Trinity Industries Inc (TRN) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to Trinity Industries first quarter results conference call. (Operator Instructions) Please note that this call may be recorded, and I will be standing by should you need any assistance.

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 for future financial performance. Statements that are not of historical fact are forward-looking. Participants are directed to Trinity's Form 10-K and other SEC filings for a description of certain business issues and risks, a change in any of which could cause actual results or outcomes to differ materially from those expressed in forward-looking statements.

It is now my pleasure to turn the conference over to Gail Peck.

Thank you, David. Good morning, everyone. Welcome to the Trinity Industries First Quarter 2017 Results Conference Call. I am Gail Peck, Vice President, Finance, and Treasurer of Trinity. Thank you for joining us this morning.

Similar to the format we have used on our recent earnings calls, we will begin with an update on the Highway Products 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 will now turn the call over to Theis Rice.

Thank you, Gail. Good morning, everyone. As previously reported, the False Claims Act judgment entered against Trinity Industries and Trinity Highway Products in June 2015 is currently on appeal to the United States of Circuit Court of Appeal for the Fifth Circuit. This case involves the ET Plus guardrail end terminal system manufactured by Trinity Highway Products. The briefing and oral argument phase of the case was concluded on December 7, 2017 -- I'm sorry, 2016. The Court now has the case under consideration and has yet to issue its opinion in the matter. Trinity Industries and Trinity Highway Products have also been named in a number of other suits involving Highway Products that we believe are groundless and represent opportunistic filings that seek to capitalize on the False Claims Act judgment now on appeal. For a more detailed review of these suits, please see Note 18 in the financial statements and Trinity's Form 10-Q for the period ended March 31, 2017. Please also refer to etplusfacts.com for additional information.

I will now turn the call over to Tim.

Thank you, Theis, and good morning to everyone. My comments this morning will be brief, since very little has changed since our last conference call.

Trinity's first quarter financial results were in line with our expectations. They reflect the decline in production volume for railcars and barges that we discussed during the last conference call. Demand conditions remain weak, and there continues to be an oversupply of railcars and barges in the North American market. These businesses are making adjustments to their production levels and continue to prepare for the possibility of extended downturns. At the same time, our rail and barge businesses are staying flexible so they can respond when opportunities resurface.

I'm pleased with the way our people are confronting the challenges associated with today's business environment. Demand for the majority of our other manufacturers' products is continuing to be impacted by the uncertainties associated with the U.S. economy and the political landscape. A unique mixture of uncertainty and optimism in the majority of the end markets our businesses serve remains prevalent. Most of the customers are placing product orders for replacement needs and projects already underway. They appear optimistic regarding the potential opportunities that could surface if major infrastructure spending program is approved by Congress.

During the first quarter, our Railcar Leasing business continued to generate strong operating earnings. We plan to grow our owned and managed lease fleet this year. We remain flexible with respect to the volume of railcars with leases we will sell to investors this year.

During business downturns, we typically make investments to enhance our positions in the future. During the recent upcycle, our manufacturing businesses ran at aggressive pace, and we identified some areas for improvement. As an example, we're currently making investments to upgrade a number of core technologies that support Trinity's manufacturing businesses. Downcycles are ideal times for this type of infrastructure improvement. These projects provide an effective way to preserve and utilize some of our talent until business volumes increase.

Overall, I'm pleased with our company's ability to make prompt and orderly transitions when market conditions shift. Our industrial manufacturing, construction aggregates and railcar leasing businesses strive to do their best in every market environment and constantly work at strengthening their competitive positions. We remain positioned to capitalize on opportunities to enhance shareholder value.

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

Thank you, Tim, and good morning, everyone. The first quarter results for our Inland Barge Group reflect significant volume reductions year-over-year as weak market conditions persist. Overcapacity of barge equipment along the inland waterways continues to create headwinds. The team has responded well to these market challenges by reducing our manufacturing footprint to match market demand.

Our customers continue to be optimistic that fleet utilization will begin to improve later this year or in 2018. During the quarter, our Inland Barge business received $53 million in orders, bringing the total backlog to $110 million. During the quarter, we worked with an existing customer to shift production scheduled for this year into 2018 in exchange for a new order, a good outcome in a competitive environment. James will discuss the impact of this agreement on our 2017 financial guidance.

Beginning in the second quarter, we expect quarterly revenues for the Inland Barge Group to run at approximately 50% of the first quarter levels. This reduction in volume is expected to result in an operating profit for the remainder of the year of a small loss. We are working diligently to secure orders and reduce costs while maintaining flexibility to respond quickly when demand improves.

The financial performance of the Energy Equipment Group during the first quarter reflects soft demand conditions for many of the end markets we serve. At the end of the first quarter, our wind tower backlog totaled $1 billion, providing production visibility and continuity for this business. I am pleased with our team's performance during the first quarter, producing wind towers under the long-term order received in the second quarter of last year. We continue to have positive expectations for this business given the Federal production tax credit and improvements in wind turbine technology.

