Trinity Industries Inc (TRN) 2014 Q1 法說會逐字稿

Good day. And before we get started let me remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, and includes statements as to estimates, expectations, intentions and predictions of future financial performance. Statements 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 business issues and risks, a change in any of which could cause actual results or outcomes to differ materially from those expressed in those forward-looking statements.

Its my now my pleasure to turn the call over to Ms. Gail Peck, Vice President and Treasurer. Please go ahead.

Thank you, James. Good morning, everyone.

Welcome to the Trinity Industries first-quarter 2014 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 representative groups.

Our speakers are Bill McWhirter, Senior Vice President and Group President of the Construction Products, Energy Equipment and Inland Barge Groups; and Steve Menzies, Senior Vice President and Group President of the Rail and Railcar Leasing Groups. Following their comments, James Perry, our Senior Vice President and Chief Financial Officer, will provide the financial summary and guidance.

We will then move to the Q&A session. Mary Henderson, our Vice President and Chief Accounting Officer, is also in the room with us today.

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

Thank you, Gail. And good morning, everyone.

I am very pleased with our record financial results for the first quarter, which was enhanced by a large sale of railcars from our lease fleet. Our businesses did an outstanding job of driving operating leverage and efficiencies to the bottom line.

We are also making good progress in the business development area. We completed three acquisitions during the first quarter within our Energy Equipment Group. These activities built upon the positive momentum already occurring within our Company.

Our Rail Group generated record financial results in the first quarter, and significantly increased its order backlog. I am pleased with the Group's ability to continue improving its performance while converting manufacturing space, making line changeovers, and collaborating with Trinity's internal supply chain to maximize profitability.

Our Railcar Leasing and Management Services Group delivered another quarter of solid operating results. In addition, they did a good job of completing the railcar transaction I mentioned earlier.

I am pleased with our Inland Barge Group's financial performance during the first quarter. They obtained orders during the first quarter that were crucial to filling gaps in their production lines for the balance of the year.

Our Construction Products Group continues to make good progress, improving its overall performance resulting from the repositioning activities we completed last year.

The first-quarter financial performance of our Energy Equipment Group continued to show improvement year over year. I'm pleased with this group's efforts to expand its product offerings.

Today Trinity is uniquely positioned to provide a variety of transportation and storage products to the oil, gas, and chemicals industries. Our Rail Car, Barge, and Energy Equipment Groups have very high-quality products to serve the demand in these industries. We will continue to leverage our resources to pursue opportunities to expand our product offerings and extend our market leadership positions.

Trinity's financial performance during the first quarter demonstrates the progress we are making in attaining our corporate vision of becoming a premiere diversified industrial company. Our strong financial results were supported by the successful execution of our corporate business model, which generates value by leveraging the strengths of our businesses within our portfolio.

Many of Trinity's businesses receive, share, and generate value through various interactions with one another. I am very pleased with the way our businesses are collaborating to generate strong financial results for our Company.

I am very proud of our people whose capabilities and hard work enabled us to realign our manufacturing capacity to meet strong demand for products that support the energy industries. Our short-term priorities during the next year are to operate our Company on lean principles, while providing superior products and services to our customers; create shareholder value through a variety of organic initiatives; acquire and successfully integrate industrial manufacturing businesses into our portfolio; and to conduct railcar leasing and other asset transactions that provide incremental earnings.

Today Trinity is in a strong position with backlogs of orders in our major businesses that enable us to continue to generate operating efficiencies. Our future is bright. Our financial health has never been better. And we have a great deal of positive momentum occurring within our Company.

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

Thank you, Tim. And good morning, everyone.

The Inland Barge Group achieved strong margins during the first quarter on slightly lower revenue, due to a favorable product mix and production efficiencies in our plants. During the first quarter, we received orders totaling approximately $215 million, bringing the barge backlog to $508 million at the end of March. Our production plans for 2014 are now solidified and orders are being taken for deliveries in 2015.

Demand for hopper barges is recovering, as scrap prices improve and barge traffic along the inland waterways increases, due to stronger exports of corn, wheat, and soybeans. Demand drivers for tank barges continues to be favorable, with backlogs in the industry stretching into 2015.

As infrastructure investments in the energy sector are completed, we expect additional expansions in downstream markets, resulting in rising shipments of chemical and petrochemical commodities. As a result of the improvement in hopper barge demand, and the level of orders taken during the quarter, we recently shifted some production capacity from smaller tank barges to hopper barges. We also enhanced our profit forecast for the Inland Barge Group in 2014.

I am pleased with how our Barge Group has responded to various demand drivers and maximized efficiencies within the plants to drive profit. This group's operational flexibility is a key differentiator, enabling us to enhance profitability and respond to our customers' needs.

Moving to our Construction Products Group, year-over-year revenue increased modestly during the first quarter, due to acquisition-related volumes. The more favorable product mix drove an increase in operating margin from 7.4%, during the first quarter of last year, to 9.3% this year on an adjusted basis, excluding the gain on a land sale. I am pleased with the performance of this group, considering much of the first quarter was negatively impacted by weather conditions across the country.

