Trinity Industries Inc (TRN) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to today's fourth-quarter results conference call.

At this time, all participants are in a listen-only mode. Please note, this call may be recorded.

Today's conference call contains forward-looking statements, as defined by the Private Securities Litigation Reform Act 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 business issues and risks. A change in any of which would cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.

(Operator Instructions)

It is now my pleasure to turn the conference over to Miss Gail Peck, please go ahead.

Thank you, Erica. Good morning, everyone.

Welcome to the Trinity Industries fourth-quarter 2013 results conference call. I'm 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 accomplishments and the strong financial results for the fourth quarter and for the entire year. We achieved a number of key financial milestones. During the quarter and the full year, our revenues, net income, and EPS all reached new record levels.

Our businesses are continuing to create value by leveraging their combined expertise, competencies, and manufacturing capacity to produce their products. We are also making great progress in the business development area. We have a great deal of positive momentum occurring within our Company.

Our Rail Group generated strong financial results in the fourth quarter, reporting a record level of quarterly revenue and operating profit. I remain impressed with the group's ability to continue to improve its performance, while converting manufacturing space, making line change-overs, and increasing production levels.

Our railcar Leasing Company delivered another quarter of solid results. In December, we announced a strategic alliance with Element Financial Corporation. Under the terms of this agreement, we are assisting Element to develop a diversified portfolio of up to $2 billion of leased railcars over a multi-year period. The agreement also provides for our Leasing Company to be the servicer of their railcar fleet. This alliance is consistent with our strategy to continue growing our Leasing platform, while maintaining ongoing relationships with our lessees.

I'm pleased with the way our Inland Barge Group maintained consistent margins on a lower revenue run rate during the fourth quarter. The group illustrated its operational flexibility in 2013 by successfully converting a portion of its manufacturing capacity from dry cargo barges to tank barges. This conversion was a significant accomplishment.

Our Construction Products Group is continuing make good progress to improve its overall performance. We expect to realize benefits from the repositioning of this segment.

The fourth-quarter financial performance of our Energy Equipment Group continued to show significant improvement year over year. We continued to reposition our Energy Equipment Group by expanding its product offerings to serve customers in the oil, gas, and chemicals industries. In January, we announced the acquisition of two companies that manufacture cryogenic products.

In addition, in early February, we announced the acquisition of Platinum Energy Services. Platinum manufactures a variety of products that are used at the well site and in midstream locations. These three companies expand our portfolio of Energy Equipment Products and bring strong competencies, as well as energy-industry expertise to our businesses.

The energy renaissance in the US and Canada has created strong demand for many of our storage and transportation products. During the past few years, our customers have ordered railcars and barges to transport crude oil, as well as storage tanks to hold various forms of gas products. We anticipate there will be demand for storage and transportation of products supporting the production of chemicals and petrochemicals.

Our Companies are in a strong position to serve this demand. Over the long-term, we expect to see additional demand developing in Mexico for our transportation and storage products that serve the oil, gas, and chemicals industries.

Trinity's financial health remains solid and we are in a strong position with a large backlog of orders in our major businesses. Our businesses are driven by sustainable progress and are constantly striving to reach new levels of achievement. We are continuing devote resources to identify acquisition candidates that have products, services, technology, and competencies that enrich and expand our industrial manufacturing platforms.

Our people make a major difference in the performance of our Company. We have a very strong team and we continue to add resources that will help us perform better. I'm especially proud of the accomplishments of the industrial athletes who work in our manufacturing facilities. They have performed exceptionally well as we continue to flex our production lines in order to pursue orders for products in the oil, gas, and chemical industries.

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

Thank you, Tim; and good morning, everyone.

I'm pleased with our Inland Barge Group's fourth-quarter results, which showed solid improvement over the third quarter of 2013, in large part due to our recent investment in our facilities. These investments enhanced our flexibility, allowing us to produce a more favorable product mix.

During the fourth quarter, our Barge Group took orders totaling approximately $97 million, bringing the barge backlog to $430 million at the end of the year. Demand for hopper barges is still weak, despite the relatively strong harvest last fall, which typically stimulates equipment purchases. We believe this is in part due to coal barges being converted to transport agricultural products. We are watching these demand drivers closely and are well positioned should a pick up in activity occur.

Demand drivers for tank barge orders continues to be favorable, however our customers are closely monitoring the absorption of new equipment into the marketplace. As upstream infrastructure investments are completed, we expect downstream markets to begin to expand, resulting in increased shipments of chemical and petrochemical commodities, which should have a positive effect on tank barge demand.

For the full year 2014, we currently expect a revenue run rate similar to 2013, and a slight decline in profit due to our planned production mix. We have a steady backlog of orders and our facilities are well positioned to respond to any additional changes in demand.

Moving to our Construction Products Group. Revenue increased modestly due to acquisition related volumes. Operating margin declined year over year to 6.2% from 8.5%, primarily due to weather related issues. The first quarter of 2014 continues to be relatively slow, due to poor weather conditions.

In the fourth quarter, we acquired a galvanizing business located in San Antonio, Texas. This facility provides a full range of galvanizing services to a diverse group of industrial and energy end markets in the surrounding area. Our galvanizing operations were primarily located in the southern US. We will continue to seek opportunities in the galvanizing business.

Inquiry levels for highway products are stable, with activity in 2014 expected to be similar to 2013. There continues to be uncertainty due to the expiration of the current Federal Highway Bill in October. Until these issues are addressed, revenue and earnings growth from this segment will likely be acquisition related.

Moving to our Energy Equipment Group. During the fourth quarter the group set new records for both quarterly and annual revenues. I am pleased with the group progress in growing its portfolio of businesses.