During the first quarter, we saw further evidence of an increase in demand for utility structures. We expect demand to continue improving as projects that will replace aging utility structures are authorized for construction.

The Construction Products Group results for the first quarter were in line with last year's results. The group is on track for another strong year in 2017. Demand for construction aggregates remained strong, primarily due to infrastructure-related work within our markets. We continue to look for opportunities to expand this business. Our investments during the past few years have created scale that provides a foundation for long-term growth.

Our Highway Products business is performing well. Funding initiatives at the federal and state levels are driving commitments to longer-term highway projects. We continue to monitor discussions on Capitol Hill concerning the potential passage of a large infrastructure bill.

In closing, the first quarter financial results for our various businesses continues to reflect mixed demand conditions. We are highly focused on securing new orders and reducing costs.

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

Thank you, Bill, and good morning. TrinityRail's performance for the first quarter met our expectations. The leasing group delivered a solid financial performance in the first quarter, increasing total operating profit by 14.6% year-over-year. Lease fleet growth, high lease fleet utilization and continued disciplined cost management initiatives contributed to the quarter's results. Our owned and managed lease fleet now stands at more than 105,000 railcars, providing Trinity with a solid level of earnings stability as we continue to confront challenging railcar market fundamentals.

Our Rail Group achieved a 10.6% operating margin on deliveries of 3,770 railcars. As anticipated, production volumes were almost 50% less during the quarter compared with both the first and fourth quarters of 2016. Our team did a good job transitioning to lower volumes.

Market fundamentals improved slightly during the first quarter. However, it is too early to declare a market recovery. Train speeds continued their slow descent off last year's highs and dwell times increased slightly, thereby increasing railcar cycle times. Idle railcars fell for the third straight quarter, although the oversupply in many railcar categories remained significant.

The upward trend in railcar loadings is encouraging but needs to be sustained for an extended period of time to return to 2014 levels. While there appears to be optimism from our customers about the direction of our economy, it is yet to translate to meaningful new capital investments.

I am very pleased with the Leasing Group's operating performance during the first quarter of 2017. On a year-over-year basis, leasing and management services revenues and profit from operations increased 4.9% and 21.8%, respectively, on high fleet utilization and new fleet additions of 1,730 leased railcars, partially offset by lower average lease rates. As expected, we did not sell any leased railcars during the first quarter. The scale and diversification of our owned and managed lease fleet of 105,455 railcars are providing a valuable base of earnings and cash flow to the company as railcar manufacturing profits decline.

Our owned and partially owned portfolio of leased railcars, which has a book value of approximately $6 billion excluding deferred profit, is well positioned for solid performance in the current railcar market. Lease fleet utilization in the first quarter increased slightly year-over-year to 97.5%, about the same as the fourth quarter of 2016. We continue to focus on maintaining high lease fleet utilization while growing the fleet in 2017. While the lease pricing environment is still weak, there appears to be firming in lease renewal rates at existing pricing levels.

Only as the oversupply of idle railcars in the industry are placed back into service will we then begin to see lease rate improvement in existing leased railcars. With an average remaining lease term of 3.5 years, lease expirations in 2017 and 2018 are within a manageable range that is consistent with prior levels -- prior years. At the end of the first quarter, our committed leased railcar backlog stood at 7,930 railcars with a value of approximately $720 million.

Lease fleet maintenance and regulatory compliance costs, while up slightly compared with the fourth quarter, decreased 35% year-over-year. However, during the course of the year, as we do more regulatory compliance work and railcar services performed for remarketed railcars, maintenance and regulatory compliance costs may increase. While our expectation is that railcar leasing fundamentals will remain challenging in 2017, our operating guidance reflects relatively stable profit from leasing operations.

For 2017, we anticipate leased railcar sales of between $300 million and $350 million, a slight reduction in the high end of our previous guidance. During the year, we will continue to balance investment demand from institutional investors with the growth of our wholly-owned lease fleet.

Order levels for newly built railcars during the first quarter, both industry-wide and for our Rail Group, continue to reflect weak industry conditions. During the quarter, the industry received orders for approximately 4,815 railcars, well below the estimated replacement rate for the North American fleet. Trinity's Rail Group received orders for 970 railcars in the first quarter from industrial shippers, railroads and leasing companies. Our order level for the quarter was reflective of the very weak inquiry levels we described in our February earnings call.

While we have seen recent improvement in inquiries, we have yet to see these inquiries turn into meaningful order levels. Again, I would not expect to see a meaningful increase in orders for new cars until there is a meaningful improvement in economic growth and the overhang of existing railcars is absorbed. The average selling price of orders received improved during the first quarter due to product mix, but competitive pricing pressure remained strong.

