Trinity Industries Inc (TRN) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. 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 these expressed in the forward-looking statements. It is now my pleasure to turn the program over to Gail Peck, please go ahead ma'am.

Thank you, Tanisha. Good morning, everyone. Welcome to Trinity Industries second quarter 2015 results conference call. I am Gail Peck, Vice President, Finance and Treasurer of Trinity. Thank you for joining us today.

Similar to the format we used on our last earnings call, we are going to have two parts to our conference call remarks. First, we would begin with an update on highway litigation matter, we will then follow with our normal quarterly earnings conference call format.

Today's speakers are Theis Rice, Senior Vice President and Chief Legal Officer, Tim Wallace, our Chairman, Chief Executive Officer and President, Bill McWhirter, Senior Vice President and Group President of the Construction Products, Energy Equipment and Inland Barge Groups, Steve Menzies, Senior Vice President and Group President of the Rail and Railcar Leasing Groups and James Perry, our Senior Vice President and Chief Financial Officer.

Following their comments, 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 went out to the call over to Theis Rice.

Thank you, Gail. Good morning, everyone.

As we previously reported, Trinity Industries and Trinity Highway Products received an adverse jury verdict in October 2014 in a False Claims Act case involving the ET Plus guardrail end terminal system. For the purposes of today's comments, I will refer to Trinity Industries and Trinity Highway Products together as the Company.

Following the jury verdict, the United States District Court for the Eastern District of Texas, Marshall Division, ordered the parties to engage in good-faith negotiations in an effort to reach a settlement of this matter. Recently, on June 9, the parties reported to the District Court that despite mutual best efforts the parties were not successful at resolving their disputes. That afternoon the District Court issued its memorandum opinion and order in the case entering judgment on the verdict in the total amount of $682.4 million.

On June 23, the Company posted a supersedeas bond in the amount of $686 million covering the total judgment and two years of post judgment interest. The bond was approved by the District Court and has stayed execution on the judgement until all post judgement motions and appeals are exhausted.

The Company's motion for a new trial is pending. If denied, the company will vigorously pursue its rights of appeal of the judgment to the United States Court of Appeals for the Fifth Circuit. The Company's motion for new trial is based on errors committed by district court in the course of the trial, the district court's failure to apply the applicable law to the allegations in the case, and substantial evidence obtained post-verdict invalidating the claims made.

The Company believes that the evidence presented at trial clearly showed no fraud was committed. After Fifth Circuit, the Company's position will be simple. The judgment is erroneous and should be reversed. Based on information currently available to the Company, including, but not limited to, the significance of 8 successful post-verdict crash tests of the ET Plus, conclusions reached by the FHWA's first joint task force, founded upon such crash tests, and the FHWA's published field observations and research, reported by the FHWA's first joint task force regarding the ET Plus Systems installed on the nation's roadways, we do not believe that a loss is probable in this matter. Therefore no accrual has been included in the consolidated financial statements. For additional information on this matter please see note 18 in our 10-Q being filed later today.

The Federal Highway Administration formed a second joint task force to further evaluate the in-service performance of the ET Plus to the collection and analysis of a broad array of data. The FHWA has stated that the second joint task force will report its findings this summer at which time we will perform a thorough analysis before resuming any shipment of the product to customers. We previously reported the Company received a federal subpoena from the US Department of Justice through the US Attorney for the District of Massachusetts.

The Company has fully cooperated with the Department of Justice in response to this subpoena. Our second quarter 10-Q will be filed today. In Note 18 of the 10-Q, we provide additional information on this litigation, and other related legal matters pertaining to the ET Plus. If you would like more details related to my comments please refer to the Company's website at www.ETPlusFacts.com.

I will now turn the call over to Tim.

Thank you, Theis and good morning everyone. I'm very pleased with Trinity's financial during the second quarter. Our performance continues to reflect the strength of our diversified industrial business model and our ability to shift resources to meet our customers needs.

I'm extremely proud of the exceptional performance delivered by our people. Their consolidated efforts and proven ability to execute were major contributors to the high quality results we achieved during the second quarter.

Our Rail Group generated strong quarterly financial results reporting record operating profit during the second quarter. I'm very pleased with the level of orders the Group received during the quarter. I'm impressed with the Groups continued ability to increase profitability while making shifts in product mix.

Our Railcar Leasing and Management Services Group delivered record results from operations during the second quarter. The groups results were also enhanced by the solid level of sales of the leased railcars. I'm pleased with the progress our team is making with high-quality institutional investors who are looking to invest long-term capital and portfolios of leased railcars. Over the last several years we have been successful building a railcar investment platform for institutional equity investors. We expect to continue to grow our railcar investment platform.

I'm impressed with our Inland Barge Groups record of financial performance during the second quarter, the Groups substantially increased profit levels, compared to the first quarter, as well as year over year. The Group's ability to demonstrate manufacturing flexibility and generate productivity gains over the past couple of years has been remarkable.

The second quarter financial performance of our Energy Equipment Group approved year over year. The successful integration of Meyer Steel Structures contributed to the improved results. I'm also pleased with our Construction Products Group's profitability, it improved from the first quarter. From a growth point of view, we continue to search for acquisition and organic growth opportunities in markets that have products, services, technology and competencies that fit within our portfolio of industrial manufacturing businesses.