Fourth-quarter revenue increased approximately 13% year over year, primarily due to increased shipments of domestic containers serving agricultural, industrial, and residential markets, and storage containers serving the energy sector. The group reported an operating profit of $17 million on a margin of 9.1%. Our wind tower business is well positioned to realize operating leverage during 2014, due to a strong backlog of $554 million.

Since the start of this year, we completed three acquisitions in the Energy Group. These businesses are expected to add a combined revenue of $90 million to $100 million on an annual basis.

The acquisition of WesMor Cryogenic and Alloy Custom Products broadens our presence in the cryogenics container market. Combined, these two acquisitions have placed Trinity as one of the market leaders in cryogenic transportation equipment.

Cryogenic products are double-walled tanks used to store and transport liquefied gases for a variety of uses. One of the growing uses is for liquefied natural gas, or LNG.

In addition, we also acquired Platinum Energy Services, which expands our product portfolio to include energy related equipment used at the well site and in midstream locations. We continue to invest resources to identify and pursue opportunities to add new businesses to our portfolio that enhance our competencies, complement our product offering, and expands our reach in the markets we are pursuing. Overall I'm pleased with the performance during the fourth quarter.

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

Thank you, Bill, and good morning.

I'm very pleased with the accomplishments of the Trinity Rail team during the fourth quarter and throughout 2013. Our Rail Group reported its fourth consecutive quarter of record operating profit and our highest ever operating margin, driven by a 17% increase in railcar shipments compared to the third quarter.

Our Leasing Group continues to generate strong returns and contributes steady cash flows to the Company, resulting from strong lease renewals, fleet growth, and our alliance with Element Financial. I continue to be encouraged with the way our North American industrial markets are developing and the resulting opportunities for Trinity Rail.

We are very pleased to have completed the formation of our $2 billion strategic alliance with Element Financial during the fourth quarter. Our alliance enhances our ability to continue growing our Leasing platform in a capital efficient manner, while maintaining ongoing relationships with our commercial customers. Element's desire to invest in leased railcars and the confidence they have placed in Trinity to originate and manage these assets is an exciting opportunity.

Along with RIV 2013, the $1 billion railcar investment partnership we announced last May, these two transactions expand the funding relationships we have developed with institutional investors desiring to invest in portfolios of leased railcars. These lease funding alternatives, along with Trinity's strong balance sheet, increases our leasing capacity.

Our overall leasing strategy has not changed. Trinity Rail was developed to offer comprehensive, integrated railcar products and service solutions to our customers. A one-stop shop business model, including leasing services.

Our model is two key objectives, providing a steady flow of equipment orders for our manufacturing operations, and generating a stable stream of earnings and cash flow for Trinity. Over the last 12 years, we have invested significant capital to grow our lease portfolio from approximately 13,000 railcars in 2001, to the size and scale that it has today with over 75,000 railcars under lease to over 500 industrial shippers.

The RIV 2013 and Element transactions increase Trinity's financial flexibility to strengthen our ability to originate leases with our industrial customers, while maintaining those direct commercial relationships. As we originated railcar lease, we now have the flexibility to retain the asset in our wholly owned portfolio, share in the investment with third-party investors, as in RIV 2013, or sell the asset and retain the management and servicing like we are doing with Element.

This flexibility enhances our ability to grow our leased portfolio. I'm very pleased with the growth of our leasing platform and the progress we have made in expanding our access to capital to support our strong lease origination capability.

Our Leasing Group earned record operating profit during the fourth quarter, resulting from lease fleet additions, solid increases in lease rates, and secondary market sales of railcars under the initial phase of the program agreement with Element. Our lease fleet utilization at the end of the fourth quarter increased to 99.5%.

During the fourth quarter, the Rail Group delivered approximately 1,670 new railcars to our lease fleet portfolio. Our total lease portfolio, including partially owned subsidiaries, now stands at approximately 75,685 railcars after secondary railcar sales, an increase of 6% year over year.

At the end of the quarter, approximately 17% of the units in our railcar order backlog with a total value of approximately $827 million, were slated for customers of our Leasing business. During the fourth quarter, the Rail Group delivered 7,280 railcars and generated our highest ever quarterly operating profit and margin. In spite of several product line change-overs and further capacity additions during the fourth quarter, our work force did an amazing job realizing strong operating efficiencies, while meeting stringent customer delivery requirements.

For the full year 2013, we delivered 24,335 railcars, a 26% increase over 2012 deliveries. We anticipated unit deliveries during 2014 to be in the range of 25,500 to 27,500. North American railcar industry orders in the fourth quarter were solid and continue to reflect improving demand for a broader mix of freight cars.

The industry backlog declined slightly as capacity increases outpaced orders, but still remains at a very healthy 72,900 railcars. During the fourth quarter, Trinity Rail received orders for 7,125 new railcars, including tank cars, covered hoppers, and auto racks from railroads, third-party lessors, and industrial shippers. Our backlog now stands at 39,895 railcars with a value of approximately $5 billion.

Current inquiry levels reflect continuing demand for covered hoppers to serve the frac sand and construction markets, grain, and petrochemicals such as resins. Auto racks continue to be in steady demand resulting from increased North American automobile production.

We are receiving an increasing level of inquiries for a greater variety of freight cars as the economy continues to grow and fleet replacement opportunities develop. The markets that we serve are dynamic; our highly flexible railcar manufacturing, and strong leasing platform that's uniquely positioned to respond to market demand changes quickly and effectively. We have additional production capacity available to respond to increased freight car demand should current market trends continue.

We continue to see attributes of this railcar cycle as different from previous cycles, because of the energy renaissance occurring in North America. Inquiries for tank cars are continuing at high levels, as additional crude oil loading facilities and petrochemical production expansion comes online. As the energy market matures and investments for infrastructure are completed, opportunities for rail transportation will develop throughout the crude oil and petrochemical supply chains.

