Trinity Industries Inc (TRN) 2014 Q3 法說會逐字稿

Good day and welcome to the Trinity Industries Inc Incorporated third-quarter results conference call.

(Operator Instructions)

Please be advised, today's program may be recorded.

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 the 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 program over to Ms. Gail Peck. You may begin.

Thank you, Aaron. Good morning, everyone. Welcome to the Trinity Industries third-quarter 2014 results conference call. I am Gail Peck, Vice President, Finance and Treasurer at 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 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 Groups; and Steve Menzies, Senior Vice President and Group President of the Rail and rail car 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'll begin this morning by providing some brief comments pertaining to our highway products litigation and then I'll move to some comments about our strong third-quarter financial results.

Before I provide remarks pertaining to the litigation, I want everyone to know that it is extremely important to us that our nation's roads are safe for drivers across the country. Last week, Trinity and Trinity Highway Products LLC received an adverse jury verdict on its previously disclosed false claims litigation.

The Company maintains that the allegations are without merit and the damages awarded were based on insufficient evidence. The court has not yet entered a final judgment in this case. We intend to vigorously defend our position in post-trial motions and on appeal to the US Court of Appeals for the Fifth Circuit.

As background information, engineers at Texas A&M developed and designed the ET-Plus, which is the product involved in the litigation. The Texas A&M system established the Texas A&M Transportation Institute in 1950 and is recognized as the largest transportation research agency in the United States. The Texas A&M University system is the owner of the ET-Plus patent. We have placed a high degree of confidence in the Texas A&M system, as well as the Texas A&M Transportation Institute, and we rely on their engineering and expertise pertaining to the ET-Plus.

In order to keep things simple, I'm going to refer to both entities as Texas A&M. Trinity Highway Products manufactures and markets the ET-Plus according to an exclusive license agreement granted by Texas A&M. According to our license agreement, Texas A&M is responsible for the research, design, and development of the ET-Plus. Texas A&M conducted crash testing of the ET-Plus to demonstrate compliance with the required federal highway standards. In addition, Texas A&M prepared the ET-Plus test reports reviewed by the Federal Highway Administration in their consideration of product acceptance.

It is our belief that since its introduction in 2000, including all additional improvements to the product, the ET-Plus system has been in compliance with the governing standards. On October 21, after the adverse trial verdict, the Federal Highway Administration requested that Trinity Highway Products perform a series of additional test to support their ongoing evaluation of the ET-Plus. On October 24, Trinity Highway Products issued a press release stating it will stop shipment of the ET-Plus until the additional testing has been completed.

Texas A&M's technical and engineering experts are confident the additional test of the ET-Plus will be successful. Until we know the outcome of the additional test, we will not speculate on hypothetical scenarios. During today's call, our responses to specific questions regarding litigation will be limited. Our third-quarter 10-Q will provide detailed disclosures related to this matter. From a capital planning point of view, we will maintain a conservative approach until we develop a better sense of clarity pertaining to the litigation and related matters.

Now, I will provide some comments about our third-quarter financial results. I'm pleased with our financial results for the third quarter. I continue to be impressed with how our people are driving operating leverage and efficiencies to the bottom line. We also made great progress in the business development area during the third quarter. In August we closed on the purchase of the assets of Meyer Steel Structures. This transaction established our market leadership position in the electric transmission towers industry.

During the third quarter, our rail and leasing businesses continued to achieve high levels of profitability. We are making significant investments in our rail platform to organically grow our operations in response to strong demand. I'm pleased with the performance of our energy equipment, construction products, and inland barge groups. These businesses grew year-over-year revenue and profits by 34% and 44% respectively in the third quarter. The growth is a result of the great strides our businesses made in flexing their operations to respond to changes in market demand, as well as the acquisitions we made during the last year.

Trinity's financial accomplishments during the past year have established a higher earnings platform. Our current 2014 earnings guidance range indicates a new record level for Trinity, surpassing prior record years by a wide margin. I'm very pleased with the Company's financial performance.

A portion of our earnings increase is due to the level of rail car sales generated by our leasing business. Transactional activities are becoming a fundamental part of our leasing business model. We expect to continue conducting rail car leasing and other transactions that provide earnings and generate cash.

As we plan and look towards 2015, we have set a goal of generating a higher level of earnings than we achieved this year. We have a large amount of positive momentum occurring at the operating level of our businesses and we are working diligently to build upon the strong earnings platform we have established. Trinity remains uniquely positioned to provide a variety of transportation and storage products to the oil, gas, chemicals industry.

To be a premier diversified industrial company, we recognize the importance of sustainable earnings growth, and the Company's business model is aligned with that goal in mind.

I now turn it over to Bill for his comments.

Thank you, Tim. Good morning, everyone.

The energy equipment group reported record revenue for the third quarter. The group also doubled its quarterly operating profit compared to last year. Revenues and profits increased primarily due to recent acquisitions, higher shipments of storage containers serving the energy sector, as well as increased deliveries and improved operational performance in our wind tower business. At the end of the quarter, our wind tower backlog totaled $529 million.

During the third quarter, Trinity completed the purchase of the assets of Meyer Steel Structures. This acquisition enhances the diversity of Trinity's portfolio businesses. The Meyer business is now a part of Trinity's energy equipment group and operates as Trinity Meyer Utility Structures LLC.

The integration of Meyer is progressing smoothly. The addition of Meyer provides Trinity a market-leading position in the North American utility steel structures market. While current market fundamentals continue to create a very competitive environment, our long-term outcome is positive.

Moving to our inland barge group, during the third quarter, the inland barge group reported a 30% year-over-year increase in operating profit, primarily resulting from a change in product mix. We received orders totalling approximately $177 million during the quarter, resulting in a backlog of $475 million at the end of September. I am pleased with our barge group's ability to respond to various demand drivers and generate efficiencies within the plans.