Trinity's financial and operational status continues to be solid. I'm pleased with the way we are balancing our current business conditions, including litigation matters, while continuing while continuing to maintain momentum towards obtaining our vision of being a premier diversified industrial company.

Our 2015 earnings outlook reflects the positive momentum we are experiencing within our Company, as well as the benefits of having solid backlogs in our primary businesses. Our accomplishments are due to the capabilities and expertise of our dedicated employees, our ability to respond effectively to shifts in demand and our ongoing commitment to provide high-quality products and services to our customers.

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

Thank you, Tim and good morning, everyone. The Energy Equipment Group reported another solid level of profit during the second quarter. The wind tower business continued to perform well. During the second quarter the wind tower business received $184 million of orders. Wind industry continues to make advancements in reducing the installed cost of wind.

However, the current order environment is still primarily driven by the extension of a production tax credit late last year. The core market for utility structures remains competitive. But long-term investment projections for this industry show positive fundamentals. We are well positioned to respond to increased transmission infrastructure spending in North America. Overall we are pleased with the performance of the energy equipment segment do expect some variability within the segment's performance from quarter to quarter as result of product mix and volumes.

I am proud of the Construction Products Group's efforts on the second quarter. The Group faced a challenging operating environment due to significant rainfall during the start of the construction season. In addition, the lack of a longer-term highway bill and ongoing litigation matters in the highway business created headwinds.

Despite these pressures the Group maintained revenues during the quarter in line with last year. Our aggregates business is benefiting from a robust Southern US market, and our recent lightweight acquisitions strengthen our ability to serve our customers.

Moving to the Inland Barge Group. During the second quarter our Barge Group reported record levels of revenue and profit. I am impressed with this group's ability to achieve such a strong performance in a dynamic market environment where demand conditions are constantly changing.

At the end of the quarter we will begin converting one of our manufacturing facilities to increase capacity for hopper barges. Large demand continues to reflect steady inquiry levels for both dry cargo barges, the agricultural market and smaller tank barges for the chemical market.

Demand for large tank barges that transport oil is currently soft. During the second quarter the Barge Group received orders for $76 million. In closing, our businesses are responding effectively to varying demand conditions.

Our long-term outlook for energy and infrastructure investment in North America remains positive. Our businesses have a great deal of potential for future growth. We continue to watch the market for opportunities to add to our portfolio of industrial business.

And now I'll turn the presentation over to Steve.

Thank you, Bill, good morning. I continue to be very pleased with the strong operating results generated by dedicated TrinityRail team and the strength of our integrated business model, which includes railcar manufacturing, leasing, parts and services.

For the first time our Rail Group topped a 20% operating profit margin during the quarter and once again achieved record profit levels for its tenth consecutive quarter. Our leasing Group also reported record profit levels from operations during the quarter. These are all outstanding achievements.

Our operating and financial flexibility, and leading market position, allowed us to quickly react to shifting market demand patterns and customer needs as evidenced by our order backlog increase. During the second quarter the industry received orders for approximately 20,000 railcars and maintained a steady level of backlog. TrinityRail received orders for 11,170 railcars, increasing our backlog to 59,830 railcars with the value of $6.9 billion. We received orders for open-top hoppers, covered hoppers of varying capacities, boxcars, auto racks, flat cars and tank cars, reflecting broad market demand for a wide variety of railcar types. The diversity of these orders reflects demand beyond the energy sector.

Activity in the upstream energy markets propelled the railcar industry out of the last downturn and generated a robust level of demand for the last several years. More recently the demand environment has shifted away from this catalyst it is now supported by increased activity in the downstream petrochemical markets, as well as the agriculture, construction, consumer and automotive markets.

The rotation and current railcar market demand drivers towards these broad markets, combined with increased replacement needs for an aging fleet of general-purpose freight cars, supports our view of an extended railcar cycle. Order inquiry levels into the third quarter, thus far, has been consistent with the second quarter.

Our industry-leading backlog serving a diverse mix of markets, provides an unprecedented level of visibility with which to plan our operations. An extended railcars cycle provides our operating team and opportunity to achieve exceptional results.

During the second quarter extended production runs positioned our Rail Group to generate higher levels of productivity and increase efficiencies leading to our superior operating performance evidenced by our 20% operating profit margin. During the quarter we delivered 8,530 railcars.

We continue to expect annual delivers of between 33,000 and 34,500 railcars in 2015. In early May the US Department of Transportation and Transport Canada together announced enhanced tank car standards for both newly built and modified tank cars in flammable service. At this time we are assessing our own lease fleet plans and collaborating with our customers regarding implementation of the new regulations.

As information, as of the second quarter, our wholly-owned and partially-owned lease fleets, included approximately 11,800 DOT 111 railcars in flammable service. Roughly 85% of these railcars operated in crude and ethanol service with a fairly even split between the two commodity services.

TrinityRail is well-positioned to help our customers meet the regulatory requirements for their owned tank car fleets, as well as the needs of our leased and managed fleet, whether by providing newly built tank cars or modifications to existing tank cars. As we expected our customers are taking time to evaluate the impacts of the new regulations and to assess their business needs. Our first priority is to ensure the compliance of our own railcar fleet and those of our key customers.

