Trinity Industries Inc (TRN) 2016 Q1 法說會逐字稿

Good day, everyone and welcome to the first-quarter results conference call. 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 include statements as to estimates, expectations, intentions, and predictions to 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 of any of which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Please note today's call may be recorded.

It is now my pleasure to turn the program over to Gail Peck, Vice President Finance, and Treasurer. Please go ahead.

Thank you, Lindy. Good morning, everyone. Welcome to the Trinity Industries first-quarter 2016 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 have used on our recent earnings call, we will begin with an update on the highway products litigation matter. We will then follow with our normal quality 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 section. 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 Theis Rice.

Thank you, Gail, and good morning everyone. Today, I will provide brief updates on the litigation we are facing related to our ET-Plus system. I will discuss three things in particular. First, what Trinity is doing from a legal standpoint, to have the judgment and federal claims case overturned on appeal; second what third-party organizations have done to support the cause to overturn the judgment; and third what other legal issues have arisen by virtue of the judgment.

As reported previously, an adverse judgment was entered October 2014 against Trinity Industries and Trinity Highway products in a false claims act case filed in the United States District Court for the Eastern District of Texas. This case involves the ET-Plus guardrail and terminal system manufactured by Trinity Highway products.

We have appealed the judgment as to the United States Court of Appeals for the Fifth Circuit. Our opening appellate brief was filed March 21, 2016. Briefing by all the partnership may be completed by mid-summer 2016. Which meant the Fifth Circuit would not issue a ruling earlier than late2016.

We believe our filing spelled-out in a clear and convincing way why the original judgment should not stand. We believe our brief present a compelling argument of the errors that were made and why this case should not have been brought to trial from the start.

After filing our appellate brief, (inaudible) brief were filed with the Fifth Circuit by several organizations, individuals and states supporting the position that the judgment should be overturned. While these briefs offer diverse arguments in support of Trinity's appeal, we believe several fundamental positions are clear.

First, the judgment could undermine safety on the nations roadways, inhibit innovation, and create crippling regulatory uncertainty. Second, the judgment will prevent companies from relying on governmental assurances that their profits comply with equitable regulations and it will discourage companies from entering the marketplace and increase costs to states.

Third, the judgments takes Highway safety decisions out of the hands of government safety experts, motivated by the public good, in to the hands of private individuals motivated by monetary gain. And last a false claims act suit should not proceed when the government repeatedly denies there have been any material false claims. When taken together, these leaky briefs offer a convincing affirmation that the case against Trinity Industries and Trinity Highway is without merit and the judgment should be reversed.

Trinity industries and Trinity Highway are also named in multiple suits that stem from the federal false claims act case. Nine suits have been filed under separate respective state false claims act law. All nine of these suits are stayed pending the Fifth Circuit's ruling in the false claim acts appeal.

Additionally individual project liability cases as well as product class actions have been filed. A shareholder class action and multiple books and records request under Delaware law have also been filed. We believe these actions are groundless and are seeking to capitalize on the jury verdict in the false claims act case.

For a more detailed review of these cases, please see note 18 to the financial statements in Trinity's form 10-Q for the period ending March 31, 2016. Please also refer to www.ETplusfacts.com for additional information.

Enclosing the ETplus has undergone and passed more crash tests and performance evaluations than any guardrail internal device in history. Since it was introduced in 2000 it has maintained an unbroken chain of eligibility for reimbursement of the federal aid to highways program and it has always been accepted for use on the nation's roadways by the Federal Highway Administration. Today we are manufacturing and selling a ETplus and the federal government continues to reimburse states for installations of the device on authorized projects.

In simple terms, it's my understanding that since 2000, all states that purchased and installed the ETplus under the Federal Aid to Highways program have been reimbursed by the federal government under the provisions of that program and these states are receiving the benefits associated with the use of this product on a daily basis. We remain absolutely confident in our products and our business practices and we continue to maintain that the allegations in these cases are baseless and without merit.

I will now turn the call over to Tim.

Thank you, Theis, and good morning everyone. Trinity's first-quarter financial results reflect the deterioration in demand for a number of our products even though our financial results decline, I am pleased with our overall operating performance. The ability of our people to make orderly transitions when market condition shift is impressive.

In some of the energy markets we serve, there's an over-supply of products. We expect it may take a while before they are absorbed and the demand returns to more normal levels. In the meantime, we are planning for an extended slowdown while remaining flexible to respond to opportunities that may surface.

During the last several years we honed our manufacturing flexibility and refined our line changeover skills. This enables us to shift our production line so we can pursue a variety of products that fit our production criteria.

Regardless of where we are in the market cycle, our business leaders constantly evaluate the positioning of their manufacturing facilities and streamline operations to align their production with demand. We also focus on cost containment, lean manufacturing, and a variety of initiatives to enhance and grow our Company.

Trinity is in a much stronger Company today than in previous downturns. Our businesses have significant experience successfully responding to shifts in demand levels. We are better positioned given our healthy balance sheets and liquidity the backlogs in our business built during the up cycle have been crucial for an orderly transition to lower production levels.

The growth of our railcar leasing business and the diversification of our manufacturing business provide value during various points of the business cycle. I am confident in the ability to identify opportunities to improve and grow our Company as we successively navigate through the current cycle.

Regarding our railcar leasing business, we plan to grow our wholly-owned lease fleet this year. We are flexible with respect to volume of railcars with leases we will sell this year to investors. Steve and James will provide more comments on this topic during their remarks.