Included in the first quarter profit is an $11.2 million gain on the sale of certain land held by our aggregates business. This gain was included in our annual guidance provided for the group on the last conference call.

First-quarter results for the Construction Products Group typically reflect a seasonal low point. And we expect a pick up in activity across the group's portfolio during the summer construction season. So far this quarter we have seen strong demand in the Texas market, which is usually a good indicator of overall demand for our aggregates business.

Inquiry levels for highway products continue to remain stable compared to 2013, although uncertainty exists due to the upcoming expiration of the current federal highway bill in October. We are monitoring potential legislation closely and are prepared to respond should demand levels change.

Moving to our Energy Equipment Group, during the first quarter, the group set a new record for quarterly revenues and increased it operating profit performance year over year by 54%. Revenues and profits increased primarily due to higher shipments of storage containers serving the energy sector, coupled with improved performance in our wind tower business. I am pleased with the progress we are making integrating our recently acquired companies.

In the first quarter, we announced three acquisitions in the Energy Equipment Group. Two of the acquisitions are in the cryogenic containers market, which places Trinity among the North American market leaders providing cryogenic transportation equipment.

The addition of Platinum Energy Services expands our product portfolio to include energy-related equipment used at the well site and at midstream locations. These businesses combined are expected to add revenue of $90 million to $100 million on an annual basis.

We continue to invest resources to identify and pursue opportunities to add new businesses to our industrial portfolio that enhance our competencies, complement our product offering, and expand our reach in the markets we are pursuing. Overall, I am pleased with our performance during the first quarter.

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

Thank you, Bill. Good morning.

I continue to be very pleased with the operating performance and achievements of our Rail and Leasing groups. The focused efforts of our dedicated Trinity Rail team, the benefits of our integrated business model, and both our operating and financial flexibility continue to drive record performance levels for our businesses.

During the first quarter, our Leasing Group again earned record operating profit, due to continued strong market fundamentals, as well as profit recognized from sales of leased railcars to Element Financial Corporation. Lease renewals continue to show strong rate increases and longer lease terms. Our lease fleet utilization at the end of the first quarter was 99.5%, up from 98.4% last year.

So far in 2014 we have sold $517 million of leased railcars in the secondary market, the majority of which were sold to Element under the strategic alliance formed last December. Selling railcars from our leased portfolio to various financial institutions, and managing those leases, while retaining our commercial relationships with the lessees, is an important strategy of the Trinity Rail business model.

We developed a strong competency in syndicating leased railcars while simultaneously growing our wholly owned lease fleet. Secondary market activities help us to manage leased fleet portfolio diversification and create additional value through the monetization of leased assets when market conditions are most favorable. I am very pleased with the success we have had in growing our leasing platform and expanding our access to institution of capital to support our strong lease origination capability.

During the first quarter, our Leasing Group took delivery of approximately 2,280 new railcars. Our total lease fleet portfolio, including partially owned subsidiaries, now stands at approximately 73,545 railcars, a 1% increase year over year, even after first-quarter leased railcar sales. At the end of the quarter, approximately 22% of the units in our railcar order backlog, with a total value of $1 billion, were slated for customers of our leasing business.

During the first quarter, the Rail Group delivered 6,890 railcars and generated our highest ever quarterly operating profit and margin. The skill and efficiency with which our employees have enhanced our operational flexibility, leading to further increases in our production capacity to accommodate growing customer demand, is quite remarkable. Their hard work and dedication is reflected in the significant increase in our operating margin, compared to the fourth quarter, on a relatively stable revenue base, driving incremental earnings to the bottom line.

We are currently generating record operating profit and margins. The rate of margin expansion over the last year has been significant and we will continue to focus our resources on enhancing our profitability. Ultimately, we are most focused on delivering quality earnings growth to the Company through sustained volume increases. Our strong order backlog, comprised of a favorable product mix, positions us to realize further benefits from extended production runs.

North American railcar industry orders in the first quarter were very strong and reflected a healthy mix of freight car orders. During the first quarter, Trinity Rail received orders for 9,625 new railcars, including tank cars and covered hoppers, from railroads, third-party lessors and industrial shippers. Our backlog increased to a record 42,630 railcars, with a record value of approximately $5.2 billion.

Current inquiry levels reflect continuing demand for covered hoppers to serve the oil and gas drilling, and construction markets, agricultural products and petrochemicals such as resins. Auto racks continue to be in steady demand resulting from increased North American automotive production, and replacement of the aging North American auto rack fleet.

While overall tank car orders for the industry have slowed in recent quarters, order inquiry levels remain strong. And we are in dialogue with a number of customers ready to place orders.

Our customers, like us, are assessing the potential impacts from pending regulatory changes and, as you would expect, delaying decisions to obtain railcars given the uncertainty surrounding specifications for tank cars carrying flammable products. We believe this is only a temporary delay and we expect to see strong demand for tank cars serving the oil and gas industries once new regulations are finalized.

We are monitoring closely the potential regulatory actions of PHMSA, the US Department of Transportation, and Transport Canada, with respect to changes in railcar designs for tank cars carrying flammable commodities. PHMSA recently proposed an accelerated time line that we expect to lead to a final rule shortly after September 30, 2014.