We are engaged with the number of customers discussing modifications to existing tank cars they own, and potential new DOT 117 tank car purchases. We continue to believe these new regulations will be a demand catalyst for new tank cars as well as tank car modification services.

The performance of our leasing group continues to reflect strong railcar market fundamentals. Record revenue and profit for the operations, which excludes railcar sales, increased year-over-year by 11% and 20%, respectively. New additions to the wholly-owned lease fleet, high fleet utilization levels and healthy lease renewal increases, all contributed to record quarterly performance during the second quarter.

Lease fleet utilization remains high at 98.9%. Our total lease portfolio now stands at 76,440 railcars, after taking delivery of 1,510 new railcars and acquiring 260 railcars in the secondary market, offset by the sale of 1,500 leased railcars during the second quarter. At the end of June, 28% of the railcars in our order backlog were committed to customers of our leasing business bringing our leased railcar backlog to approximately $2 billion.

The size of our lease backlog underscores the expected continued growth in our lease fleet. This growth includes investment in our own lease portfolio, and creating new railcar investment vehicles for institutional investors. There is a high degree of interest in owning leased railcars on the part of financial institutions. Our railcar investment platform provides a valuable asset management service to institutional investors interested to invest in portfolios of leased railcars.

This service offering is unique extension of the TrinityRail integrated business model. I am pleased with the progress our teams are making in expanding our interface with key institutional investors, which could yield multi-year relationships for creating and managing portfolios of leased railcars for our railcar investment vehicles.

In summary, TrinityRail's integrated business platform is well-positioned and responding effectively to healthy railcar demand. The Rail Group and Leasing and Management Services Group delivered exceptional results during the second quarter. I expect our performance to be strong throughout the balance of 2015, as well, and provide good momentum into the coming year. Our operating and financial flexibility continues to differentiate TrinityRail enhancing our position as a premier provider of railcar products and services.

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

Thank you, Steve and good morning everyone.

Yesterday we announced our results for the second quarter of 2015. For the quarter, the Company reported earnings per share of $1.33 and record revenues of $1.68 billion, compared to EPS and revenues of $1.1 and $1.49 billion, respectively, for the same period last year. During the second quarter, our EPS reflected strong operating performance by most of our businesses. During the second quarter, the Company repurchased 1.7 million shares of its common stock for $50 million.

This year we have repurchased $75 million of our stock and have $143.6 million of availability under our current authorization. We prepaid in full during the second quarter approximately $340 million of secure growth car leasing debt, known as TRL VI, that we issued in 2008. We used a portion of the railcars from TRL VI to secure a $250 million borrowing, under our $1 billion leasing warehouse facility, at a current interest rate that is more than 350 basis points lower than the TRL fixed-interest rate. The railcar assets used to secure the warehouse advance, and those that remain fully unencumbered, are available for use in future financings or sales to institutional investors. This loan prepayment and warehouse borrowing were included in our previous earnings guidance.

During the second quarter, as previously announced, we divested the assets of our galvanizing business for $51 million, and recorded a pretax gain of $7.8 million within the Construction Products Group. The impact of this divestiture was not included in our previous earnings guidance.

Invested approximately $179 million in leased railcar additions to our own lease fleet during the second quarter. This investment was partially offset by $149 million of leased railcar sales from our lease fleet. Leased railcars remain very good investment for us. Offering attractive returns with solid cash flow, while the railcars are in our fleet, and the opportunity for additional profit recognition when sold to third parties, including institutional investors.

Finally, we invested $47 million in capital expenditures during the quarter across a number of our manufacturing businesses and at the corporate level. We have significant cash on hand and access to capital though our committed lines of credit at both the corporate and leasing levels. Both our corporate revolver and our leasing warehouse facility were renewed during the second quarter at higher levels of availability with extended termination dates. At the end of the second quarter our liquidity position remains strong at $1.77 billion.

As provided in our press release yesterday, we increased our annual guidance for 2015 to $4.45 to $4.75, from $4.10 to $4.45. We expect the level of EPS in a second half of the year to be relatively evenly split between the third and fourth quarters. In 2015, as Steve mentioned, we expect our Rail Group to deliver between 33,000 and 34,500 railcars during the year, which maintains our previous guidance range. This will result in total revenues for the Rail Group of between $4.35 billion and $4.45 billion, with an expected operating margin of 19% to 19.5%.

TrinityRail's strong railcar backlog was enhanced by the solid level of railcar orders taken during the second quarter. It continues to provide a high level of production visibility for our railcar operations in future years. We expect our Leasing Group to record 2015 operating revenues, excluding leased railcar sales, of $675 million to $700 million, with operating profit from operations of $315 million to $330 million. As a reminder, maintenance expenses tend to be higher in the back half of each year due to the timing of services performed.

Our 2015 guidance includes earnings and cash flow from the sale of leased railcars which were reported in both the Rail and Leasing Groups. Year to date, these earnings totaled $0.47 per share, of which $0.36 per share was reported in the Leasing Group. Sales of leased railcars to Element Financial under the $2 billion strategic alliance, totaled approximately $350 million year to date, bringing the cumulative total to more than $1.3 billion since program inception in 2013.