Overall, I am pleased with our Company's ability to make prompt and orderly transitions when market conditions shift. We strive to do our best in every market environment and constantly work at strengthening our Company's competitive position. We remain positioned to capitalize on opportunities that align with our vision of being a premier and diversified industrial Company.

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

Thank you, Tim, and good morning everyone. The energy equipment group performed well during the first quarter of the year primarily due to the wind tower business. The groups margin improved year-over-year on slightly lower revenues.

At the end of the first quarter the wind tower backlog totaled $263 million providing solid visibility of our planned production in 2016. We are beginning to see indications of future demand as a result of the tax incentive for renewable energy pass by the federal government at the end of 2015.

The multi-year federal incentive provides windfarm developers and their supply chains partners time to plan and develop new wind projects. The utilities structure market remains highly competitive. Shifting dynamics within the markets are causing uncertainty about the timing of large projects.

Replacement opportunities for utility towers may involve as customers increasingly focus on reliability issues associated with the Asian power grid. The federal tax incentive for wind power should eventually drive the development of additional transmission infrastructure needed to bring new wind power to the market.

The barge team has done a great job maximizing production efficiencies and reducing costs as we align our footprint to the current demand. During the first quarter we completed the closure of one of four manufacturing facilities.

Demand for both drive cargo barges and liquid cargo barges remains weak. The strong US dollar is negatively impacting agricultural exports, suppressing demand for [output] barges.

At the same time declining oil production has led to a significant overhang of the unutilized tank barges. Approximately $14 million of orders were received during the first quarter, resulting in a total backlog of $319 million. This level of backlog substantially fills our production plan for the remainder of the year.

The manufacturing flexibility built into our facilities in recent years has positioned our barge team to respond effectively to changes in market demand. The construction products group improved quarterly revenue and profit year-over-year as a result of better weather and improving market conditions.

Demand for aggregates remains robust in the markets we serve in the southwestern United States. Repositioning our construction products business in the last few years has benefited this group's overall performance. We are committed to finding opportunities to expand our product portfolio and grow our market positions.

We expect the new federal transportation bill will increase demand for our Highway products as we get closer to the end of the year. I am pleased with the way our businesses are responding to this changing and often challenging demand conditions. Long-term, our outlook for energy and infrastructure investment in North America remains positive.

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

Thank you, Bill, and good morning. The Trinity rail team has solid operating performance during the first quarter of 2016. This is particularly impressive as our team adjusted to reduced production volumes following the record-setting pace of the fourth quarter of 2015.

During the first quarter we shipped more than 7,100 railcars, achieved favorable operating margins and grew the lease fleet while maintaining high fleet utilization. We achieve these results while we continued to adjust to new demand environment.

Access industry production capacity and the growing overhang of idle railcars, along with weak industrial market conditions, are creating a challenging environment for our railcar manufacturing leasing businesses. We are responding to market conditions by rationalizing production, implementing initiatives to reduce our cost structure, keeping railcars on lease and pursuing orders that support further production efficiencies.

As we discussed in our last earnings call, we expect our financial performance to decline from 2015 peak levels resulting from lower anticipated shipment levels, to significant shift in railcar product mix scheduled for delivery in 2016, and costs associated with the planned reduction in our production levels. The weak market fundamentals are also placing pressure on lease rates and may adversely impact lease fleet utilization. A lower volume of leased railcar sales is also impacting our 2016 financial results.

Our rail group received 1,620 new railcar orders during the first quarter. Most of the orders we receive during the quarter are for rail cars scheduled for shipment in 2016. The orders we receive represent a mix of tank cars, hoppers, gondolas, flat cars, and auto racks, and highlight the broad range of the Trinity rail product line.

We are focused on securing additional orders that extend production continuity and enable operating efficiencies. We are well-positioned to respond to the market given the broad range of railcar types we are currently producing.

At the same time, the recent railcar up cycle provided our production team the opportunity to fine-tune our ability to efficiently execute production line changeovers. We are highly confident in our manufacturing flexibility which positions us well to pursue a diverse range of railcar orders.

Our order backlog of approximately 43,360 railcars valued at $4.7 billion at the end of the first quarter provided good visibility for 2016 production planning. During the first quarter the railroad delivered 7,145 railcars and achieved a very healthy operating margin of 18.6%. We are maintaining current expectations for deliveries in 2016 of approximately 27,000 railcars.

We have begun several line changeovers to accommodate the significant shift in our product mix plan for production in the balance of 2016 while reducing our production footprint and throughput to align with current railcar demand. This will have an impact on our second-quarter operating margins. We will continue to monitor order levels and make adjustments to our production as necessary.

I am pleased that the leasing groups operating performance during the first quarter of 2016, maintaining fleet utilization above 97% and taking delivery of 2,410 railcars. However, lease rates per renewals and assignments are highly competitive and in general reflect overall rate declines with certain market sectors more pressured.

Our total managed fleet including our wholly-owned, partially-owned and investor-owned fleet now exceeds 97,200 railcars. The significant scale of our lease fleet provides a base of earnings and cash flow to help mitigate declining manufacturing earnings.

In 2009, the year after the last railcar cycle peaked, our lease fleet contributed $128 million in operating profits from operations for the full year. In the first quarter of 2016 alone, our lease fleet generated operating profit from operations of $70 million or 55% of the 2009 total. This reflects the continued growth of our lease fleet.

