Trinity Industries Inc (TRN) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to today's program. 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 certain of the business issues and risks; a change in any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. It is now my pleasure to turn the conference over to Ms. Gail Peck. Please go ahead.

Thank you, Keith. Good morning, everyone. Welcome to the Trinity Industries Second Quarter 2014 Results Conference Call. I'm Gail Peck, Vice President Finance and Treasurer of Trinity. Thank you for joining us today. Following the introduction, you will hear from Tim Wallace, our Chairman, Chief Executive Officer, and President.

After Tim, our business group leaders will provide overviews of the businesses within their respective groups. Our speakers are Bill McWhirter, Senior Vice President and Group President of the Construction Products, Energy Equipment, and Inland Barge Group, and Steve Menzies, Senior Vice President and Group President of the Rail and Railcar Leasing Groups. Following their comments, James Perry, our Senior Vice President and Chief Financial Officer, will provide the financial summary and guidance.

We will then move to the Q&A session. Mary Henderson, our Vice President and Chief Accounting Officer, is also in the room with us today. I will now turn the call over to Tim Wallace for his comments.

Thank you, Gail, and good morning, everyone. I'm pleased with our financial results for the second quarter. Our business has continued to do an outstanding job of driving operating leverage and efficiencies to the bottom line. We are also continuing to make great progress in the business development area. In late June, we announced an agreement to purchase the assets of Meyer Steel Structures from Thomas and Bett's Corporation.

This transaction demonstrates our commitment to strengthening our portfolio of diversified industrial companies. Our Rail Group generated strong financial results in the second quarter and increased its order backlog to a new record level. Our Rail businesses continued to make investments that expand their operating flexibility and capacity respond to various market conditions.

Our Railcar Leasing and Management Services Group delivered another quarter of solid operating results. In addition, this group continued to execute railcar transactions that enhanced profitability and generated cash. I'm pleased with our Inland Barge Group's financial performance during the second quarter. The profitability of our Construction Products Group improved during second quarter compared to the same period last year.

Our Energy Equipment Group continues to show improved financial performance. I'm pleased with the progress we're making integrating the three businesses we acquired in the first quarter. We are optimistic about the long-term opportunities for growth in the cryogenic industry. Trinity remains uniquely positioned to provide a variety of transportation and storage products to the oil, gas, and chemicals industries.

Once we complete our acquisitions of Meyer, Trinity's Utility Structure business will be positioned as a leader in this industry. We are continuing to review acquisition opportunities in the energy and infrastructure markets that have products, services, technology, and competencies that will enrich our portfolio of industrial manufacturing businesses. Trinity's financial performance during the second quarter, along with our pending acquisition of Meyer, represents additional progress toward attaining our corporate vision of being a premiere diversified industrial company.

Over the short-term, our goals are to continue operating our Company on lean principles, while providing superior products and services to our customers. We are focused on creating shareholder value through a variety of organic improvement and growth initiatives, as well as identifying manufacturing acquisition opportunities. We expect to continue to conduct railcar leasing and other asset transactions that provide earnings and generate cash.

Trinity's future remains bright. Our financial health is strong 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. We are pleased with the recently announced agreement to purchase the assets of Meyer Steel Structures, which is proceeding through the regulatory review process and is expected to close in third quarter, pending approval. The acquisition of Meyer provides Trinity a market-leading position in the North American utilities steel structures market.

Meyer's strong engineering reputation, manufacturing capabilities, and products with high steel content align well with Trinity's existing competencies and offer enrichment opportunities to create additional value. We are optimistic about the long-term outlook with infrastructure investment in North America for electricity transmission and distribution. Reliability concerns, increasing need for renewable energy interconnections, congestion, and government oversight or all important long-term demand drivers.

Over the next decade, we also expect Mexico will continue to develop and expand its infrastructure; combining Meyer with Trinity's existing capabilities positions us well to serve this market. During the second quarter, the Energy Equipment Group set another record for quarterly revenue and increased its operating profit by 98% over the second quarter last year. Revenues and profits increased, primarily due to higher shipments of storage containers serving the energy sector, as well as higher deliveries and improved operational performance in our wind tower business.

During the quarter, we received $213 million in wind tower orders, resulting in a backlog of $611 million at the end of the quarter. Our production visibility in the wind tower business now extends into 2016. I am pleased with the progress we are making integrating our recently acquired companies within this group. We continue to invest resources to identify and pursue opportunities to add new businesses to our industrial portfolio that expand our reach in the markets we are pursuing, enhance our competencies, and complement our product offerings.

Moving to our Construction Products Group, revenue was relatively flat as compared to the same quarter of last year. The more favorable product mix drove an increase in operating margin to 13.1% during the second quarter, after excluding a $2.6 million gain reported this year, resulting from the early retirement of certain acquisition-related liabilities. This compares favorably with the margin of 12.3% in last year's second quarter.

I am pleased with the performance of this group, considering conditions in the highway business remained challenging due to uncertainty regarding the upcoming expiration of the Federal Highway Bill. We continue to see strong demand in the Texas construction market, which is a good indicator of overall demand for our aggregates business. We also increased our US galvanizing capacity and geographic reach during the quarter with a small acquisition of an additional facility in West Texas.