We expect to fulfill the alliance during the remainder of 2015 and our guidance assumes these sales to Element will be split roughly equally between the Rail and Leasing Groups. In 2015, we anticipate the leasing group will report proceeds from sales of leased railcars from the lease fleet of approximately $775 million to $825 million, with profit of $210 million to $240 million, which includes sales to Element as well as other institutional investors in third parties.

The increase in this guidance, compared to our previous guidance, is primarily due to certain element sales moving from the Rail Group to the Leasing Group. This increasing guidance is offset by a higher level of deferred profit eliminations, which I will discuss shortly. The total level of profitability expected from the sale of leased railcars, reflected in the Rail and Leasing Groups, remains substantially unchanged in 2015 compared to our previous guidance.

Earnings and cash flow generation from the sales of leased railcars are expected be normal part of our business model going forward and reflect the strength of TrinityRail's lease origination and servicing capabilities. The levels of such transactions will vary from quarter to quarter.

Our railcar investment platform provides Trinity with unique level of financial flexibility for a diversified industrial company. As we originate a lease, we have the flexibility to retain the asset in our wholly-owned portfolio for the long-term, or for a period of time and then sell the leased railcar, or we can sell the leased railcar into a railcar investment vehicle.

The capital generated through our railcar investment platform provides us with the financial flexibility to reinvest in our railcar leasing and management services platform, our portfolio of diversified industrial businesses, or in other investments that enhance the shareholder returns. The level of interest in acquiring leased railcars remains high among institutional investors.

We expect our Energy Equipment Group to generate 2015 revenues of $1.1 billion to $1.2 billion, with an operating margin of 11.5% to 12.5%. We were pleased during the quarter to receive orders for $184 million of wind towers, which provides us with a production visibility for that business in 2016.

We expect our Construction Products Group to record 2015 revenues of $525 million to $540 million, with an operating margin of 9% to 10%. The change in the guidance range from the previous quarter reflects the portfolio restructuring completed in the first half of the year and the gain from the asset divestiture in a second quarter. We continue to experience headwinds associated with uncertainty around highway funding at the federal and state levels, in addition to the ongoing highway litigation. We are pleased with the performance and opportunities within our aggregates businesses.

Our Inland Barge Group is expected to report 2015 revenues of $680 million to $700 million with a full-year operating margin of 17% to 18%. The increase in guidance is a direct result of the productivity improvements made within our barge facilities.

Corporate expenses are expected to range from $115 million to $125 million during 2015, which includes ongoing litigation-related expenses. This range now includes the prorated $2 million of the $3.9 million annual premium associated with the appeal bond we posted during the second quarter to stay the execution of the highway litigation judgment.

In 2015 we now expect to eliminate between $1 billion and $1.1 billion of revenue, and defer between $200 million and $225 million of operating profit due to the addition of new railcars to our lease fleet and the timing of sales to institutional investors of new leased railcars manufactured by the Rail Group. We eliminated $475 million of revenue and deferred $98 million of profit, due to the addition of new railcars to our lease fleet, in the first half of the year. We expect to eliminate between $375 million and $400 million of revenues from other inter-company transactions during the year.

Our annual EPS guidance also includes the following assumptions: a tax rate of approximately 33.7%, though this rate could vary quarter to quarter; the deduction of between $30 million and $35 million of non-controlling earnings due to our partial ownership in Trip and RIV 2013; a reduction of $0.17 per share, due to the two class method of accounting, compared to calculating Trinity EPS directly from the face of the income statement; and dilution of a approximately $0.07 per share from the convertible notes.

As it pertains to cash flow, we expect the annual net cash investment in new railcars in our lease fleet to be between $160 million and $185 million in 2015, after considering the expected proceeds received from leased railcar sales during the year and the purchase of TRL I that was conducted in the first quarter. Full year manufacturing and corporate capital expenditures for 2015 are expected to be between $250 million and $300 million.

We remain very well-positioned with a combined $7.8 billion backlog in our railcar, inland barge and wind tower businesses that will generate incremental earnings and cash flow to enhance our strong balance sheet and liquidity position. As we now prepare for our question and answer session, please note that Theis's remarks today related to highway litigation were very thorough. We would ask that your questions today focus on our operations and financial performance.

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

(Operator Instructions)

Bascome Majors, Susquehanna

Thank you. Good morning.

I was curious how is the shift, or the mix of buyer shifted the local marketplace over the last three to six months? With these very strong orders, are you seeing in have your mix of leasing companies with multi-year orders looking to secure longer-term capacity here?

Certainly different car types are utilized by different industrial shippers, so there is some change in mix there from industrial shippers standpoint. Some of our lessees are different from that standpoint. We have seen lessors place orders for freight cars. There have been some announcements about multi-year orders from lessors as well. And of course the railroads are large owners of freight cars, so right now I would say that now the number of car types and markets that will respond to very broad, but the customer base is very diverse as well.

All right, thanks for that. What I'm focused on, can you help us understand how you generated such a strong railcar order outcome, both an absolute basis and certainly relative to the rest of the industry this quarter, given near-term demand fundamentals on the rails which have been pretty poor for the last three to six months here?

