleet to third parties that have occurred year-to-date. Full year manufacturing and corporate capital expenditures for 2013 are now expected to be between $125 million and $145 million. We expect corporate expenses to range from $68 million to $73 million for the year. We now expect a tax rate of 34% to 36% for the full year.

Our annual guidance uses a full-year weighted average share count of 76.5 million shares for the purpose of calculating fully diluted EPS. As a reminder, we are required to report EPS using the two plus method of accounting. The result of which should be the reduction of EPS attributable to Trinity by approximately $0.16 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 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 operations and delivery schedules. Our full year guidance reflects earnings per share growth of more than 40% as compared to 2012, and would result in a record annual earnings for Trinity. We remain very pleased with the focused dedication of all of our employees who helped deliver this impressive growth and high quality earnings.

We continue to seek investment opportunities, both organically and externally, that will add value to our diversified industrial portfolio. Our total liquidity at the end of the third quarter was $1.2 billion, positioning us to consider a wide range of acquisition opportunities. As we consider various opportunities, we are focused on those that enhance our competencies, complement our product offerings, and expand our reach in the markets that we are pursuing. We are actively evaluating multiple acquisition opportunities and will provide updates as appropriate when transactions are completed.

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

(Operator Instructions)

Sal Vitale, Sterne Agee.

Good morning, gentlemen, thanks for taking my question. The first question I have is looking at the ASP, can you give me a little color on what drove the decline? I see, I don't have it in front of me right now but I think a few percentage points of decline in the ASP. Was that just product mix, it's actually 3%. Was that just a lower proportion of tank cars in the sales mix?

Steve, you want to take that? Or James?

Yes, sure. Sal, it's really a matter of mix and you have such a wide variety of cars that we're producing with a wide variance in sales prices and that mix continues to shift each quarter and we continue to see a very favorable shift in our mix to higher value cars with strong margins.

Okay. And then I guess in the guidance you give for 1Q in terms of the deliveries guidance, you said that would be roughly flat with 4Q, but that the ASP would be slightly higher? And that is driven by, is that any particular type of car that is driving that ASP higher in 1Q?

Sal, this is James. Again, the ASP is really mix and the fact that as we go through our backlog we are working with cars with more recent pricing. To clarify one thing, Steve's guidance for the first-quarter deliveries is more in line with the third quarter not the fourth quarter, which has a bit of a move-up and then we move back down to a run rate that we have been on in the third quarter.

Okay. Thanks for that clarification, I appreciate it. And then the other question I have is on the energy side, specifically on the tank containers. Can you give a little bit of a sense for what the pricing and volume growth has been there?

Bill?

Yes, Sal, from a pricing perspective I would say that the market is still competitive although it is good pricing in the industry, but there is more demand coming on pace. We see nice double-digit growth rates within the container side, particularly the larger storage container side, those associated with NGL storage and just basic propane as well.

Okay. Is it safe to assume that the profitability or the margin is improving in that business as well?

I'd say from a margin perspective we really got a lot of effort on the cost side. We are working on our cost side pretty strong so I don't look for that from a sales price perspective, but I look for us to continue to improve our production efficiencies in the plants when we have got nice backlogs and good teams working on these products.

Okay, and then on the acquisition front, just staying on that line of business, do you see a lot of opportunities there? Is that a fairly fragmented market? I am saying manufacturers of tank containers.

Yes, it is a fairly fragmented market, as I said in my speech, we're always looking for opportunities to grow. We're out there looking around for businesses that make sense for Trinity, where our competencies and our ability to enrich those businesses add value.

Any interest in getting on the leasing side of that business. Leasing out tank containers?

We are not currently leasing out tank containers.

Okay, thank you.

Thanks Sal.

Justin Long from Stephens.

Thanks, and good morning guys. With RIV and the potential for similar transactions going forward I was wondering if this will translate into more deliveries to the wholly owned lease fleet as you put some of this additional capital to work. Should we expect the percentage of your total deliveries allocated to the lease fleet to change going forward? Or do you think it will be more in line with what we've seen historically?

Justin, this is James. Right now it's a little less than 20% of our total backlog. Which, historically that's moved around a little bit plus or minus that number, it's been in that general range. Again, the cars that go to leasing are going to be, the demand from the customers on whether they are going to lease or buy a car. Transactions like TRIP and RIV give us the opportunity to have capital associated from external parties with capital that we've put into those type of opportunities, but the demand is going to come from the customer side.