This group's operational flexibility is the key differentiator, enabling us to enhance profitability and respond to our customers needs. Inquiries for hopper barges have been steady due to strong corn and soybean harvest. Tank barge demand is currently driven, primarily, by downstream markets, including chemical and petrochemicals. The order environment for new tank barges is consistent with our earlier expectations that downstream infrastructure investments would create additional demand.

Moving into our construction products group. Overall, I'm pleased with the level of profitability we achieved during the third quarter. Revenues increase 14% year over year, primarily resulting from higher sales volumes in our aggregate business. Operating profit increased 16% compared to last year due to a more favorable product mix. We continue to see strong demand in the Texas construction market, which is a good indicator of overall demand for our aggregates business.

Conditions in the highway business remain challenging. The continued uncertainty regarding the availability of funding for the Federal Highway Bill makes it difficult for state highway authorities to plan longer-term projects.

With regard to the highway litigation matter, both Trinity Highway Products and Texas A& M Transportation Institute are working to develop the testing plan requested by the Federal Highway Administration, and will deliver the proposed plan this week. Testing dates and additional details will not be finalized until the plan has been approved by the Federal Highway Administration.

At a state level we are working with each state to better understand their concerns and the possible course of action. We do not have any additional details to provide this time.

Now, I'll turn the presentation over to Steve.

Thank you, Bill. Good morning.

Trinity Rail's positive operating momentum continued during the third quarter. Our integrated business platform is well positioned and responding effectively to strong rail car demand. During the third quarter, our rail group and leasing and management services group delivered outstanding results. Our operating and financial flexibility continue to differentiate Trinity Rail, enhancing our position as a premier provider of rail car products and services.

North American rail car industry experienced a record level of orders during the third quarter, reflecting broad industry demand. The industry backlog now stands at over 124,000 rail cars, eclipsing last quarter's record levels. During the third quarter, Trinity Rail received orders for 14,120 new rail cars, including covered hoppers, tank cars and auto racks, with orders received from railroads, third-party leasers and industrial shippers. Our backlog increased to 51,725 rail cars, with a new record value of approximately $6.1 billion.

The North American energy renaissance and economic recovery are driving increased demand for rail cars across a broad number of key markets. We continue to receive orders for tank cars to transport crude oil and other flammables, although some demand is currently paused pending regulatory clarity. Demand for rail cars to transport sand and proppants used in oil and gas production remains very strong.

We are also seeing rising rail car demand in downstream oil and gas markets such as petrochemicals, chemicals, and fertilizers. We believe this downstream will continue to grow with the significant investments being made in production capacity in those industries.

There is steady demand of rail cars supporting the automotive and steel industries as well as construction-related activities. Demand for rail cars to move agricultural products is also strong as existing rail car supply is limited for this year's harvest and rising grain exports.

In addition, the replacement of the aging North American fleet continues to be an important driver for long-term rail car demand. This demand environment creates an exciting period for the rail car business and presents, potentially, an early stage of an elongated rail car cycle.

During the third quarter our rail group produced another record level of operating profit. I'm very pleased with the group's abilities to sustain high levels of productivity and efficiency while facing some operational headwinds due to product mix changes and product production line change overs. Our industry-leading backlog, comprised of a broad mix of tank and freight cars, positions us to realize benefits from extended production runs into 2015 and 2016.

During the third quarter, the rail group delivered 7,745 rail cars. In the fourth quarter, we expect to deliver between 8,100 and 8,300 rail cars, which brings total annual deliveries to approximately 30,000 rail cars in 2014, a record level for Trinity. As we enter 2015, we expect a production rate similar to that of the upcoming fourth quarter. If sustained, this will result in another record year of rail car deliveries for Trinity Rail.

We continue to make investments in our business to prepare for tank car regulatory changes expected from the US Department of Transportation and Transport Canada in the very near future. We appreciate the careful considerations that the federal regulatory agencies are giving to the many public responses to the notice of proposed rule making. Trinity Rail continues to participate in the industry dialogue. Our priority is to ensure the regulatory compliance of our own lease fleet, as well as though of key strategic customers.

Keep in mind, the issuance of new regulations does not change the fact that commodities currently transported in DOT-111 tank cars will still need to be transported in either modified tank cars or new tank cars. Trinity Rail is well positioned to meet demand for rail cars created by both alternatives.

We recently announced plans to establish a maintenance services facility in the state of Iowa. The development of this new facility increases our capacity to ensure our growing lease fleet of tank cars meets regulatory requirements and to perform modifications that may stem from new tank car regulations.

As a reminder, in the second quarter, we announced the acquisition of our Arkansas maintenance services facility. Our ongoing investments in maintenance services facilities ensure that both our leasing company and our key industrial customers have access to cost-effective services in a capacity constrained marketplace.

During the third quarter, our leasing group reported an increase in year-over-year operating profit, due to strong market fundamentals and new additions to the wholly-owned lease fleet. With industry rail car utilization quite high, there are very few available existing rail cars. New rail car production backlogs extend well into 2016 and some into 2017 for both new tank and freight cars. These factors, combined with rising new rail car prices, are driving very strong lease renewal rate increases across most rail cars types.

Our lease fleet utilization of the end of the third quarter was 99.7%, up from 98.5% last year. I am very pleased with our sustained, high level of fleet utilization and the strong renewal rate increases that our team continues to achieve.

During the third quarter, the leasing group took delivery of approximately 1,830 new rail cars. Our total lease portfolio, including partially owned subsidiaries, now stands at 74,945 rail cars. At the end of the quarter, 28% of the rail cars in our order backlog were committed to customers of our leasing business bringing our leasing backlog to $1.7 billion. During the last 12 months, our commercial team has originated over $1.8 billion in new rail car leases and achieved excellent renewal results.