We are encouraged, though, by the improving fundamentals in the frac sand market. The number of idle small cube covered hoppers has dropped significantly in recent months. Stable oil prices, modest improvement in drilling activity and increased sand usage in existing wells are causing railcars to be placed back into service much sooner than previously anticipated. As we disclosed previously, we reached agreements with several frac sand customers with orders in our backlog to defer delivery of their railcars to later dates. Those same customers have recently begun to inquire about pulling railcars forward from the backlog for earlier delivery, and we have confirmed delivery in 2017 for some of those orders. We are in the process of adjusting our production plans to accommodate these requests. At the end of the first quarter, we had 7,600 railcars in our backlog for frac sand service, of which 60% are scheduled for delivery to our lease fleet.

Our order backlog for new-built railcars at the end of the first quarter totaled 26,420 railcars and was valued at approximately $2.7 billion. During the first quarter, TrinityRail delivered 3,770 railcars. Based on orders received during the first quarter, the acceleration of certain frac sand deliveries and current inquiry levels, we now anticipate full year 2017 deliveries of between 15,000 and 16,000 railcars compared to our previous delivery guidance of between 14,000 and 15,000 railcars. At the end of the first quarter, approximately 91% of the midpoint of our new delivery guidance for 2017 was filled with either sold or leased railcars.

As anticipated, significantly lower production volumes and weaker pricing contributed to a 10.6% operating margin in the first quarter compared to 18.6% last year. For the full year, we now expect Rail Group revenues and operating margin of $1.7 billion and 8%, respectively. For the second quarter, we anticipate operating margin to decline relative to the first quarter.

On margin guidance, year-over-year reflects lost operating leverage due to the 45% decline in production. I am confident in the ability of our operations team to optimize our production footprint and to remain flexible to accommodate potential improvement in demand.

In summary, TrinityRail's performance during the first quarter reflects the strength of our integrated railcar manufacturing, leasing and services business model and our operating and financial flexibility. In the current market environment, we expect to continue focusing on optimizing our production efficiency, controlling costs and maintaining high lease fleet utilization. At the same time, we are investing in the growth of our lease fleet, product development and manufacturing processes and systems to continue elevating TrinityRail's performance.

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 2017. For the quarter, the company reported revenues of $877 million and earnings per share of $0.30 compared to revenues of $1.2 billion and EPS of $0.64 for the first quarter of 2016. These quarterly results were in line with our internal expectations. As a reminder, in February, we only provided full year guidance.

On the year-over-year basis, the decline in our results was primarily due to significant volume reductions and product mix changes in our railcar and barge manufacturing businesses. Our Railcar Leasing company and Construction Products Group reported solid results for the quarter.

During the first quarter, we added new railcars to our wholly-owned lease fleet with a value of $181 million and invested $24 million in capital expenditures across our manufacturing businesses and at the corporate level.

Our balance sheet remains very strong with a high level of liquidity. At the end of the first quarter, our cash, cash equivalents and short-term marketable securities totaled $779 million, offsetting most of the recourse debt on our balance sheet. Available committed credit capacity under our $600 million corporate revolver and our $1 billion leasing warehouse facility totaled $1.3 billion at quarter end net of outstandings. Combined with cash instruments, our available liquidity position was $2.1 billion at the end of the quarter.

As a reminder, we have a $450 million convertible debt instrument with a put option by the debtholders in June of 2018 and that is callable by the company thereafter. There is also a deferred tax liability associated with this debt that is payable upon the debt retirement. The amount of this tax payment is dependent on the settlement value.

We continue to maintain liquidity through our ownership of more than $2.6 billion of unencumbered leased railcars, a key asset in the current economic environment. At the end of the quarter, the loan-to-value on our wholly-owned lease fleet was 21%, low for a stand-alone leasing business. Our lease fleet gives us the financial flexibility to package unencumbered assets for sale to railcar investment vehicles, sell them in the secondary market or use them to support a secured financing.

As projected in February, we did not sell any portfolios of leased railcars during the first quarter. This has a slight impact on the year-over-year comparison as $23 million in sales of leased railcars during the same quarter last year generated $0.03 of EPS. And as Steve indicated, we expect sales of leased railcars of between $300 million and $350 million, slightly lower than our previous guidance range for the year.

During the first quarter, the IRS formally closed its audit of the company's 2006 through 2009 tax years, which resulted in a $5.8 million tax benefit. This equates to a onetime tax benefit to our EPS of $0.04 per share, resulting in a lower-than-normal tax rate of 29% for the first quarter.

I would like to share a few comments related to the corporate expenses in our consolidated SE&A. Our $35 million of corporate expenses in the first quarter were within the annualized run rate that we guided to on our last call and are in line with our fourth quarter level. We continue to have a high level of litigation-related costs, the timing of which will vary quarter-to-quarter. In addition, we've made certain investments in our corporate infrastructure that have increased our level of depreciation expense going forward.

Consolidated SE&A expenses increased year-over-year by 6%, primarily due to litigation-related expenses. However, SE&A for the manufacturing businesses declined year-over-year as we continue to stay focused on cost reductions. The company's overall headcount, including both production and nonproduction personnel, has decreased 27% since the first quarter of 2016 to align our staffing with current market conditions.