We expect our committed leased railcar backlog of $1.3 billion to generate further growth of our lease portfolio in 2016. As we assured on prior conference calls, our RIV platform provides Trinity a unique capability which enhances our flexibility.

Railcar investment vehicles or RIVs are discrete portfolios of lease railcars originated and managed by Trinity rail and offered for sale to institutional investors for inclusion in an investment fund or for their direct investment. The RIVs we have put in place are highly structured transactions that are intended to span several years.

Over the years, we are certain to experience shifting market conditions such as we are experiencing today. In the RIV structures, Trinity has flexibility as to the timing and quantities of leased railcars we may offer for sale to an investor.

In today's economic environment the capital markets may perceive greater overall risk and institutional investors can be influenced by spot market conditions in assessing railcar lease rates. The result may be a lower valuation of lease railcars that we've seen in previous years during strong rail market conditions.

Both quantitative and qualitative considerations are reviewed in deciding whether to sell or hold leased railcars. We evaluate the economic returns of selling these railcars to our RIV platform compared to the returns of owning these railcars in our own portfolio.

We also evaluate qualitative considerations including the diversification and size of our lease portfolio as well as the terms of our RIV agreements. In the current market environment we may find it more advantageous to place leased railcars into our portfolio and as such may hold a portion of the volume of leased railcars previously anticipated to be sold into the RIV platform.

We continue to monitor the industry's implementation of HM 251 tank car regulations. As we've indicated, modifications to our lease fleet are currently underway.

I am pleased with the flexibility of our expanded maintenance services facilities which are making HM 251 modifications while also providing regulatory compliance services for our owned and managed lease fleets. During the second quarter we will begin HM 251 modifications for third parties.

In summary, Trinity Rails operating performance reflects the strength of our integrated railcar manufacturing, leases, leasing and services business model, our operating and financial flexibility and leading market position, give us confidence we can effectively adapt to rapidly changing market conditions. Our investment in our facilities, manufacturing processes and lease fleet have positioned Trinity Rail to elevate our performance throughout the entire business cycle.

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 first quarter of 2016. For the quarter the Company reported earnings per share of $0.64 and revenues of approximately $1.2 billion, compared to EPS of $1.13 and revenues of more $1.6 billion respectively for the same period last year.

Major variances from last year's first quarter include an 18% decrease in railcar deliveries contributing to a 26% year-over-year decline in operating profit for the rail group, an 89% decline in operating profits from sales of leased railcars due to lower volume of quarterly sales, and a 54% decrease in operating profit from the inland barge group.

During the first quarter we invested $229 million in our wholly-owned lease portfolio. We also invested $26 million across our manufacturing businesses and at the corporate level. During the first quarter we repurchased $35 million of our stock.

We ended the first quarter with $835 million of cash, cash equivalents and short-term marketable securities. We have access to additional capital through our committed lines of credit at both the corporate and leasing levels. At the end of the quarter, our available liquidity position was approximately $2.1 billion.

Now I'll move to the current guidance for 2016. As we discussed on the last earnings call, we think this year to be more challenging than last few years due to weaker demand levels in many of the markets we serve. [As you can see] from our customers to place orders continues.

Shifts in our product mix and costs associated with aligning our production levels with demand will impact our margins this year. However, it is difficult to precisely predict the magnitude and timing of the impact on a quarter by quarter basis.

In our press release yesterday, we provided EPS guidance of $2 to $2.30 for 2016. Our guidance assumes no improvement in current economic conditions this year and represents several factors: our current firm backlogs, expectations for our operations against the weak industrial outlook, and our expectations for sales of leased railcars to the RIV platform.

We have lowered the high end of our guidance range from $2.40 to $2.30 due to lower expected level of leased railcar sales which I will detail later. We expect our rail group to deliver approximately 27,000 railcars in 2016, with first-half and second half deliveries roughly equivalent.

We are maintaining our annual revenue guidance for the rail group of approximately $3.1 billion and operating margin of approximately 15%. Our margin guidance reflects a significant change in our product mix, and declining operating leverage due to the lower level of production as compared to 2015 as well as costs associated with the lining of production levels with demand.

The rail group reported an 18.6% margin in the first quarter. Our full-year guidance level of 15% reflects our expectations that the groups quarterly operating margins for the remainder of the year will be below that of the first quarter. At this time, we expect the second quarter to be the low point for the groups margin this year due to the mix of railcars being delivered during this quarter.

In 2016, we expect to eliminate approximately $1.15 billion of revenues related to railcar sales to our leasing company and lease fleet maintenance. We expect to differ approximately $215 million of operating [profit].

These revenue eliminations and profit deferrals result from the accounting treatment of sales from our manufacturing company to our leasing company. We are maintaining our energy equipment guidance for 2016 revenues of approximately $1 billion, with an operating margin of approximately 12%.

At the end of the first quarter, our wind towers backlog totaled $263 million. We are also maintaining our Construction Products Group guidance for 2016 with revenues of approximately $560 million and an operating margin of approximately 11%.

Our Inland Barge Group is now expected to generate revenues of approximately $420 million in 2016 with an operating margin of approximately 11%. Our backlog for Inland Barge Group was $319 million at quarter end.

In 2016, we still expect our leasing group to report operating revenues excluding leased railcar sales of approximately $700 million, with profit from operations of approximately $300 million. During the first quarter, total proceeds from sales of leased railcars to the railcar investment vehicle platform were $21 million, including sales directly from the rail group.