Okay great. One question I had was on the customer mix. Could you talk about that a little bit more and what you're seeing in the last few months in terms of maybe what you're both delivering and the inquiry levels for tank and non-tanked railcars. I'm just curious what the balance looks like between leasing companies and shippers and how that's been fluctuating?

This is Steve, Justin, yes we are really seeing a good balance of inquiries, we are seeing railroads that are looking to make some investments for fleet replacement. We are seeing chemical companies and oil and production companies, obviously increasing their tank car needs. Automotive companies. We're also seeing the lessors looking to strategically invest in their fleets as well. So right now we are really experiencing a broad response from customers, third party lessors, railroads, and the industrial shippers.

Okay that's helpful. It sounds like there was a sizable plastic pellet order that was placed in October with another OEM. I was curious if I could get your updated thoughts on the likelihood we see more orders like this materialize in the near-term or do think this is still a cycle that's coming, but it's a year or two years away.

This is Steve again, Justin. Specific to the resins and plastic pellets, all that's going to be very much in conjunction with the infrastructure and the plants that are being constructed and expanded. I think a number of those announcements have said that production capacity comes on stream in 2015 and 2016 and I still think that will largely be the case. I would expect that for plastic pellet cars we will start to see increased inquiries and orders for those cars as we get closer to the completion of production.

In general, I think Tim and I both commented that downstream opportunities beyond the oil and gas sectors, and the petrochemical and chemical sectors is going to drive railcar demand. And again significant investments being made in the Gulf Coast and in the Marcellus region will yield additional chemical and petrochemical traffic as well that we still have not seen the brunt of. So, we are really excited long-term about the market developments and we're certainly enjoying the first phase as Tim referred to with the oil producers and refineries.

Okay thanks. One last one, maybe this one is for you too, Steve. On the railcar leasing business, could you just talk about the trends you've seen recently in lease rates on both the tank and the freight car side over the past few months?

That's really hard to answer that question because lease rates all behave in discrete manners with different markets and different car types. I think generally we continue to see strong lease rates in the tank car sector, and where there's more sluggish demand and excess capacity in the freight car sector, we see less strength in renewal rates and in railcar pricing.

Okay great. I appreciate the time today, guys.

Steve Barger from KeyBanc Capital Markets.

Good morning, guys. You talked about the need for more railcar loading facilities or infrastructure needed for chemical or petrochem plants. Are customers talking to you about specific parts of that chain that are underserved or do you see market opportunities to get involved with the infrastructure build out beyond storage that may go to your specific strengths?

This is Steve, Steve. Again, we see more developments in those markets as infrastructure is developed and plants come on stream. I think the exciting thing for our Company is while those developments are happening there is many other products that Trinity manufactures that also have opportunities in those markets as well. And so what we learned about these markets is really shared amongst the different business groups here and we try to leverage one another's knowledge and customer relationships to look for broader opportunities for the Company.

This is Tim, Steve. As well as when the petrochemical companies begin their build out, they have primary locations and secondary locations and they ship a lot of products in between themselves. And store a lot of products. There's a lot of inter company movement of products and even between the various companies selling raw material to another company that uses that in the processing of their products. We see kind of a spiraling effect here that the demand builds over a longer period of time.

Right, so definitely opportunities to get more involved in that entire supply chain?

Absolutely. These are industrial products that serve that industry and that's just right down our alley. So we're looking at a wide variety of products that we could bolt on our existing platform that enhance that, and utilize that manufacturing flexibility that we have and get multipurpose manufacturing and continue to take that to another level.

Got it. And Steve, I know production mix will change as you take non-tank orders, but in general are the tank cars that you'll produce in 2014, do they have better unit economics than the cars you delivered in 2013?

I don't think we are really in a position, Steve, today to talk about 2014 in any great detail. We are certainly pleased with our backlog and we are seeing here in the third quarter and fourth quarter the impact of strong pricing in our backlog.

All right, well, that may make my next question tough. For the wind tower economics, based on pricing and delivery schedule you see, is that high single low double digit EBIT margin business similar to what you used to run when that was a more robust market?