We continue to invest in our businesses through research and development as well as in the infrastructure across the company, which results in higher ongoing depreciation cost. These investments add to our SE&A but, we believe, better prepare us for the economic recovery.

In our press release yesterday, we provided updated full year 2017 earnings guidance of $1 to $1.25 compared to our prior guidance of $1 dollar to $1.35. I will provide detail on each of the guidance items, but at a high level, the reduction to the top end of the range reflects the adjustment we made to the anticipated volume of leased railcar sales and slight downward adjustments to guidance for our Inland Barge and Energy Equipment groups.

In 2017, we anticipate total company revenues, excluding sales of leased railcars, of approximately $3.5 billion. As Steve mentioned, we increased our railcar delivery guidance and now expect our Rail Group to deliver between 15,000 and 16,000 railcars in 2017. We expect Rail Group revenues of approximately $1.7 billion during 2017 with an operating margin of 8%.

In 2017, we expect to eliminate $480 million of the Rail Group's revenues due to sales to our leasing company. We expect to defer $62 million of operating profit from these sales, which is higher than our prior forecast due to the mix of railcars that we now anticipate adding to our lease fleet.

We project Energy Equipment Group revenues of approximately $950 million with an operating margin of 10% for the full year. The slight decline in our revenue guidance is due to weak demand for products in the oil and gas markets. We continue to expect revenues of $520 million for our Construction Products Group with an operating margin of 14% in 2017. For the Inland Barge Group, we now expect revenues of $175 million and an operating margin of 3% in 2017, both down substantially year-over-year due to weak market conditions. Our revised guidance reflects shifting some of the barge backlog into 2018, as Bill discussed during his comments. We have previously guided to revenues of $210 million and a margin of 4% during 2017 for this business.

We continue to expect our Leasing Group to record 2017 operating revenues, excluding sales of leased railcars, of $710 million with profit from operations of $295 million. As I mentioned earlier, we expect to sell between $300 million and $350 million worth of leased railcars during 2017, a tighter range than the guidance we provided in February. As part of our long-term strategy, we remain focused on selling leased railcars through our RIV platform, where we retain the servicing and customer relationships following leased railcar sales. At this time, we expect a relatively smooth cadence of leased railcar sales in each of the remaining 3 quarters of this year.

Our full year EPS guidance includes the following corporate-level assumptions: corporate expenses of between $130 million and $140 million; a reduction of $0.04 per share due to the two-class method of accounting compared to calculating Trinity's EPS directly from the face of the income statement; a reduction of $0.03 per share due to our noncontrolling interest in the partially-owned lease fleet; dilution from the convertible notes of $0.01 per share based on the current stock price; and a tax rate of approximately 36%, which includes the 29% tax rate during the first quarter and a higher-than-normal expected tax rate in the second quarter due to the adoption of a new accounting standard. We provided detail related to the new standard in yesterday's press release.

In terms of investment, we expect manufacturing and corporate capital expenditures in the range of $100 million to $130 million in 2017. We anticipate adding $500 million to $600 million of leased railcars to our wholly-owned fleet. The net investment in our wholly-owned fleet is expected to be between $180 million and $230 million after taking into account the proceeds from sales of leased railcars. These guidance ranges include a modest level of opportunistic purchases of railcars in the secondary market.

As we indicated in our press release yesterday, actual results in 2017 may differ from present expectations and could be impacted by a number of factors including, among others, the risk factors and forward-looking statements as disclosed in our 10-K.

We've historically built high cash balances and liquidity during strong markets so we can operate from a position of strength during economic downturns. Our balance sheet currently reflects this focus, and we are actively seeking ways to enhance shareholder value.

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

(Operator Instructions) And we'll take our first question from Bascome Majors with Susquehanna.

Yes, on the leased railcar sales, there seems to be an appetite in the marketplace from financial buyers that's still pretty healthy. Certainly, the announcement that Greenbrier had a few weeks ago along with some of the portfolio sales we've seen over the last 4 months. But I believe this is the third quarter in a row that you guys have not sold railcars over a year out of your lease fleet. Can you just tell us, from a high level, walk us through the strategy there? Maybe what's different between what you're seeing and what some of your peers are seeing? And how this should play out, from your eyes, longer term as we move through the cycle, i.e., not just the next 3 quarters, which you kind of guided to, but maybe over the next year or 2?

Yes, Bascome, this is James, and I'll -- then I'll turn it over to Steve for a couple of comments. As we've said and I mentioned in my comments today, we've given guidance for what we expect to do the next few quarters, and it's primarily focused on our railcar investment vehicle platform and those investors. That has been our focus for the last couple of years. We do occasionally sell cars into the secondary market but really maintaining the servicing and managing of those cars. As Steve mentioned, we have a total fleet now of over 105,000 cars in that. As we continue to grow that, it grows the revenue and income base for the leasing company, which helps the whole company. So while we will look at the market from time to time, that's really where we're focused. Hard to project beyond 2017, but there clearly continues to be an appetite with our RIV partners to grow lease fleets.