We are currently defending the Company in a false claims complaint related to our Highway Products business. The trial began on July 14 and ended in a mistrial on July 18 of this year. The Company intends to vigorously defend itself against the allegations. Our second quarter 10-Q, which will be filed this morning, will provide more information on this matter.

Moving to our Inland Barge Group, during the second quarter, the Inland Barge Group reported a 48% year-over-year increase in operating profit, primarily resulting from a change in product mix. We received orders totaling approximately $124 million in the quarter, resulting in a backlog of $467 million at the end of the quarter. Our production visibility in this business stretches into 2015.

We are optimistic that inquiries for hopper barges will increase, as stronger exports of corn, wheat, and soybeans, as well as the replenishment of coal stockpiles for the summer cooling season are expected to increase barge traffic along the inland waterways. The outlook for the fall harvest is also very good. Demand drivers for tank barges continue to be favorable with backlogs in the industry stretching into 2015.

Barge operators have absorbed a significant amount of new equipment in their fleets, while maintaining high utilization levels. 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. We expect the need for additional barge equipment to increase as a result.

I am pleased with our Barge Group's ability to respond to various demand drivers and generate efficiencies within the plants. This Group's operational flexibility is a key differentiator, enabling us to enhance profitability and respond to our customer's needs. At this time, I'll turn the presentation over to Steve.

Thank you, Bill. Good morning. I am very pleased with the strong momentum in our Rail and Leasing Groups. Our focus and execution continued to enhance Trinity Rail's position as a premier provider of railcar products and services and are responsible for our record financial performance during the second quarter. This is a very exciting time for Trinity Rail.

Railcar demand is broadening, fleet replacement opportunities are beginning to materialize, and demand catalysts from the North American energy renaissance remain strong. Our business is growing and our integrated manufacturing and leasing platforms are responding effectively to increasing railcar demand. North American industry railcar orders in the quarter very strong and reflected a particularly healthy mix of freight car orders.

The 33,900 railcars ordered during the second quarter drove the industry backlog to its highest level in the last 25 years. The current backlog approximates 100,000 railcars, representing approximately six quarters of industry production at current rates. During the second quarter, Trinity Rail received orders for 9,880 new railcars, including tank cars, covered hoppers, and auto racks, with orders received from railroads, third-party lessors, and industrial shippers.

Our orders during the quarter aligned very well with our production plans. Our backlog increased to 45,350 railcars with a record value of approximately $5.5 billion. Order inquiry levels continue to be steady thus far in the third quarter and reflect continuing demand for a wide variety of freight cars. Order inquiries for tank cars remained steady, but some order activity for tank cars for flammable commodities service is on hold pending new regulatory standards.

However, with extended production backlog, some customers are beginning to place orders with us, recognizing that with our production flexibility, we will be able to amend their tank car building specifications to the most current regulatory standards at the time of production. We continue to closely monitor the regulatory actions of PHMSA, the US Department of Transportation, and Transport Canada with respect to changes in railcar designs for tank cars in flammable service.

As you may be aware, over the last few weeks, both the US Department of Transportation and Transport Canada took meaningful steps within their respective regulatory review processes toward making changes impacting the transportation of crude oil, ethanol, and other flammable products. While we are gaining additional insights into the direction of new regulations, there is still a great deal of uncertainty and the regulatory processes still have much further to go before final rules are issued.

We continue to study both regulator's actions, directives, and comments and we will continue to be engaged in the industry's dialogue. In anticipation of the new regulations, we are making preparations to build to newly developed tank car specifications, as well as to potentially modify existing tank cars in flammable service. Trinity Rail's a leader in railcar design, railcar production, and customer service.

Our team will be well-prepared to manage the eventual regulatory outcome and help ensure that our customers' railcar fleets, as well as our owned lease fleet comply with industry safety standards. We are actively investing capital in our Rail business in response to growth opportunities, as we expect demand to increase as a result of the new tank car regulations and continued favorable industry fundamentals across all railcar types.

I am pleased with the progress we are making to incorporate our flexible manufacturing asset base into our Georgia facility, positioning it to be a multi-product railcar production facility. In addition, we are making other investments in our production facilities to enhance our operating flexibility. During the quarter, we also continued to invest in our maintenance services business by acquiring a facility in Arkansas.

We expect this facility will be in operation by year-end and be well-positioned to support market reaction to revised tank car regulations and we are expanding capacity at our other four maintenance service facilities to enhance our ability to support increased tank car maintenance requirements and potential modifications of our leased fleet and the fleets of key industrial shippers. Our Rail Group produced our sixth consecutive record quarter of operating profit.

I'm very pleased with our improvement in operating margins, although we anticipate some margin headwinds in the second half of the year, due to product mix changes and start up costs from our investments in manufacturing and maintenance services facilities. Our record $5.5 billion order backlog, comprised of a broad product mix with increasingly better pricing across most railcar types, positions us to realize benefits from extended production runs into 2015 and 2016.