I would like to provide a brief update on the potential industry regulatory changes pertaining to DOT-111 tank cars that transport flammable liquids. According to the Railway Supply Institute as of September 30, 2013, there were approximately 272,120 DOT-111 tank cars in the North American fleet. Of that total, approximately 94,180 tank cars transport flammable liquids. Over 70% of the DOT-111 tank cars that transport flammable liquids carry either ethanol or crude oil.

Let me provide some history for you as context for the issues our industry faces. Following several derailments involving ethanol unit trains and subsequent recommendations from the National Transportation Safety Board, in May of 2011, the Association of American Railroads Tank Car Committee, petitioned the Pipeline and Hazardous Materials Safety Administration, PHMSA, regarding the reexamination of the existing tank car design transporting hazardous materials, including flammable materials.

The AAR Tank Car Committee is comprised of representatives from railroads, railcar manufacturers, railcar lessors, industrial shippers, and railcar owners, and collaborates closely with the Federal Railway Administration, PHMSA, and Transport Canada on tank car designs. A new enhanced tank car design involving thicker steel, head shields, and enhanced top fittings protection was proposed at that time by the AAR Tank Car Committee.

In the absence of PHMSA's issuing a ruling, the AAR, in good faith, adopted the new tank car design for new DOT-111 tank cars ordered after 2011 for flammable service. These tank cars are referred to in the industry as the good faith tank cars. The tank cars ordered prior to October 2011 are referred to in the industry as the legacy cars.

As of December 31, 2013, there were approximately 12,200 DOT-111 tank cars in flammable service in Trinity's wholly- and partially-owned lease fleets. Of these tank cars, approximately 2,600 are good faith tank cars, built to the current AAR standard adopted in October 2011, and approximately 9,600 are legacy cars.

Following the derailment of a crude oil unit train in Quebec in 2013, and additional derailments that occurred after that time, PHMSA issued an advanced notice of proposed rule making in September requesting interested parties to comment on recommendations proposed by the National Transportation Safety Board and other petitions regarding regulatory requirements for DOT-111 tank cars. PHMSA is currently reviewing the comments submitted in response to the advanced notice for proposed rule making.

There are three categories of tank cars that a proposed rule making may likely address. The proposed rules that may apply to legacy tank cars, good faith tank cars, and a next generation tank car. We are closely monitoring the regulatory process of potential outcomes. Trinity is a member of the Railway Supply Institute and an active participant on the American Association of Railroads Tank Car Committee.

It is still too early to discuss the possible regulatory changes to DOT-111 tank cars and flammable service that may result, or when a ruling may be made. These are very complex and technical public safety issues that require extensive review, as they should. The rule making process is thorough, as it is crucial to get input from a wide variety of stakeholders, including shippers and carriers, railcar owners and builders, and state and local officials.

As we gain further clarity, we will provide an update on how we plan to address any changes and continue to offer premiere railcar products and services to our customers.

I'll now turn it over to James.

Thank you, Steve; and good morning, everyone.

Yesterday we announced strong fourth-quarter and full-year 2013 financial results, reporting record revenues and earnings per share for both periods. During the quarter, we reported revenues of $1.3 billion and earnings of $1.44. Quarterly net income increase by more than 58% compared to last year, resulting in the most profitable quarter in Trinity's history.

During the fourth quarter, we repurchased 639,000 shares of our common stock in the open market for a total cost of $34 million. For the full year, we repurchased approximately 2.5 million shares for a total cost of $108 million. The 15% increase in the quarterly dividend we announced in September, became effective during the fourth quarter, bringing the total increase of the dividend during 2013 to 36%. The action taken in 2013 reflects our ongoing commitment to return capital to our shareholders.

The $2 billion strategic railcar alliance that we formed with Element Financial during the fourth quarter was an important accomplishment for Trinity. The alliance enhances our flexibility to continue growing our leasing presence in a capital efficient manner, while maintaining ongoing commercial relationships with our lessees. The capital generated through the alliance can be invested in our railcar leasing and management services platform, our portfolio of diversified industrial businesses, or other investments that will enhance shareholder returns.

Since we announced the agreement in December, Element has purchased $500 million of railcars from the lease fleet, generating earnings per share of approximately $1.12 to $1.22, of which $0.12 per share was recorded in the fourth quarter. During the next 12 months, we plan to deliver another $500 million of leased railcars to Element, primarily from our current leasing backlog. At this time it is difficult to precisely project the exact timing and composition of each group of leased railcars that we will sell to Element.

Revenue and profit from these new railcar sales will be recorded in our Rail Group, either as a direct sale to Element or as a sale to the Leasing Group. If the cars are sold to the Leasing Group, we will eliminate the revenue and defer the profit at a consolidated level during the quarter. The sale of a railcar from the lease fleet to Element in the future quarter would then be recorded in the Leasing Group as a car sale.

Under the terms of the program agreement, Element is expected to add another $1 billion of leased railcars to its portfolio during 2015. These railcars will come from our leasing backlog, our wholly-owned lease fleet, and from other secondary market sources.

During 2013 we invested capital across a number of areas. We invested approximately $150 million in capital expenditures for our manufacturing and corporate operations, and $581 million in the lease fleet. We returned approximately $145 million to shareholders through share repurchases and dividends, and invested $73 million in acquisitions during the year.

In 2014 we expect to identify additional investment opportunities in all of these areas. The timing of our investments will be determined by our ability to find quality opportunity as the year progresses. During the last decade, we invested nearly $4.8 billion in our railcar leasing business. Its scale now provides a baseload of business for our rail manufacturing companies, and a steady level of earnings and cash flow for our shareholders.