As we have said, the level of sales of leased railcars will vary on a quarterly basis due to their transactional nature. The current railcar market conditions are impacting the overall margins we may achieve for portfolio sales to the RIV platform compared to recent years. We are evaluating the margins we may have earned from selling portfolios to the RIV platform as compared to retaining the leased railcars in our fleet in the near term.

Owning a large number of railcars in our fleet provides ongoing rental income that helps to somewhat offset declining manufacturing income during a down cycle. Ownership also provides cashflow benefits, solid returns to the cycle and the flexibility to enhance those returns by selling the railcars at attractive prices in a stronger market.

We are committed to growing our RIV platform and we have strong relationships with long-term investors. However, we expect the portfolio evaluation process and sales to the RIV platforms to be very fluid throughout the year.

Given our evaluation of the appropriate timing of the leased railcar sales and the current term proposition, we now expect between $300 million and $400 million of leased railcar sales to the RIV platform in 2016, down from our previous guidance of $500 million. At this time we're not providing operating profit guidance associated with these sales or the quarterly cadence due to the fluid nature of these transactions as Steve described.

Our annual EPS guidance also includes the following assumptions; a tax rate of approximately 36%; corporate expenses of $120 million to $140 million which include ongoing litigation expenses; the deduction of approximately $17 million of noncontrolling earnings due to our partial ownership [interest] and are RIVs 2013, a reduction of approximately $0.08 per share do to the two class method of accounting compared to calculating Trinity EPS directly from the face of the income statement and no dilution from the convertible [mix] based on the current stock price.

We expect the gross cash investments in our lease fleet to be approximately $925 million in 2016. This will be partially offset by the level of leased railcars sold for the leasing group that we conduct in 2016. Full-year manufacturing and corporate capital expenditure for 2016 are expected to be between $150 million and $200 million.

In conclusion, we maintain a strong balance sheet and significant liquidity. We continue to seek investment opportunity that enhance shareholder value. We are confident that Trinity will respond appropriately to the weak industrial markets this year as we continue to pursue our vision to be a premier diversified industrial company.

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

(Operator Instructions)

Matt Elkott, Cowen and Company.

I want to try to get a sense of where we are on the operating cost adjustment front. If I assume deliveries in the 27,000 unit neighborhood this year and another, say 30%, decline next year, I'm not too concerned about the gross margins of these deliveries even in 2017, because I think about of them will -- are already in the backlog and presumably at solid [ASPs].

How much more operating cost adjustment can happen from this point and how concerned are you that if the environment remains unchanged, that gross margins remain solid but operating cost adjustments will level off before we see a rebound in the cycle?

Matt, this is James. Thanks for your time and question this morning. I think we look at -- across the enterprise, all of our businesses, the adjustments we have in aligning to the demand, our production levels that we are currently anticipating. As we go through each quarter we look at footprint reductions, throughput reductions, those kind of things, and the costs are going vary.

We certainly, with the backlogs we have as we mentioned, have a good sense of what the production is needed to be in several of our businesses, but that is very fluid. We will provide our expectations for margins, which obviously incorporate operating costs as we go forward throughout the year.

And it's a little too early I think to get into 2017 expectations we have there. But we have a keen eye on reduction of overhead, operating costs at both the manufacturing, leasing, and corporate levels.

Okay. I was just trying to get a sense on whether there is a level where you'd be cutting into the [bones[. If the environment remains the same or deteriorates further, where they'll still be some wiggle room on the operating costs front. But that's a fair answer.

Just one more question on your guidance assumptions, we have seen some flickers of light, if you like, in the industrial world in recent months. You have steel prices trying to recover a bit, energy prices, some improvement in some manufacturing indicators, the dollar strength becoming a bit less pronounced.

When you say your guidance assumes current conditions continue, does that mean that the things I just mentioned continue on the rebound, or is it more of a literal sense that you mean no change in either direction in the overall environment from current levels?

Matt, again, this is James. Thanks for your question. I think when we talk about the current economic environment not changing, we are not seeing much pickup yet. We don't assume that the economic environment will improve.

We are planning for an extended slowdown. As several of us have said, we always remain flexible enough to be able to respond quickly if demand strengthens for some of our products and can adjust our facilities and employment levels accordingly. We analyze many of the same things you talk about, energy prices, industrial production, those kind of things, and one of the key indicators is obviously talking to our customers themselves about what they are seeing.

We remain ready to react accordingly in either direction. Steve, do you want to add to that?

Sure, Matt, the other thing I point out is while certainly the demand drivers for specific commodities in specific markets may change, we also have the market dynamics in rail, the significant overhang of idle railcars that will have to be absorbed through demand before we see significant improvement in demand for new railcars.

So it's not just the demand in the activity that's going on in those markets, it's also the available equipment in those markets that has to be absorbed, too.

That's a good point, but I guess on the bright side for you guys, not for the railroad -- saw a lot of the reason behind the idle railcars is the velocity improvement has been in great part attributable to near ideal weather conditions along with low volumes.

It's kind of an anomalous combination that may not occur as we go forward -- recur as we go forward. We will see how that plays out. Thank you very much for your responses. I appreciate that.

Allison Poliniak, Wells Fargo.

Just touching on -- obviously Steve, you mentioned a lot of available capacity out there. Looking at the multi-year agreements, I understand they are not cancelable. Given this environment and how fast it's deteriorating, I want a broad sense, are there mechanisms there that we should consider those contracts potentially at risk as we go forward here?