Bascome, I think there's a compliment in there somewhere, so thank you. I think I said it in my remarks, the operating flexibility that we have demonstrated gives us really the chance to be able to respond to shifts in the marketplace, to be able to seize opportunities with our customers. I'm very, very pleased with the results from our operating folks, and the leverage that it gives us when we were able to go out and pursue these orders. So we've seen a shift in demand and operationally we've been able to respond very quickly to be able to satisfy customers needs.

Okay. I appreciate that. One more.

Looking at plate steel pricing, that looks like it is down 30% to 40% over the last year, maybe 20% to 30% over the last six months. How has this impacted margins in your various businesses and maybe is it impacting the average price embedded in your railcar backlog that we can see?

Yes, this is James, Bascome. I think in general and to your point sale prices are down. We generally have our steel prices covered through our customer contracts and with our steel suppliers themselves. So it could impact pricing a little bit as it shifts though the system. From a percentage perspective as we talked to that before your margins maybe a little bit higher because we have the same level of profit on potentially a little lower cost in price. Overall is going through this system very comfortably.

Okay, so to your comments about the percentage margins, if stronger dollar and structurally lower steel prices are the new normal, longer-term, it follows from that the mid cycle normal margins could be a little bit higher in some of your businesses going forward?

Bascome, this is Steve. Let me just add with respect to steel price, while we talk about still plates, those prices moving down, we are still I think in a very tight supply demand situation for railcar components. We have not seen those core prices decrease, and they remain very strong and very solid.

Bascome, with respect to your margin question, we are not project anything beyond what we've given for 2015 so we'd be premature in long-term perspective there.

All right. Thanks for the color this morning. Take care.

Allison Poliniak, Wells Fargo.

Hello. Good morning. Just back to the margin question for particularly on rail. Obviously very strong margin there. I just want to understand the sequential impact with the lift driving the lift there. It seems like a little moderation in the back half of the year. Can you help me better understand the pits and peaks there for this quarter, as well as looking forward into the next two?

Allison, this is Steve. As we move through the balance part of the year we do have a shift in our production mix and along with that shift in production mix we do have some challenges there with line changeovers. We are also still incurring the ramp-up costs associated with the expansion of our maintenance services business.

Those are some of the things we are looking at going into the second half of 2015. Again I will point to our operations teams has really been remarkable, what they've accomplished so we continue to present more challenges in front of them and they respond exceptionally well. I wouldn't expect anything different.

That's great. Just turning to barge. Bill, I think you mentioned transitioning that one facility back to dry. Did that happen yet or is that what is driving these line changeovers in the back half of year for the barge industry?

Allison, the line changeover is completing as we talk, so I would suspect by the end of the month that line changeover is complete.

Okay, perfect. Then there will be the two and two back to what you historically had in terms of manufacturing?

No we will actually going to be at three and one when that changes.

Okay, perfect, thank you.

Justin Long

Thanks and good morning. I wanted to ask a question now that we have the final rule on tank car regulations, had we taken any strategic steps to either increase your capacity for tank car builds and/or utilize your maintenance facilities to potentially perform third-party maintenance work?

Justin, Steve. I think we have demonstrated in our production platform and footprint a lot of flexibility to be able to respond to shifts in demand, and I'm quite certain that if we see a substantial number of orders for new tank cars that we'll be able to handle those in good stead. I previously discussed, we are making investment maintenance services capacity to be able to support our own Lease and Manage fleet, which is our first priority, and then we have key strategic customers who require tank cars from us that we want to be able to support, but at this point in time we don't envision our business model on a for-hire, take-all-comers basis. So that's where we are at from that standpoint.

Okay, that's helpful. Of the 11,800 DOT 111s that are in flammable service that you mentioned, do you have you have a sense for how many of those you anticipate to retrofit versus scrap and replace?

I really don't at this time, Justin. It is all part of our analysis. This is really a very, very complex issue with many different stakeholders in many different perspectives. We're continuing to work through that. I think I mentioned we are in extensive discussions with our customers with respect to either purchases of new DOT 117s, or modifications. Again I think they are still doing their business assessments and needs, as well. So we will see how that unfolds over the coming months.

Okay. I can appreciate that. Last question, the order number was strong here in the quarter, and I was wondering if you have a sense of how much of that demand is coming from growth versus replacement? As a follow-up to that, I also wanted to ask about the impact of improving velocity on the rail network and how that can impact demand? I don't know if you have a rule of thumb that you think about for a one mile per hour improvement on the rail network, how that could impact demand for railcars, but anything you can share on that topic would be helpful.

Sure, Justin. Steve again.

On the latter part of your question, you know it really depends upon the car type in the traffic lanes. I think it is really dangerous to try to make broad generalizations about the railcar market. Our analysis gets much more into individual markets and individual car types and projecting growth in demand from that standpoint. I think as a rule, railroads become more fluid. It just simply creates greater opportunity for them to grow their business and we certainly share in that success.

Okay, then on the growth versus replacement and in terms of the order book, do you have a sense for the mix between the two?

Yes, this is just a rough number, we might say 2/3 to 3/4 of the orders were growth. A lot of that is being driven by the investment in petrochemical complexes down in the Gulf Coast and of course from a replacement standpoint we have been projecting the long-term meaningful replacement cycle for railcars as it is.