Transport Canada also recently took several initiatives which will have effect on tank cars used to transport certain flammable products in Canada. As we gain further clarity from the regulatory process, we will provide an update on how we plan to address regulatory changes.

We are currently investing capital in our Rail business for organic growth opportunities, operating improvements, and to be prepared to respond to demand increases associated with new tank car regulation. Our intent is to enhance our operational flexibility by having additional manufacturing capacity capable of producing multiple products that will be ready to respond as the level of demand increases.

We are in the process of bringing online a large existing railcar manufacturing plant located in Georgia. Initially, we are planning to produce a group of tank cars at that plant intended for our leasing business. In addition, we are also taking steps to expand our maintenance services capacity to meet the maintenance and regulatory requirements of our growing lease fleet and key customers.

As we make these investments, there will be associated start-up costs that are incurred by the Rail Group, having a near-term adverse impact on Rail Group operating margins. Our team has demonstrated great skill at bringing on new operations and additional capacity. And I am optimistic we will continue to be successful.

As a result of the orders received in the first quarter, and capacity increases, we have increased our 2014 unit delivery guidance to be in the range of 27,500 to 29,000, an increase from our previous guidance of 25,500 to 27,500. Our operational flexibility and strong lease origination capability differentiate Trinity Rail, and enable us to respond quickly to changes in market demand. Our current delivery forecast for 2014 is on pace to exceed our prior annual record delivery level.

This is a very exciting time for Trinity Rail, as we continue to see a broadening in railcar demand as the economic recovery accelerates, developing fleet replacement opportunities, and ongoing strong demand catalysts from the North American energy renaissance.

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

Thank you, Steve. And good morning, everyone.

Yesterday we announced record results for the first quarter of 2014. For the quarter, we reported record revenue of $1.5 billion and record earnings per share of $2.85, compared to our first-quarter guidance of $2.45 to $2.65 per share.

Included in our results, and in first-quarter guidance, were proceeds from the sale of $514 million of new and existing leased railcars to Element, completed under the strategic alliance that we announced in December, with an EPS impact of $1.43. Our first-quarter earnings, without the profit from sales to Element, represented a quarterly record for Trinity. All of our business units constricted to our strong quarterly results, with each group reporting year-over-year improvement in quarterly operating profit and margin.

Our tax rate for the first quarter was 32.5%, lower than our guidance of 35% to 36%, primarily due to the benefits of certain domestic manufacturing deductions, lower state taxes, and the partnership tax status of our non-controlling interest. The lower tax rate accounted for $0.13 of incremental EPS during the first quarter, as compared to our guidance. Our current earnings guidance assumes a tax rate of 34% for the remaining three quarters of 2014.

As we mentioned on our last call, the Company's convertible notes will have a dilutive impact on EPS when the average stock price for the quarter exceeds the conversion price of the notes. During the first quarter, the average stock price was $64.08, which was well above the conversion price in effect of $50.69. As a result, 1.9 million additional shares were added to the share count in the calculation of EPS for the first quarter, reducing EPS by $0.06 per share.

For the remainder of the year, our guidance assumes a $72.50 stock price, our recent level, resulting in an annual average stock price of $70.40 and 2.5 million additional shares in the calculation of annual EPS, an impact of $0.24 per share. Including the assumed impact of the convertible notes, our annual EPS guidance uses a full-year weighted average share count of approximately 78 million shares.

During the first quarter, we repurchased 138,000 shares of our common stock in the open market for a total cost of $10 million. This leaves $240 million available through 2015 for additional stock purchases under our recently re-authorized share repurchase program.

Consistent with our program agreement with Element Financial, we expect to substantially complete the first $1 billion of leased railcar sales to Element during the remainder of 2014, primarily from our current leasing backlog. Since we announced the agreement in December, Element has purchased $619 million of railcars from Trinity.

The earnings related to Element in our 2014 guidance remain substantially unchanged. Under the terms of the program agreement, Element is expected to acquire another $1 billion of leased railcars during 2015.

Given our strong financial position, the solid backlog of orders in our major businesses, and the solid leasing operations platform, we continue to seek organic and external investment opportunities. During the first quarter, we invested $118 million in three previously announced acquisitions within our Energy Equipment Group. And we have a healthy pipeline of acquisition opportunities across various industries that we are currently assessing.

I will now turn to our current outlook for the year 2014. Our current guidance for 2014 EPS is between $7.00 and $7.50, compared to our previous full-year EPS guidance of between $6.30 and $7. The increase in guidance incorporates the strong performance in the first quarter, as well as higher expected results for the remainder of the year, due to orders we have received that fill in many of our production lines.

In the Rail Group, our 2014 revenue guidance is between $3.4 billion and $3.6 billion, based on our increased railcar delivery guidance. We expect a full-year operating margin of between 17.5% and 19% for the Rail Group.

In the Inland Barge Group, we now expect full-year revenue of between $605 million and $625 million in 2014, with an operating margin of between 15.5% and 17% for the year, representing a significant improvement in guidance. The orders we have received in the last few months, along with better production efficiencies we are experiencing, have improved our 2014 outlook for this group.