Over the last decade we focused on investing in the lease fleet to offer one-stop shopping for our industrial customers, as well as creating a stable base of earnings and cash flow to mitigate rail market cyclicality on the Company's overall results. Our leasing platform has grown and developed, and now includes extensive relationships with institutional investors that will support the growth of our lease fleet.

The size and scale of our leasing operations allows us to actively participate in the secondary market. To participate in the secondary market helps manage fleet diversification and creates the opportunity for transactional earnings. We expect transactional earnings to be a consistent part of the annual earnings profile of our leasing business.

In summary, the focused efforts of our dedicated Trinity Rail team to enhance our operating and financial flexibility continue to drive strong performance levels. The investments we are making, position us to benefit from strong market fundamentals, as well as fulfill market requirements when new federal tank car guidelines are issued. I'm very pleased with Trinity Rail's strong momentum as we finished the current year and head into 2015.

I'll now turn it over to James for his remarks.

Thank you, Stephen. Good morning, everyone.

Yesterday we announced strong results for the third quarter of 2014, with a record revenue of approximately $1.6 billion and EPS of $0.90 compared with revenues of $1.1 billion and EPS of $0.63 during the third quarter of 2013. Please recall that we completed two-for-one stock split in June of this year, so all figures have been adjusted accordingly.

The Company's convertible notes had a diluted impact of $0.05 to EPS during the third quarter. The convertible notes did not have a dilutive impact on prior-year results. Please refer to the EPS schedule provided in our press release yesterday for the calculation of the diluted impact.

In the third quarter we recorded approximately $7.5 million, or $0.03 per share of one-time costs related to the asset purchase of Meyer Steel Structures, which closed in August. Approximately $6 million of these costs were recorded at the corporate level and approximately $1.5 million were recorded as additional nonrecurring state income tax expense.

During the third quarter, we repurchased 407,000 shares of our common stock in the open market for a total cost of $19 million. Year to date, we have repurchased $31.5 million of common stock.

With respect to the highway litigation, Trinity believes that it is not probable at this time that the jury division will withstand legal scrutiny. As we diligently pursue a successful outcome in this case, which may result in an appeal to the Fifth Circuit, we may need to satisfy certain bonding requirements as the District Court enters a final judgment. We are confident in our ability to procure sufficient bonding capacity at a reasonable cost should the court require an appeal bond.

Current indications from our insurance providers are that such a bond would be provided an unsecured basis. We maintain a strong balance sheet with the readily available liquidity of approximately $1.3 billion. We expect our cash flow generation to be strong and Trinity has access to additional capital as needed.

I will now discuss our current outlook for the remainder of 2014. As provided in our press release yesterday, my guidance for 2014 annual EPS is $4.08 to $4.16, which compares very favorably to our prior guidance of $3.90 to $4.10. This implies fourth-quarter earnings of $0.75 to $0.83 per share.

Results from the Meyer acquisition are now included in our earnings guidance. Due to one-time costs associated with the transaction, as well as ongoing intangible asset amortization, Meyer has a minimal net earnings impact in 2014. Our earnings and guidance also incorporated expenses associated with our highway products litigation.

Our current EPS guidance for 2014 assumes a weighted average diluted share count of 157 million shares, which includes 5.8 million shares from the convertible notes. The dilutive impact assumes an average stock price of $37.45 for the year and reduces earnings by approximately $0.16 per share.

The remainder of the guidance I will provide today relates to the fourth quarter. We expect to resume our practice of providing annual guidance ranges when we issue guidance for 2015.

In the fourth quarter, we expect our rail group to generate revenues of $1 billion to $1.1 billion with an operating margin of 17.5% to 18%. These ranges incorporate the fourth-quarter delivery guidance Steve mentioned in his remarks, which implies 2014 total deliveries of approximately 30,000 rail cars. Fourth-quarter operating margins for the rail group are lower than previously achieved year to date due to product mix changes and changeover costs associated with certain production lines.

We expect our leasing group to record operating revenues for the fourth quarter of $155 million to $160 million with operating profits from operations of $65 million to $70 million. The implied operating margin is lower on a year-over-year and sequential basis, due to a higher level of compliance-related maintenance, the timing of which can be uneven.

We anticipate fourth-quarter sales of leased rail cars from the lease fleet to generate $62 million to $67 million, all of which are expected to be recorded in the leasing group as revenues. The fourth quarter operating profit associated with these sales is expected to range between $13 million and $15 million.

Since announcing the $2-billion strategic alliance last December, we have sold $873 million of leased rail cars to Element Financial. We expect to substantially complete the sale of the first $1 billion of leased rail cars by the end of 2014, leaving $1 billion of sales remaining. Element intends to purchase these rail cars in 2015, and we remain confident in this timing.

We expect our construction products group to record fourth-quarter revenues of $135 million to $145 million with an operating margin of 4% to 5%. Margins are expected to step down in the fourth quarter reflecting the seasonal nature of the construction business as well as impacts from the litigation, including our decision last week to suspend sales of the ET-Plus system. Year-to-date nine-month revenue from this product was approximately $33 million, consistent with prior-year levels.

Our inland barge group is expected to report revenues of $165 million to $175 million for the fourth quarter with an operating margin of 13.5% to 14.5% as a result of the mix of products being delivered in the quarter. As we look beyond the fourth quarter, we are pleased with the overall pricing levels in our barge backlog.

We expect our energy equipment group to produce fourth-quarter revenues of $265 million to $275 million with an operating margin of 9.5% to 10.5%, including the operating results of Meyer from the date of acquisition, which includes the atomization of certain acquired assets due to purchase-price accounting.