Yes, Steve, so again consistent with Steve's answer we are not going to get into details of the margins, but it was a nice order, and I think we have an opportunity to get some really fair returns on the order as we go through our production cycle in 2014 and 2015. We are pleased with the economics on the order.

Appreciate it. I will get back in line.

Art Hatfield from Raymond James.

Good morning, everyone. Just a quick question. You guys have done a tremendous job of extracting operating margin in your rail manufacturing group. Are there any other levers that you can pull going forward to continue to ratchet that up, or are you kind of at the mercy of mix and what the market is going to give you on price of the cars that are flowing through your production facilities?

Art, this it Tim. I come from the school that there is really no end to being able to drive sustainable progress throughout our organization. Our people are performing remarkably in that area right now. I think that we just do much better as we get long backlogs and we are able to do what Bill and Steve have both described, work on cost and efficiencies in utilizing the full resources within our Company to leverage additional efficiencies. We are all looking to expand and improve upon the financial performance that we have demonstrated to date.

All right, thanks for the color.

Allison Poliniak, from Wells Fargo.

Hi, good morning, guys. Not to beat up on the Rail segment margins or pick on them because obviously they are very strong, but it seems like you've narrowed the range just a touch. Is there any, is it mix, just given the acceleration of orders, or is it line changeovers, or am I just reading into too much?

Allison, this is James. I think it's really just as we get further in the year and then deeper into the quarter we have a better sense of which cars will be producing. To your point, it's mix, it's the efficiencies we're achieving and just where we see things right now.

Okay. Great. And I know, Steve, you mentioned that you guys aren't willing to talk about 2014, but obviously a very strong backlog here. Is there any reason to think that deliveries for next year shouldn't at least meet this year's level, if not greater?

Allison, again, we are just not prepared to talk about 2014 deliveries, and you are correct, we have a very strong backlog. That backlog on some production lines goes into 2015 as well and we also have some open production slots in 2014 we're anxious to sell. We are not really in a position to share details for 2014 as yet.

Great. And just last question, on the Barge segment, obviously very nice margins in that business. I know historically they have been a bit higher but I think there was some, maybe some steel inflation or something going on there. Bill, can you just touch on that margin and sort of how we should think about them going forward, past Q4 now that the capacity additions have been made?

Yes, Allison, so Q3 I think was a really good quarter for the team, they are doing a great job on the production side. We did a nice job on the changeover at one of our facilities into tank barges, so we are currently operating three facilities on the tank barge side. I think it is really from a cost perspective, from an hours perspective, and just how well the team is performing, but I like the margins, I like what the team is doing.

Great. Thanks, guys.

Thank you.

Bascome Majors from Susquehanna.

Yes. I was looking at the guidance for your eliminations from the railcar fleet profits. It's come down in a little bit over the last couple of quarters, which does impact the bottom line. Just looking into next year, I know you're not going to guide it explicitly, from your earlier comments, but you've got a record backlog, you've told us how much is going into the lease fleet, at least out of that backlog. Is there any sense that sort of the mix of revenues between internal and external will change next year or directionally go higher or lower? I'm just curious with what you can see and when those decisions how to finance those cars are made by your customers if you have any insight into next year?

Yes, Bascome, this is James. Thanks for the question. Yes, we continue to tighten the range we have on the lease fleet additions, and again, as we get deeper into the year and now into the fourth quarter, we have a sense of which cars are scheduled in our production cycle for delivery to the lease fleet and which cars are going to be to external sales without eliminations. As we said, the backlog at the end of third quarter was about $848 million to leasing, a little less than 20% of our total. As I said earlier, that fluctuates over time with the demand and how people want to finance their cars, whether they want to buy or lease those cars.

As Steve mentioned, and as a theme we've had, it's a little early to give that type of precise guidance for 2014, how it may be different historically. We have been in this type of range that we are experiencing this year, but it's a little too early in the production schedule and dealing with the customers on all of the cars that will be delivered next year to get real precise on the level of eliminations yet.

Okay. Maybe I will try again on the acquisition front. Clearly you have the intent to grow the business outside of rail from your commentary and you certainly have the means of it today, and I appreciate you not wanting to talk specifically on deals in progress. With this being a bigger part of your story today than it was six months ago, I was hoping you could give us a little more visibility into your process on the acquisition front, how you look at that, how you approach that. How rich is the pipeline? What's the sort of range of deal size that you might be comfortable with and whether or not valuation has been a stumbling block over the last couple of quarters to perhaps announcing more transactions?