As you guys look out over the next year or 2, do you think there is appetite for another very large formal relationship? Maybe not as large as, but kind of in the same vein as to the relationship you guys had with Element a few years ago?

Yes, Bascome, this is Steve. I mean, we interface with institutional investors as a normal course of our leasing business, and we find the opportunity to partner with an institution that has the same long-term perspectives about the railcar leasing business and the assets in that business. We certainly look to grow those relationships. As James mentioned, our RIV platform is an important part of our company strategy that provides our financial flexibility and also helps to grow our owned and managed lease fleets. So we're going to continue to look for those opportunities. But not all institutional investors were created equal, and we look for those that share our long-term view of the value of the assets and the leasing market.

And just one housekeeping [guide] on the guidance here. Of the corporate expense, I believe you said $130 million to $140 million, can you let us know how much of that budget is related to some of the legal costs that are elevated today as we think about how that might look going forward?

Yes, Bascome, it's James. We don't break that down. Clearly, a lot of the increase from if you go back several years ago, before the litigation ramped up, you're going to see much of the increase is related to that. But as we mentioned, we have investments in our infrastructure and some other pieces that have elevated that number that we think are going to help us in the future. So we don't break that out and would certainly be hard to project on the other side of those numbers coming down.

And we'll take our next question from Prashant Rao with Citigroup.

I wanted to pick up on the sale of railcars and the change in the guidance. Sorry, 2 questions here. One, in terms of the marketplace demand, has the mix, in terms of the appetite, changed at all over the last few months? Or could you give any color as to whether that's been evolving? And then, secondly, I guess, the $50 million, that -- in the reduction on the top end, is that something we should think of conceptually more as maybe getting pushed out into 2018, then, more of a deferral in terms of the sale? Or just any color there would be helpful.

Yes, Prashant, it's James. I think as we look at -- as we go through the year, we narrow our guidance, we fine-tune our numbers. We did that with the EPS side, we've done it with the car sale side as well, selling of leased railcars. And just as we sit here in April, we know a little more than we did in February on what cars we're targeting, especially looking into that RIV platform. Whether those are pushed into future years, we certainly expect to continue to have sales of leased railcars into the RIV platform. So the timing of that is not necessarily what we try to do here, it was just fine-tuning kind of the visibility we have now into the next 3 quarters.

Okay. That's helpful, James. And touching on lease rates, you talked about a firming repricing environment. Certainly, we've seen that in -- definitely in sand cars. Just curious to know what the repricing sort of opportunity, how much it's improved, let's say, from maybe 6 months ago specifically on the sand side. And then, outside of sand, where else are you seeing sort of rates, sequentially at least, bottom out and seeing some firming up outside of those hoppers?

Yes, Prashant, this is Steve. Further to put in perspective, the firming simply means we haven't seen further deterioration in lease rates. So I don't want to characterize that we're seeing a lot of upside in lease rates right now, but certainly, things aren't getting any worse. Where we are seeing -- again, in the frac sand market, we've seen some improvement there, perhaps in some of the agricultural markets where we've seen a little tighter supply, on railcars, we've seen some modest improvement there. But generally, we're kind of flat on lease rates, and we'll see where it goes from here based upon economic activity and the availability of cars coming out of storage and how the overall supply-demand equation balance out over time.

Excellent. Great. And just one last sort of housekeeping question on the year. The maintenance and compliance expenses that you called out in the lease group that should tick up slightly through the year. How should we think about that cadence as it moves -- as we move through the year?

Yes. The timing of railcar maintenance expenses is very lumpy, I guess, is the term we've used over time. I'm real pleased with our performance in the first quarter, but I do expect that we will see perhaps an increase in our expenses by the end of the year.

We'll take our next question from Allison Poliniak with Wells Fargo.

Just talking about the general railcar environment, you talked about optimism out there not necessarily equating to orders and, obviously, the overhang. From the overhang perspective, and I know there's not a real magic number, but do you guys have a thought in your head of how much that really [indiscernible] needs to come down to spur some orders?

Allison, this is Steve. Yes, I guess, maybe one way to look at that would be to kind of compare the last trough to this trough. And looking at overall general numbers, we're still much higher than where we improved to from the last trough. So I think we've got a ways to go. Better answers are probably left to looking at individual specific markets as we start to talk about which cars are coming back into service. As I mentioned, frac sand is certainly a large contributor to the overall idle fleet. We're seeing those cars come back into service. And from what conversations with our customers in that market, they anticipate that all the existing cars will be utilized by the end of the year. So we really look at each of those individual markets. But I would say, you'd have to see, in general, the overall oversupply of railcars come down a fairly good bit from where it is today.

Great. And then just on lease utilization. I guess, just given -- maybe from a near-term perspective, as you look out in the next few quarters, do you feel like they bottom in term of the utilization, based on what you're hearing in terms of renewals out there?