Corporate expenses are expected to range from $28 million to $32 million during the fourth quarter. Our guidance does not include a reserve related to the jury's adverse decision in the highway litigation. Pending entry of a final judgment and completion of the Company's post-trial and appellate activities in this matter, we do not currently believe that a loss is probable. We will direct you to our third-quarter Form 10-Q, which will provide further details regarding the status of the litigation and related matters. Our guidance for corporate expenses does, however, include certain legal expenses associated with the ongoing litigation.

For the fourth quarter we expect to eliminate between $190 million and $200 million of revenue and differ between $30 million and $35 million of operating profit due to the addition of new rail cars to our lease fleet. This guidance range also includes the elimination of certain rail group sales to the leasing group that are later sold to third parties from the leasing group. We expect between $70 million and $80 million of revenue eliminations for other inter-company transactions during the fourth quarter.

We expect to deduct between $8 million and $10 million of non-controlling earnings in the fourth quarter due to our partial ownership in TRIP and RIV 2013. As we've indicated on previous earning 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.

Near the end of the third quarter we issued $400 million of 10-year senior unsecured notes for general corporate purposes at an attractive interest rate of 4.55%. During the fourth quarter, we will begin to occur a full quarter of interest expense from our $400 million of senior notes, reducing EPS by approximately $0.02 per quarter going forward.

For the purpose of calculating our EPS guidance, we are assuming a tax rate of approximately 33% for the fourth quarter. As a reminder, we are required to report EPS using the two-class method of accounting, the results of which should be the reduction of EPS attributable to Trinity by approximately $0.03 per share for the fourth quarter, compared to calculating Trinity's EPS directly from the face of the income statement. This is included in our EPS guidance, as well.

As it pertains to cash flow, we expect the annual net cash investment in new rail cars and our lease fleet to be minimal if any in 2014, after considering the expected proceeds received from leased rail cars sales during the year. Full-year manufacturing and corporate capital expenditures for 2014 are expected to be between the $250 million and $300 million. Our guidance ranges imply year-over-year annual revenue growth of approximately 40%, an annual earnings growth of more than 70%, representing a number record year for Trinity.

As Tim indicated in his remarks, we are establishing a higher earnings platform in 2014. We recognize the importance of sustainable earnings growth, and we believe the Company's business model is aligned with that goal in mind. With a record combined reported backlog of the $7.1 billion in our major businesses, we are well positioned to make progress on this goal in 2015.

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

(Operator Instructions)

We can take our first question from Allison Poliniak with Wells Fargo. Your line is now open.

Hi, guys, good morning.

Good morning.

There's a lot of uncertainty around being the regulations from crude by rail, and obviously, we've seen oil come down pretty dramatically and people concerned about capital budgets and such in that industry. Do you guys hear anything anecdotally?

Is there a change in tone? Are regulations to onerous? Any updated thoughts on what you're hearing that you can share with us with respect to that?

Steve, do you want to take that?

Good morning, Allison. I think the question really revolves around our current market dynamics such as the crude oil and the impact on demand for rail cars. I think first of all, when we look at what's happening with crude oil today, we're really looking at the long-term prospects for continued growth and expansion of oil and gas production. I think the investments being made are really based on long-term price projections, not necessarily short-term spot market price volatility, so we don't really see it having that type of pushing and pulling on demand.

We continue to see strong demand for small cube covered hoppers for frac sand and proppants, as existing drilling techniques continue to consume greater amounts of these materials to enhance extraction. Rail cars moving crude oil in our lease fleet are under long-term contracts, which mitigates any short-term volatility because of the spot market changes.

As a reminder the rail cars are in our backlog and those intended for crude oil are non-cancelable. So, while we've seen some changes here in the near term in spot market oil prices have, really, has not had any appreciable impact on our business and we don't expect it to.

That's great. Then just on Meyers, I think, Billy, you talked a little bit about nice long-term growth. Can you quantify what the growth profile of that market's been? I think you even mentioned concurrent dynamics bringing that down near term, can you maybe elaborate on that a little bit?

Yes, sure Allison. The market obviously had pretty good growth rate in 2011, 2012, and 2013. We had a good bit of capacity come online for most of the players in the industry and a few new entrants and demand shrunk a little bit in 2014 as a few of the major projects, in particular the CREZ project and Texas wrapped up.

As we look at the projections going forward, the market fundamentals continue to be strong. Still a real strong need for reliability and renewable connections, and so we're strong on the industry and strong on the market overall.

Great. Thank you.

We can take our next question from Eric Crawford with UBS. Your line is open.

Hi, good morning. I guess switching over to the highway guardrails, clearly the news, as states pulling out product and seeking reimbursement has raised some concerns. Do state DOT claims for reimbursement have any merit?

Bill, you want to take that?

Yes. At this time we've made all the comments regarding the highway products that we want to make through the call. Our 10-Q has got a fair amount of information in it and we would refer you to the 10-Q. I think we shouldn't speculate on unknown scenarios.

Okay. Well, staying on the same topic but maybe not relating to any litigation. The testing of the ET-Plus system, I understand the plan has yet to be approved, the final plan, and the dates are still up in the air, but what timeframe would be required to conduct the test? Not the dates, but the actual amount of time needed to conduct the tests? Would you, once a plan has been approved, would you issue a press release once the plan's been established?

I'm not going to comment on whether we'd issue a press release or not. It is our intention to submit to the Federal Highway Administration a proposed plan this week, as requested by the Federal Highway Administration. Once they've received that plan, I'm sure they will have questions and want to visit with us before finalizing the plan and only after the plan has been finalized and all the details discussed, would the actual testing begin.

It would be premature on my part to tell you what amount of time that testing would take given that the plan itself has not been approved at this point in time.