Okay. This is Tim. We are very actively involved right now looking for external opportunities that will enhance our position to serve the infrastructure and energy markets. We have a number of opportunities in our pipeline. As we look at business and we typically like to find products that have a high content of steel, and involve a repetitive manufacturing process and we like businesses to -- that will interplay with our existing businesses in some ways and we've got a number of niche businesses right now that we could potentially grow and then we are also looking for support businesses, and then we also look at primary businesses. One of the reasons we wanted to categorize these things is as we bring forth acquisitions over the next couple of years we want to be able to articulate precisely what the reason is for the purchase and how we feel they will fit in our Company and enrich and participate in the platform of businesses that we have.

We are not out looking at businesses like a holding company, we are looking at businesses like a diversified industrial company that has a good keen eye on operations and the benefits and the value that the companies would bring by being connected to our portfolio. We have added some resources in this area over the last year. We've had a lot of discussions with our Board and internally. We're heavily focused, and fortunately, the Company is positioned in an ideal spot right now from a capital standpoint and a backlog standpoint with all systems go.

I appreciate that color. And just -- with expectations here, should we be thinking more about a lot more deals in the size of sort of what you have done over the last 12 to 18 months, just kind of ramping up the quantity there, or could we potentially go after much larger targets given the means and the favorable trends across your other portfolio?

That's a good question. Over the last decade we spent the majority of our resources building our leasing fleet and our leasing platform and we did not do a lot of acquisitions during that time period. Over the last couple of years as the economy has improved, we began to acquire companies that we saw a really nice fit in our portfolio. As our backlog has improved, and the financial metrics of the Company have substantially improved, we are thinking bigger and larger in terms of acquisitions, and we are not really interested in the quantity that we would do, so we are not trying to do a whole lot of them, we are more interested in the quality and the value that we can bring.

And so we have, like I said, we've brought on resources, we've worked with the last couple of acquisitions that we have done, we have an external resource that's really perfected our processes in integrating companies successfully. We acquired a public company maybe three years ago and integrated that company with the assistance of this external consultant and it worked really nice for us. We are really in a really good position to begin to move forward in this area.

All right I will leave it at that. Thanks for your time.

Matt Brooklier from Longbow Research.

Thanks. Good morning. I had a question regarding the DOT-111 potential regulatory change. The question being, what is your sense as to the most likely outcomes if there is a potential change here within the tank car market?

Steve, you want to take that one?

Yes, sure. Matt, there's certainly a lot of discussion and activity going on right now leading up to the responses to PHMSA, and I think I said in my script November 11 the responses were due, it's November 5, so I wanted to correct that. There are so many different industry positions, it's difficult to determine what the regulators are going to do and when they are going to do it. We're certainly looking at a number of different alternatives and we will be prepared for whatever outcome evolves out of that regulatory process. Really hard to opine as to what is highly likely and what is most likely at this point.

Okay. Do you have, I guess, I'll try again, a sense at this point if you see potential complete retirement of certain tank cars because they make up a pretty decent portion of the overall population. Does the population potentially shrink? Or do you think we are more headed towards a course of potential retrofits versus taking out some of the active fleet?

Matt, those are all considerations plus a host of others. We are looking at all those, and again, we think we will be positioned well to respond appropriately to whatever the outcomes are.

Okay. Just your positioning in the market, the fact that you are a lessor, but at the same time have an OEM and services component. I guess that giving you advantage in terms of if there were meaningful change in the market, is that how you are looking at things?

Well certainly with the different capabilities within Trinity Rail and the financial resources of Trinity Industries, we think we are well-positioned to respond to any outcomes, so yes, I think your observations are correct.

Okay. I appreciate the color. Thank you.

Thom Albrecht from BB&T Capital Markets.

Good afternoon, or good morning, everyone. I don't know who the question would be asked of, but on the wind situation, can you refresh my memory, at the beginning of this year when Congress cut their budget deal or whatever, the wind tax credit was extended into 2014 or 2015?

Bill?

Yes, Tom, this is Bill. The wind tax credit was essentially extended to both 2014 and 2015 and it's really done through an IRS ruling that provided kind of a construction moment in time. There's a safe harbor that really requires that physical work begin and they have the ability to pay 5% of the project and get it going. While it is a 2014 plan, we see it moving well into 2015 as construction finishes.