Well, I'd like to think so. Our team's really done a very good job in working at our renewals. I'm pleased with the renewal success rate we've been having. And they've also been very effective at assigning railcars that aren't renewed, and as evidenced by the stability in our utilization over the last few quarters. So I would hope to see that certainly improve but time will tell on that.

Great. And then just one last question. Barge, I think you had mentioned about $110 million of backlog, obviously, some of that getting pushed to 2018. It seems like that could be still a little bit aggressive in terms of that, unless you're seeing orders out there. Any thoughts on that?

I guess, Allison, aggressive from what perspective?

Well, I guess, just to get to the $175 million in revenue for this year.

Yes. Not say -- on the last call, we said there was definitely some risk to getting to the revenue number. That risk has declined to a relatively small portion at this point in time, but I'm feeling much better about the $175 million for the year.

Yes, Allison, you had $62 million in the first quarter, so to get to the $175 million, you've got about $110 million left. So as you said, some of it is pushed, but we always look at taking some orders as the year goes along.

We'll take our next question from Gordon Johnson with Axiom.

This is James Bardowski in for Gordon. I just have a couple right now. But you mentioned that guidance for the deliveries has increased to 15,000 to 16,000. Do you expect that to be more of a kind of linear distribution or do you expect some kind of seasonal lumpiness?

No. James, this is Steve. I wouldn't say it's seasonal. I'd say it's probably fairly even over the remaining 3 quarters of the year. Certainly, as we're taking orders today, we're probably producing those cars in the latter part of the year. But I would think the cadence would be fairly, fairly straight through the balance of the year.

Okay, definitely helpful in modeling. Turning next, looking at your return on equity, first quarter in '17 was the lowest in, give or take, 5 years, using our trailing-12-months numbers. But if I assume unrealistically that your book value doesn't change through year-end and taking the midpoint of your EPS guidance, that would put your ROE at about 4.3%, which will be the lowest since 2010. Can you just talk a little bit about this, such as what you see as a comfortable return, what kind of floor there could potentially be and anything else?

Well, this is James. And we're clearly in a down market, and the equity base has continued to grow as we've added earnings to the company. So you've got an equity base of well over $4 billion now and that's more than doubled over last few years. So you've got a much larger equity base, and obviously, when earnings are down at these levels, then the returns aren't going to be as high. The leasing business itself has a significant level of equity in it, given how we've structured the capital in that business. But when you're looking at making $1 to $1.25 on that type of equity base, you're going to see the math result in that type of ROE. I don't think we could comment on where we would want that to be necessarily, certainly higher in the longer term. But I think if you look over the long-term history of the company, you see attractive ROEs as you go through cycles. At the peak, you clearly have very strong ROEs, and in the mid-cycle, you have good ROEs for the type of business we have given that we're a manufacturing, leasing and construction materials company that has 3 different type of profiles. There's a lot of balance sheet capacity to invest. As we mentioned, the unencumbered railcar fleet that we have, the cash that we have, we are looking to enhance shareholder value, and with that hopefully comes ROE as well.

And you mentioned the Leasing Group kind of turning to that -- well done, by the way, on maintaining a high utilization rate. But on that note, you mentioned that you're also seeing some higher demand in hoppers, you quoted or you cited frac sand. Is there any other area that you're seeing demand in? And also, in addition to the demand, are you kind of shifting your strategy to pursue these specific end markets?

Well, I'm kind of taking the last part of your question, James, first. We have a broad, diversified portfolio that serves a lot of different markets. So I mean, we really segment our business into dozens of different markets that we serve; some are larger than others. As you mentioned, frac sand and agriculture have shown some resilience. Some of the specialty chemical and, little smaller markets and tank cars have also shown some strengthening. But overall, again, I think we've kind of leveled out at a low level, and where we go from here really depends upon the economy and government policies and the overall use of the existing railcars in the market.

It certainly makes sense. One more quick one and I'll hand it back. But looking at your -- the remaining -- average remaining lease term that you guys published, it's been going up to, I think, it was like 3.5 years in the fourth quarter, not sure what it was in the first quarter. But I'm just kind of scratching my head a little bit. In a falling lease environment, generally, we would expect lease terms to decline. Could you just give a little color as to why it's been going up since the first half of '16?

Sure. What -- This is Steve again, James. One of the things that we've been a beneficiary of, which is different in this downturn than previous downturns, is the strong backlog that we have. And that backlog was built at a time of very high lease rates, so -- and long lease terms, and we had the opportunity to take those orders over the last few years, and we also took the opportunity to make sure we had locked in those lease rates at long term. So as we take delivery of those railcars, that does have an impact on that metric. But again, that 3.5 years average remaining lease term doesn't really place any undue pressure on lease expirations. Again, we see that as very manageable and very smooth over the next couple of years as it has been over the last couple of years.

We'll take our next question from Matt with Cowen.

With the railcar fundamentals starting to show signs of life and some of your inland barge deliveries deferred to 2018 and potentially easy comparisons in 2018 on the sales of lower -- of leased railcars, is it feasible that 2018 could be flat from 2017 or even up from 2017 as far as earnings?