Got you. Alright. Thanks very much.

We'll now take a question from Justin Long with Stephens. Your line is open.

Thanks and good morning.

Morning, Justin.

When you look at the backlog for tank cars, do you have a sense for how much of this number is composed of people trying to secure build capacity for regulatory replacement? Basically, we don't have a final rule, but do you think the potential for regulation is already contributing to the tank car order book, or is it at this point is it also growth demand?

Yes, Justin, this is Steve. I think I said in my comments that we continue to receive orders for tank cars to transport crude oil. There is some who are paused before submitting additional orders, as well.

Right now, we're continuing to see strong orders that seem to have a real place to go, married to infrastructure development and to transport our crude to various refineries. We have not seen speculative demand for cars in this market.

I think there, perhaps, are some orders that maybe are hedges for customers to make sure they're in queue to receive cars once a regulatory clarity is received. I don't think that's necessarily a bad thing, actually, I think those are pretty smart moves by our customers to get in line. Because I think once the regulatory requirements are more clear, you're going to see even stronger demand for tank cars in that sector.

Okay. Great. That's helpful. As a second question, I was wondering if you're approach to M&A has changed at all with the ET-Plus lawsuit ongoing? Are you still comfortable putting capital to work and increasing the leverage of the business before we get of a resolution on that litigation, or is the approach, now, a little less aggressive given how things have developed?

James, do you want to take that one?

Sure, Justin. Thank you. Year to date, Justin, I would remind everybody that we've invested almost $720 million in acquisitions this year. As Bill mentioned, we're integrating the Meyer acquisition. That's going very well. I've also mentioned we plan to invest $250 million to $300 million in manufacturing CapEx this year, so we see around $1 billion is a significant investment figure for us.

These aligned with the business model that Tim and I both mentioned, the high level of earnings platform we've established to be able to sustain growth in future years. As Tim did mention we'll maintain a conservative approach in capital planning while we absorb these investments, while we integrate the businesses and, as you mentioned, develop a better sense of clarity around the litigation.

Okay. Fair enough. I'll leave it at that. Thanks, James.

Thank you.

We'll take our next question from Steve Barger with KeyBanc Capital. Your line is open.

Hey, good morning, guys.

Morning.

You said that transactional activities are becoming part of the fundamental model. I'm just trying to flesh that out? Does that the appetite in the market from financial partners remains strong right now? Specifically, do you have any line of sight on deals?

Yes, Steve, this is Steve Menzies. No question that the capital markets are indeed very active and have heightened interest in leased rail cars. I think general sentiment is there's tremendous capital that needs to be invested, is looking to be invested in hard assets with a certain risk profile that's very consistent with the leased rail cars. We see -- Element is certainly an example of that.

James mentioned, ready to move to 2015 with our $1 billion commitment there. We have a number of other institutional investors who we're developing very strong relationships with, looking to acquire leased rail cars and have us manage them. I think you'll see more those activities from us, and as we get close to those we'll share them with you at that time.

Thanks. Speaking of Element, you said you remain confident that you'll sell that $1 billion dollars of rail cars in 2015. Any idea of cadence yet?

No, not really, and typically, we'll work with Element on how that flows off of our production line and what cars we're providing out of our fleet, so not at this time.

Okay. If we assume the regulations settle on Option 2 for tank car design, so thicker steel, head shields and all that, but no ECP, what do you think that does to tank car pricing? Would you expect to at least keep the current margin on that higher dollar amount?

Steve, it's difficult to speculate on various scenarios, but if I step back and take a look, I can't help but to think that any of those scenarios, and number two would certainly be the case, to support rising demand for tank cars. We're certainly positioned to be able to respond to that rising demand. Where pricing goes, and margins, we'll have to wait and see.

But is there any reason that you would give up margin on that higher-priced car, I mean in a robust demand environment?

(laughter) I think it's going to be a robust environment and we're certainly going to try to capture as much profitability in our orders as possible.

Got it. I'll ask one more. James, anyway you can help us think about Q4 impacts from Meyer amortization costs, litigation costs and change over activity in the rail group either individually or in aggregate?

I think in aggregate, Steve, -- this is James. We talk about Meyer being relatively minimal as an impact for the year. That incorporates the one-time costs we already took the third quarter, and some even in the second quarter, of about $9 million in total. In terms of headwinds from changeovers, ramp up, impact, those kinds of things, obviously, we're ramping and changing over certain production lines.

Steve mentioned a couple of maintenance facilities that we're starting up right now, so that has some costs associated with it. That's embedded in the margin guidance I gave for fourth quarter of 17.5% to 18%, which is a little lower than the runway we've had, but the mix of products we have, the margin we have and our backlog is very strong. So, there's a little headwind there.

In terms of the litigation expenses, hard to give real detail there. The guidance I gave a corporate expenses is certainly higher than the run rate we've had, if you back out the $6 million of one-time Meyer costs that I alluded to in the third quarter. You have some embedded there. Then, as I mentioned, you have some litigation-related type impact we expect within the construction products group itself.

It's kind of scattered throughout the various groups. Again, a lot of this, we think, is fourth quarter impact, before we give any 2015 guidance.

Then just one follow up to that. In thinking about the manufacturing specifically, as you get past those headwinds and given the strong mix that you talked about, would you expect to see that margin recovered to some degree as you go into 2016, given that you obviously expect strong deliveries?

Yes, this is James. We obviously are finding ourselves at nice level of deliveries, as Steve mentioned, the run rate we're looking at. We do have good pricing in our backlog, of course, orders we've taken the last few quarters with the record backlog we have. I think it's a little premature to speculate on the precise margins, but as Tim and I both pointed out, we are looking to grow our earnings base and that's the goal that the Company has.