Automotive would be another area of real growth as well. It is quite interesting story that's going on there, and of course with more production being moved to Mexico, and assembly to Mexico, that changes some of the logistics and requires longer cycle times for railcars, which implies more railcars, as well.

Okay, that's very helpful. Thanks so much for the time.

Art Hatfield, Raymond James.

Good morning, thank you, everyone. I want to follow-up on this whole longer-term demand thing as we see a continued secular decline in coal volumes. Steve, have you looked at it from that perspective, that if we see more of a stronger secular decline in coal volumes how that may impact network velocity within those specific claims, and how that may change the dynamics for railcar turns within the industry?

That's a really good question. I don't know that I've ever really looked at it from that perspective. Coal, if you look at the history of railcar orders, there has always been a major car type or two that have been the leading driver for demand at that time.

As I mentioned in my remarks, the energy sector pushed us out of the 2008 to 2010 recession. Prior to that we had the ethanol boom. You can go back to other pockets in time we've had exceptionally strong inter modal production, auto racks, you can go back further into the coal. So, we've had rotation over a period of time and from car type to car type as markets shifted under themselves. We don't see any demand currently for coal, for new coal cars we're working effectively to keep our existing coal assets utilized, but I doubt coal will be leading any new car production anytime soon.

My second question is more of a technical question probably for James. When you guys report the $6.9 billion in revenue inherent in the backlog, for longer-term orders that may adjust, whether it's more to a specific car type that hasn't been defined as yet, or maybe potential adjustments for price, how do you deal with that in the current numbers? Do you take a range and hit the midpoint of that, or do you try and take out some of the downside and focus on the lower end of ranges on those potential adjustments?

Art, this is James. I will try to tackle that one for you. Our backlog will adjust a little bit as we get closer to production of the specific cars. The longer-term contracts generally have a certain car type that we put into the backlog as a default. If that were to shift with quite a bit of advance notice then we will ship the pricing of what's in the backlog. So with these kind of numbers you don't see a lot of moving around quarter to quarter. Normally a price changes due to componentry as Steve mentioned those kinds of things, you'll see a little bit of shifting. But primarily those longer-term deals have a set car type for now, and then we'll shift as we get a little bit closer.

Outside of steel, have there been any of those other types of adjustments in the most recent quarters?

I don't think we get real specific but if we get closer to producing those specific cars you'll see some tweaks around the margins. But at these levels it's not going to move the needle a whole lot in a pipeline with a $6.9 billion backlog.

Fair enough. That's very helpful. Thanks for the time this morning.

Thanks, Art.

Matt Brooklier, Longbow Research

Thanks. Good morning. Steve, another couple of regulation questions for you. First one, do you have a sense for when the retrofit work would start on the DOT 111s that you have in current service?

Sure, we are currently retrofitting cars for our own lease fleet as we speak today, Matt.

I know there's a lot of moving parts to it, but any sense as to the cadence of work going forward?

We are really proving that out right now, it is too early to really give you much projection there.

Okay, understood. Then with respect to replacement orders you talked about having conversations with your customers. This is another timing question and again I realize it is a tough one. But I'm trying to get a sense for the potential timing of when we start to see these replacement orders. We know there's a very large fleet of DOT 111s that need to get retrofitted or replaced in the next 2.5 years, I'm just trying to get my arms around when those potential orders could hit, if it's sometime this year, or if we think it is more of a 2016 event?

Good question, Matt.

I'm not real certain when this is all going to start to materialize. Let me be clear. We have built DOT-117 tank cars and we are we are currently building DOT-117 tank cars, and the discussion we are having with our customers are really as much driven by the price of crude oil as it is HM-251.

So that's an important variable that goes into their business assessment that would be very difficult for me to project here on this call. But I think this will start to unfold slowly and certainly look to the bigger fleet operators and the bigger owners of these cars to make some moves, here certainly in the near future.

Okay, good color. Appreciate the time.

Alex Cosby, Brookfield

Hey, it is actually Angelo filling in for Alex. But I want to say nice quarter and I did notice that LPG with regard to the wholly-owned fleet is actually decreasing. So just want to see if you can put a little bit more meat around what is that capacity there, assuming a more normal 75% kind of industry level. And then just also following that up with given the cash flow back half the debt capacity of the corporate level, what, just run though for us the priorities of where you see of M&A side and with regards to buybacks what else can you do there, you just have an extreme amount of liquidity in our view.

Angelo, this is James. Thank you, there's a lot there, I will try to tackle those in two pieces. As far as the LTV is concerned I'd really link it to two things: one we haven't done long-term borrowings on the fleet. We made a bit of a warehouse advance but that was after paying down an even larger piece of the principal on TRL VI.

Secondly, we have scheduled amortization on our debt, and so while the fleet has grown, our unencumbered fleet has grown, and our debt has come down. So it is a simple as -- it's continuing to deliver that side of technology the balance sheet at this time.