Yes, Matt, this is James. It's too early to get into 2018. We clearly have a nice backlog of orders in rail. We have a nice backlog of orders in our wind towers business. Bill mentioned some backlog in the barge business as well. There is still a lot of uncertainty out there. The order levels themselves have been low. So we have some visibility into 2018. And as I mentioned, we'll continue to invest in our lease fleet, continue to have opportunities to sell leased railcars into the RIV platform. But it's just too early for us to provide, really, any insight, tangible or intangible, as to what 2018 may look like yet. So that'll be later in the year as we go along. There is optimism around some policy in the agenda that we hear about in Washington, but until we see some of that come to fruition, it's just hard to put to paper and to math what the next couple of years may look like.

Got it. That's very helpful. And also, to touch back again on the kind of increased interest in lease fleets, basically, since December of last year. Would you guys be open to considering selling a significant portion of your lease fleet, given the healthy appetite by financial institutions, including a lot of international investors. I know that the lease fleet has proven to provide a lot of stability in a down cycle, but ultimately, you guys are a manufacturer. So if you did sell a significant portion of your lease fleet, you can internally grow it again. So I was just wondering what your thoughts are on that front.

Sure. Go ahead, Tim.

Yes. This is Tim. As Steve said, with our leasing business, it's really important of the quality of the institutional investor that we look at to make sure that we have alignment. We have worked really hard to develop management services that go along with it, the lease origination capabilities and everything there. So we're always open for various types of strategic initiatives, but it's very, very important that we have the right partner that would we -- would be doing business with in this particular area, because we're committed to this for a long term. And our objective is to continue growing our lease -- our owned and managed lease fleet.

And Matt, maybe just add on to that, I mean, we've really worked hard over the last 10-plus years in integrating our manufacturing and leasing businesses together. And the success that we've had on the manufacturing side has been, in part, supported by our leasing business. At the same time, the success we've had in our leasing business has been very much tied to our manufacturing business. So we see the integrated business model that we operate as an important strategy for the company. The other thing I would tell you is that, in selling leased railcars, it is very important to us to maintain our customer relationships. As Tim talked about, our lease origination capabilities is really about developing relationships with customers and expanding our reach into their businesses and being able to help them solve the problems that they have through products and services. So that customer connection that our leasing business provides is very, very important to our long-term strategies.

Got it. And just one last question. We heard from Norfolk Southern this morning that their -- they continue to homogenize or standardize some of their railcar fleet to kind of make them more able to ship different types of commodities, and that will probably lead to some replacement requirements. Are you guys hearing anything from your customers that are doing something similar to that, that could lead to some replacement demand?

Matt, Steve again. We are. I would say that a good number of the railcar orders that we're seeing today are replacement orders. Replacing aging equipment when -- specifically from railroads, we're seeing that activity in boxcars, for example. So I think you're right. Right now, in the current market environment where replacement's an opportunity, you've seen those car owners look to do that and invest in equipment. But we really haven't seen the growth side of our business beyond replacement.

We'll take our next question from Justin Long with Stephens.

So I wanted to ask about potential acquisitions. What does the pipeline look like right now? And how has it evolved over the course of this year? And I'm also curious, as you answer that, if you've seen any pullback in valuation multiples or if they're still pretty elevated.

Yes, this is Tim. And we continue to have a very active pipeline of various projects and target-type companies that we look at. We're staying very patient in this area. We have not seen valuations decrease in this particular market. And -- but at the same time, if we find something that is highly strategic, then we are willing to pay a premium for the business that would -- based on how it would fit. But we're basically still in the same position that we have been reporting in for the last couple of quarters that we're just looking at acquisition targets of all sizes. We like the small tuck-in types to the transformative-type acquisitions that would fit in our company. And that's one reason that we have our leasing business financed the way it is and that we have the ability to access capital through a number of different avenues such as our railcar investment vehicle. So when we see something, we're going to be ready to respond.

That's helpful. And maybe asking the question that was just asked on the lease fleet from the opposite side of the equation. Could you comment on your appetite to grow the railcar lease fleet through acquisitions? I know, this year, you mentioned there are some smaller secondary purchases that are factored into the guidance. But would you have interest in looking at more sizable deals in that railcar leasing market?

Yes, this is Steve, Justin. As you mentioned, we have, over time, been making smaller purchases in the secondary market and adding those to our portfolio and introducing those into our railcar investment vehicle. We would like to continue to grow our owned and managed fleet. We're at 105,000 cars today, and with the capital resources of the company and our management capabilities, we feel that we can continue to build upon that 105,000 in very meaningful ways. So as those opportunities come up in the marketplace and we're active in the marketplace, we'll certainly look at those very hard and very long.

Okay, great. And then maybe one last quick one. It sounds like there've been some more positive signs in the utility structure business, listening to some of the commentary from your competitors there. But I was wondering if you could give us some historical perspective on this business, and maybe if it's possible to share how much of a decline you've seen in operating margins for that business from the peak to where they are today. I know you've been dealing with some competitive pressures and I'm just trying to understand the opportunity if we do start to see a cyclical recovery.