During the second quarter, the Rail Group delivered 7,160 railcars, bringing our year-to-date total to just over 14,000. As a result of the orders received in the quarter and further production increases, our 2014 unit deliveries are now expected to be in the range of 28,500 to 29,500; an increase from our previous guidance range of 27,500 to 29,000. This range of deliveries represents a new record level of production.

During the second quarter, our leasing group took delivery of approximately 1,280 new railcars. Our total lease fleet portfolio, including partially-owned subsidiaries, now stands at approximately 73,760 railcars. At the end of the quarter, 20% of the units in our railcar order backlog, with a total value of $1.1 billion, were committed to customers of our leasing business. During the second quarter, our Leasing Group earned record operating profit from operations due to strong market fundamentals and new additions to our wholly-owned lease fleet.

Fewer existing idle rail cars extended production backlogs for both tank and freight cars and rising railcar prices are driving strong lease renewal rate increases across most railcar types. Our lease fleet utilization at the end of the second quarter was 99.7%, up from 98.7% last year. I am very pleased with our sustained high level of fleet utilization and the strong renewal rate increases our team continues to achieve each quarter.

We continue to sell railcars from our lease fleet to manage portfolio diversification and to generate cash when market conditions are favorable. Selling railcars from our lease portfolio to institutional investors is an important strategy for Trinity Rail. Portfolio sales also provide opportunities to serve institutional investors seeking investment in leased railcars, in addition to serving our industrial shipper customers with our leasing services.

As we originate a lease, we have the flexibility to retain it in our wholly-owned fleet shared in the investment with third-party equity investors like RIV 2013, or sell the railcar with the lease while continue to manage the railcar in the lessee-commercial relationship, as we are doing with Element Financial. We are in conversations with a number of institutional investors looking to make investment in leased railcars.

Having access to diverse sources of debt and equity capital provides the financial flexibility to grow the leasing business, in addition to generating capital for Trinity's portfolio of industrial companies. We have had considerable success in growing our leasing platform and expanding our access to capital to support our lease origination capability. During the last 12 months, our leasing group has originated approximately $1 billion of new railcar leases, as a result of its strong lease origination platform.

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 to build upon our operating financial flexibility will continue to drive strong performance levels of our businesses. The investments we are making position us to benefit from the strong market demand dynamics and pending resolution of tank car regulatory uncertainty. I'll now turn it over to James for his remarks.

Thank you, Steve, and good morning, everyone. Yesterday, we announced strong results for the second quarter of 2014 with revenue of nearly $1.5 billion and earnings per share of $1.01 compared with our revenues and EPS of $1.1 billion and $0.52 during the second quarter of 2013. Please recall that we completed a two for one stock split in June, so all figures have been adjusted accordingly.

Our tax rate for the second quarter was 32.6%, which was lower than the guidance of 34%, for the final three quarters of 2014, that we provided on our last conference call. This was primarily due to the benefits of certain domestic manufacturing deductions, lower state taxes, and the partnership tax added of our non-controlling interests. The Company's convertible notes had a dilutive impact of $0.04 to EPS during the second quarter.

Please refer to the EPS schedule provided in our press release yesterday for the dilution calculation. In the second quarter, we recorded approximately $2 million of one-time costs at the corporate level, related to the pending asset purchase of Meyer Steel Structures, which we expect to close during the third quarter. During the second quarter, we also announced the successful completion of the $1.1 billion leasing joint venture initially formed in May of 2013.

The joint venture's acquisition of approximately $388 million worth of railcars substantially utilized all of the remaining equity capital that was committed last year by TILC and our co-investors including Napier Park to perform RIV 2013 and complete the recapitalization of TRIP. Our partially owned subsidiaries, RIV 2013 and TRIP, now own a combined portfolio of approximately $2 billion in leased railcars.

During the second quarter, we repurchased 63,600 shares of our common stock in the open market, for a total cost of $2.5 million. Year-to-date, we have repurchased $12.5 million of common stock, which leaves $237.5 million available under our current program through the end of 2015 for additional stock purchases. We review a number of factors in establishing the level of share repurchase that we make.

We strive to allocate our capital in ways that will increase shareholder value. I will now discuss our current outlook for the remainder of 2014. As provided in our press release yesterday, our guidance for 2014 annual EPS is $3.90 to $4.10, which compares favorably to our prior guidance of $3.50 to $3.75. We have solid earnings expectations for each of our business segments in 2014.

The new guidance level reflects the strong results in the first half of the year, additional orders received for production in 2014, and higher levels of efficiencies in many of our production facilities. Note that our annual EPS and Energy Equipment Group guidance to not include any impact from the Meyer asset purchase, due to uncertainty with respect to the timing of closing, as well as certain accounting analysis that will be completed following the closing.

Our current EPS guidance for 2014 assumes a weighted average diluted share count of 157 million shares, which includes 6.4 million shares from the convertible notes. The dilutive impact assumes the recent $45 stock price for the remaining two quarters and reduces earnings by approximately $0.17 per share. In 2014, we expect our Rail Group to generate revenues of $3.6 billion to $3.75 billion with an operating margin of 18% to 19%.