Allison, this is Steve. No, I don't think you should consider those contracts at all to be at risk. We've been in business, in the rail business for over 40 years and we've been successful because of the relationships we build with our customers, particularly those that we have long-term agreements with.

We are going to work with those customers in strong markets and in weaker markets so that their needs are being met. At the same time we have our own needs that have to be met as well. The fact that we have changing market conditions really doesn't change the nature of those relationships and how we work with customers.

Certainly there are customers who are talking about how we can help them through these economic times and we will do that if it makes sense. But I don't see anything extraordinary going on today that isn't part of our course of business over many years.

Okay, that's great. And yesterday one of your leasing competitors mentioned that they took back some cars, obviously at a benefit to them. Has anything happened like that with Trinity yet that may be embedded in numbers that we are not aware of?

I understand the example you're talking about. We typically don't disclose specific transactions. What I think, if I understand was done there, is certainly typical what is done throughout our industry.

If there is an opportunity to work with the customer, and there's benefit to both parties, and a win-win situation, of course we're going to take that under consideration and look at that.

Great, thanks so much.

Bascome Majors, Susquehanna.

Maybe following up on the last question, but from more of a manufacturing standpoint, the RSI's railcar numbers for the industries came out a few minutes ago. It looks like, if you do the math between orders and backlogs and deliveries that maybe 6000 or so railcars orders were canceled across the industry in Q1, maybe 5000 of those coming in small-cube hoppers for frack sand.

Are you guys seeing cancellations in your backlog today? Is that buried in the numbers somewhere?

Bascome, this is Steve. Thanks for your question. First of all I just received the industry numbers as we were literally walking in the room.

Just to comment on the overall orders, it seems to be fairly consistent with what our expectations were for the market in the first quarter. I have not had the opportunity to delve further into the numbers. So I really can't apply on what you think has been taken out.

Again, we have been firm on this, and been consistent with this. We don't allow cancellations. If there is a business transaction that can be accommodated between two parties, that's a win-win, we will certainly take that into consideration.

On the face, our contracts are not cancelable. We are not in the business of selling options. We sell railcars. That's what we do.

Understood completely there. That was leading to the second part of my question, similar to the situation in the leasing business alluded to earlier.

In a situation where customers -- has an order that they do not intend or decide they didn't want to go forward with, how do you work that out in a situation where Trinity could be made whole? Is it maybe, we keep something similar to our margin and let you off delivery? What are the options there in a situation that could be attractive to Trinity and the customer?

Bascome, it's a lot of different things. I think the important thing is we are going to work to a win-win situation. We want to work with our customers. We are going to be in business next year and the year after. We're going to want to do business with those folks then as well.

Certainly there's compensation. There's the ability to switch car types. There's a number of different considerations that we can look at. We're certainly not going to impair our Company to make those things happen.

Understood. Maybe going back to the RIV platform a little bit, you made some comments about maybe the returns from holding the railcars for their [line], looking a little better than the returns from selling them in portfolios here and now under this market. But you also made some comments of the interest of institutional investors remains very robust or at least consistent year.

Is it just they still want to invest but the price no longer makes sense as much as it did for Trinity? Can you give a little color on what is happening in the market, because it feels like we are getting very different signals from Trinity and one of your competitors that operates in this business, and even from the operating lessor side with the call from a big player there yesterday. Thanks.

Bascome, Steve again. Institutional investors have identified lease railcars as an attractive asset class, particularly those in the insurance and pension fund areas who have fixed obligations. I don't think that changes over cycles or sophisticated investors who understand that it's a long life asset and there's going to be market shifts during that asset's life.

What does happen is their near-term valuation perceptions will change. The capital markets are in more of a risk on environment, which could drive up interest rates on long-term financings, which has an adverse impact on railcar valuations. And the institutional investors may also be using our current spot market lease rates in their analysis for future cash flow assumptions.

Again, that would have a negative impact on valuations. But there is still a keen interest by those institutional investors to participate in the asset class, just the valuation methodologies are a little more reflective of today's current economic environment. And we're seeing valuations slide a little bit, although what we've seen over the last few years and the peak environment that we've been in.

On the RIV platform, from peak to kind of where we are today, can you give us a directional indicator of kind of values you are seeing on an apples to apples basis?

Not really Bascome.

This is James, Bascome. Obviously every portfolio has its own characteristics, so it's really hard to generalize that. Obviously new car pricing and lease rates have come down some. It's really going to vary on the length of the lease, what the portfolio makeup is, those types of things. We look, as Steve said, qualitative and quantitative aspects when we look at the RIV platform.

As Steve said, these are structured transactions with multi-year type perspectives. So the timing may shift around, but the interest is certainly still there on both sides of the equation.

All right, thank you for the time this morning guys.

Justin Long, Stephens.

I wanted to ask a bigger picture question on the railcar cycle. We've had a couple other companies provide their thoughts on the delivery outlook for the next few years.

One thinks it'll be about replacement levels, the other thinks we could be well below replacement. Do you mind sharing your latest opinion on industry production the next few years and how long you expect this [present] weakness we've seen to last?

Justin, Steve again. If I had the crystal ball for all of that, we might be all doing something different today. Look, we're seeing still quite a bit of shifting in market conditions. I don't know that we've reached any steady state or any point of equilibrium.