I see. Okay, that's helpful. And then Steve, we have all seen what's going on with the railcar orders and that, but I usually appreciate your comments on things like the demand for auto cars, grain cars. Could you just shed some light on what kinds of discussions are occurring in the marketplace there?

Again I think in my comments I mentioned, Thom, that we are really seeing a broader array of inquiries for different freight car types and any recovery I think in the overall economy would spur some greater demand in those car types. We certainly always talk about the replacement cycle for our industry and there's a significant number of railcars that will be replaced over the next 10 or 15 years and we shouldn't lose sight of that. Certainly different markets behave differently as a result of their demand drivers. Coal right now is very soft. Grain is probably in equilibrium and we are seeing tank cars and cars for other dry chemicals as critical and significant demand. I think generally we have a moderate overall railcar market, strong tank car demand, and we expect as the economy improves and the replacement cycle continues that we will see improved demand for general freight cars as well.

Okay, thank you.

Bill Baldwin of Baldwin Anthony Securities.

Thank you, good morning. Bill, on your wind tower backlog that you have now, are you going to able to produce that basically out of your existing wind tower manufacturing capacity, manufacturing plants?

Yes, Bill, we can produce the backlog out of the existing facilities today. As well as we potentially could increase production through manufacturing flexibility in a couple of our other facilities.

Thank you.

Thanks, Bill.

Mike Baudendistel from Stifel.

Thank you. Could you talk a little bit about your expectations for capital expenditures in the leasing segment? I think there's been maybe some confusion of how much you are going to be spending there in light of the fact that you're bringing on external partners there, maybe some range that's reasonable over the next couple of years.

This is James, good morning. What we've provided for this year is a net investment of $540 million to $555 million. And what that includes is the cars that we have put into both our wholly owned and partially owned fleet of RIV 2013, as well as the offset from cars we've sold from the fleet. We have not provided any detail beyond this year other than the backlog we have for leasing right now of about $848 million out of the total $5.1 billion backlog. So again, that will fluctuate quarter-to-quarter and year-to-year based on the demand cycle and our customers' preference for sale versus lease of rail cars.

Okay. Thanks for that. Another question on the structural wind towers, historically that's been a pretty good margin business for you. Is there any reason to think that the margins, you won't see the same type of margins you had, say, in 2006 to 2008 for that business?

Michael, this is Bill, I think the dynamics in the wind tower business have changed significantly since 2006, 2007. It's a much more competitive industry from a production perspective, and so I think margins that you see back in 2006, 2007 are probably challenging to achieve. But as I said earlier we feel really good about the economics in the order that we took on a go forward basis, and we'll work hard to kind of lower our costs and improve those margins as best we can.

Okay, one final one. You mentioned about 75,000 cars that you are leased or managed, do you have any target of what you'd like that to get to as you build out your lease fleet?

This is Steve, Michael. You're correct, a little over 75,000 cars in our wholly owned and partially owned lease fleets, and we really don't target a specific number in our lease fleet. James talked about customer demand. We have our partnerships and other investment opportunities. I think Tim and I have both commented that we expect to grow our Leasing and Management Services platform over the long-term. We've obviously had considerable growth to get to the 75,000 cars today.

Okay, thanks very much.

Thom Albrecht from BB&T Capital Markets.

I just had a quick follow-up. Steve, you give a number of 11,500 approximately in your lease fleet that's DOT-111. Do you have an estimate on the entire population, how many DOT-111 cars in the overall national fleet?

I have seen numbers published by the AAR around 265,000. I don't have that number at my fingertip, but I think if you go to the AAR website they do publish that number and the total number of DOT-111 cars in service.

Yes, the number we are talking about is the flammable.

11,500 that I shared with you today are DOT --

The flammable.

-- 111 cars in flammable service in our wholly owned and partially owned fleets.

All right. Okay, thank you.

At this time I would like to turn it back over to our presenters for any follow-up remarks.

Thank you, Justin. That concludes today's conference call. A replay of the call will be available after 1.00 Eastern Standard time today through midnight on November 7. The access number is 402 220-0116. 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.

And this does conclude today's conference call. You may now disconnect, and have a good day.