We will have some margin headwinds in the second half of the year, due to product mix changes, as well as start up and ramp-up costs at certain manufacturing and maintenance services facilities. We expect our Leasing Group to record operating revenue of $620 million to $635 million, with operating profit from operations of $270 million to $285 million. In 2014, we also expect the Leasing Group to sell approximately $665 million to $690 million of leased railcars from the lease fleet; of which $425 million to $450 million will be recorded as revenues.

The total operating profit associated with these sales is expected to range between $205 million and $215 million. We expect our Construction Products group to record revenues of $540 million to $565 million with an operating margin of 13% to 14.5%. Our Inland Barge Group is expected to have revenues of $640 million to $660 million with an operating margin of 16.5% to 17.5%. We expect our Energy Equipment Group to produce revenues of $880 million to $910 million with an operating margin of 11.5% to 12.5%.

Corporate expenses are expected to range from $100 million to $110 million for the year, as a result of our growing business operations and acquisitions, as well as certain legal expenses. For 2014, we expect to eliminate between $720 million and $745 million of revenue and defer between $130 million and $140 million of operating profit, due to the addition of new railcars to the wholly and partially-owned lease fleets. This guidance range also includes certain Rail Group sales to the Leasing Group that are ultimately sold to Element.

We expect between $310 million and $330 million of revenue eliminations for other inter-company transactions. We expected to deduct between $30 million and $35 million of non-controlling earnings in 2014, due to our ownership in TRIP and RIV 2013. As we've 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.

For the purpose of the calculation of guidance EPS, we are assuming a tax rate of 33% for the remainder of 2014. As a reminder, we are required to report EPS using the two class method of accounting, the result of which should be the reduction of EPS attributable to Trinity by approximately $0.14 per share for the full year 2014 on a split adjusted basis 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 ranges reflect year-over-year revenue growth of approximately 30% to 35% with earnings per share growth of approximately 60% to 70% compared to 2013. As it pertains to cash flow, we do not expect the net investment in new railcars for 2014 to consume any cash, due to expected proceeds received from leased railcar sales during the year. Full-year manufacturing and corporate capital expenditures for 2014 are expected to be between $250 million and $300 million.

We remained very pleased with the focused dedication of our employees who are working hard to deliver high-quality earnings and growth during 2014. We continue to seek both internal and external growth opportunities for future years. The Meyer asset purchase is a great example of our acquisition strategy and we believe our balance sheet, expected cash flow, and access to the capital markets, if needed, provide us with sufficient resources to pursue additional growth.

We are confident that our team will continue to be successful identifying opportunities and integrating acquisitions into our portfolio, while maintaining a premiere level of performance in our existing businesses. Our operator will now prepare us for the question-and-answer session.

(Operator Instructions) Allison Poliniak, Wells Fargo.

Just going back to the comments on maintenance, if I remember correctly, you're prior shops were mainly committed to your leasing business. It sounds like the newer ones are not. Can you just give me a little color and if that's a little bit of a change for you guys?

Steve?

Good morning, Allison. Our maintenance services business has been principally focused on our leased fleet. As our lease fleet has grown, our maintenance requirements continue to grow as well. We are looking at the long-term demand characteristics of our fleet and positioning our maintenance services facilities to be able to support that. To the extent that we have additional capacity and scheduling permits, we want to be able to support key industrial shippers in that business as well.

Okay, that's great. On the capacity question, Steve, you mentioned that we're new territory in terms of deliveries. I know it's obviously a fluid question, depending on what's being asked to produce, but is there still opportunity that for you guys to increase capacity on that rail side, if need be?

It's Steve again. Obviously, for competitive reasons, we don't want to discuss our plans and specifics of manufacturing capacity, but I think we've demonstrated our capacity is very flexible and can be shifted across our business portfolio of products, not just within Rail as well. So I'm confident that, as we continue to assess demand characteristics that we have adequate capacity to be able to respond.

Great. On the barge, you talked about a little bit about hoping that mix is changing and hoppers are coming back. Are you starting to see that now? On the margin side, what kind of headwinds are we expecting for it to drop so meaningfully for the balance of the year?

Yes, Allison, this is Bill. I think on the inquiry side, we were feeling very good about the general inquiry nature on the hopper side of the business. Particularly, as we mentioned both scrap prices are up, there's a lot of movement of corn, wheat, and soybeans, the harvest once again looks good, and we are seeing in uptick and even coal moving as well. Overall, it looks good.

As we've said, on the margin side, it's always a function of product mix, so it's what barges are you building in any one particular quarter, as well as the conditions at which time those orders were taken. Can't get into a lot of specifics associated with that, but the back half margin a little lower than the front half margin.

Great, thank you.

Steve Barger, KeyBanc Capital Markets.

Bigger picture question first, Tim, when your management team models out the infrastructure build dollars coming into transportation and storage products that you either can participate in or hope to get involved with, can you quantify the size of those opportunities you see in dollars and talk about how you think about end market visibility in terms of years?