The Element alliance, along with the RIV 2013 investment partnership that we formed last May, provides us with additional financial flexibility. Given our strong financial position, the solid backlog of orders in our major businesses, and a stable leasing operations platform, the time is right to pursue growth opportunities that will enhance the other business segments within our diversified industrial portfolio.

We are off to a strong start in 2014 with respect to investing our capital for growth. We have already completed three acquisitions in our Energy Equipment Group for a total investment of approximately $120 million.

WesMor Cryogenics, Alloy Custom Products, and Platinum Energy manufacture products that provide us with important competencies as we grow our presence in the energy markets. As we work with our Board of Directors on the investment of capital, our focus is on enhancing the long-term growth of the Company and increasing shareholder value.

I will now turn to our current outlook for the year 2014. For the first quarter of 2014, we anticipate earnings per share of between $2.45 and $2.65, which includes between $1 and $1.10 per share of profit from sales of leased railcars to Element already closed during the quarter.

Our anticipation for EPS for the full year is between $6.30 and $7.

In the Rail Group, our 2014 revenue guidance is between $3.1 billion and $3.4 billion, based on our delivery guidance of between 25,500 and 27,500 railcars. We expect a full-year operating margin of between 17.5% and 19% for the Rail Group. This group continues to achieve strong margins and maintains an order backlog of $5 billion of railcars for future deliveries.

In the Inland Barge Group, we expect full-year revenues of between $550 million and $580 million in 2014, with an operating margin of between 14% and 16% for the year. In the Energy Equipment Group, our 2014 revenue guidance is between $840 million and $885 million. This represents expected growth of 26% to 33%, and would result in record revenues for this group.

We expect the range of operating margin for the year to be between 11% and 12%. The year over year improvement in both revenues and profit reflects the expected solid performance of our wind towers business, strong demand for storage containers, and results from the recent acquisitions made in this group.

In the Construction Products Group, we expect full-year revenues of between $530 million and $560 million in 2014, with an operating margin of between 12% and 13.5%. The improvement in results reflects the benefits from repositioning activities that have been occurring in this group.

In the Railcar Leasing and Management Services Group we expect 2014 operating revenue of between $585 million and $615 million, and operating profit of between $260 million and $280 million, similar to 2013 levels. As a result of the sale of the first $500 million of railcars to Element, our profit from leasing operations is expected to be between $30 million and $35 million lower than had the cars remained in our 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.

As a result of this, we expect to deduct between $27 million and $35 million of earnings in 2014. As we have indicated on previous earnings calls, TRIP and RIV 2013 partnership tax status results in no taxes applied to the amount of non-controlling earnings deducted from Trinity's income statement.

In addition to the guidance I just provided for the Leasing Group, we expect to report revenue from railcar sales from the lease fleet of between $315 million and $330 million, an operating profit of between $165 million and $180 million, primarily from the program agreement with Element. A railcar sale is reported in revenue if a railcar has been in the fleet for less than one year. Otherwise, it is reported as a disposition of a long-term asset with no revenue recorded.

Of the $396 million of railcars that were sold to Element during January, approximately $174 million will be reported in first quarter revenue, and the remaining amount will be reported on the cash flow statement as proceeds from car sales.

As I mentioned earlier, the amount of revenue and profit recognized from car sales in 2014 will depend on the timing of leased railcar deliveries to Element. There could be a shift from railcar revenue and profit, to leasing eliminations and deferrals or vice versa in any one quarter, with no impact of the overall level of consolidated profit in the quarter, though the timing may vary from one quarter to another.

For 2014 we expect to eliminate between $645 million and $675 million of revenue, and defer between $100 million and $115 million of operating profit, due to the addition of new railcars to the wholly- and partially-leased fleets, including railcars sold to RIV 2013. The level of eliminations is lower than last year, primarily due to the program agreement with Element.

For 2014, we do not expect the net investment in new railcars to consume any cash, due to expected proceeds received from railcar sales during the year. Full-year manufacturing and corporate capital expenditures for 2014 are expected to be between $200 million and $250 million, as we maintain our facilities and invest in organic growth to meet market demand for our products.

We expect between $250 million and $270 million of revenue eliminations for other inter-company transactions. In addition, corporate expenses are expected to range from $87 million to $97 million for the year, as a result of our growing business operations and acquisitions. For 2014, our guidance assumes a tax rate of between 35% and 36% for the year.

Before I conclude, let me address the accounting treatment on our earnings per share calculation for the Company's $450 million of convertible notes issued in 2006. Details pertaining to these notes are included in Note 11 of our 10-K. These convertible notes will have a dilutive affect on quarterly EPS if the average market price of our common stock during the quarter exceeds the convertible notes conversion price. At the end of 2013 the conversion price was $50.78.

Since issuance of the notes, our quarterly average stock price has been below the conversion price, thus we have not included any additional shares in the denominator of our diluted EPS calculation for any historical quarterly reporting period.

Our common stock is currently trading above the conversion price. If the average price of the stock for the quarter remains above the conversion price, we will report additional shares as part of our diluted EPS calculation. For example, a $60 average stock price would result in an additional 1.4 million shares being added to our diluted share count for the purposes of calculating EPS. Our annual guidance uses a full-year weighted share count of approximately 77 million shares for the purpose of calculating fully diluted EPS. This share count includes the potential dilutive impact from our convertible notes at the $60 price that was used in my example.

As a reminder we are required to report EPS using the two-plus method of accounting, the result of which would be a reduction in EPS attributable to Trinity by approximately $0.23 per share for the full year 2014, compared to calculating Trinity's EPS directly from the face of the income statement. This is included in our EPS guidance as well.

Our full-year guidance range reflects earnings per share growth of 33% to 47% compared to last year, and was result of the achievement of a new level of record annual earnings for Trinity. We remain very pleased with the focused dedication of all of our employees who helped deliver impressive growth and high-quality earnings during 2013.