Yes, and we continue to be impressed with how our people are driving operating leverage inefficiencies to the bottom line. This has been a trend that's been occurring in our Company for about 1.5 to 2 years, and so it's really difficult to estimate how much of that will actually come to the bottom line, but there's really good momentum occurring in our rail group right now. Our rail team has done a superb job of increasing the volume at the same time of driving the operating leverage inefficiencies right to the bottom line. Very pleased with them.

Okay. Thanks for the time, gentlemen.

Thanks, Steve.

We'll take our next question from Sal Vitale with Sterne Agee. Your line is open.

Good morning, all.

Morning.

Just on the guidance there, so it seems that -- so if I look at the construction products margin guidance for 4Q, 4% to 5%, and if I compare that to say, whatever the margin was in the prior quarters and maybe even a year ago, just to get a sense, is the difference there, would you say, mostly due to the litigation?

Yes, Sal, as we mentioned there's clearly some seasonality that comes into play. If you look at where margins were last year, they were about 6%, so this year we are saying 4% to 5%. You're down a little. To your point, we would certainly say that taking the one product line out of the business at this time, the ET-Plus that we've stop selling for our press release last Friday, and related matters, that's the impact that you're seeing.

Okay. That's helpful. Then, looking ahead to the production run rate that you discussed for 2015. So you're saying that the 8,100 to 8,300 of deliveries guidance for 4Q is a good run rate for 2015. Can you give some sense as to how much, what kind of quarterly flow order you're assuming it's embedded in that guidance?

Sal, this is Steve. We have our $6.1 billion backlog, which takes as well through 2015, so we've got very good visibility into our production plans for 2015. Really our orders that we're taking now are actually extending our production backlog in 2016 and in some production lines into 2017.

Okay. That's helpful. Let me just ask the question a different way, just to be clear. Of your current, so if I take the current backlog of roughly 52,000 and I deduct the 8,000 for 4Q, that leaves about 44,000 backlog. Should we assume that pretty much the vast majority of that delivers in 2015, is that safe to say?

Our backlog is spread through 2015, 2016 and into 2017. Again, we have very strong visibility into 2015, and again with the 8,100 8,300 prospective run rate for 2015, think that's settles you in there pretty well.

Okay. So put differently, if I take that 8,100 to 8,300 that comes out to roughly I guess 32,000 cars. Does that 32,000 cars pretty much all come out of the backlog?

I would say for the most part, yes it does. Obviously, we're very sold out in 2015, save a car here or there.

But, Steve is always good at being able to squeeze a little bit more out if customers come pleading with him for cars, that are big customers.

Okay. Understood. Thank you very much. I appreciate your --

And, Sal, to Tim's point earlier about improvements in productivity and the efficiency, not only does that help reduce costs but many times it increases our capacity where we're able to actually raise production volumes because of that. Those are some of the cars that Tim says I find.

Okay. If I could just ask one other question, actually? Can you give us a sense for, in that production run rate that you're talking about for 2015, can you give us a sense for how the mix of tank cars in the overall deliveries differs from say 2014?

We really don't comment specifically on breakout of our production or order sales, so --

Can you say up or down or -- ?

No, sir, sorry, can't help.

Okay. Thanks very much. Thank you.

We will now take a question from Bascome Majors with Susquehanna Financial Group. Your line is now open.

Yes, I had questions on the margins. Now, historically, I now you had said that the tank cars will typically price a little better on the percent margin versus freight, although tank got stronger quickly and those margins got to very stored highs over the last couple of years and seem to still be there. With the freight car market really just starting to tick up this year, can you talk a little bit about the spread between the pricing you're seeing and the margins you're seeing in your backlog in those? Is the freight margin rising to a point where it looks more like tank than what it has over the last couple of years?

Steve, it's definitely headed in the right direction. Isn't it?

It is. And again, what we've seen here are not only extended backlogs for tank cars, but we now have industry extended backlogs for freight cars as well. As your backlog extends you have greater pricing leverage. Certainly, we've seen rising margins on, across all of the car types that we're building because of the extended backlogs. I think that's a trend that's consistent both for freight and tank cars.

Okay. One on the regulation here. You've got a bunch of customers taking delivery of the CPC-1232 car over the next few quarters. Conceivably, we aren't going to have clarity on that regulation until a few months now at the earliest and what the quote, new car type might be.

Are you seeing customers, now that the draft rule has been out for a few months, go in and pre-emptively upgrade specs on cars that they have ordered that are going to flammable liquid service? Is that ticking up the backlog on a per-unit basis, organically, in your tank car business?

A lot of questions in there, Bascome, but yes, we have seen customers enhance the specifications on rail cars in our backlog more consistent with what some of the notice for proposed rule making alternatives were. Also, those companies who are taking delivery of CPC-1232 cars are also in discussions with us to address any potential modifications or enhancements to their cars as well.

So it's a very fluid situation, as you well know. I think big users of rail cars are trying to hedge their bets to make sure that they have capacity to modify as well as the ability to buy new cars to meet new specifications. We are well positioned to meet those needs in either case.

Okay. Just one more, I appreciate that. You talked in a high level about targeting a stronger 2015 earnings than your record 2014. From the comments earlier, it seems that rail is certainly going to be a very big part of that.

At a high level, could you just talk a little bit by business what we should think as you enter into 2015 for the outlook broadly? Where could the put and takes either amongst segment or below the line, just so we have a calibration for what you're seeing into next year?

Bascom, this is Tim Wallace. We are in the early stages of planning our budgeting numbers and our capital allocations for 2015. We'll have a series of meetings with our business leaders over the next month to six weeks and then visit with our Board on this, and so it's really premature for us to come up with a number. That's why we're not able to give guidance right now.