There's a potential that market conditions could erode further, impacting railcar building in 2017 and 2018. We've seen several of the independent forecasting companies revise their projections for several years out to downwards. Certainly they are seeing some of the same market dynamics that we are seeing.

But I really haven't focused on what industry production is going to be in 2017 and 2018. We've got our hands full with 2016 and looking to perform at a high level this year.

Okay. Maybe another way to ask it, when you think about rationalizing your manufacturing footprint, what's the environment you are preparing for?

Does it really matter at this point what you think 2017 deliveries will be or are you preparing for a 50,000 unit demand environment, something lower? Maybe that's a better way to ask it.

This is James, Justin. I think when we look across the platform, not just rail deliveries, as you've heard us say for many years, we've really worked hard to put a lot of operational flexibility into our facilities, whether it's different products, different railcar types, barge types, those types things.

We know what's in our backlog, and talking to the customers we have a sense looking a little ways with the inquiry levels look like, what the production levels look like. So we're able to adjust knowing what's coming. But looking into 2017, again, is a bit premature. But we retain a lot of flexibility. Steve?

Justin, we've been spoiled over the last few years with the robust nature of the railcar market. We've had backlogs that are lasting 12, 18 and sometimes even longer than that. We're in a very different operating environment. Historically, backlogs are in the three to six months, and a long backlog is nine months.

So we're sitting here at the end of the first quarter being asked questions about 2017 at 2018. I think later this year I'll have much better insights into 2017 and maybe even 2018, which is more in line with the traditional railcar market.

We also have backlog that takes us into 2017 which provides a foundation for us to build from and our production levels in 2017. I just think it's a little premature to really hone in on 2017 and 2018. We will certainly keep you apprised as we talk again next quarter.

Justin, this is Tim Wallace. The ability of our people to make these transitions when market conditions shift, as I said in my call remarks, is very impressive. We've come a long way over the last 15 years in this area and we've spent a lot of time working on our business model to be something similar to the way -- I used to call it the Ringling Brothers change out, the way that they change their circus around as quickly as they do.

We strive to make those same changes and we've made a lot of progress in the market -- in the mix of products that we are able to change in our facilities. Today we are changing tank barges out with hopper barges. We are changing tank cars out with boxcars.

We couldn't do this a decade ago, but our people have really worked hard to be able to do that. That all works into this flexibility that we talk about.

Okay, great. I'll maybe sneak one last one in if that's okay. I know you don't disclose all the details on car types in your lease fleet, but a lot of us try to strip out and value these assets separately from the manufacturing businesses.

One thing that would really help in that process is knowing the car type mix, specifically how weighted that lease fleet is to tank cars. Is there anything you could share high level that would help us think about the mix within that lease fleet?

Justin, this is James. We just don't provide that. We've got a very diverse fleet.

We've worked hard over the years with what we've added to our fleet, what we've placed into different RIV portfolios. All fleets, whether owned, partially owned, or invested are very diverse. I think our fleet would be rather typical of that conversation.

Okay, fair enough. I'll leave it at that. Thanks for the time.

Gordon Johnson, Axiom Capital.

The first question is, of your backlog, how much of that is in your lease portfolio?

We've got about $1.3 billion dedicated to our leasing Company at the end of first quarter.

That's helpful. And then when I look back to the last down cycle, it looks like in Q4 of 2008, there was a significant amount of deferrals. Your backlog dropped from 24,000 to 8,200 and that didn't come back until Q1 of 2011.

So I think given the prior question was asked, if you look at the difference between the rails supplies to [data] was just reported, it looks like there was roughly 6000 cars canceled. We haven't seen a number that high since the global financial crisis. So maybe not, I guess, cancellations, but could we see another significant deferral of orders impact your business?

Gordon, this is Steve. Sure, that is very possible. Of course the deferral you're talking about back in 2008 was regarding ethanol.

There were a number of ethanol cars that were planned to be built and a number of those ethanol producers didn't make it through the downturn. So that's why I think you had that adjustment back then.

We have different markets and different considerations here in the current set of circumstances. As I discussed earlier, all those things are options, but we're going to approach those on a case-by-case basis and we are going to do things that are not only in the best interest of our customers, but in the best interest of Trinity as well.

Gordon, this is James. Just one little reminder to add, back to looking back in that last cycle, those cars that came out of the backlog, that was a mutual agreement that we had with a few customers to remove about 10,000 ethanol cars from our leasing backlog. So those were cars, to Steve's point.

Not as many of those ethanol customers kind of reached the levels they were thinking about at that point. But we also looked at the risk of adding 10,000 cars to a lease fleet that may not have attractive renewals a couple years later as we saw that market starting to plateau a bit. That was a mutual decision we made, and as Steve said, it turned out to be a win-win for everybody, because we didn't then have unutilized cars a few years later.

To that point, then, is that something that we can see now in the crude, kind of crude by rail tank car area? It seems like that would be advantageous for you guys.

Again, Gordon, this is Steve. Perhaps, but as we have mentioned, we have delivered all of our crude oil tank cars. We don't have any of those in backlog. We have substantially delivered our small-cube covered hoppers.

We're working with customers that are still in our backlog to accommodate their long-term needs with that respect. We are working -- this is very dynamic situations and very fluid market.

Okay, that's helpful. One last one if I could. It seems like when we're doing our [checks] we're hearing that car types are being reworked.