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

(Operator instructions)

Steve Barger with KeyBanc.

Good morning, guys.

Good morning.

Thanks for all the color, James. I think I'm going to just jump into the acquisitions first. As you mentioned, on a trailing 12-month basis you have added almost $100 million. Without drilling down into each of the three deals, can you give us a general operating margin profile for those acquired properties, excluding one-time items or on a purely operational basis?

Yes, Steve, this is Bill. I think when we look at those operations from a margin perspective, they are probably relatively consistent with where you see our Energy Equipment Group today. We would hope longer term there is opportunity for margin expansion as we integrate the businesses, particularly the two cryogenic businesses as we put those together.

Should we be thinking there are other deals of this type to get scale in those specific applications? Or are those part of a broader product-in-service spectrum that you are trying to fill in to pursue a strategy?

Steve, this is Tim, I think the answer is yes to both of your questions. We like to focus of certain products that we think are adjacent to our businesses, like the cryogenic products. And then we also like to look for some newer ones, as well as we are going to be expanding some of our existing ones.

All right. And how should we think about growth rates for those cryogenic companies, I guess same question for Platinum, and if you can't talk about those properties specifically, can you help us think about the industry growth rates that you see?

James, you want to take that?

Sure, Steve, this is James. I think it is a little early for us to forecast growth rates and potential we have. We certainly see a lot of potential in the cryogenic space, as well as the oil field equipment space that Platinum gets us into, as well as the Canadian market that Platinum helps us enter in a big way as well.

So, again, a little too early to forecast that. This year is embedded in the guidance we provided, but as we seek more market opportunities and seek expansion opportunities, as we develop the enrichment between the existing business we have and these new businesses, we'll be able to provide that as we go forward.

Alright. Just one other and I'll jump back in line. How much of this is reacting to or, I guess, anticipating requirements for companies where you already have a relationship in one of your other lines of business? And does that really help you kickstart growth here? Or are you more assembling capabilities to put together a service package or a product package that you can then take to market?

Steve, I think when you look at our two acquisitions, they really complement each other well; one had strengths on the stainless steel side, and the other had strengths on the aluminum side. And so as we look forward, and particularly in the usage of LNG, we see a lot of applications, certainly there has been a fair amount of talk about the use of LNG through locomotives on the rail side. There is a fair amount of talk in the marine business and the barge business as well.

So I think as we think broadly downstream for Trinity, we see a lot of opportunities in these business lines and the cryogenic technology, and so for us it was getting the competencies together and then plotting a plan as we move forward.

Yes, and Steve this is Tim, we already are producing cryogenic tanks in Mexico, serving that market for stationary tanks. So we really feel like there is a great domino effect associated with these acquisitions.

That's great detail. Thanks very much, gentlemen.

Thank you, Steve.

We'll go next to the site of Allison Poliniak from Wells Fargo. Please go ahead.

Hi guys. Good morning. James, I just want to understand a little bit more your guidance range, and I know the uncertainty about that second tranche of Element coming through. If we assume most of these are going to Chel -- [to earn new target deliveries] -- do I just assume a lower end of that guidance range? Just trying to see how I should think about that.

Referring to our overall guidance range for the Company or for the specific Element --

For the Company specific, I guess either, however you want to address it. I'm just trying to get a sense of -- I know it's hard to say now, but did that lower end assume more going to Chel versus Element?

Yes, I think what we said is in terms of the overall guidance range for the Company, we always at this early point in the year try to give a pretty wide range in the sense of where we are. The guidance I gave for each business gives you a scale of how large a Company we've become, and how much opportunity we have within those ranges to perform.

In terms of the second tranche of Element cars, the $500 million, as we said the exact timing and composition is still being worked through with Element. As we said, the majority of that will be from our leasing backlog.

Because of timing of when a car is produced and delivered, whether it gets sold to Element during the quarter or the next quarter will depend on whether you see it come out of the car sales or purely in new car sales from the OEM segment. So that won't impact the margin range within the guidance that we have given you or the profitability of the transaction itself, that is simply going to be geography, and we can certainly help with you that on a quarter-by-quarter basis as we report those results.

Okay, that is perfect. Then, Steve, you gave a number for the leasing fleet as it stands. Was that at the end of Q4, or did that include the sales to Element in Q1 as well?

At the end of the fourth quarter 2013.

Okay, are you willing to provide the Q, as it is today?

Not today, no.

Not today? Okay, great, thank you guys.

Thank you, Allison.

Next to the site of Justin Long from Stephens Inc.

Thanks. Congrats on the quarter.

Thanks.

Are you more confident in terms of the non-tank railcar markets coming back the next several years? It seems like you are, based on the increase you are seeing in the market. And also if you look at the manufacturing operation today in the Rail Group, what are some of the non-tank railcar types where you have latent capacity?

Steve, you want to take that?

Sure, Justin, good question. We really are seeing a broadening in demand for railcars beyond just tank cars for crude oil service.

Let's talk about tank cars for a moment before I get into the freight cars. Again, crude oil is the initial phase of tank car demand. As refined products continue to expand and the petrochemical complex expands, we're going to see additional need for tank cars to carry those refined products as well, so I think there is still growth and length to the tank car demand.

Freight cars, we are seeing strong demand really across the board, we're seeing significant demand for small-cube covered hoppers for frac sand and construction product, we're also seeing demand for covered hoppers that will carry grain products. And again, part of the expansion of the petrochemical sector, we expect the demand will only grow for covered hoppers for resins and plastics. So we are very well positioned to address any additional freight car demand from a capacity standpoint, and we really do see some growth in that area to complement what we are doing on the tank car side.