As far [the pull through] balance sheet I don't think we would opine on specific debt capacity. We have quite a bit of liquidity, we do feel we have good access to the capital markets and I think the priorities will be unchanged from what we talked about before. Tim certainly talked about, and we all have, looking for opportunities at good valuations within our portfolio of businesses, continuing to grow our leasing platform, and there's a lot of different ways we can do that, and then you have certainly seen a return of capital to shareholders through share repurchases and increased dividends this year. So I think as you have heard from us before on calls that we have had, it is very broad-based capital investment plan, that the executive team and Board of Directors visit on very regularly.

All right, I appreciate that, but just getting back to the piece I was more hitting on is, I understand you are still delevering and you have the amortization in that wholly-owned lease fleet, but if I look at a lot of your comps they are running 75% LTD across that platform and your -- our numbers are (inaudible) this morning. You are now sub 40. So it just seems that there quite a bit of debt capacity at that level.

I think we recognize there's liquidity and capacity there. We've had higher leverage levels in the past, and we have been comfortable with that but at this time delevering and not bearing those interest expense costs within our P&L makes more sense for us. We know that's available to us.

Okay. Thank you.

Thank you, Angelo.

Cleo Zagrean, Macquarie Capital

Good morning. I have a few questions and thank you for your patience.

To pick up on your earlier statement about (inaudible) growth coming from petchem? Can you help us see what you see in terms of next level of growth there in types of customers? Is it now mostly investors in shipping rather than a leasing company? What could follow in the petchem wave?

Cleo, this is Steve, let me first clarify my response. I think the question was asked was what percentage of the orders were received during the quarter were associated with growth versus replacement. I think my answer was somewhere between 2/3 to 3/4 of those orders were related to growth. With respect to growth, some of those elements of growth are related to the petrochemical sector, not all of that growth is related to petrochemicals.

The amount of investment, tens of billions are being spent for capacity expansion, the Gulf Coast I think will continue to be the catalyst for railcar demand. Those customers there are typically large petrochemical producers, both domestic and foreign, so they are looking to buy and lease railcars to support their expanded operations. Which includes both covered hoppers for resins, as well as tank cars for refined products and other specialty chemicals that they will produce.

Automotive has been a very clear driver for growth as we mentioned, expanded auto racks, the beauty of an auto rack is that when an auto rack is ordered there is also a flat car that goes along with it. So every time we hear about an auto rack order it is really almost 2 for 1 from that standpoint. And we are seeing some of the specialty grain dairy has also continued to expand, requiring new types of equipment that's suited for those capacity -- those commodity densities. So those are some of the areas for growth, a lot of those our industrial shippers as a customer base and other leasing companies obviously are looking for opportunities to invest in those sectors too.

Thank you. My next question relates to the backlog yesterday on Gatex's call. We heard their assessment that still a lot of the tank cars in the backlog were related to flammable liquids, I think they put out a number of 80%, but then quickly said don't hold me to that probably those are shifting maybe some orders are been pushed out, replaces with other types of cars. Can you tell us what you see in your order book in that regard?

This is Steve again, Cleo. I'm not sure how [geotex] would have insight into order backlogs, but other than anecdotal. But I think we've said several times that the tank cars destined for crude oil comprise a very nominal portion of our backlog and those are scheduled for delivery yet this year, and that remains consistent.

Right now we are seeing only a few inquiries for crude oil cars, these are in discussions with customers looking at alternatives with respect to DOT-117s. So I think the crude oil backlog, as far as Trinity's concern, is not an area concern for us, and we are very comfortable that those orders are solid and those customers are prepared to take their equipment.

My next question relates to a lease lead. Can you remind us just broadly maybe the mix of cars there and what you are seeing for pricing and extensions at this time?

Cleo, Steve again. We don't really give detail breakouts of portfolio composition and I think we've said in our comments we are seeing strong lease renewal rate increases across our portfolio, and have had very good experience in lease renewals with our customers. The fleet continues to be highly utilized and I would say that's the case for most of the leased fleets in North America.

Okay. Again many thanks for your patience and my last question relates to institutional invested interest. Could you help us get the big picture in our minds about the mix of earnings related to this customer segment? Do see them coming, and I know it's to a great extent accounting, but given just what they are willing to take and what you are willing to offer. Should we see earnings related to the sales number mostly from manufacturing, for manufacturing type earnings, or sales from your leased backlog or leased fleet, more [game-type] that would be harder for us to assess?

Cleo, this is James. You will certainly see a mix between new railcar production with leases that are sold directly to institutional investors, as well as out of our lease fleet. We've given you the level of proceeds we expect from the lease fleet. We obviously, as you well know, have a little over $600 million, $650 million remaining on the $2 billion Element strategic alliance. We've said that would be roughly evenly split between rail and leasing. As far as the others we have not given a firm breakdown there. And we assess the investors as we talk to them and the portfolios of cars we have available, and that quarter to quarter, year to year type conversation. We look at our rail investment platform as a long-term strategy for the Company and you are starting to see the benefits of that with the multiple relationships that we have.

Okay, and then in terms of maybe an early peek into next year would you say that next year will be compatible in terms of interest with like a steady flow, or materially different in any way from 2015?

I don't think Cleo again, this is James, we can get specific on giving any guidance for 2016, but as I said we do expect earnings from railcar sales that are -- leased railcar sales to be normal part of our earnings model going forward

Many thanks.

Thank you.