No. We can't quantify the dollars, but what we do is we look at the various businesses that we have in our portfolio and each of our businesses leaders looks at it from an ecosphere point of view and tries to identify the business opportunities that are in front of them. Then we get together and talk about the entire industry spectrum and the products that are in those spectrums that we could potentially manufacture and then the companies that manufacture those products.

We look at it on a industry and a market by market case tied back to our businesses and then we look at how they overlap when the other businesses that we have from a manufacturing flexibility point of view. That's more or less the basis of what our strategic planning and growth process looks like.

Well you've done the cryogenic acquisition and now you've announced the Meyer deal. Are there other acquisitions in those specific spaces or should we expect to see a broader product build-out? How are you thinking about the opportunities in front of you?

We're really an opportunistic company and it's a matter of businesses that are up for sale or in the marketplace is one group that we look at and then it's also businesses that we've planted seeds with over a period of time that would begin to harvest as far as the idea of us acquiring them and/or a lot of networking and relationships that we have. It's very opportunistic and it also is tied to the quality of the fit of the particular business within our portfolio.

Thanks. Steve, are you seen customers come to you and placing multi-year or blanket orders? Or are the inquiries and orders coming in bigger blocks giving whether it's the regulatory changes or what looks like increasing demand for freight cars?

It's Steve. We have customers who want to look at their long-term purchases, particularly with extended backlogs, I think that's becoming a little more prevalent. Historically, you could get a railcar in six, nine, 12 months, that's not the case now. It forces customers to look more long-term. Certainly, we'll entertain long-term agreements to the extent they make sense and they have the proper pricing mechanisms and hedges towards rising costs.

Given the increasing volume of freight orders, are you seeing pricing starting to firm up on that side of the business?

Absolutely. As I mentioned, we've got a backlog of -- industry backlog's a little over six quarters in freight car production and a really wide swath of railcar types and clearly, we're seeing pricing firming and increasing as those backlogs extend. There are really no existing idle cars available today. I think the AAR reported their idle count is the lowest it's been since they've started taking account. All that bodes very well for a good, strong pricing environment.

Got it. Last question, for you, James, when I look at your balance sheet, your net cash on the manufacturing side very conservatively levered on the leasing side. As you mentioned, you're going to be generating a lot of operating cash flow. I know Trinity will continue to look for acquisitions, but do you see anything out there trading at a more attractive multiple than your own stock? Should we expect you to remain active on the buyback?

As I said my script, and this is James, thanks for the question, we look at capital allocation on a quarter-by-quarter annual basis with our Board of Directors, as well. We're looking at a lot of organic investment with the manufacturing CapEx we have of $250 million to $300 million. We've been active in the stock buyback over the last year or so. We've raised our dividend multiple times. We've clearly been active on the acquisition side.

To your point, we do have a lot of cash on the balance sheet. We continue to generate cash flow. We will use some of that with the Meyer acquisition, the cash on hand, but we do continue to have a very strong balance sheet to pursue all of the above type strategies as we see opportunities.

Got it, very good. Thank you.

Justin Long, Stephens.

Congrats on the quarter, guys. Over the first half of the year, the railcar order environment was clearly very strong, but I was curious, as you look into the second half, do you have confidence that the industry backlog can continue to build from these levels, just based on the inquiry levels that you're seeing in the market today? Or do you think that there's a chance we could see a little bit of a pause in order flow?

Steve?

Good morning, Justin, this is Steve. As I said in my script, we're seeing very steady order inquiry levels of both tank and freight cars coming into the third quarter. I look long-term at the fundamentals from the energy renaissance, I look at broader markets and see a continuing strong demand. Short of geopolitical events, which obviously we don't control, I would expect we're going to continue operating a strong railcar environment.

Okay, great. That's helpful. I know you guys won't give guidance on 2015 yet, but just high level, if I look, you have 45,000 railcars in your backlog today. At this point, do you feel like you have enough visibility to say that deliveries will be directionally higher next year?

Justin, this is James, I'll take that one. We clearly do have a strong backlog across our business lines. We have about $6.5 billion when you combine the backlogs in the major businesses that we disclosed. That does give us good visibility well into 2015 and beyond in certain product lines. We're not in a position, at this time, to give direction on our production levels in our different businesses, our earnings levels.

But as Tim said, we do have positive momentum. The investments we've been making are resulting in nice margins. We continue to have good order inquiries and orders come through in the businesses, so we do look forward to, later as we move along, providing more insight into 2015 and 2016. But for now, we're focused on our guidance for 2014.

Okay, fair enough. One last one for me, if you don't mind, I wanted to ask about the Meyer acquisition. Is there any detail you can provide in terms of the margin profile of this business and the earnings impact you expect, maybe on an annual basis once this is closed? Along those lines, anything you could speak to in terms of the synergy opportunity, as well, would be helpful.

James?

Sure. This is James, Justin. One thing we did disclose in our press release, basically, is the revenue run rate for 2014 for Meyer on a standalone basis was about $325 million. We're not able to provide any margin guidance at this point. I'll mention a couple of things: one is, we need to finish the acquisition during the third quarter and absorb that business. As we look at enrichment opportunities, we do believe they will be there flowing both ways between our companies.