Thanks, Steve. That's helpful. My second question was on the balance sheet. So your debt today is mainly nonrecourse debt associated with the lease fleet, and I was wondering how you think about the level of leverage you feel comfortable bringing on as you pursue acquisitions going forward?

Hey Justin, this is James. I think, as you point out, we have a strong balance sheet. The majority of the debt is nonrecourse on the leasing side. You have seen the leverage in that side continue to come down, as we have financed a lot of our growth in the lease fleet with our cash flow from operations and from the capital that we have generated through our alliances and partnerships over the last year.

On the corporate side of the balance sheet, as you mentioned, really the only piece there is the convertible debt, and the cash we have puts us in a net cash position on the balance sheet. In terms of comfort around leverage we are an investment grade Company from S&P and Fitch now, that's a good position for us to be in, it broadens our access to the financial markets. We wouldn't put ourselves in a position of stating you back to a level of leverage we are comfortable with. Having that investment grade rating gives us a lot of opportunities, but as we're making acquisitions, we are investing in the Company, that is also bringing with it cash flow and earnings, so that increases your capacity there.

So I think I would say we have a lot of room, we have $1.3 billion of liquidity between our cash and immediately available facilities, certainly among the debt and equity markets if we had that need. But I don't think we would be able to give you a number on how much leverage we are comfortable with, but we certainly feel confident that we have got the ability to pursue opportunities for growth in the Company with the balance sheet we have and the cash flow.

Okay, great. That is fair. Thanks, James. I guess one last one, I just wanted to clarify, so is the next tranche of $500 million of sales going to Element, is that reflected in your guidance?

Yes, it is. And again, it's expected over the next 12 months, it's going to come primarily from the leasing backlog, it's going to be primarily new cars, and it is included in the guidance. We are not breaking out the specific component from that because it is a leasing group of customers and then a third-party sale to Element of that railcar, so it is included in the guidance, yes.

Okay, perfect. I'll leave it and pass it along. Thanks for the time.

Thank you, Justin.

Next question from Eric Crawford from UBS.

Good morning.

Good morning.

Quick point of clarification on the deliveries guidance. I think the midpoint implies a 9% decline in deliveries from the 4Q run rate.

Is that just a function of Element deliveries coming from lease fleet rather than backlog? How should we be thinking about that?

Eric, this is Steve. Yes, I wouldn't necessarily relate our delivery cadence with Element and that backlog. As I mentioned, we had some significant delivery requirements to meet customers' needs to have cars in service by the end of 2013, which caused this to ratchet up a little bit more in the fourth quarter. I think the run rate of 25,500 to 27,500 is the right rate that you'll see on average over the four quarters.

Okay, that is helpful. Should we be thinking about a constant average run rate for the four quarters? Or do any quarters in particular stand out?

Well, generally our deliveries are within a fairly narrow range. We are going to have some changes in delivery numbers based upon product mix and potential line change-overs. But again, I feel good about the range of deliveries we have given you for the year.

Okay. Got it. No, that is helpful. Thank you.

I guess next, it is a common theme for everyone, but if you could speak more broadly to the opportunity you are seeing with respect to tank car safety, seeing reports of some customers looking to buy new rather than retrofit, and other OEMs have commented they are hopeful to see some movement on the regulatory front in the next 60 to 90 days. So just wondered if you could speak to what you are seeing there?

It is all speculation.

Okay.

PHMSA has a very clear process that they must go through. They are in a quiet period following their request for various opinions and some riddles under the advance notice of proposed rule making, we are very much engaged in any conversations within the industry with our customers. There will be a number of different scenarios, I think we will be prepared for whatever outcome comes to us from the rule making. But I still think we are a little bit in the offing before we know what goes on.

Got it. Appreciate it. And then last for me switching over to barge, I guess that coal to ag barge switching dynamic that you called out, is that gaining momentum or has it been more limited? I guess with the big harvest and the higher nat gas prices that we are seeing at least now, I'd think that there might be less momentum there.

Yes, Eric, I think the momentum has definitely slowed down on the conversions. We did see it pretty strong for a period of time, but we are seeing it slow down at this point in time.

Great. That is it for me. Thanks so much.

Bascome Majors from Susquehanna. Please go ahead.

Good morning. I wanted to ask another one on the acquisition front, you talked a little bit about leverage and where you are seeking to deploy capital. But now that Element's out there, we have some of the same visibility you do into some of the cash inflows from your leasing monetization efforts over the next couple of years.

Can you help us think about sizing up the amount of capital you and your Board are comfortable with deploying over the next couple of years here? And just give us a little sense to the cadence or pace of that in your guys' heads as you think about growing the business outside of Rail?

Okay Bascome. This is Tim. We were very focused in our business development process within our Company, and we know our markets and our industries real well that our businesses participate in, and we've got a broad group of relationships that provide a large number of opportunities for us. So in the business development and the business growth area, we always have something going on in that particular area. We are either participating in a formal bidding process for a company, or we are taking some deliberate steps to discuss opportunities with principals of companies that we are interested in.

It is just a very dynamic environment, and it is hard for us to pinpoint one particular item at this time. Sometimes our transactions occur very quickly, and at other times they take a long time to finalize the deal. That is how the history of our Company has been for decades.

We are fortunate to have a highly flexible and collaborative manufacturing platform that we build upon. When we look at an acquisition candidate, we always analyze their enrichment value, and that's the value that they bring to us and the value that our manufacturing platform will add to their business. This enrichment flows both ways.

And so on some of the smaller deals we may get some competencies and we may get some technology that's very crucial to us. The acquisitions that we did in the cryogenic business were very small, but they have opportunities with the seeds that have been planted to grow into something very large, and make a significant impact.