In the Energy Equipment Group, our 2014 revenue guidance is between $880 million and $910 million. We expect the range of operating margin for the year to be between 11% and 12%. The year-over-year improvement in both revenue and operating profit reflects the improved performance of our wind towers business, strong demand for storage containers, and the inclusion of results from the recent acquisitions made in this group.

In the Construction Products Group, we expect full-year revenue of between $540 million and $565 million in 2014, with an operating margin of between 12.5% and 14%.

In the Railcar Leasing and Management Services Group, we expect 2014 operating revenue of between $595 million and $625 million, and operating profit of between $260 million and $280 million. We expect to deduct between $27 million and $35 million of non-controlling earnings in 2014, due to our ownership in TRIP and RIV 2013.

As we have indicated on previous earnings calls, TRIP and RIV 2013's 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 additional sales of railcars from our lease fleet during the remainder of the year of between $160 million and $175 million, generating operating profit of between $30 million and $35 million. We expect the majority of these additional car sales to be recognized as revenue in the Leasing Group.

For 2014, we expect to eliminate between $825 million and $875 million of revenue, and defer between $140 million and $150 million of operating profit, due to the addition of new railcars to the wholly- and partially-owned lease fleets. This guidance range also includes Rail Group sales to the Leasing Group that are ultimately sold to Element.

For 2014, we do not expect the net investment in new railcars to consume any cash due to expected proceeds received from leased railcar sales during the year. We expect between $275 million and $300 million of revenue eliminations for other inter-Company transactions.

To date, approximately $700 million of leased railcars have been sold to RIV 2013, the railcar investment partnership formed last May, in which Trinity holds a 31% ownership interest. During the second quarter, we expect to complete the final scheduled sale of a group of leased railcars that consumes the remaining equity commitment from the TRIP and RIV 2013 investors. TRIP will purchase the railcars rather than RIV 2013.

As a reminder, the two entities have the same investors. And for capital structuring benefits, the investors prefer the purchase of this final set of railcars to be made by TRIP.

Full-year manufacturing and corporate capital expenditures for 2014 are expected to be between $250 million and $300 million. In addition, corporate expenses are expected to range from $95 million to $100 million for the year, as a result of our growing business operations and acquisitions.

As a reminder, we are required to report EPS using the 2-plus method of accounting, the result of which should be the reduction of EPS attributable to Trinity by approximately $0.25 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 earning per share growth of 47% to 58%, compared to 2013, and would result in the achievement of a new level of record annual earnings for Trinity. We remain very pleased with the focused dedication of all our employees who are working hard to deliver high-quality earnings and growth during 2014.

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

(Operator Instructions)

Allison Poliniak of Wells Fargo.

Hello, good morning.

James, you threw out a lot of numbers. Could you walk me through so I understand Element, the second $500 million tranche this year? Is that already in backlog?

I think you mentioned something about the lease backlog. I know some of that gets eliminated, but I know Element is not. Can you walk how I should be thinking about that?

Yes, let me give you a couple of pieces, Allison.

First of all, there is not necessarily $500 million that were scheduled this year. We said we'll complete the first $1 billion.

To date we have done $619 million. So you've got about $380 million left in that $1 billion. And timing will vary quarter to quarter in that of course.

Some of those cars may come directly from our Rail Group, so they will just be sales within the Rail Group. Some may be existing cars within the lease fleet.

There may be cars that move into the lease fleet during the year and are then sold to Element. So they will be eliminated and then reflected as car sales.

We will provide that geography as the year goes on. But all of those sales, whether they're in the Rail Group or in the Leasing Group, are included in the guidance for the rest of the year.

Okay, perfect. That's helpful.

And then just turning to the announcement coming out of Canada about a week ago, any thoughts there? The time line seems much more aggressive than what the RSI was proposing. Thoughts of how real that number could be? Is there still a comment period on that side?

Steve, do you want to take that?

Sure. Good morning, Allison.

Yes, we're obviously following this closely. We are familiar with Transport Canada's actions earlier.

I think we expect that over time the US and Canadian standards will be synchronized. That has always been the historical pattern. And certainly as we gain further clarity, we will provide an update on how we plan to address any regulatory changes.

I think, too, the fact that PHMSA came out with a more accelerated regulatory process to culminate at the end of September was certainly trying to accelerate and respond to Transport Canada's actions as well.

We'll continue to follow and provide updates as we become more clear on what the alternatives are.

Great. Thank you.

Eric Crawford of UBS.

Good morning.

I'll start with Rail. Is there 2014 capacity left that isn't already spoken for? The real question is, how much upside risk is there to the delivery's guidance that you gave today?

Good morning, Eric.

As I mentioned, we've seen productivity increases in our existing facilities that have yielded some additional capacity. And we have filled orders in some of our open-production slots with the freight car orders that were received during the quarter. And I mentioned a new plant that we're expanding that will also be contributing to railcars to be delivered.

We've given a range of 27,500 to 29,000 cars to be delivered yet this year. And we're certainly confident within that range.