So given there are certain car types that are clearly in oversupply and there's other car types that are better-positioned, is it potentially the case that some of these re-working of car types could be flooding other markets, other car-type markets and causing oversupply in those segments? Thanks for the questions.

Sure Gordon, Steve again. When you say re-worked, perhaps they're being retrofitted or modified for other commodity services or other classes of service.

That's what the leasing business is about. We take residual risk. We are buying long-lived assets, we expect to remarket these assets during their life.

We have to have the ability to configure railcars to meet different commodity service to maximize their marketability. It's one of the reasons why we've invested significantly in our maintenance services capability so that we have the ability to take care of our own and managed fleet in that regard. Again, this is very much part of the leasing business and having to remarket and reconfigure cars for different commodity services, is really part of what a leasing company does.

Thank you.

Matt Brooklier, Longbow Research.

I just wanted to clarify something I heard earlier in the call. Steve, you'd mentioned that your expectations are for Q2 to be potentially a low point for the Rail Group margin.

I just want to confirm that was said, and then I also wanted to dig in just a little bit in terms of what are the components of why the margin dips in Q2 and kind of the expectations for the second half of the year.

Sure, thanks Matt. Q2, we really are going through a significant shift in our product mix, a very significant shift in our product mix.

Tim has talked about the capabilities of our organization to respond with our flexibility. I believe we were challenging it here in the second quarter, and I'm very confident we will do well with it. That is going to have an impact on our margins in the second quarter. That's a big part of it.

Okay. Did you guys provide any color in terms of the cadence of deliveries for the rest of this year?

Steve again, Matt. We expect first-half and second-half deliveries to be basically comparable.

We are working on the second quarter here with line changeovers. We would expect fewer deliveries in the second quarter compared to our first quarter.

Got you. That's very helpful. And then you talked to, I think, starting to do some of the retrofits I think on your lease fleet.

I wanted to get a little bit more color in terms of if you are offering, how many retrofits you think you're going to do, if it is for your lease fleet and if your expectations to potentially maybe do the retrofits outside of just your own fleet at this point.

Matt, thanks for the question. I did say that we have been doing modifications to a group of cars in our lease fleet. We wanted to really prime the pump at our facilities so that we can develop strong competencies and efficiencies in making those modifications.

We have been successful in receiving orders from third parties. We will now move to that phase, again with a proven competency and begin third-party modifications during the second quarter. Those are not for our lease fleet. Those are for third-party owners.

Okay, appreciate the time.

Mike Baudendistel, Stifel.

I notice that you resumed share purposes in the quarter and kept liquidity at $2.1 billion. Is that a liquidity level that you're comfortable with given the legal uncertainty and what's happening in the market?

Yes, this is James. We are very comfortable with that level of liquidity. It has been growing. As we have seen our leverage move down, as we have seen working capital come down, so we're comfortable where we are.

We don't give projections for use of capital necessarily. We are prudent with those opportunities to make sure that they enhance the shareholder value for you guys, but we are very comfortable with where are liquidity-wise.

Okay, good. Steve, can I ask you, you talked about leasing rates declining. Is it possible to put some numbers around that in terms of order of magnitude?

That's surprise question, Michael. I'm not able to put -- it really varies by car type. It varies by market. I think, suffice it to say, that we are in a very challenging market and there's a lot of pressure on lease rates.

And keep in mind that a lot of cars are coming off of leases that had peak lease rates on them from a very strong market time. Inevitably, there's going to be downward pressure on those.

I think we're going to be in this position until you see a substantial amount of the idle fleet overhang absorbed. You can get stronger pricing traction under those circumstances.

Okay, and how do you think about balancing portfolio utilization with price at this point? The competitor yesterday talked about maybe taking a leadership position on price. Do you share that philosophy?

I think it's very important to keep railcars utilized in periods of weak demand. Obviously, you're going to look at lower lease rates. But at the same time we will also work hard to keep our lease term shorter so that we have the opportunity to reprice that asset when market conditions improve.

Okay, great. That's all for me. Thank you.

Steve Barger, KeyBanc Capital.

Just going back to the liquidity question, you've got a lot of firepower right now. You've made it clear you want to be seen as a premier diversified industrial Company.

Do you think you're diversified enough at this point and the focus will be on managing and growing the current segments, or do you think further diversification would be helpful? If that's the case, what would that look like?

Steve, this is Tim. We are always looking for opportunities in the industrial manufacturing market to acquire companies and launch new products as such, and we don't have a percentage of diversification that we're striving for in any business because all of our businesses are cyclical. When they grow we want to be able to grow and expand as aggressively as we can.

When they cycle down, we like having businesses like we have with our leasing business, that has a little more consistent level of earnings than some of the manufacturing businesses. We basically search for businesses that have enrichment potential that fit in our portfolio really well.

We're not really hung up on diversification percentages or goals as much as we are as how well business fit with the manufacturing platform and the leasing business we have.

Understood. I know you're always looking at deals. Have you seen private company multiples come down as the cycle has progressed?

We think as the cycle progresses that the multiples should come down. Historically we have been pretty good at acquiring businesses at lower pricing during lower markets, when companies are a little more -- have a little more incentive to sell for one reason or another.

And so we are very patient and we think long-term. When the opportunity services, we will pursue it as aggressively as we feel we need to.

Can you tell me, as you look at the things that cross your desk, what the size is in terms of revenue? Would you look at a relatively large deal?