Steve Barker, KeyBanc Capital.

Thanks, good morning, everybody. There's been a lot of pressure on industrial multiples in the public market recently. Can you talk what you are seeing in the private market in terms of the pipeline and how those conversations may have changed?

Steve, this is James, you are referring to the M&A world?

Exactly.

I don't think we can comment too much on what we are seeing there. We have been able to put several acquisitions into the Company over the last couple of years, largest one being about this time last year with Meyer, pleased with that integration as we've had divestitures and acquisitions this year especially within the construction product business. So I don't think we give a lot of insight terms of what we are seeing. It's going certainly vary market to market and opportunity to opportunity but we continue to see opportunities and good valuations.

Is the slate full for the pipeline are you having to engage in more conversations than you were six months go, any way to firm that up?

This is Tim. We are just constantly engaged in conversations with people that have interest either buying or selling businesses. We have an ongoing dialogue with a number of different opportunities, and we've always been that way and I think that will always exist. Many times we will be talking with somebody that we have had a multi-year relationship with, or an interest in a particular business, and then we just have to wait for the right timing to come along until we think it fits with our internal conditions, as well as the external conditions.

Tim, to that point we've already seen talk about an extended railcar cycle and you obviously have great cash flow visibility from the backlog right now. When the Board meets, do the discussions lean towards cycle concerns at all, or is it really a capital allocation strategy to stabilize EBITDA and EPS or GAAP earnings going forward?

We have a variety of discussions with our Board. We talk about numerous topics and it really just depends on the opportunity or the challenge or issue that we're confronted with at the time. We engage with our Board regularly and have -- I wouldn't say that there was one type of conversation that we have with our Board or that we are currently having with our Board.

Okay. James, back to the question about leverage on the lease fleet. Are you limited to use of capital in terms of leverage on these fleet or said another way, could you use the lease fleet as collateral to raise funds for other purposes?

Steve, yes, this is James. When we raised capital through screen railcars whether in the warehouse or in long-term financing, it's corporate cash, so the cash is very fungible and can be used for a variety of purposes there is not limitations in that respect.

All right, thanks very much.

Thank you, Steve.

Mike Baudendistel, Stifel.

Thank you. Just wanted to get your philosophy on just number of deliveries you expect the next quarters with backlogs been as long as they are. We do expect they will stay in the sort of 8500 unit per quarter range, or given that you think the cycle is going to be extended, would you increase capacity further to get more out the door?

Mike, this is Steve. I've given you guidance for the balance of the year, which takes us to 33,000 and 34,500 cars, which implies a very similar run rate in a second half to the first half, give or take a few hundred railcars. And that's certainly where we see our production footprint position at least move into the first part of 2016.

Okay. Then related to that as far as third-party finance institutions that where you may have Element-like deals, should we expect those to be announcements to be forthcoming during the back half of this year?

Certainly, Mike as we continue to work on these things and build relationships, when we come to something formative, usually fairly substantial engagements with these financial institutions and we certainly do make an announcement and share those with the public, and will so as we move forward.

Great, that's all I have, thank you.

Bill Baldwin, Baldwin Anthony Securities

Good morning. Things for your time. A couple items. Steve, can you give us some color on how the ramp up it is going in Cartersville and how that's progressing?

Sure. The ramp up in Cartersville is going very well. We were successful at hiring a number of the management team that had been with us prior to the closing of that facility. We have done very good at our labor hiring, so I'm pleased that what's going on at that facility and that facility is a great example of the type of operating flexibility that we have throughout our platform.

Looking to do some other things with that facility as the market may dictate and when I get questions about additional capacity I think we also have the ability to take Cartersville further than where it is going right now. That's been a really great facility for us.

So it is up and running and producing cars at a pretty competitive rate, pretty competitive efficiency?

It has Bill, yes.

Very good. Secondly, I haven't talked in a while about this, but can you talk about the dynamics of what's going on with your railcar production operations in Mexico, and how important that is to your overall rail manufacturing business?

Sure. We've had great success in our Mexico production platform. We have seen great operating flexibility and shifting from other Trinity products to tank cars and our free car facility down there is operating at peak levels. So we have demonstrated great efficiency in moving materials across the border and handling all of the issues associated with importation and exportation there and our network is operating very efficiently. It is a very important part of our production footprint and one that's operating at a very effective level.

Did it supply about this a percentage of your railcars today as it did a few years ago or how is that trended?

It fluctuates depending upon product mix. So it is -- probably a little greater portion of our cars right now are coming out of Mexico but that could shift again depending upon product mix.

Do you make just certain car types down there Steve, or can you pretty much make your broad product line in Mexico?

Great question Bill. If you ask that a few years ago we were limited on the number of product types and railcar types we could make there. I would tell you that we feel confident being able to make any of the railcars in our portfolio at the facilities in Mexico today. One of the success stories in the growth development of our Mexico footprint.

Very good. You have done an outstanding job.

Thank you, Bill.

That does conclude our Q&A session for today. I would now have the program back over to Gail for any additional or closing remarks.

Thank you. That concludes today's conference call. A replay of this call will be available after 1:00 Eastern Standard Time today through midnight on July 31. The access number is 402-220-1346. 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. And thank you for joining us this morning.