Okay. Fair enough. Thanks.

On covered hoppers, can you speak a bit more as to what you're seeing in the markets there? You touched on the main buckets, and as a whole orders have been improving. But there has been some inherit lumpiness from quarter to quarter with respect to where the demand is coming from.

I was hoping maybe you could touch on the three buckets from an inquiries level on where you see demand headed.

Eric, when I think about demand in the Railcar area, if you look back over an extended period of time, there has always been one or two car types that are driving the markets. The fact that tank cars are taking a little bit of a respite until there's regulatory clarity and that covered hoppers are filling the void, that's not unusual.

I think what we're most encouraged by is the first-quarter earnings reflected, really, a broadening of demand. We saw strong demand for small-cube covered hopper cars for both frac sand and the construction market.

We see the agricultural market again looking for equipment. Automotive remains strong.

While I don't expect to be building any new coal cars, we have actually seen improved demand in the coal sector, which has been supporting stronger lease rates and lease terms there.

Okay, great. Absolutely. Great to see and nice to see demand coming back on the dry side of barge, too.

On construction -- lastly for me and I'll pass it on -- but on construction, any preliminary thoughts on the GROW AMERICA Act and how that might impact you?

Eric, this is Bill.

We're closely monitoring the legislative situation, as you might well guess. We're certainly concerned that it's a punt, and we end up back in a situation where we're just doing temporary extensions as we go forward. But we continue to watch it and we remain ready.

Should demand increase, we certainly have the capacity to take care of that demand in our customers.

Great. Great quarter. Thanks so much.

Bascome Majors of Susquehanna.

Good morning.

I know there is a lot of noise in the current quarter, and the year as a whole given your partnerships with RIV and Element. But beyond that, the Railcar backlog is very strong at record levels. And your visibility into future revenues in your largest segment, accordingly, is reaching all-time highs in the quarter.

Can you talk a little bit at a very high level about your expectations for core demand into 2015 in your key markets, both in Railcar and your other businesses? Just stripping all the noise away, where do you see some opportunities for incremental organic growth into next year beyond the strong conditions you are already seeing today?

Steve, do you want to give him your perspective on Rail?

And then maybe, Bill, yours on wind and barge?

Sure. Bascome, this is Steve.

Certainly on the Rail side, we have a strong backlog going into 2015. And it's across the widest breadth of our product lines. We certainly have certain production lines that are not filled out for 2015.

What I like is the continuing demand trends. I think freight car demand trends are going to remain solid. And, again, I think once we get over this regulatory pause, that we're going to see strong demand for tank cars going into 2015.

So, I am very encouraged by what we see. We've developed our production flexibility; so that if there is additional demand to meet, we can do that. Or if we have to flex down we can do that, as well.

I like our positioning for 2015, and I like the demand characteristics going into the new year.

Bascome, on the Barge side, I think Trinity really had a great experience in the first quarter of 2014 when we used one of our facilities to convert from tank to hopper back to tank. The guys just did a fantastic job really proving out the multi-purpose capabilities of our facilities.

So as we look forward into 2015 we continue to see opportunity on the tank barge side.

I think the dry side will be a little more opportunistic. Although, again, recent numbers on the fleet profiles suggest that scrapping continues at a higher rate than buying.

So the fleet continues to get compressed, which should create some demand. Overall, I am encouraged for 2015 on the Barge side.

And just quickly slipping into the wind tower side, we've got a really nice backlog in the wind tower business. Continue to have strong inquiries in that business.

And I like the way the guys are producing the products right now. And I think we've got good opportunity in 2015 on wind tower.

Thanks for that.

Just one more on the acquisition front. You talked a little bit at a high level about it; and you've certainly outlined your strategy, as that's become more important over the last six months.

But as we get to the point where the net cash balance is rising pretty substantially, as it did during the quarter, can you help us a little bit on sizing up the magnitude of the pipeline and the amount of capital you are willing to deploy towards deals over the next few quarters or even two years, and the pace at which you would like, or think you can, start to deploy that?

Yes. This is Tim.

As far as the balance sheet goes, it definitely provides us a great foundation to be able to think small, medium, and large, as well, so we can look at businesses across all those sectors.

First off, it's important to remind you that when we look at businesses, we take into consideration our corporate business model that generates value by leveraging the strengths of our businesses within our portfolio. A lot of our businesses, they receive and they share and they generate value through various interactions with each other.

So when we're looking for external opportunities, we look for those that will enhance our position of each of our product lines that we have or businesses that are adjacent to our businesses. When you look at the three acquisitions that we made earlier this year, these companies all have a great role in our Company in the way that they play off of the competencies that we have; and they fit real well.

We look to companies that have a heavy manufacturing of steel content. In fact, we like heavy manufacturing as opposed to the lighter manufacturing. We look at businesses that need competencies that we have to offer or we can gain some advantages through some of the supply agreements that we have in the steel area.

Right now our pipeline, as James said in his summary, is fairly robust and full. And so we have an active group, which I'm included, of looking at various businesses.

Okay. And does your full-year outlook assume anything on the acquisition front beyond what you've announced in the first quarter?