We'll also point out, and we'll disclose later in the year as we're able to close the acquisition, what accounting adjustments we need to make through purchase price accounting and so forth. Historically, the business has had healthy margins. We believe in that going forward, but as Bill said, there's a lot of demand drivers there that we'll get our arms around as we absorb the business.

Okay, great. On the synergy opportunity, anything you could speak to there, just high level?

We really can't provide any specific, what you would call, synergies. We really use the term enrichment in our culture more, Justin, as we look at everything from the customer base, the manufacturing requirements, to the steel and those kind of things. We'll provide what we can as we go along and we'll determine what level of guidance we can provide as we make the acquisition.

Okay, fair enough. Thanks, James. I appreciate the time, guys.

Bascome Majors, Susquehanna Financial Group.

Thanks for the time this morning. We finally got US safety regulations, at least in draft form, about the flammable liquids by rail and movements and tank car standards and that gives you at least some incremental clarity of which tank car upgrades are going to be required and how long you'll have to make those if you want to keep those cars in crude or ethanol unit train service.

How are you approaching the replace versus retrofit decision in your own lease fleet today and how is that going to differ between whether this is a, quote, legacy DOT111 car or a newer CPC1232 car? If there's any differentiation between how you're approaching a jacketed versus non-jacketed car, please point that out as well.

Steve, you want to take that one?

Sure. Thanks, Bascome, for your question this morning. I don't know that I share your insight that we have great clarity following the announcement from PHMSA and Transport Canada. If anything, I think there's perhaps even more uncertainty. There's obvious conflicts between the two regulatory bodies, so I think we have much to learn. We have dedicated resources that are deep in analysis and study of this. Obviously, we have cars that will be impacted. We have cars in flammable service today and we're positioning ourselves to be able to respond to building the new specifications.

We've got investing and doing our prototyping and analysis, so I feel we'll be very well prepared for whatever the outcomes are. But the announcements in the last few weeks, I didn't think, brought any really great clarity to the process. As far as retrofit and scrapping, we're going to do analysis on that. So much depends upon the age of the car, it depends upon the lease terms that we have, and so there's quite a bit of analysis that needs to be done once we understand what the new performance standards are and what the specifications are that we have to meet.

Okay. Following up on an earlier question, just from a high level, looking from here to 2015, I know you don't want to give specific guidance, but estimates from the street out there implying that earnings and EBITDA are going to be down year over year, which certainly is at odds with the momentum you seem to be seeing in our businesses and the visibility you have today. Is there any help or things you could point out that could cause a -- or what are you concerned about that might cause a weaker 2015 versus 2014, just so we can have that on our radar?

Sure, Bascome, this is James. I'm not sure I'd point to anything that would give you a lot of clarity in terms of opportunity there, other than we continue to build the backlog in our business units. We continue to show strong margin performance. As we've talked about before, we expect to complete roughly the first $1 billion of purchases from Element during 2014 and the second $1 billion is slated for 2015.

We'll provide clarity as we have that later in the year, as is available. But we continue to have a lot of positive momentum in the Company. We're optimistic about our growth opportunities. We've demonstrated that through the acquisitions we've made to continue to build the portfolio and we've continued to invest our capital organically to give us growth opportunities, as well.

All right. If I could ask just one more on the tank car side, clearly, there's uncertainty out there, which you alluded to in answer to my earlier question, but if you've got customers with CPC1232 cars on order today, expecting delivery over the next couple quarters before that uncertainty may be, I guess, resolved, have they changed their response? Are they changing specs in response to what we've seen already or is it more so of a wait and see and potentially retrofit if we have to on the backend? Just what you're hearing from your customers today?

Bascome, this is Steve again. We're obviously going to work with our customers and try to accommodate them. We want them to have the right cars for their fleet, to the extent Rail would do that we will. Each of those has an individual view, all the companies view this issue very differently, and I think it's our responsibility to work with them on an individual basis. It would be very hard for me to give you a general answer to the question.

All right. Thanks for the time this morning, guys.

Matt Brooklier, Longbow Research.

Thanks, good morning. If you could maybe highlight what's left in terms of the $1 billion for the Element deal that should be booked on the second half of this year and then maybe talk to the contribution per third and fourth quarter. It looks like you did about 1/3 of the total of what was left in 2Q, I'm just curious as to your expectations for the cadence of what remains from Element in the back half of this year?

Matt, this is James. Thanks for the question. Using the roughly $1 billion that we've talked about and again, that could move a little bit timing-wise, to-date, Element has purchased, since December of last year through June 30, $740 million of railcars from us but from our Rail Group and our Leasing Group. That math would tell you there's $260 million left in the first $1 billion, but again, that's not a terribly precise number. We do expect to have a relatively steady level of sales to Element throughout the course of the last two quarters of the year. But again, geography, the timing of exact sales, and whether they're from the Rail and Leasing Group is to be determined

Okay, that's helpful. Then we heard there is some uncertainty with respect to flammable tank cars and orders here do have I guess a little more visibility with the proposed rule out there. But I'm just curious, it seems like there's still a pause with respect to market participants stepping in and booking orders and that was the case in Q2, yet the industry tank car number was really strong at roughly 10,000 units. I'm just curious as to pause in the market, yet the industry numbers got better in 2Q. What were some of the contributors to that improvement, if you have some thoughts on that?