We're just saying, in discussions that I've had with all of our business leaders, we're giving them the challenge of setting the goal of generating a higher level of earnings than we've achieved this year. Everybody is focused on that and we've got a lot of really good, high-quality people in our Company, and when they get focused on something, I'm always amazed at the results that they deliver.

Okay. I appreciate that and we'll look forward to an update from you guys in the next quarter from you guys in the next quarter. Thanks.

We can take our next question from Matt Brooklier with Longbow Research. Your line is now open.

Hey, thanks. Good morning. Wanted to get an update in terms of the Georgia facility expectations for when that facility goes live and potentially if that's part of the margin step down sequentially in rail group from 3Q to 4Q?

Thanks, Matt. This is Steve. I am very please with the progress we're making in developing our Georgia facility, the type of flexibility that's being incorporated into our asset base and production processes there. We're doing a nice job staffing and training. We've started to do some production there.

We're going to bring that facility up slowly. It does have a bit of drag on our earnings margins, both in the fourth quarter and to at least in the first quarter maybe in the second quarter of next year, until we achieve a higher level of production. I would expect by, certainly, the second half of next year that facility would be up to a good production level and our costs would start to move out from there.

Matt, this is James. I would add similar to Georgia, as we mentioned, the Iowa and Arkansas facilities are in the start up phase of hiring people, getting ramped up, those kinds of things, so you've got a couple of those issues that as we get into 2015 we'll be in production mode.

Well, the Iowa facility will be longer, because the Iowa facility is breaking ground.

Right, 2015, that'll be later. Thank you.

Okay. So those two specific maintenance facilities and staffing up there, that's also part of the margin headwind and the sequential, potential margin step down in 4Q versus 3Q?

It is, yes.

Okay. As we look forward and you guys talk to, let's call it a 32,000 potential delivery number for 2015, if orders continue to be strong, if potentially, we get a nice kicker from regulation and replacement demand, do you think you're manufacturing network, let's say at the end of fourth quarter, is positioned to handle all that business? Or do you think there would be the potential need for incremental investment and maybe some further expansion in terms of your production capacity?

Good, question, Matt. This is Steve. We certainly monitor demand very closely. We really have been, I think, very judicious in bringing on additional capacity as evidenced by a continual increase in our production levels while our backlog has continued to grow.

As we see demand firming up from regulatory actions or replacement or likewise, we always are evaluating our capacity to see if it's sustainable and whether we want to bring on additional capacity. The wonderful part about our Company is that we've got proven flexibility. We have multiple-purpose manufacturing facilities, so we are in a good position to accommodate increasing demand as long as we believe that demand is sustainable.

Okay. This goes back, I think, to the 2012 acquisition of DMI where you acquired three manufacturing facilities. I think they were mixed-use facilities, but can you talk to what is being currently produced at those facilities? Is it rail cars? Is it wind tower? Is there potentially room within those facilities to handle potential incremental demand from here for rail car?

Right now, our facilities are really, we're operating two of the facilities and are targeted for our energy equipment products as well as our rail car products, so the flexibility that Steve was just mentioning is a reality in those facilities. Based on where the demand is for the products, both of the groups are working really well together to shift the production to the highest and best usage.

Okay. I appreciate the color.

We can now take a question from Mike Baudendistel with Stifel. Your line is open.

Thank you. I appreciate the detail on the expectation for number of deliveries in the fourth quarter and then with the Georgia facility coming online. Why is the fourth quarter number a good run rate for 2015? Wouldn't there be a potential for it to increase?

Steve?

I think that is an increase over 2014. As I just said in the previous question, as we see opportunities to increase production further, through improvements and efficiencies, we will. If we see sustainable demand we have other flexibility in our operating platforms to continue to grow.

Okay. I was also wanted to ask you, it sounded like on recent calls, you talked about the energy equipment segments being that the area that you're most focused on acquisitions and that's where the last few have been. With the volatility in the energy prices recently, does that change that outlook at all?

Bill?

Again, I think consistent with Steve's answer earlier, I think the people that are buying our products are really interested in long-term fundamentals of pricing as opposed to short-term spot market volatility.

Okay. My last question here is on the ET-Plus. I won't ask you about the litigation, but just since it's just such a small part of the overall Trinity puzzle, why is that product important for you to stay in?

That's a good question. We are going to have to try to resolve an answer to that question over the long term. Our priority right now is, let's navigate and get our sales back to a good strong foundation in that business. Then, from that point forward, we'll make whatever strategic decisions are necessary.

Okay. Great. Thanks very much.

We can take our next question from Art Hatfield with Raymond James. Your line is now open.

Morning. Hey, thanks for taking my questions. I've just got three quick ones, and most of my other questions have all been answered. Can you tell us if there's any quarterly seasonality to the Meyer business?

Art, this is Bill. I think there would be a little seasonality, mostly related to weather conditions that prohibit construction of projects, particularly during the wintertime, so I would look for a little seasonality in that business.

Art, this is James. Bill, we've talked about that in the wind tower business, recently installations in the winter months tend to have a little bit of seasonality to them.

Okay. Thank you. Secondly, James, on your comments about the litigation, just if you can clarify or maybe make sure I understand? You had mentioned that in case of an appeal you may need to put out some bonding related to that. Did you mentioned that your insurance company said that they would provide that on an unsecured basis?

That's our current indication, Art, yes.

Okay. Thank you. Finally, on your guidance about Element and the deliveries for next year. You hedged yourself and I think Steve did to when talking about Element about your confident that the $1 billion will be able to be delivered next year. Refresh my memory, do they have the opportunity to change delivery schedules, or is that something you to work together on and your confidence is just your ability to getting together with them and making sure you can get products to them in a particular timeframe?