Nothing that we would talk about, Bascome. We've got certain things included in our forecast that we don't detail. But we won't mention anything at this time.

All right. Thanks for the time.

Justin Long of Stephens Research.

Congratulations on the quarter, and good morning.

Last quarter, you gave the number of DOT-111 tank cars in flammable service in your wholly-owned and partially-owned leased fleets. I wanted to ask a couple of questions on that.

First, did that number change materially with the sales to Element in the first quarter? And, second, is there a way to break down how many of these tank cars are in your wholly-owned fleet versus the JVs?

Thanks, Justin, for your question.

At the end of the first quarter, our DOT-111 cars in flammable service, both included in our wholly-owned and partially-owned fleets, was approximately 11,300. That would compare to the number we have given to you previously. I think we disclosed 12,200 in our February call.

And at this time, we are not prepared to break out in any further detail the ownership of that number.

Okay. Fair enough.

And is there any way you could give any detail on how many of those cars are touching Canada and could be subject to the three-year retrofit or phase-out that they've discussed?

Sure. I can give you a little more detail on that.

As far as the A515 tank cars, as they are referred to in the direction that was given by Transport Canada, we have approximately 17 of those cars in flammable service, of which 12 have been in Canada recently. So we're working with our customers there to transition those cars.

Okay. So, it's really small. That's helpful detail.

My next question, I was wondering if you could comment on the new railcar pricing environment for both tank and non-tank. We heard from another OEM that they have actually been turning down some orders based on price.

Did you experience that in the first quarter as well?

I am not sure about the question. We are very pleased with the orders that we took in the first quarter.

Our industry continues to be competitive. But I think we are also really continuing to target orders that meet our return requirements and allow us to extend our production runs. And I would say that virtually all the orders we took in the first quarter supported that strategy.

Okay, great. And one last one from me.

I know you're not building marine barges today, but it sounds like this is a market that's heating up. I was wondering if there is any possibility for you to adjust some of your existing facilities in Inland Barge to build some of the smaller marine barges?

Yes, Justin, this is Bill.

As far as what you are calling marine -- I guess, ocean-going barges -- we have the ability to build to the smaller side of ocean-going barges but not to the larger side of ocean-going. We would have to have a new facility with much bigger docks.

Okay. And what kind of capacity would you classify the smaller marine barge, just from a barrel standpoint?

At the 50,000 and less, maybe a little bigger. It depends on the design of the barge.

Okay. That's helpful. I'll leave it at that. I appreciate the time today.

Matt Brooklier of Longbow Research.

Thanks. Good morning.

Just a question on deliveries in the first quarter. Saw a sequential decline. Just curious to hear if that was just a function of mix or maybe there were some weather or other hindrances in the quarter.

No, Matt, I would say it was mixed. Again, I was very pleased with our production deliveries; and I thought they met our expectations.

Okay.

And then you talked about the Georgia facility where you're going to be producing incremental tank cars. Is that a new facility, or that's an existing facility where you're adding production lines?

Matt, we actually have several facilities in Georgia, and have been producing railcar components at one of those facilities. This is a facility we've owned for a number of years that we're re-opening. And we'll be bringing that up to production scale on a very gradual basis.

Got you.

And then, do you have a sense for when that facility is online producing? Is that more a second half 2014 event, or is that something that could be more near term?

And then maybe provide a little bit of color in terms of the incremental investment needed to get that facility up.

I'm really confident in our team's ability to bring that plan up to speed. I'd prefer not to give specific deliveries for competitive reasons.

But the cars that we would expect to see from that facility this year are incorporated into our projections of 27,500 to 29,000 for the year.

Okay.

And can you talk to the incremental investment needed on that facility and the timing of those investments?

I'm not prepared to share that.

I should say it's not really material, and it usually has a really quick payback. Our internal investments that we've made to increase our capacity has given us tremendous returns.

Okay.

And then for your 2014 guide, can you give a little bit of color in terms of expectations for the lease fleet? What's potentially the size of the lease fleet from a unit perspective by the end of the year?

This is James, Matt.

It's hard to get real precise there. We're going to continue to have sales of cars to Element. We continue to add to the fleet. Our leasing backlog is a little over 20% of our total backlog.

But we are not prepared to get real precise on where that's going to end up, given the timing of some of those transactions.

Okay. Appreciate the time.

Sal Vitale of Sterne Agee.

Good morning, gentlemen.

First question, just to segue on the Georgia facility, can you give a sense for, once the incremental capacity is added, in terms of numbers, do you think that's a few 1,000 in terms of additional tank capacity?

Sal, thanks for your question.

We really don't provide individual plant capacities and run rates. It's all reflected in our projections for production deliveries for the year, and I think we will stay with that.

Okay, that's fine.

Just in terms of the opportunity for replacement of the DOT-111s, there are varying estimates. How do you consider the universe of cars that could potentially be replaced?

Do you just look at, say, the pre-petition DOT-111s that are carrying crude and ethanol, which is about in the mid 50,000s -- let's call it 56,000? Or do you look at the entire universe of the DOT-111s that are carrying hazardous materials, which is more like between 150,000 and 160,000?