Sure, Matt, this is Steve. I think, generally, there are customers who are pausing, waiting to order new railcars pending regulatory standards. That's to be expected. As I mentioned in my earlier comments, we also have customers who recognize that they'll have a chance to clarify their railcar specifications by the time a car is built in late 2015, 2016. The regulations will be more certain before then. Beyond just tank cars going to flammables, we're seeing steady demand for other types of tank cars.

In particular, we're seeing strong demand for pressure cars to move natural gas liquids and propylene for example. We're also seeing tank cars to move more general commodities. There are tank cars in demand beyond those serving flammable service and we will see a pause, and I think it's a temporary pause, until standards are clarified for those flammable customers to place their orders. Perhaps will see a few early so they can get in queue. I would expect that demand will be strong once those flammable standards are clarified.

Okay. Is it fair to assume, the past two years, we've seen a disproportionate amount of flammable service tank car orders coming through and yet, we've neglected a portion of the market outside of the flammable service. Could the step up in Q2 be a result of some of these other market participants coming in and maybe playing some catch-up in some of these other tank car categories?

Matt, this is Steve. Sure, that's entirely possible. When we say disproportionate, I'm not really sure what that means. If you look historically, there's always been one or two car types driving overall railcar demand. We had ethanol cars back in the 2007/2008 period. We've had periods for coal cars drove railcar demand, intermodal cars, The trend right now is for cars for crude oil service.

We saw a lot of other tank cars over the last couple years go into service for hydrochloric acid, other general service cars. These are natural cycles and trends where different car types lead the way, but the clue there is demand for tank cars beyond crude oil cars.

Okay, that's helpful. Thanks for the time

Eric Crawford, UBS.

Bascome was asking some questions on PHMSA. I appreciate the commentary on tank car rates, but hoping we could drill down a little bit more on the MPRM. Do you have a preference for one of the three options or some variation that was outlined? To that, any thoughts on the proposed timeframe or the retrofit estimated costs that were included, if you think those are accurate, any color would be helpful?

Eric, Steve. I think the only thing that I'm excited about is having certainty and it appears that we might have greater certainty as to the direction of regulatory requirements by the end of the year. I don't have a preference. We're going to be prepared for any of our outcomes. I think our team has really done a fine job in preparing themselves for regulatory change, so I'm confident we'll be in a good position.

Okay. Switching over to the Energy segment, the recent acquisitions and the integration that's going on there, from the segment guidance, you've taken up the margin expectations while holding revenue steady. Just wondering if that's a function of an improved margin profile for the new businesses relative to your initial expectations or if it's just broader execution across the segment?

Yes, Eric, this is Bill. I would say it's really broader execution across the segment; in particular, our storage containers doing very well and our wind tower business continues to have improved performance, so probably those two businesses really the driving force. I am pleased with the integration of the businesses, but like all new business you bring in, it takes a little time to get them up to full speed.

Sure, okay. No, that's helpful. You mentioned a margin headwind in Rail just from the start-up costs and a little bit from next, but wondering if you could kind of give us a sense of the breakdown between those two? Is it 50-50 equally attributable or is one really the primary driver?

Eric, this is James. We really aren't in a position to break that down. The margins remain very strong second half of the year for Rail, certainly. We simply wanted to point out that you're going to, from time to time, as we're ramping up our capacity to the new volume guidance that Steve provided.

We're ramping up our maintenance facilities, integrating the Arkansas facility, for example, as well as, as Steve mentioned, the timing of which we took certain orders and when we're producing certain orders, you're going to have a slight headwind in the second part of the year. But again, margins remain very strong in the Rail Group.

Okay, no, I appreciate that. Thanks very much, guys, and really great quarter.

Sal Vitale, Sterne Agee.

Just a quick question on the backlog. If I just back out the implied second half deliveries guidance, just based on your full-year guidance, I see 29,500 to about 31,000 cars slated for delivery beyond 2014. How should we think about how much of that stretches out into 2016 at this point?

Steve?

I don't want to get into specifics of what parts of our backlog fall into what years. I think we have great visibility into 2015 in our production plants. We do have some of our production lines that are slated all the way into 2016. So obviously, that gives us a good bit of visibility and allows us to plan our business effectively and I would expect that we'll continue to take orders and fill in whatever holes we might have in 2015 and 2016 as we move forward.

Okay, that's helpful.

Sal, this is Tim. The other thing that Steve and his group have done really well is they identify bottlenecks that they may have on certain product lines. Then the capital that James mentioned, the internal capital that we're spending, we've spent quite a bit of capital on minimizing bottlenecks, freeing up bottlenecks in our rail car lines and then getting the volume to increase.

That capital that we're spending to getting tremendous returns on it and the people are doing a fabulous job of driving operating efficiencies once the bottlenecks that we have in a particular production facility get, once they overcome them. That's why it was a little bit hard for Steve to say how high you could go because our industrial engineering people, as well as our lean initiatives and all of our people are identifying bottlenecks, once they overcome one bottleneck then they go to the next one. We've made great headway in continuing to invest capital in that area.