We look at all sizes of the businesses. The size we have become, we have to start looking at larger deals than we have in the past.

So yes, we will look at larger deals. But then at the same time, there are smaller deals that come across that add to the businesses that we have that we pursue.

Last question, when you think about your core competencies, are you more inclined to buy a company that's operating well where you may have to pay a slightly higher multiple, or would you buy a fixer-upper in some circumstances?

Both. It's just a matter of the quality of the fit with our portfolio, the enrichment value that we think we will receive, and the returns on the investment.

And I guess I actually do have one more. Most of your businesses are metal bending outside of leasing, and I guess construction. Do you primarily think you would get into another metal bending kind of business or would you look further afield?

Our preference really is metal bending businesses, but we also have made some nice acquisitions in the aggregates business that fit real well within our portfolio. We have casting businesses that are in our portfolio, and we have foundry businesses. Not just purely mental bending.

And we've got a business that does composite fiberglass-type materials, and our barge business that makes covers. We look for how well does it fit with our ongoing businesses.

Understood, thanks very much.

Art Hatfield, Raymond James.

Real quick on retrofit, [JTX] said on their call yesterday that they were really only going to do jacketed CPC 1232 cars because that's where they saw, for them at least, the economics making most sense. Are you kind of at the same thought process, or are you able to make the economics work retrofitting other car types?

It's Steve. I guess there's kind of two considerations. One is when we are contracting with a third party, the decision of what kind of car they want to modify is really their decision. We're just very pleased to provide the modification service which we feel we can provide to a legacy car or to a CPC 1232, whether those are jacketed or unjacketed.

We have the building capability to do that work. We continue to evaluate our fleet to see with the advantages are and which cars we should modify. Again, we have modified a group of cars to our fleet. We will continue to evaluate other cars in our fleet.

Thank you, next question. I will keep it to three questions. The second question, any change in the last six to nine months in any of the credit quality of your lease customers?

I would assume nobody has stopped making any payments at this point in time. But any areas that you are a little bit concerned about and you're watching a little more closely than you did six months ago?

I guess, in response to that, Art, we are comfortable with the credit composite of our leasing portfolio. We've monitored very closely. Certainly the energy sector is experiencing some difficult economic circumstances.

You have a wide array of customers in the energy sector, some AAA rated companies, and somewhat smaller private companies. So we monitor those very closely. At this point, we don't feel we have any significant issues in the credit quality of our portfolio.

Great. Final thing, something I want to, I guess, get a greater appreciation for. Within your business you have these inherent conflicts to deal with. I think you've done a great job over the years of balancing the needs of the railcar manufacturing business versus your desire to grow and invest in the railcar leasing business.

But given the market we are in today, I'm trying to understand if it would at some point in time, on a certain car type or whatnot, is there a moment where maybe it would be advantageous for you to allow a customer to cancel certain car types that are being manufactured in an effort to reduce a potential oversupply situation that you are facing on cars that you have an interest in within the Leasing Group?

I would assume there's short-term and long-term considerations. I keep coming back to this belief that if a situation gets enough oversupplied, that you could have a real damaging impact on the value of those cars you've invested in versus any give up that you would have in the short run with regards to profits on manufacturing a specific car.

Art, that's a good strategic conversation we should invite you to join. Thank you. We have a significant investment in lease railcars and we have a significant interest in those assets maintaining good values and those values growing over the long term.

It's not good for our industry whether the manufacturer is the lessor to have idle equipment in the marketplace, and for there to be oversupply of railcars. In general I agree with all that you said.

The specifics of various hypothetical situations I really can't opine on, but certainly we are proponents of growth in lease railcar values over time. We are not interested in simply over supplying markets just to make railcars.

And as a quick follow-up to that, and I appreciate your answer. From your answer I'm assuming that that's not really a conflict you've had to deal with, at least in the recent past. Is that fair?

Okay. Yes.

Thank you. I appreciate it.

Bill Baldwin, Baldwin Anthony Securities.

Just a quick one, Steve, on the modifications of the cars that you all own in your own lease fleet and to partially own. Do those modifications show up in your maintenance expense when we see your maintenance expense on the lease income statement?

Bill, this is James.

Or are those capitalized? (multiple speakers)

This is James. Primarily, that is capitalization, so you'll see that run through CapEx.

Is that CapEx in -- depreciated over the expected remaining life of the railcars? Is that the way you do that?

That's right. It's just like when we put a new car in the fleet. So the remaining life, we take that and depreciate accordingly.

Okay, thank you.

Gordon Johnson, Axiom Capital.

I just had a question. It seems like you are saying that the second half is going to be better and margins are going to improve in the second half. Can you just provide maybe some commentary on what you are seeing to support those comments? Thanks.

I want to clarify a little bit, Gordon. This is James. It's kind of a math exercise, without getting too specific because we didn't. We said the second quarter we expect at this point to be the low point for the Rail Group margin of the four quarters.

But remember our annual guidance is 15%. The first quarter was 18.6% on 7100 railcars. You've got to do some math to back into your back half of that point. We're not necessarily talking about margins moving up or down quarter to quarter, but on average it's 15%. But we want to point out the second quarter what to expect.

Thank you.

This is Gail. It looks like that concludes today's conference call. A replay of this call will be available after 1:00 Eastern Standard Time today through midnight on April 29, 2016. The access number is 402-220-7220.

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

This does conclude today's program. You may disconnect at this time. Thank you, and have a great day.