A lot of times when we acquire a company, we may have an idle facility that we think we can convert some manufacturing space over to. We are just constantly reviewing growth opportunities that fit within our current business or adjacent to our manufacturing platforms in that area. So it is just really hard for us to quantify them and put the dollars and cents to the size.

We are not afraid of doing a large acquisition, in fact we have a pretty good appetite in that particular area, but it is a matter of finding something that fits really well with our culture and fits with the manufacturing platform that we have. We are very confident that we will have some very interesting opportunities this year and next year, as we are go -- on a go-forward basis.

I appreciate the detail there. Maybe could you help us get a sense for what the boundaries of small, medium, or large would be in your eyes?

No. Because like I said, we don't really categorize something as small, medium, and large, we look at it as to the potential that we think that business can bring to us, and then the value that we can create on a go-forward basis. But as James said, we have got significant liquidity, our balance sheet capacity is great, we have got cash flow coming in, so we can handle a relatively large acquisition.

Understood. Thank you. And I'll just ask one more on a different angle. This morning, the largest crude carrier among the class ones confirmed that they were seeking to purchase their own fleet of newer tank cars, in light of some of the public and regulatory safety concerns that you addressed earlier in your call.

Rails owning tank cars would be a pretty dramatic shift from the traditional operating lessor-ownership structure here. Can you confirm if you are getting inquiries from multiple railroads on the tank car side today?

Bascome, this is Steve. We don't comment on specific orders or order inquiries. I agree with you that a major railroad taking ownership of tank cars is something different in our industry. And I have seen where B&S up and made their large announcement earlier this morning about an interest in purchasing tank cars.

We'll certainly look at that business opportunity, like we look at any other orders. We're guessing there will be a number of people looking to buy a lot of tank cars following regulatory change.

Understood. I mean hypothetically, since this early at this point, could this impact or could this change the safety debate in any way in your eyes, and how that plays out, if they emerge as buyers and owners in this asset class which they historically haven't been?

I don't think so. I mean, railroads have always been concerned about tank car safety, whether they owned them or not. There is 330,000, 340,000 tank cars in North America. So I think the tank car segment is a strong market segment, and is going to continue to grow.

At the same time Steve, this is Tim, Berkshire already owns tank cars. So it is just really one of their units owning tank cars versus another one.

Good point. Union Tank Car, of course another subsidiary of Marmon Group, which is owned by the Berkshire Company, Berkshire Hathaway, and which also owns Burlington Northern Santa Fe.

Understood. I appreciate the time this morning, guys. Thank you.

Sal Vitale from Sterne Agee.

Just a quick clarification. When you say the next tranche of the $500 million to Element that will come from the lease backlog, so just to make sure I understand that, that will not be eliminated, so the profit will not be eliminated on that, correct?

Ultimately, that's correct. You may see one quarter of the profits eliminated as it goes into our lease fleet and then sold to Element, that's simply a matter of timing and geography as I mentioned. But once the cars are sold to Element, you'll see a full recognition of the profit at a consolidated level.

Okay. So then when you say that the guidance that you gave in all the categories, so basically the profit on the $500 million would be included in the leased profit right, rather than the manufacturing profit?

The majority of that would be in the manufacturing profit, as the majority of this will come out of the Rail Group directly. There may be some that move the leasing first income from that, and again we'll update that on a quarterly basis if we see that shift.

Okay, understood. And then the other question is, if I just look at your backlog, you have about 40,000 cars in the backlog, and the midpoint of your guidance for 2014 is 26,500. How do we think about -- is all of that 26,500, should we assume that all comes from the backlog? Or is some of it, are you envisioning some of those deliveries to come from current-year orders?

Sal, this is Steve. Good question. We certainly expect a significant number of our deliveries to come from our backlog. We do have unsold space on several of our product lines, production lines in 2014, so there may be some additional sales that would come from those opportunities.

Okay, thank you. That is very helpful.

Next to the site of Matt Brooklier from Longbow Research.

Thanks. Good morning. In your prepared remarks, you talked about potential opportunity within Mexico, I'm just curious to hear kind of your overall thoughts on what that opportunity could look like. That is an energy market currently undergoing pretty radical change here. I'm just curious to hear where potentially Trinity fits into that market, in particular businesses, what is your level of, I guess, conviction that you can grab incremental business in that particular market?

Okay. This is Tim. As I said during the past few years, our customers have ordered railcars and barges that transport crude oil, they're ordering tanks for the storage of it. If you look at our product line, it fits real well to serve -- all of our products fit real well to serve the oil, gas, and chemical industries. And so we are just closely monitoring the opportunities in Mexico, we have got great relationships down in Mexico, we've got a Board member that used to be the CEO of Pemex at one time, so we're following proposed legislation and the changes that could open up the energy markets and increase the privatization down there.

So it is more of a longer term, let's sit on the sidelines and look at what opportunities are there, and then let's be prepared to strike when we think the appropriate time fits. We are building right now in Mexico, loads of frac sand cars, as an example, and we're building tank cars down there, so we're geographically desirably set up, we are building tanks right now of all different types that serve that particular market. So our Mexico companies that we have are really strategically located to serve that market on a very rapid basis, should the demand increase.

Okay. Is the opportunity more on the railcar side or is it more on the tank storage side? Or is it a little bit of both, maybe?

I think it is across-the-board from the Energy Equipment business segment that we have, as well as the Railcar segment that we have.

Okay. Then just another question about regulation. Is there any other I guess preemptive measures that tank car buyers are currently making ahead of potential regulation? I mean for the most part we don't know what the final rule could look like, we do have kind of a sense of what the requirements may be, and I'm just curious to hear if kind of the equipment mix on the tank car side, if that's shifted further towards jacketed cars versus non-jacketed cars, and kind of the overall potential benefit for Trinity.