If I understand your question, Sal, I think the regulatory process is particularly focused on railcars operating in flammable service. So, that's where our focus has been. And I think the numbers that the RSI last had in late September were about 85,000 of those cars.

We've told how many numbers that we have in our fleet. And we are certainly focused on transitioning those cars and modifying them, if that's the appropriate action is -- if the economics support that, and the regulations support that. And where it doesn't, we feel pretty confident there is going to be a replacement demand for cars that meet any new specifications or regulations.

The investments that we are making that I talked about earlier, I think, give us the flexibility to respond to both increased demand for new railcars and to be able to support modifications and regulatory compliance with our own feet.

Okay, thanks, that's helpful.

And then the numbers you mentioned earlier, you said there are currently 11,300. Those are, I guess, the DOT-111s in your lease fleet. And that compares to, say, 12,200 a quarter ago.

I remember a figure you mentioned a quarter ago of 9,600. Those are the bad faith cars? What is that level? How many bad faith cars are in your fleet now?

We don't have anything in our fleet that's bad faith. We have good faith cars. But we haven't broken out the 11,300 into different categories publicly.

Okay, that's fine.

Then the other question is just to get a clarification on your guidance. You had said the additional sales of cars from the lease fleet of $160 million to $175 million, and profit on that of $30 million to $35 million.

Is the $160 million to $175 million, are those above and beyond the sales to Element? Or is that inclusive?

It's simply above and beyond what we did in the first quarter. So that would include the sales that we have scheduled to Element for the rest of the year.

Okay, so the $160 million to $175 million, that's assumed to be sales of cars that you have held for less than one year, which you recognize as revenue, correct?

The majority of those would be.

Right. Okay. Thank you very much. I appreciate it.

Thom Albrecht of BB&T.

Everyone, I appreciate all the numbers and everything; but sometimes I get lost in them. So, I want to clarify a couple of things.

I don't know if it was Steve or James, you talked about there could be some margin issues for the rest of the year in the Rail Group.

Was that primarily because of the opening of the Georgia plant and the startup costs? Or is it because as the production mix becomes maybe a little bit less tank, the margins would naturally maybe not stay at that 19.5% level?

I think we have given guidance of 17.5% to 19%, and that was consistent with the first quarter. We have raised our revenue guidance, so the overall profit dollars are significantly higher with the new guidance.

Steve did mention a little bit of a headwind as we go through some expansion-type things. Mix will always change throughout the year.

Again, the margin guidance hasn't changed much. But the dollars have moved up quite a bit on the new delivery guidance that Steve provided.

And just to add to James' point, in addition to startup costs for our Georgia facility, we are also making investments in our maintenance services, which has some adverse costs associated with that, that impacts margin in the balance of the year.

So those two factors, Georgia and the investment in the maintenance services, would be the bigger headwind, if you want to use that term, as opposed to changing mix on the production?

I think mix is probably a better impact on the rest of the year. And that's what we had forecasted before. Again, our margin guidance hasn't changed.

As we go through the year and see which cars are coming through our production facilities, I think mix is probably the bigger piece. But we are not prepared to break out in a lot of detail the distinction between the pieces.

Okay.

And then in terms of a second-quarter production, I know your production was off from the December quarter. But you had actually guided to that. I think someone may have forgotten about that.

Should we be thinking about -- I know what you've given for the full year, but in terms of just an immediate ramp up -- kind of more of the same, around 7,000 for the second quarter?

Thom, we've given the annual guidance and we'll stay with that. I really don't' want to have to be going quarter to quarter on guiding deliveries. But, again, I think we're confident in the range we've provided for the year.

Okay.

James, you gave a number of $619 million that you've done with Element so far. Is that inclusive of April? Because the press release talks about $514 million.

No, that's from December when we initiated the agreement with Element through the end of the first quarter.

Okay. I wasn't sure which extra month it included.

Yes, that was the original $105 million we did in December, plus the little over $514 million we did in the first quarter, Thom.

Okay, I appreciate that.

And then just on your guidance, there were a couple things I missed. Revenue eliminations were $800 million-something. Was it $800 million to $850 million?

$825 million to $875 million during the year.

Okay.

And then other revenue eliminations were $270 million to something.

$275 million to $300 million. And that's the non-leasing-related eliminations we have.

And as a reminder, Thom, we'll file these remarks very shortly after the call so you'll have all the numbers. We're happy to walk you through them.

Okay. And then just one last question.

You had tremendous incremental margins from the December quarter into the March quarter, even though you delivered about 390 fewer cars. Just in your opinion, what was the biggest influence on either the incremental margin being over 500% or the fact that the absolute margin rose 110 basis points?

This is James, Thom.

I think as you look at good pricing on the cars that we produce we continue to see that as they've come through the backlog. I think the employees at the plants are doing a great job with getting their manufacturing efficiencies through the operational flexibility we have.

We've really seen the margin increase quarter over quarter. And, again, as we said, we project a very good margin the rest of the year for those same reasons.

Okay, I really appreciate it. Thank you.