Okay, that's helpful. I appreciate your response. Regarding the Georgia facility, could you give us a little color there? When does the incremental capacity from that come online or is it already onstream? Have you spoken in the past about how many cars, how much that capacity actually is?

Sal, this is Steve, thanks. Again, I'm very pleased with the progress we're making. We're really positioning our Cartersville facility to be a very flexible facility capable of making multi-products within our railcar product line. I would anticipate that we'll be in a reasonable level of production by the end of the year and then we will ramp up that facility to meet demand requirements as we see fit. Again, we typically don't provide capacity numbers by plant or in total, but this facility will be very constructive to our production plans.

Okay, that's helpful. If I could just switch gears to the maintenance services side, once all of your -- you mentioned a few different plants, I think you said four additional facilities beyond the Arkansas facility. So once all those facilities are up and running, what do you think your capacity to do retrofits would be at that point?

Sal, it's Steve again. That's a difficult question because I'm not sure what the retrofits are going to be and there's a fair amount of variability in the different possible outcomes. But we certainly want to be able to comply with any of the regulatory requirements from a timing standpoint, as well as from a specification standpoint.

As I mentioned, we have our own fleet that we want to be sure that we can keep in service and meet the needs of our customers. Obviously, we want to be able to work with key customers who have larger fleets as well. I think we'll be in very good position to respond to regulatory changes when they come down.

Just a follow up on that, do you expect that to be a profit center at some point or do you expect the capacity to be consumed by retrofits on your lease fleet?

Obviously, Sal, if we're doing a lot of work on our own fleet, those revenues and profits are eliminated in consolidation. Profits that we would realize from third-party work would go to the bottom line and difficult for us to really give you any projections on that right now.

Okay, that's great. Thank you for your time

Art Hatfield, Raymond James.

Good morning, guys. This is Derek Raabe on for Art.

Morning, Derek.

Just had two questions that really haven't been addressed on my end. The first question concerns labor. We've been hearing across multiple industries that there's some difficulty in finding and keeping skilled workers. As you ramp up your production and maintenance capabilities across several of your platforms, has this been an issue or are you seen this as being an issue going forward across any of those businesses, be it in the US or in Mexico?

Derek, this is Tim. Hiring skilled laborers throughout our system has been a challenge and our people working with our HR groups are trying to find a variety of different ways to assist our plants in hiring people in a number of areas. We have training programs that have been established and we've worked with the local authorities and the trade schools to try to equip people for our type of work environment, but this is nothing new.

This is something -- I'm in my 16th year as CEO and almost every year that I've been in this position, we've had challenges of hiring people and getting them equipped for our facilities. Our people do it remarkable job of coping with the challenges that out there.

Okay. I appreciate that color. The second and final question for me, could you just provide an update on where you stand today in terms of your DOT 111 in flammable service exposure within your lease fleet? I think at the end of the last quarter, it was down to 11,300. Secondly, as you reduce that exposure within your own fleet, can you comment on what you're doing with those cars? Are you moving those to other services or are you looking to sell them?

Derek, this is James. In terms of the level of exposure we have with those cars, it's in line with where it was last quarter. We gave guidance last quarter that was around 11,000 and the number hasn't really changed. We've added cars to the fleet, we've sold cars to our partially owned fleet, as well as to Element and other third parties. That number can move around. I don't think we're in a position yet to talk about what we may do to change the exposure or what may happen with those cars until, as Steve said, we have more clarity on the regulations.

Okay, great. Thanks for the time this morning, guys.

Thom Albrecht, BB&T Capital Markets.

As the recovery takes place in non-tank cars, I was wondering, Steve, if you could comment on how competitive pricing might be for those? Just wanted to clarify, I know years ago, you did intermodal cars, but it seems like there's been a long time. As of right now, you're not doing building intermodal or coal cars, is that correct?

Thom, it's Steve. Thanks for your question. Our industry's a very competitive industry and I think historically, we've seen excess capacity compared to demand. We have very, very strong demand. I think some of the capacity in our industry has been rationalized. I think some of the capacity for freight cars has moved to tank cars. When we look at six quarter backlog, I think that's a very strong environment and it certainly sends messages that we should be able to operate in a fairly strong pricing environment as well.

I like the fundamentals that I'm seeing in the non-tank car side of the business and hopefully those will continue. With respect to intermodal cars, there was a large number of intermodal cars placed during the second quarter orders for intermodal cars. You are correct, we are not currently building intermodal cars. Frankly, when we prioritize our production plans, we look for those cars that provide us the greatest returns and typically we find that those are markets that have multiple customers and fewer than five or six suppliers.

When we look at the intermodal market, we see basically one buyer and multiple suppliers, so that doesn't really compel us to chase that market when we have opportunities that are consistent with our current production plans.

Okay, that's very helpful to hear. Thank you.

Okay. This is Gail Peck. It 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 August 6, 2014. The access number is 402-220-0119. 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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