Art, this is Steve. First of all, I'm highly confident that Element as the financial wherewithal to meet their obligation, and I'm highly confident that we have the rail cars coming off of our production line committed to lease agreements that will meet Element's investment criteria. I have no reason to believe that we won't fulfill the $1 billion agreement that we have between the two companies.

Then just as a follow up to that. I don't know if you mentioned this, but is it still to be determined whether those cars will come from the existing lease fleet or from the manufacturing side of things?

That's correct. There's flexibility in that, and we evaluate that throughout the year and pose those portfolios to Element for transaction.

And is it feasible, just as an example, that you could sell a car in Q1 to your leasing business and then say Q2, 3, or 4, then sell that out of the lease fleet to Element? That kind of transaction could happen as well?

Definitely. That's probably more likely than it is to take cars of our existing lease fleet.

Okay. That's actually very helpful. Hey, thanks for your time this morning.

Thank you, Art.

We will now take a question from Bill Baldwin with Baldwin Anthony. Your line is open.

Good morning.

Morning.

James, have any of your convertible bondholders actually converted their bonds in exchange of part value for cash and so forth?

A very minimal amount, as you will see in our 10-Q.

Okay. Are you anticipating that going forward?

I don't think we can make an anticipation there, again, it's been very minimal. From that perspective, the numbers hasn't changed a whole lot from a retail bondholders side, but I don't think we can anticipate or speculate there.

Okay. That being the case, have you all decided internally how you would handle the premium portion of that? I know you have an option to either pay cash or Trinity stock. Have you all determine how you would do that?

I would say, Bill, that's a decision no earlier than 2018, when there is the first call or put option. So this time we would give any indication of plans that far out

So it's that far out then, before that -- ?

Yes, sir. That's the first call and put option, was 12 years from when we issued the bonds in 2018.

I see, okay. Thank you much.

Thank you, Bill.

We'll now take a question from Thom Albrecht with BB&T Capital Markets. Your line is open.

Hey, guys. Believe it or not everything I was wanting to ask has been asked. Starting with the barge, just curious on your margin guidance 13.5% to 14.5%. All three quarters this year, you've blown away your quarterly guidance for margins, and so I'm wondering why you wouldn't have a little more favorable? In fact, this guidance is the lowest of the four quarters, from a margin perspective, you've had all year, so can you help with there?

Yes, Thom. This is Bill. I think, really, the fourth quarter is just an issue of us running into a pocket of orders that are going to be produced in the fourth quarter that were taken at a little more competitive moment in time in the cycle. We've got to run through those orders and get them through the system.

Okay. Then, James, I know you mentioned 157 million share count. I thought you meant that more for the full year. Given that you had 159.6 million fully diluted in Q3, shouldn't we use something more like that for Q4 as well?

The 157 million is the weighted average for the annual guidance. We provided a $4.08 to $4.16, Thom.

Okay. But you don't have to Q4, I mean I can back into it, but I didn't know if you had given a specific Q4 guidance for share count?

No, not specifically there, but I'm sure when you back into it, the weighted average -- you'll be you be there.

Yep. Okay. Then on the -- I think I heard $33 million of year-to-date sales for the ET-Plus. How does that compare year over year, because I'm just wondering if with the headlines throughout the year, not just recently, if that had hindered sales? If that $33 million was up, down, or flat?

I mentioned in my remarks, Thom, that number is consistent with last year's nine-month level as well.

Okay. I missed that part. I gotta learn to write faster. Then, Steve, on the -- I don't know if you have any insight, but obviously you know that the third quarter saw about 8,100 tank orders and the whole tank population isn't just crude by rail. Do you have any sense of how much of that may have been from non-CBR usage, just as you talk to folks in the industry?

Thanks, Thom, it's a really, really good point. Many of the tank cars being ordered today are not for crude oil transportation. They're caring other chemicals, other pressurized liquids, so the tank car demand we're currently seeing is broad-based and encompasses a number of different car types within the tank car segment.

Okay. Then, I know all along you've said that orders are non-cancelable, but I wonder, I'm just throwing out a worst-case scenario, I'm not thinking this in the next few months, but if oil really got low, at what point do you maybe bring up, should we defer something like, you start to get concerned about the credit worthiness of a buyer. How does that all play out, if we go into a much more negative spin cycle?

It's just hard to tell, Thom. Again, we have a contract in place with customers. They have long-term investments being made. For the wells that are currently pumping, the oil's coming out of the ground and you can put a cork in it and stop it.

If the needs there, the needs there. Now how much growth beyond that might start to be the question, but it seems to me these rail cars are being highly utilized on a business to service right away.

Thom, this is Tim. The last time we experienced that was 2009 in the ethanol. Everybody knows what the economic conditions were in 2009 when that occurred, and it was just on a limited basis with, I think, one customer, wasn't it? Maybe one or two customers.

Yes, we did remove some cars from the backlog in 2009, that Tim talked about. Anyway, as the market conditions change --

No, nothing like what we're -- the situation we-re experiencing today.

Do they have money on the hook that they would have to forfeit if they got ugly with you and said I want out regardless? What's sort of penalty would be paid?

Thom, in many instances we're taking advanced deposits or advanced payments, whether it's a lease or a purchase, especially when we're looking at extended production backlogs going through 2016 and 2017. We want to know they're going to be there when it's time to make the cars, and typically when they put money down it indicates their level of seriousness.

Okay. Alright. I think that's all I had. Thank you.

Thank you, Tom.

Aaron, it looks like that concludes today's conference call. A replay of this call will be available after 1 o'clock Eastern Standard Time today through midnight on November 5, 2014. The access number is 402-220-0423.

Also the replay will be available on the website located at www.trend.net. We look forward to visiting with you again on our next conference call. Thank you for joining us this morning.

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