Yes, Justin, this is Bill. So a little challenging, in that we don't break out the utility business from either a revenue or an operating perspective. In revenue, it is with our wind tower business in the Q. Just to give you some color, though, I would say that after we acquired the business, the market took a step-down over the next 2 years. And that step-down could've been felt in kind of the 10% to 15% range easily enough. We have, over the past few quarters, seen a step back up. I'm not willing to put a percent on it as much as it is something where you're seeing lead times move out a little bit and you're seeing the competitive landscape fill up with production commitments for a period of time. So it's optimistic, it's moving in the right direction, but it's not anything that I would hang a bogey on and say it's plus-so-many percent at this point in time.

We'll take our next question from Bill Baldwin with Baldwin Anthony Securities.

Bill, we're certainly seeing signs of improved investment and spending in the domestic oil and gas markets. Also, from what you read, the increased exports of propane and continued investment in LNG facilities. I was just trying to get a feel for color from you as to when you think we might begin to see an improved spending on some of your oil and gas products, particularly your storage containers and things of this nature used in the oil and gas industry and related industries.

Yes. Bill, great question. It's been slow in coming for sure. We are seeing quotations for larger projects on the storage tank side, but they are a ways out there. And they're projects that sometimes seem to come and go and -- or have 2 or 3 different parties bidding on them, and so it looks like a lot of activity, but -- when it's really just one particular job. The other stress point is still, at this time, everybody who is producing equipment is very hungry for work. And so from a margin perspective, I think you can expect, over the next 12 months or so, margins to stay highly compressed.

Do you think it's likely that we will begin to see, though, a pickup in overall activity as we go out through the year into 2018, so that perhaps, sometime in '18, the competitive environment will be somewhat eased as capacity utilization picks up?

Bill, the trends show that. You show more rigs, you show more oil coming online. But with the macro indicators around the world today and how quickly oil and gas can move, it's not something where I'd go out and say it is a definite at this point in time.

And we'll take our last question from Mike Baudendistel with Stifel.

You mentioned that you're upgrading a number of facilities while things are a little bit slower. And maybe just to give us a sense for how you're thinking about the businesses the next few years, can you tell us which segments those are in? And is that increasing capacity or just more making things efficient?

This is James, Michael. There's a couple of pieces to that. We're certainly always looking at our facilities in up times and in downcycles, making the right upgrades, taking care of the facilities so they're ready for the next levels of production. When Tim and I both mentioned some infrastructure investment, probably a little more specifically, that was on some of the IT-related type things. When we go through a downcycle and you go through refreshes of some of your IT, things like your ERP system, your HR systems, your e-mail systems even, when you go through some of those types of things, you're going to see some elevated expenses. What it does, it allows us to keep talent onboard and that elevates SE&A a little bit as a percent of revenue. So we keep talent onboard to manage those projects, and we've done everything from implementing a new CRM system to asset management systems, asset maintenance systems, those type of things. So we're making investments right now that, as we said, elevates a little bit of the staffing cost, elevates a little bit of the ongoing depreciation cost, but we really think these are things that will keep us as we strive towards being a premier company as we look at the next up cycle that we'll have the systems in place, the analytics in place and the infrastructure in place to excel.

Yes, and this is Tim. I'll add to that. We have created a concept of centers of excellence and we have, as an example, teams of people on our supply side, teams -- centers of excellence, looking at a lot of our -- reducing our cost on our indirect materials as well as our direct materials. We get a lot of synergies by grouping our spend under our various businesses, and we have some people that are working in that particular area. We have a lot of projects going in engineering, where our -- all of our engineers have got together that are the -- working in our various different businesses and sharing best practices. And then we also work on our tooling and our fixturing. We're kind of like a large resort. When they're in their off-season, they're sprucing up everything so when they get back in their high season, they're ready to rock 'n roll. And that's basically what our people are doing right now. A large number of them are getting things spruced up. So as soon as the demand comes, we'll be right back on the racetrack and we'll go as aggressively as we have always gone.

Great. Thanks for that detail. Just one last one for me. A lot of those frac sand cars you talked about are going into your lease fleet, and the market's been such a roller coaster the past few years. Is there anything you can do to mitigate the reinvestment risk on those cars, either long durations or some other method?

Yes, Michael, this is Steve. We indeed have longer lease terms on those. And when we did work with those customers to accommodate the request for deferral, we were also successful in getting other considerations with respect to keeping our cars in service with those customers. So I think I'm very comfortable with the risk we've taken on in that market and I'm comfortable that we can maintain those assets earning well.

And there are no further questions at this time. I'll return the call to Gail Peck.

Thank you, David. That concludes today's conference call. A replay of today's call will be available after 1:00 Eastern Standard Time through midnight on May 3, 2017. The access number is (402) 220-2553. 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. Thank you for your participation, and you may disconnect at any time.