Kristine Kubacki of Avondale Partners.

Good morning. I'm going to ask a little bit bigger question, going back to the regulations side.

On PHMSA, it seems like they've laid out here recently a wish list in the car design coinciding with AAR was proposing on the shell thickness, full-height head shields, thermal protection and jacketing. Can you give us some thoughts if that comes to fruition how this would impact the backlog that's already there?

Am I wrong to think about, given that we're finally going to get some design certainty, that we would see an increase in the existing backlog pricing as we incorporate those design changes? And the new car pricing obviously will be going up in the future on those tanks going into crude methanol?

Thanks, Kristine. Steve.

You asked a lot of questions in there.

Certainly, I think a possible outcome of regulatory change is increased demand for tank cars, new tank cars to be built. As we continue to have strong backlogs in new tank cars, that gives us greater ability to raise prices. As new tank car prices rise it also gives us the ability to raise existing car lease rates, as well.

So I think all of those are positive in the long term. But certainly a lot of details to figure out in what comes through in regulations and investment returns and lease rates and how the market is going to accept those lease rates and investments and modified cars.

So there is just a lot to deal with, and we have to really sit down and understand what the final regulations are to be able to develop our plans. And we will certainly share those with you when that becomes available.

Okay.

I would assume, then, if you had a, say, a CPC-1232 in the backlog and it was going for crude service that with those design changes, probably you would be able to incorporate any new design that they started to mandate and that pricing would be incorporated?

I am not sure. We'll take a look at things when they become more clear. That's highly speculative and it's difficult to respond.

Okay. No. I appreciate the color. Thank you very much.

Bill Baldwin of Baldwin Anthony.

Thank you. Good morning. Two questions.

The first, Steve, with the uncertainty regarding the regulations, are you seeing any of your customers that have backlog deferring delivery, saying -- Let's wait and see what happens here before we take a delivery of our tank cars.

I think I mentioned in my comments, Bill, that like us, people want to make good investment decisions and understand clearly what equipment to invest in. And that's pretty hard to do in this regulatory uncertainty.

I think we are going to have some clarity here towards the end of the summer.

And we're certainly going to work with our customers to assist them in being able to build the right cars for their fleet and lease the right cars for their business. We're just going to have to be flexible in working with our customers to make that happen.

Exactly. It's kind of an unusual environment, really, at this point with all of this going on like it is. And many different people involved, too -- so many different organizations.

That's right. And I wouldn't want to be in this position for a long time. But, again, I think by the end of the summer, we will start to have some clarity as outlined in PHMSA's schedule.

I hope the regulatory people understand the importance of keeping this process moving.

Secondly, Bill, acquisition of these cryogenic companies, cryogenic tank manufacturing, can you give some color as to the markets that you think these tanks will basically be serving -- the markets that they will be going into over the next several years?

Sure, Bill.

We really think about cryogenics in a couple of buckets -- just atmospheric gases, but then LNG. And, so, as we look at the markets broadly for LNG, there's a lot of expansion, particularly on the transport side.

And that can be traditional transport trailers. But it can also be ISO trailers, serious movement of LNG into the infrastructure to fuel motor vehicles; the potential for fueling locomotives; and certainly the potential for fueling tows for barge lines.

We see a lot of opportunity across Trinity's broad spectrum of products and acquiring that technology to complement what we already had in Mexico, really the anchor for what we think could be really nice growth.

And in that same vein, a little different product category, but can you talk to us about what Trinity is doing, if anything really, in the compressed natural gas storage markets and how you see those markets unfolding?

Yes, Bill, we do a little bit of work in the compressed side. We have done some prototyping in the compressed side. But typically right now we are a little more focused on the liquid side.

But we certainly have the capabilities to participate in the compressed side.

Bill, this is Tim.

We also manufacture the heads that are used to build the spheres in the CNG business. And that is a competency that is easily leveraged into that business because if you are building those vessels, steel, I think, is two-and-a-half to three inches thick.

And there are not that many people that have the capability of making the heads that go on those vessels. So we're serving that market right now.

Yes. As I recall, that's the way you got in the tank car business years ago.

That's the way most of our businesses have evolved. It's just business that are adjacent to our core businesses and then they grow from there.

It's very fascinating for us and very exciting for us.

How do you see the compressed natural gas markets evolving? Is it really very fuzzy right now, or is there some clarity about what might be going on there?

I think you've got compressed natural gas currently being used by a lot of the large commercial companies that have local vehicles that will be using them, like school buses and other buses and delivery vehicles, and things like that.

And the compressed natural gas industry is trying to spread that out to where the longer-haul trucks would either go LNG or compressed natural gas in that particular area. But then they've got to put in the infrastructure, and there is a lot of capital being raised to put in infrastructure in these areas.

Okay. Thank you very much.

It looks like we have no more questions. That concludes today's conference call.

A replay of this call will be available after 1:00 Eastern Standard Time today through midnight on May 7, 2014. The access number is 402-220-0118.

Also the replay will be available on the website located at www.trin.net.

We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

This concludes your teleconference. Thank you for your participation.

You may now disconnect. Have a wonderful day.