Hi Matt, this is Steve. Certainly we are in dialogues with all of our customers about potential outcomes, and about orders they may have placed with us. We really haven't had a situation where a major customer shifted from a non-jacketed car to a jacketed car, because the non-jacketed cars are acceptable under the regulations.

And I think you have to understand from the shippers standpoint, this oil continues to come out of the ground. They have refineries they have to be able to continue to feed, so just halting railcar shipments, whether that is new equipment they have earmarked for expansion or whether it is existing equipment, just is not very feasible. And so I think we're going to continue to make what we make, and as soon as new regulations are available, we are going to make that shift and produce those cars for our customers.

Okay, that is helpful. Thank you for the time.

Next to the site of Art Hatfield from Raymond James. Please go ahead.

Morning, everyone. James, I know you don't want another question on Element and your guidance, but just on your elimination guidance, are you currently assuming all $500 million will be direct sale? Or is a portion of that you have going through the lease fleet at this point in time? I know you'll update us as time goes on, but just kind of for an understanding where the guidance stands now.

Sure, Art, thanks for that. That is why we give ranges. The guidance we gave is that the vast majority of that is through the elimination line directly from the Rail Group.

But the car sale figure that we gave you and the elimination figure that we gave you does include some of that flowing through. But for the most part, the vast majority is directly from the Rail Group. And again, we'll update that each quarter as we move along and give more precise timing around that.

Recall that we already have a piece of that recorded in the first quarter, that we recorded previously, what shows up in revenues versus what shows up not as revenue, those kinds of things. We're happy to walk you through that after the call as well. Hopefully, that helps.

Actually no, that helps me a lot. Just to get that clarification. Just another thing, and I don't know if this is just an accounting thing, but can you kind of help me understand in the fourth quarter of 2013 you sold from the lease fleet you sold about $112 million worth of cars and generated a profit of $16 million, whereas a year ago you sold $50 million and generated about $15 million in profit. Can you just walk me through kind of what happened year over year there? And if I'm not really --

I'll mention that a few different ways Art. Clearly, one thing is simply mix and which cars you are selling and what leases are attached. Another thing is, again we can walk you through this, the revenue piece of this, whether a car is less than one year-old and recorded as revenue versus a car that is more than one year old and not shows up as revenue, can make a big difference in that margin.

It is all going to show up as profit. The only portion that may show up is revenue. The cars we sold in the fourth quarter this year could have a different mix in that perspective in terms of age, as fourth quarter a year ago. We can track that with you as we file our 10-K later today and help you with that math.

Okay, that's helpful. That is all I've got for me, thanks.

Thank you Art.

We'll take our next question from Barry Haimes from Sage Asset Management.

A couple of questions. One, if there is a retrofit market that develops when the safety regulations come out, is there anyway you can give us a broad range per car, let's say, to size that? Would you need to bring on some more capacity to handle that, since you are pretty full on your tank car capacity now? That is the first question.

Barry, it is really hard to speculate on the nature of a retrofit until we know what that retrofit is. Recall that in the fourth quarter we made an acquisition in maintenance services, we acquired Seaboard, which expanded our maintenance service capabilities. Typically, retrofit work would be done in a maintenance facility as opposed to a new car production facility, so we are looking at alternatives to be able to support our fleet and any customers if and when the retrofits are required.

Okay, great. The second question was, on the acquisition program that you talked about, can you, and obviously each [part] will be somewhat different, but can you give us a sense of what sort of IR hurdle rate you are looking at, or what kind of spread to cost to capital you are looking at?

Sure, Barry, this is James. Thanks for that. We really just don't dive into what our hurdle rates might be, what IRR rates might be. We clearly look at all of those factors when we discuss potential investments across the Company, internal and external with our Board of Directors.

But we take into account those exact types of things as well as the long-term benefits we have, enrichment opportunities we have, as Tim mentioned, and what it is going to do for the Company and the shareholder value. So we just don't dive into that, certainly externally.

Okay, and then last question for me. The new ethylene plants that are scheduled to come on in the second half of the decade, about when would you start to see railcar orders to service those new plants? Thanks.

Barry, this is Steve. Certainly there's a lot of investment planned to expand ethylene cracker capacity, that's exciting for us. We've started to see the initial inquiries for railcars to transport resins out of several of those expanded facilities, and we expect that to continue. I would look at -- I think we've said in previous conference calls that 2015, 2016, we would expect to see a good flow of railcars for those operations.

Okay. Thanks very much, great quarter.

Thank you.

We'll do a follow-up from Bascome Majors. Please go ahead.

Hey guys. Thanks for the time. I just wanted to ask your thoughts on cash taxes for the year, given that some of the lease fleet is aging and the composition is changing a bit; I'm just curious if you expect the cash versus book tax mix to change dramatically this year?

Sure, Bascome. I think you have seen that change over the last few years, as you have seen the depreciation of our lease fleet flow through the system, as you have seen the bonus depreciation opportunities the last couple of years, we have looked at that and certainly with our partnerships as well, now they have tax partnership status. So we would expect the cash tax aspect as opposed to the GAAP tax aspect to continue to increase this year as we go through the quarters.

Is there any guidance you can give us about a cash tax rate or perhaps a directional trend in deferred taxes this year?

No, I think it is a little early to go through that. We still are working through the 2013 taxes, of course, as we file that later this year. And then as we see what opportunities present themselves in terms of how we view the lease fleet sales, how we look at the depreciation of our own lease fleet, acquisitions we might make, those kind of things, there is a lot of variables that impact that quite a bit. So I don't think we'd be able to here in February provide any detailed guidance or much direction beyond what I said earlier.

Understood, thank you.

Looks like that concludes today's conference call. A replay of this call will be available after 1:00 Eastern Standard Time today through midnight on February 27, 2014. The access number is 402-220-0117. 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.

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